81 medium in the context of the audit of sales

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Unformatted text preview: Auditing standards make no distinction between the auditor's responsibilities for searching for errors and fraud. In either case, the auditor must obtain reasonable assurance about whether the statements are free of material misstatements. The standards also recognize that fraud is often more difficult to detect because management or the employees perpetrating the fraud attempt to conceal the fraud. Still, the difficulty of detection does not change the auditor's responsibility to properly plan and perform the audit to detect material misstatements, whether caused by error or fraud. The auditor’s responsibility for uncovering direct-effect illegal acts is the same as for errors and fraud. However, the auditor is not required to search for indirect-effect illegal acts unless there is reason to believe they exist. 83. challenging A financial statement audit typically consists of four phases. Identify each of these four phases of an audit and discuss the major activities performed by the auditor in each phase. Answer: Phase I: Plan and design an audit approach . In this phase, the auditor obtains an understanding of the client’s entity and its environment. In addition, the auditor obtains an understanding of the client’s internal control and assesses the risk of material misstatement. Phase II: Perform tests of controls and substantive tests of transactions . In this phase, the auditor tests those internal controls he/she believes may be effective at preventing or detecting misstatements. In addition, the auditor performs substantive tests of transactions to verify the monetary amounts of transactions. Phase III: Perform analytical procedures and tests of details of balances . In this phase, the auditor performs analytical procedures to assess the overall reasonableness of transactions and balances. In addition, tests of details of balances are performed to test for monetary misstatements in the financial statements. Phase IV: Complete the audit and issue an audit report . In the last phase of the audit, the information obtained in the previous phases is combined to reach an overall conclusion as to whether the financial statements are fairly presented. An audit report is then issued based on this conclusion. 84. challenging Discuss some precautionary actions an auditor should take when there is a moderate or high risk of management fraud. Answer: Some precautionary actions an auditor should take when there is a moderate or high risk of management fraud include: • Critically challenging the client’s choice of accounting principles. 1-105 • • • • • Assigning more experienced personnel to the engagement. Doing more audit work at year-end instead of at interim dates. Closely supervising assistants and other inexperienced staff. Performing additional or more effective audit procedures. In extreme situations, the auditor should consider withdrawing from the engagement. 1-106 Other Objective Answer Format Questions 85. medium Match seven of the terms (a-k) with the definitions provided below (1-7): a. b. c. d. e. f. g. h. i. j. k. Tests of details of balances Tests of controls Substantive tests of transactions Analytical procedures Transaction-related audit objectives Management assertions Balance-related audit objectives Fraud Illegal act Error Management fraud h 1. An intentional misstatement of the financial statements. e 2. A set of six audit objectives the auditor must meet, including timing, posting and summarization, and accuracy. f 3. Implied or expressed representations made by the client about classes of transactions, account balances and disclosures in the financial statements. a 4. Audit procedures testing for monetary misstatements to determine whether the balance-related audit objectives have been satisfied for each significant account balance. g 5. A set of nine audit objectives the auditor must meet, including completeness, detail tie-in, and rights and obligations. b 6. Audit procedures designed to test the effectiveness of control policies and procedures. d 7. Use of comparisons and relationships to assess whether account balances or other data appears reasonable. 86. challenging Below are five audit procedures, all of which are tests of transactions associated with the audit of the sales and collection cycle. Also below are the six general transaction-related audit objectives and the five management assertions. For each audit procedure, indicate (1) its audit objective, and (2) the management assertion being tested. A. B. C. D. E. F. Audit Objectives Occurrence Completeness Accuracy Posting and summarization Classification Timing 1-107 V. W. X. Y. Z. Assertions Occurrence Completeness Accuracy Classification Cutoff 1. A V F Z 2. Compare dates on the bill of lading, sales invoices, and sales journal to test for delays in recording sales transactions. (1) . (2) . 3. B W B, C W, X Account for the sequence of prenumbered bills of lading and sales invoices. (1) . (2) . 4. Trace from a...
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This note was uploaded on 02/04/2014 for the course ACCOUNTING 211 taught by Professor Alikapur during the Fall '13 term at American University of Sharjah.

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