Test counts should also have men selected from the factory floor and checked to the client’s inventory sheets to test for the assertion of completeness (an understatement test in the other direction). Quantities must be tested BOTH ways. I No work has been carried out on the valuation and allocation assertion.
Auditor cannot come to the conclusion that the Inventory is fairly stated without * an understatement test of quantities and * then work on the valuation e. G. Q x P = Value I. E. Cost of products using accounting policy, and then * testing the provision for obsolescence I I Tests of control sales prices to selling price list) revealed 3 / 20 were not checked by sales clerk, despite the prices being matched without error.
I The test of control is checking for existence and effectiveness of the control. I Failing to complete the ‘prices checked’ box meaner that there were 3 deviations out of 20 for the test of existence of the control. The fact that the prices were correct is not relevant when checking the existence of the control. It could be concluded that there is already enough evidence to say that the control is not working.
* A lot depends on the definition off ‘deviation?error’. If the error had to include an incorrect price a bigger sample would have be drawn before a conclusion could be reached. I I Post-balance sheet sales returns of Product 751 were noted as large in number. Adjustments may have to apply for 30 June I Sales returns = Dry Sales returns Cry Acts Receivable Dry Inventory Cost of Salesrooms are faulty but we don’t know how many I Monica has not considered the possible effect of the sales returns on other accounts.
Quality of evidence appears superficial (not detailed enough to test understatement of Provision for warranty) I * Assertion – (Over or understated) Valuation and allocation of the inventory of Product ALL, * Assertion – (overstated) Collegiality / valuation of accounts receivable in relation to sales of Product ALL and * Assertion – Completeness of Provision for warranty if the goods are faulty. I (d) I Advertising expenses vouched for overstatement. I Problem is prior amount is higher than current year.
I Testing has been done only in one direction (for overstatement) I However, the primary risk with the advertising expenses is understatement, considering the 50 per cent reduction from the previous year. * test for completeness from Advertising invoices/statements to GEL or corroborate possible expenses which may be noted in director’s minutes. I (e) I Search for unrecorded liabilities on random basis revealed 3/ 20 cheeses for services not accrued at BAD. I Sensitive test may reveal a systemic internal control problem.
I Auditors’ assessment of controls identified that expenses for services were not correctly accrued. Other services may also suffer from incorrect cut-off. I * A larger sample s to De mace 5. 34 (Medium) A proper test AT consequent payments need s to De mace. This would substantially increase the level of audit risk (increased control risk), as here has been a breakdown in internal control?procedures designed to ensure that this internal control exists have not been properly applied. The level of audit risk would decrease (decreased control risk), as management has demonstrated a proactive approach to internal control.
There is an independent party now present to ensure that controls are regularly followed. It is obvious that the parent company will not allow the lack of controls to remain unattended and has a definite plan to solve the problems noted during the internal audit review. This would decrease control sis, as, based on the facts given, the new managing director appears to have all the necessary skills and experience to manage the company effectively.
The company’s performance under her direction will need to be reviewed to ensure that this is the case; however, there appear to be promising signs given that she has instigated the additional controls which have been favorably commented on by internal audit. On the other hand, inherent risk may be increased, as the managing director may have an incentive to increase profit in her first year to indicate that she has improved reference; also, she is not experienced in the industry. 5. 5 (Hard) It is first necessary to determine whether to adopt a lower assessed level of control risk approach or a substantive approach.
The basic steps to follow if trying to use a lower assessed level of control risk approach include: preliminary assessment of control risk and assessment of other risks; performing tests of controls to the extent necessary; and performing planned substantive procedures to the extent necessary. The following key points should be raised. The risk assessment is preliminary only and will need to be updated for the exults of tests of control.
The testing approach adopted is related to acceptable detection risk, which is determined by assessment of inherent and control risk, as per the risk matrix in Exhibit 5. 1 in the textbook. As indicated in AS 200. AAA (SIS 200. AAA), detection risk is inversely related to the assessed level of risk of material misstatement, which depends on the combined effect of inherent and control risk. This relationship is important to understand, as it determines the nature, timing and extent of substantive procedures necessary to complement tests of control.
Some substantive testing will always be necessary, as outlined in AS 330. 18 (SIS 330. 18). Regardless of the assessed levels of inherent and control risks, the auditor should perform some substantive procedures for material account balances, classes of transactions and disclosures.
Risk assessment and planning decisions should be considered at the financial report assertion level, as different assertions may carry different risks. The planned approach would be a more significant level of tests of control with minimal substantive procedures at the balance date. Initial assessment of control risk non a nave Eden galena tongue Locutions Walt appropriate client management to update and reconfirm the overview of the internal control and understanding of controls related to the calculation and recording of depreciation expense.
Observe whether amounts are processed in a imply manner. Review procedures in place by management to detect errors in calculation and evaluate effectiveness. Perform a walk-through of the system and re-perform or observe controls in place. Based on results of internal control testing, confirm or modify the preliminary assessment of control risk. If results require modification of planned approach, incorporate more extensive substantive procedures. Conduct the following substantive tests to the extent determined necessary from the results of the internal control testing. Reconcile totals from subsidiary ledgers to general ledger.
Determine whether depreciation rates are consistent with previous years. Analyses depreciation expense and rates used by comparing depreciation expense divided by gross vehicle cost with previous years. Recalculate depreciation on a sample of assets. Ascertain that depreciation calculations apply appropriate depreciation rates and incorporate salvage value and relevant useful lives. Trace a sample of disposals to sales documentation. Verify the mathematical accuracy of supporting reports, schedules and documents. Agree opening balances to previous year’s books and/or working papers.