The following statements relate to general principles or terms used in the audit

Question

The following statements relate to general principles or terms used in the audit of financial statements. For each of the independent statements (a)-(e) below, identify and explain two errors and suggest the corrections needed.

(a) Internal control system (4 marks)

The following internal control activities are all relevant to an audit:

(i) Installing and monitoring fire sprinkler systems for tenants by the landlord of a shopping mall.

(ii) Counting the number of customers visiting a shopping mall by the landlord.

(b) Internal control system (4 marks)

It is the auditor’s responsibility to establish and maintain an internal control system to ensure efficient and effective operations and accurate financial reporting.

(c) Audit procedures (4 marks)

Tests of controls are usually performed during the year end visit and include audit procedures such as external confirmation and analytical procedures.

(d) Audit evidence (4 marks)

Auditors need to obtain sufficient and appropriate audit evidence. Reliability of evidence is not important as long as we have sufficient quantity of evidence. It is important for auditors to gather the evidence himself/herself. It is not acceptable to rely on internal auditors or any experts outside of the audit team.

(e) Audit strategy (4 marks)

In accordance with the Hong Kong Standards of Auditing, you have developed an understanding of internal controls and continued that the design is effective and the control risk is low. Next, you document your understanding of the internal controls using a management representation letter. Now you are ready to perform tests of transactions as you have adopted a substantive strategy.

Explanation / Answer

a Internal control system means procedures & policies designed ,implemented & overseen by an organisation to ensure that operations are being carried effectively & efficinetly And internal controls activities that have impact on the financial reporting shall only be considred for the purpose of audit In the light of above explanation- i&ii-Does not have any bearing on the financial reporting Accordingly not relevant for audit b As explained in (a) above…it is the responsibilty of an organisation (management) to design,implement and monitor the internal control system to ensure that operations being carried effectively & efficeintly c External confirmation and analytical procedures falls under the category of test of details (Substantive procedures) which is being is used to capture the audit evidence and test it's sufficiency d Auditor need to obtain sufficient AND appropriate audit evidence Accordingly ,evidence obtained shall be sufficient (quantity) as well as appropriate (Quality) with respect to the particular material item to relay on such evidence Auditors are always allowed to accept the evidences other than gathered by themselves such as internal audit evidences or outside expert.However they need to ensure that-- I.The sufficeincy and appropriateness of such evidence ii.Internal auditor or expert outside audit team are independent iii. Understands the work done by others e Substantive strategy refers to implementing audit procedures when auditor is not relayed on organisation internal controls However in the given question auditor has concluded that controls are in place and effective too and decided that control risk is low So this is not a substantive strategy

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