TACC608 – Auditing and Assurance Services Essay Example

Auditing and assurance 6


Question one

A preliminary audit plan assessing internal control risk and providing preliminary judgment for detection risk

Organization: MTICompany

Audit Date: 5/09/2013

Scope: Internal control system and procedures

Objective: appraise and establish the performance and efficiency of management of the considerable internal control procedure and system

Thomas smithAudit Team:

Areas to be Audited

Criteria to be audited


Detection risk

Information systems and business process

Thomas smith

Efficient of the system in detecting errors

The information system department

Virus infection into the system, Placing reliance on Mr. lee on general supervision and accountability of the systems

Accounting system

Thomas smith

Effectiveness of accounting system

Accounting and information system department

Unqualified administrative staff assistance during period of high workload

Work in progress inventory

Thomas smith

The internal control system over w.i.p

Stores department and the accounting department

Isabel enters the data manually where the value of inventory exceeds the value of sales, High value of work in process due to long period of work in process pile up

Information system and business process

The following are the requirement to be audited in detail in this department so as to enhance the effectiveness of the internal control systems as well as detection of risk.

1. The internal control and efficiency of the system.

IT is apparent that the company uses the latest machine such as computer aided design in managing their numerous assets and therefore there is potential risk of virus infection in the system that might interfere with the company’s data (Zabihollah Rezaee 2009). The management of MTL provides a single password to account clerk, tiffany and George pose a threat to fraud since incase of fraud or errors, no one will clearly be held accountable. The company purchase all their equipment and software from one supplier Mr. Lee who is as well accountable for maintenance of the computer aided design and manufacturing. A treat is seen since; the supplier is the sole supervision of the CAD AND CAM which poses a threat of confidentiality of the company’s private information

Criteria to be audited


What is the state of the internal control system over the security of the computer from virus infection, are there any back up to act as a security in case of system infection by virus. It is apparent that the company system are not all fully secured with anti-virus because the program that was booth from one of their supplier was infected by virus and George’s daughter had an antivirus in her system which saved the company from virus infection (Larry Rittenberg 2011). This is threat to company since, virus will get rid of the company’s vital data and therefore strict measures such as firewall and advanced antivirus should be installed into the company’s system in order to secure the company’s system from virus infections.

Password security checks

The company has allocated one security password for three different people which is deemed risk and therefore, each and every individual should be given a password in order to enhance accountability of every poersonel.ana advanced password system such as use of biometrics and deadman door lock up will be relevant in this type of security in order to further enhance the security of the system,

2) Accounting system

The accounting department is one of the crucial department that needs and effective internal control system. It is apparent that the account clerk is given more responsibility to supervise the receivables and cash disbursement. Therefore an audit check for integrity as well as competence of the account of paramount importance Isabel the account clerk had no experience in the past and therefore it is clear that she got experience form the company. A threat is seen in that the company appointed an account clerk who does not have an experience in accounting. And therefore, a substantive checks need to be undertaken on all transaction undertaken by is able in order to guarantee for authenticity and consistency in recording. Where there is high volume of transaction, the company uses the effort of the administrative staff that does not have relevant experience in the accounting department (Larry Rittenberg 2011). There is risk since the administrative staff does not have the necessary knowledge and experience to handle the accounting work and hence threat of wring data entry will be eminent. The management should ensure that effort of those with skilled knowledge ion the accounting are employed so as to guarantee the data validation and entry into the system.

Criteria to be audited

The requirement to be audited is testing the skills, integrity and competency of Isabel since she didn’t have any past business experience. performing an in-depth audit investigation on the company’s books of account as well as audit trail review will be relevant in to check for any errors or inconsistency that might have occurred during documentation and posting of data into the system by Isabel. The skills competence and integrity of the administrative staff should be ascertained in order to provide an assurance that the support they are expending in the accounting department will lead to a legitimate transaction during processing of the data entered into the system (Iain Gray 2008). Understanding the reason why the management concluded on using the efforts of the administrative staff during the period of high work load must be ascertained because, the directors will use the skills of other staff who are not well conversant with accounting skills so as to manipulate the data in order to create room for perpetrating frauds, The managers will be questioned on the basis of using the effort of administrative staff instead of employing extra personnel with relevant accounting skills and experience in helping the account clerk since, it is apparent that the accounting department is deficient of staff to assist in daily accounting work.

