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Unformatted text preview: 11-2The audit of revenue and receivables is of significant audit risk because (1) overstatement of revenue has been a factor in many instances of fraudulent financial reporting, (2) the overstatement of revenue results in a corresponding overstatement of net income, (3) the determination of the amount of revenue recognized may be determined by the application of complex accounting principles, and (4) significant accounting estimates may be involve in the determination of the financial statement presentation of receivables and revenue.11-28All three generally accepted auditing standards of field work were violated in the audit of the accounts receivable of Thorne Company. The first standard of field work, which requires adequate planning of the audit and proper supervision of assistants, was obviously violated. Planning was inadequate because no audit plan, audit programs, or time budgets were prepared. Supervision was inadequate because Martin Joseph, an inexperienced staff assistant, was left on his own to audit the accounts receivable, with no guidance from the senior auditor.The second standard of field work, which requires the auditors to obtain an understanding of the entity and its environment, including existing internal control, was violated. Martin Joseph did not obtain an understanding of the internal control for the business processes related to accounts receivable, nor did he perform tests of controls over receivables and sales transactions. Obviously, the substantive procedures that Joseph applied to Thorne Company’s accounts receivable were merely a repetition of the preceding year’s audit procedures.The third standard of field work, which requires the obtaining of sufficient competent evidence matter, was violated because no assessments of the risks of material misstatement were performed. What constitutes sufficient, competentevidence in an audit is determined principally by the assessed levels of risks of material misstatement (inherent and control risks)....
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This note was uploaded on 11/19/2010 for the course ACCOUNTING Auditing taught by Professor G during the Spring '10 term at Oakton.
- Spring '10