Audit week 7

SEC has influence this audit. The auditor team needs to follow some standards or
would be sanctioned. The firm followed the audit standards to establish the auditors
independence. The auditor must be independent, is one the ethical principles of the
American institute of certificate public accountants. There is also responsibilities, the
public interest, objectivity, integrity, due care and scope of nature services. Team
members are required to be objective and independent with regard to the audit. The
team needs to be objective and be free of conflict. These SEC standards can be use for
public and non public companies.
The following are initial planning of the audit:
Understanding the clients industry. The team manager Pete and two other team
members Ben and Maureen have to understand the clients business. These would be
good for future audits.
Assess clients business risk. The team members have to assess the risk of material
misstatements from the business.
Perform preliminary analytical procedures. The team needs to compare the business
performance with the industry to support the initial assessment of business risk. This
helps the team identify areas with high misstatement the risk.
The team has to set the acceptable level of materiality risk. This risk level would be
subject to the auditors judgment.
The team needs to develop an audit program and plan. This would provide the team
reasonable assurance and basis for the audit report and opinion.

Four steps are:

Planning and risk assessment by understanding the clients industry. Design the
clients internal control procedures to assess the control for each transaction, posting,
summarization, occurrence, completeness, accuracy, classification and timing.
Test of internal control The team can make some test by making inquiries.
Substantive test The team needs to make substantive test of the companies
transactions, procedures and detail of balances.
Audit finalization The team needs to provide a report to the companys management
of the auditor opinion based on the evidence obtained.
Accepted auditing standards and professional conduct required that the auditor reports
in writing a report about the weaknesses identified during the audit. The following was
identified during the audit:
The commission paid to sales personnel based on estimated sales. This issue presents
a risk; the personnel might get pay for sales that were not actually made. This
represents a risk in the companys financial resources since there is no refund for these
commissions paid.
A single person assigned to inventory records. The changes on material misstatements
are very high.
No procedure control on the returned items. There is a high risk of employees taking
home these returns.

No control on the way accounts receivables are been recorded. This represents 31% of
the total sales are facing financial difficulties and 29% is the total assets of the company.
There are two general classifications of confirmation, positive and negative:
Positive confirmation is confirmed directly with the debtor, a blank invoice provided.
Negative confirmation is confirmed with the debtor, but debtor is to respond only if the
amount owe is different from the amount reported.
The team would only use positive confirmation. The team would implement an invoice
confirmation form for positive confirmation.
The following are the major factors affecting sample size for confirming accounts
receivables:
Tolerable accounts receivables and financial statements misstatement.
Risk which is dependent on the size of accounts receivables and misstatements
Detection based on substantive test. Positive confirmation requires a number of
samples.
Control risk
The team would need to obtain evidence about the existing legal encumbrances:
Inquiry with property, plant and custodians
Review of meeting minutes
Confirmation of liabilities
Review leasing agreements and the contract for property, plant and equipment
purchased and or leased.

The team needs to be present during the year end inventory taking. This presence
provides assurance that the inventory count was done properly. The auditors duty is to
ensured that the employees are performing with efficiency and as instructed. The
auditor would take notes and can take an specific item to them compare with the final
count.
The six functions that make the inventory and warehouse cycle are:
Processing the purchase orders purchase orders, purchase requisitions and
quotations from suppliers
Receipts of purchases receiving report
Inventory inventory requisition form
Processing raw material job cost
Storage of goods sales invoice and order form
Shipping of goods shipping form and invoice
The internal control weakness is:
There is not an establish procedure for the receipt, the storage and the return of the
goods. Also the purchase orders, receipt of the inventory, the storage of the goods. All is
handle by a single person, the chances of misstatement is very high.
Members of the audit team are breaching the professional rule of conduct. The auditor
and team members are required to keep and ethical conduct. The audit team is not to

disclose any details about the audit. Pete has been discussing some details of the audit
with Alan.
The legal liability of the firm concerns for this audit if they make a material unintentional
or intentional mistake.

If an auditor fails to uncover material misstatements and

provides a report and an opinion based on this information, makes the auditors
responsibilities and services questionable; even if due care was exercise. The damage
to the investor that relied on the report to invest on the company, that would determine
the auditors legal liability.