3) Work in process inventory

The value of work in process inventory is updated by Isabel manually. Where the value of work in process exceeds the value of sales, the inventory is reduced manually by Isabel. There is risk of fraud that might be perpetrated by Isabel since she is the sole person who alters the value of the inventory. The responsibility is ought to be bestowed upon the cost accountant and not the clerk.

Audit criteria to be conducted,

In ascertaining the validity of the work in process inventory, the audit requirement necessary is to ascertain the effectiveness of the accounting department is valuing the inventory, the approach that the warehouse as employed in valuing the stock in store as well the internal control systems in store before concluding on the value of closing stock (Audrey A. Gramling 2012). The detection risk that is apparent is that, Isabel the account clerk is given the authority of manually changing the value of inventory. This responsibility should be bestowed upon the cost accountant who works close with the stores department in order to check for consistency in valuing g inventories and to correct any inconsistency before transferring the costing data to the accounting data. In this case, there is proper accountability in valuing the work in process inventory and hence where a fraud or error is encounter, the relevant personnel will therefore be accounted for.

Question two

Specific substantive procedures that could be conducted for the WIP inventory

Substantive test is a test of detail such as the cut-off test, in depth audit review, as well as post balance sheet or subsequent events that need to perform on work in process inventory so as to ascertain the validity of the closing value in order to ensure that books of account are free from material misstatement.

Cut-off test

This procedure is performed in order to ascertain the accuracy of the closing value of work in process inventory between the closing balance and the opening balance as well as checking for any unusual transaction such as abrupt decline in value of working in process. In performing the cut-off test, we first identify the value of closing stock prior to closing the books off account and also determining the value of the opening inventory and checking for any inconsistency in value of opening and closing inventory in process.

Audit trail review

Audit trail review is an in depth audit investigation on specific areas of the accounts. In testing the validity of the work in process inventory closing and opening value, an audit trail review will be necessary. The process entails checking details of each entry step by step from the initial start point to the end while ascertaining the correctness of very value at every stage until completion. (Ainapure/ainapure 2013) This process will prove substantive audit evidence on the accuracy of the work improves inventory and therefore concluding on the validity of the accounting standard adoption in valuing and document the inventory as well as the materiality concept. In this case, the final audit report provide by the auditor will be relied upon by potential investors for decision making since, the books of account will be free from material misstatement and where errors or frauds where identified, the auditor will include them in as disclaimer of opinion where there nature of the fraud is material. Where the nature of error is immaterial, the practitioner will command the director to make any changes before issuing the final audit report.

Post balance sheet or subsequent events

Post balance sheet events or subsequent events are events after the balance sheet date but before the books are issued to the directors. This event is always performed in order to check for any frauds that might have been perpetrated when the books of account have been audited but before the y are issued to the directors. In this case, performing a post balance events on the work in process inventory will aid in checking for any errors or fraud that might exist before the final audit report is given to the directors. Majorly, subsequent event is performed three to four months after the books of accounts as been audited but not presented to directors of the company. Consequently, the result of post balance will be concluded in the auditors opinion in concluding on the accuracy and consistently of the company’s books of account and as well as making judgment on the closing value of the work in process inventory.

Reference list

Ainapure/ainapure. Auditing and Assurance. 2013.

Audrey A. Gramling, ‎Karla M. Johnstone, ‎Larry E. Rittenberg. Auditng. 2012.

Iain Gray, ‎Stuart Manson. The Audit Process: Principles, Practice and Cases. 2008.

Larry Rittenberg, ‎Karla Johnstone, ‎Audrey Gramling. Auditing: A Business Risk Approach . 2011.

VARSHA AINAPURE, ‎MUKUND AINAPURE. Auditing and Assurance. 2009.

Zabihollah Rezaee, ‎Richard Riley. Financial Statement Fraud: Prevention and Detection. 2009.