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Unformatted text preview: 6-8The audit procedures to be followed in a given engagement depend upon such factors as the risks of material misstatement of the financial statements, the assumption about the effectiveness of internal control, the auditors' estimates of materiality, the nature of the accounting records, the caliber of accounting personnel, and any special objectives of the engagement. Consequently, a separate, tailor-made audit program should be prepared for each audit engagement.6-15The general objectives of the auditor's substantive procedures with respect to assets are to:(1)Establish the existenceof the assets.(2) Establish the client's rightsto the assets.(3) Establish the completenessof recorded assets.(4)Verify cut-off of related transactions.(5) Determine the proper valuationof the assets.(6) Determine the proper financial statement presentation and disclosure.6-16Making a proper cutoffrefers to the process of assigning transactions occurring near the balance sheet date to the proper accounting period. A cutoff error in recording sales transactions affects revenue in the income statement, and accounts receivable (or cash) and retained earnings in the balance sheet. In addition, an offsetting error in revenue will occur in the income statement of the following year.A cutoff error in recording sales also may give rise to a related cutoff error in recording the cost of these sales. An improper cutoff in recording the cost of sales affects cost of goods sold in the current income statement, and inventory and retained earnings in the current balance sheet. An offsetting error in the cost of goods sold will also occur in the following year's income statement.6-23During the planning process, the auditors make preliminary estimates of both risk and materiality for the engagement. The auditors must plan their engagements to reduce the audit risk of issuing an unqualified opinion on materially misstated financial statements to a relatively low level. At the account balance level, audit risk actually has three components: (1) inherent risk, (2) control risk, and (3) detection risk. On audits where the risk of misstatement is relatively high, the auditors must compensate by increasing the effectiveness of their audit procedures. They may design more effective procedures, increase the number of items selected for testing, or perform more procedures at the balance sheet date rather than at an interim date. They may also add an...
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- Spring '10