Audit Procedures in Response to Assessed Risks Essay Example
Case 3-2: Miscellaneous Audit Issues
- The nature of audit procedure taken in this case refers to the type and test of controls. Well, the audit procedure has shown that, through observation, aerial survey of sand stockpile is not responsive to the assessed risk. Potential risk is understatement of the stockpiles owing to unevenness of the ground where the sand is piled. With 20 tonnes being a significant amount, it means that there is a risk of material misstatement. Meanwhile, the audit evidence is reliable and relevant due to higher assessment of risk by the auditor. The auditor may choose to question the method used to quantify the stockpile of sand, re-inspect the method and obtain the management’s view on the terms of contract with the quantity surveyor. The timing is appropriate as it is the end of the financial year as an interim date. However, an inquiry needs to be done and recalculate individual stockpiles at the period end. The auditor may choose to highlight the number of sand stockpiles and consider if there is tolerable material misstatement in the assessed risk. The auditor may consider physical weighting of sand other than aerial surveys to increase accuracy. This will require audit sampling to guide plans, performance and evaluation of audit samples.
- Audit staff in the new warehouse considers specific audit checks such as monthly checks on a number of products as appropriate for this assertion. Being a substantive procedure, it is more responsive to the assessed risk of misstatement where there is likelihood of occurrence of an assertion. For example, the safety procedure only allows the crane operator who is unionized to enter the premises full of stockpile for the finished goods. The auditor determined the accuracy of audit evidence of the perpetual inventory system because there was a lower risk of material misstatement occurring. Use of the crane operator to perform random counts of stock take can be relied on as it is a sufficient source of appropriate audit evidence. The test of controls relies on regular monthly test counts and with lower risk of material misstatement, it is possible that the audit staff may consider dates before the monthly period end to perform the audit procedures. This will help in identifying significant matters and resolve with the assistance of management who has prevailed upon the crane operates to perform stock take audit samples for 2-3 hours guided by the audit staff. Meanwhile, the control activity in the warehouse involves a number of observations or a sample size. In fact, not allowing the audit staff to access the stock is in itself an assessed risk of material misstatement which affects the degree of assurance of the plans to be obtained by the auditor. Remote sensing equipment may be needed to extensively test the stock levels and changes in the warehouse. With sampling approaches, a bigger sample is necessary to achieve the specific audit objective. However, the extent of testing the cut-off controls should be appropriate as indicated.
- The substantive procedures in this case use the count team and the checking team to detect material misstatement at an assertion level. This includes agreeing to counting, checking and sign off procedures. The assessment of risk by the staff is judgmental and lacks precision in identifying all risks of material misstatement. The two teams when working together in a bid to clear the audit procedures quickly are bound to run into inherent limitations of internal control. The risk of material misstatement is not eliminated because internal staff is used and possibility of management override is high. Tests of detail are compromised and the substantive analytical procedures are compromised and as such the auditor may need to consider testing the controls. In addition, substantive procedures will need to be done at an interim date combined with test of controls, say quarterly, where the remaining period length is not increased. Higher detection of risk reduced the risk of material misstatement. Substantive procedures will need to be increased by increasing satisfactory results from tests performed on audit samples from the count and the checking teams. This will be determined by selecting unusual or large items instead of stratifying the samples into sub-populations. The desired level of assurance should be consistent with tolerable misstatement.
- In this case, the nature of test of controls is dictated by the planned level of production and output. A more reliable and extensive audit evidence is required. The appropriate procedures include reports, inspection of documents and inquiries from the entity personnel. Apart from testing raw materials and work in progress as well as finished goods, it is advisable for the auditor to test operating effectiveness of controls by using a combination of audit procedures. For example, the audit may choose to open bin codes and reorganize inventory as well as inspecting documentation available. A user review of exception reports can be done throughout the production period to obtain evidence of effectiveness of controls in the operational period. Weekly audits will be necessary to monitor controls by combining observations, inspections and inquiries to confirm how the specific controls are understood. Also, audits can be done at unpredictable times on selected locations of the production area. Nonetheless, it will be subject to personnel changes, monitoring controls and the control environment. The audit evidence should be consistent with the sufficient test of controls depending on frequency of performance, length of audit period and reliability and relevance of the audit evidence. As a result, the audit will need to increase the level of operating effectiveness and the extent of tests of controls.
- Stock take will involve certain audit procedures that will increase the assessment of risk by the auditor. The completeness of the stock take before year end may help lower the risk of material misstatement because the entity will be seen as having effective controls. Audit evidence will then be obtained through an effective operation on the operating effectiveness. Meanwhile, the audit evidence will exhibit information accuracy and completeness drawn from the information system of the entity. Performing audit queries at an earlier date may help the audit to resolve significant matters and resolve much earlier with the management or develop an audit approach that is effective. The judgment by the auditor on the extent of the audit procedure will require techniques that select sample transactions and stocks at random. A larger sample will be appropriate to achieve a specific audit objective.
AICPA (2006). Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained. AU Section 318. Available at: https://www.aicpa.org/Research/Standards/AuditAttest/DownloadableDocuments/AU-00318.pdf
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