Q4 Part A An auditor is required to obtain sufficient understanding of each elem

Question

Q4

Part A

An auditor is required to obtain sufficient understanding of each element of a company’s internal control system in order to properly plan the audit of the company’s financial statements and to assess control risk for the assertions included in the account balances.

Required:

(a) Briefly discuss the elements of a company’s internal control system. (5 marks)

(b) How does the sufficiency of evidence differ between procedures to obtain an understanding of internal control and tests of controls? (5 marks)

(c) What are the auditor’s documentation requirements concerning a company’s internal control system and the assessed level of control risk? Explain the choices of methods of documentation. (5 marks)

(d) Explain what is meant by independent checks on performance and give two specific examples. (5 marks)

Part B

The following questions concern the reliability of audit evidence.

Required:

(a) Give two examples of relatively reliable documentation and two examples of less reliable documentation. What characteristics distinguish the two? (6 marks)

(b) Define analytical procedures and explain why they are important evidence even though they are relatively unreliable by themselves. (7 marks)

(C) Under what circumstances is the physical observation of inventory considered relatively unreliable evidence. (Hint: Which management assertion is unlikely to be verified by physical observation?) (3 marks)

(d) Give two examples in which the qualifications of the respondent or the qualifications of the auditor affect the reliability of the evidence. (4 marks)

Part C

The following are 5 independent situations involving audit reports. For each case, describe the type of audit opinion the auditor should issue and explain your reasoning. If more than one type of Opinion may be appropriate, describe the conditions under which each type is chosen.

(a) During the course of your audit of Alex Ltd., you suspect that a material amount of the assets has been misappropriated through fraud. Management of Alex Ltd. refuses to allow you to expand your scope of examination sufficiently to confirm these suspicions. (4 marks)

(b) The market value of your audit client’s investment in a Hong Kong listed company has dropped significantly after the year-end. You consider the amount of decrease is material and the client has not made any adjustment to the year-end amount of the investment. (4 marks)

(c) Your audit client has changed from using the FIFO method of accounting for inventory in previous years to the LIFO basis for valuing inventory in the current year. The amount involved is material. (4 marks)

(d) Due to an argument with the previous auditor, ABC Fashions has employed you as the new auditor after the company’s financial year end. Therefore, you have not carried out the inventory observation (stock take). The accounting records and other evidence were not reliable enough to enable the auditors to obtain satisfactory evidence regarding the company’s inventory balance. (4 marks)

(e) Upon review of the recent history of the useful lives of its fleet of trucks, Apple Ltd. justifiably changed the useful lives for depreciation of its trucks from five years to three years. This change resulted in a material amount of additional depreciation expense. (4 marks)

Explanation / Answer

Q4 PART A

(a) In an “effective” internal control system, the following five components work to support the achievement of an entity's mission, strategies and related business objectives.

1. Control Environment. Integrity and Ethical Values.

2. Risk Assessment. Company-wide Objectives. ...

3. Control Activities. ...

4. Information and Communication. ...

5. Monitoring.

(B) Sufficient appropriate audit evidence

A large part of the work involved in the performance of an audit consists of obtaining and evaluating audit evidence, which is primarily derived from audit procedures carried out during the course of the engagement, but that can also be gained from other sources. For example sources like previous audits; provided that changes occurred in the meantime have been carefully taken into account; or the firm’s quality control procedures, especially around client acceptance and continuance.

Audit procedures that are used to obtain audit evidence are various and are often applied in combination. They can include inspection, observation, confirmation, recalculation, reperformance and analytical procedures, in addition to inquiry, as the latter does not normally provide sufficient audit evidence on its own.

However, audit evidence obtained will only be useful in reducing to an acceptably low level the risk that the auditor could express an inappropriate opinion when the financial statements are materially misstated and, therefore, allow the auditor to draw reasonable conclusions, when it is sufficient and appropriate to the circumstances.

Related Questions

Navigate

• Browse (All)
• Browse Q
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.