Accounting: Auditing and Substantive Testing Essay

Submitted By arizona1234
Words: 807
Pages: 4
Open Document
6-45
a. – shipment were recorded before the actual shipment took place: Shows less inventory than actual inventory, so net income will be higher than actual.
Shipping documents is missing: This is very serious. There may be chances of fraud.
Goods were received and sat on the dock for up to seven day before the receipt was recorded: This will show understatement in the inventory. And it shows overstatement of net income
b. Substantive test is the test of account balances to verify the correctness of the amounts they are design to identify errors and irregularities. In this case misstatement of inventory identified would be considered significantly enough to require substantive testing of inventory. In this case inventory is not entering proper time and missing the records. So auditor has to do substantive test of inventory.
c. Substantive testing procedures that evaluate the accuracy, completeness and existence of amounts stated in general ledger accounts and financial statements. In this case substantive testing should performed by physical inspection of inventory, verification of vendors invoice, verification of delivery documentation, tracing of related disbursement records, and ascertaining that the inventory is recorded in appropriated general ledger account, and timing of the transaction record.
d. If there is no deficiencies were found in the auditor’s tests of control, auditor doesn’t have to do all substantive tests. They can reduce their work load. They can take continuous inventory. A daily record is maintained for the physical quantity of the inventory, and this should reconciled to actual physical counts at short intervals.
7-39
a. Confirmation is a verification of a condition or fact. Auditors written or oral request to a third party to verify the existence or amount of a financial item related to the client and evidence from independent outside sources is more reliable than evidence from within the client’s organization.
b. More reliable evidences: Evidence received from well controlled information system, original documents, and evidences from independent outside sources.
Less reliable evidences: Evidence derived from poorly controlled system, evidence from within the client’s organization, and photocopies or facsimiles, or digitized data.
c. Observation or inspection is useful and it gives strong evidence in verifying the existence of tangible assets and in identifying potential obsolescence or sign of wear and tear. However, inspection alone does not provide evidence on completeness, ownership, or valuation. In addition, inspection does not provide evidence about the cost of inventory. Auditor should have enough knowledge about inventory or should have somebody with knowledge of inventory to make observation of inventory both relevant and reliable.
d. Internal documentation ranges from legal agreements to business document, accounting documents, planning and control documents. The reliability of internal documentation varies according to the following: Effectiveness of internal controls, Risk and management motivation to misstate individual accounts, Formality of documentation, such as acknowledgement of its validity by parties outside the organization or independent of the accounting function. Independence of those preparing the documentation from those recording the transactions.
e. Analytical testing involves comparisons, either judgmentally or statistically, of data over time, across operating units, or between related components of the financial statements to develop insight concerning expected relationships. Direct tests involves testing
Show More

Related Documents: Accounting: Auditing and Substantive Testing Essay

Essay about Deloping: Financial Systems

and procedures that framework auditing and reporting on financial systems and records. Reporting periods Taxation payment timings Delegated authorities Internal control procedures Taxable transactions Question Two Indentify the key Australian Accounting Industry professional standards for auditing and reporting on financial systems and records. Australian Accounting Standards Board (AASB) Australian Accounting Standards Australian Auditing Standards Auditing Guidance Statements Ethical…

Words 468 - Pages 2

Essay Chapter 9 Lecture Notes

misstatement) 3. When allocating of performance materiality to elements, the percentage of materiality can be higher because you would be over-auditing (1) netting effect: overstate/understate of bases (2) highly unlikely that all accounts will be misstated by full performance materiality 2. AU-C 350: Evaluation of Misstatements a. When we implement auditing procedures, we will find misstatements. How do we determine materiality? 3. AU-C 450: Material Misstatements a. Auditors should communicate…

Words 1354 - Pages 6

Audit: Auditing and Appropriate Audit Evidence Essays

CHAPTER 5: LECTURE NOTES LEARNING OBJECTIVE 1: ACCOUNTING AND AUDITING CONTRASTED SLIDE 1: ACCOUNTING AND AUDITING CONTRASTED * The financial report is the product of the entity’s accounting system and of judgement made by those charged with governance and management * ASA 200.3 / ISA 200.3 * Purpose of the audit is to enhance the degree of confidence of the intended users of the FR * To form a judgement on FR, auditor must look behind the FR to the data and allocations of the…

Words 1941 - Pages 8

auditing Essay

Auditing Theory and Practice Case 1 WorldCom: A Focus on Professional Responsibility Prepared by: EL Ahmadi Med Reda Worked With: Ibtihal Slassi Fall 2013 1- Auditor independence refers to the disinterest from the internal and external parties that could influence the professional judgment of an auditor. In other words, auditor independence is the lack of any interest that may create a threat or a risk of material bias regarding the reliability of the financial statement…

Words 1030 - Pages 5

Internal Accountant's Report To Management

Internal Accountant’s Report to Management Diana Liminovic ACC/556 Forensic Accounting Kimberly Warren Introduction Since our company is preparing for an upcoming government contract bid, management has decided that a full Financial Status Review (FSR) prior to the release of the bid is essential. This report is to provide supporting information prior to the bid in order to evaluate if any irregularities with regard to fraud and/or abuse of the company have taken place and if so, to what…

Words 1060 - Pages 5

Auditing and Audit Procedures Essay

EXAM #1 STUDY GUIDE (CHAPTER 1-5) *Chapter 1—Introduction to Assurance & Financial Statement Auditing Auditing: analytical and logical skills; much more conceptual in nature; risk based assessments (RBA) Why is Auditing Necessary? House inspector analogy Provides reasonable assurance that financial statements are free from material misstatement Information asymmetry & conflicts of interest lead to information risk for the principal (absentee owner) Principal (Absentee Owner) provides capital…

Words 6939 - Pages 28

Section 4 Lecture Audit Responsibilities And Assertions Essay

Section 4: Audit Responsibilities and Assertions Management responsibilities • • • • Adopting sound accounting policies Maintaining adequate internal control Making fair representations (assertions) SOX requires CEO/CFO certifications Page 1 Section 4: Audit Responsibilities and Assertions Auditor responsibilities • Plan/perform the audit to provide reasonable assurance... o high level of assurance, but not absolute assurance (guarantee) o auditor only provides reasonable assurance because:…

Words 971 - Pages 4

Essay about bombadier auditing review

Administration. Audit committee for Bombardier consists entirely of independent and financial literate directors. MD&A contains both IFRS and non-GAAP measures with certain measures that are also presented on a pro-forma basis to reflect impact of new accounting changes such as debt. Non-Gaap measures are defined and reconciled to the most comparable IFRS measure. Management has also identified operational risks in the annual report and outlines several risk management strategies that they are employing…

Words 7867 - Pages 32

Essay On Sales And Collection Cycle

AUDIT PROGRAM DESIGN PART II Sales and Collection Cycle The objective in the audit of the sales and collection cycle is to evaluate whether the account balance affected by the cycle are fairly presented in accordance with accounting standards. There are five classes of transactions in the sales and collection cycle. • Sales • Cash Receipts • Sales returns and allowances • Write-off of uncollectible accounts • Estimate of bad debt expense (Arens, 2012, p.442) The Key control…

Words 2069 - Pages 9

Essay about Grand Hotel

appropriate; and * Appropriate accounting policies are consistently applied or changes have been properly accounted for and adequately disclosed Where the working papers of the previous auditor are not available, the auditor applies other audit procedures in order to form an opinion about the opening balances, accounting policies and comparative figures. These include further consultation with management, review of records and working papers of the client and accounting and internal control activities…

Words 3066 - Pages 13