The following independent scenarios describe auditor decisions made during an au
ID: 340561 • Letter: T
Question
The following independent scenarios describe auditor decisions made
during an audit engagement.
1. Chen Li worked on the audit of American Healthcare Associations (AHA), which
operates hospitals and outpatient centers in Texas and Oklahoma. Chen was assigned
responsibility to audit the allowance for patient receivables. For the past several years,
AHA’s accounting policy required that the recorded allowance for patient receivables
be set to equal the total amount of receivables over 180 days past due. Prior audit
testing of the allowance in previous years has found that the subsequent write-offs of
patient receivables has closely approximated the amount included in the allowance.
During the current year audit, Chen examined the amount recorded in the general
ledger allowance account and reconciled that amount to the amount shown in AHA’s
consolidated aged trial balance in the 180 days past due amount. Given that the dollar
amounts agreed, Chen concluded that the allowance was in accordance with AHA
accounting policy and fairly stated. While media reports and other industry publications
suggested that recent regulatory changes in healthcare insurance were affecting
patients’ ability to pay, Chen concluded that AHA’s allowance was fairly stated given
the amounts complied with AHA’s policy.
2. Sherry Zipersky was assigned responsibility for evaluating the goodwill impairment
testing process at Georgia Metals, Inc. Because Georgia Metals’ growth strategy was
based mostly on acquisitions, the company had experience in performing annual impairment
tests of goodwill. The client provided Sherry extensive information along
with detailed schedules that documented management’s testing approaches, and it
provided her support for key assumptions made by management. Sherry reviewed
the schedules in detail and tested the key calculations. While Sherry’s firm has a
requirednumber of valuation specialists as part of its staff, Sherry decided not to request their
assistance in making an independent assessment of goodwill impairment given that
the client’s documentation was extensive and it would take too much time to have the
firm’s valuation specialists complete an independent assessment.
3. Jason Jackson was responsible for auditing the occurrence of sales transactions in the
audit of Asheville Manufacturing. As part of his testing, he reviewed the contracts
signed between Asheville Manufacturing and its customers to determine that the
transaction terms justified the recording of sales for the year under audit. In addition,
he examined documentation related to the sales transactions, including the customers’
purchase orders, shipping documents, and invoices generated by Asheville.
That evidence examined supported the correct recording of sales in the current year.
However, Jason also noticed in the customer files copies of email exchanges between
Asheville Manufacturing sales agents and the customers suggesting that some of the
terms of the sales agreements could be waived at the customers’ discretion. Jason
decided to rely on the contracts and sales transactions documentation to conclude
that the sales were properly stated, given that the other information was only included
in emails.
4. Allison Garrett works on a number of audits of technology equipment manufacturers
and has developed extensive knowledge and experience in the industry. On the
recent audit engagement of financial statements for Zurich Technologies, Allison was
responsible for auditing the valuation of inventories, including the reserve for obsolescence.
Given her familiarity with the industry, Allison decided to conduct a quick
substantive analytical procedure regarding the days in inventory and determined that
the reserve was fairly stated, given it was in line with reserves established by some of
her other clients. She determined that additional evidence was not necessary to obtain
because of her experience with other clients.
For each of the scenarios listed above, describe the most likely judgment trap that ultimately
biased the auditor’s decision making in the audit.
Explanation / Answer
1) In this case auditor has relied on the past information and accounting policy of the company. This can be 1 criteria for audit conclusion but auditor should also obtain substantive evidence from external sources.In this case there are also reports in media that regulartory changes which are affecting the companies ability to pay. The auditor should evaluate the impact of this changes and accordingly come with an estimate of allowance which needs to be provided. The auditor can also check the financial health of major customers from publicaly available sources like annual reports, quartelry reports and frame his opinion on that basis.
2) In this case the auditors has not done any independent testing from external valuers. Ideally the auditor should have evaluated the management testing along with independent evaluation from external valuers and accordingly given their opinion. There can be biased in the process followed by the managment and accordingly opinion of extenal valuer is necessary in test of impairment.
3) In thsi case the auditor should ask that there should be proper change order signed by both parties when there is any change in terms of contract. Merely email communication is not sufficient. Thus auditor should check the correctness of sales recording by checking the signed contract and other relevant document. Any deviation from signed contract should be highlighted and documented.
4)In case valuation of obselete inventory the auditor should take view of external market and accordingly determine the provision required for obselete inventory. In this case the auditor has not taken any evidence from external market and thus her method is not according to the accepted audit procedure.
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