Professional Documents
Culture Documents
(a) ISA 500 expects the auditor to obtain audit evidence from an appropriate mix of
tests of control systems and substantive tests of transactions and balances. It requires
the auditor to obtain sufficient and appropriate audit evidence in order to draw
reasonable conclusion on which to base the audit opinion.
ISA 500 identifies eight types of procedures that the auditor can adopt to obtain audit
evidence; inspection of records or documents, inspection of tangible assets,
observation, enquiry, confirmation, recalculation, reperformance and analytical
procedures.
‘Sufficient appropriate’ audit evidence requires that while the nature of an item is
under scrutiny (class of transaction, account balance, disclosure) and the assertion
being tested affects the type of procedure performed, these issues do no necessarily
affect considerations of how much evidence to gather.
Appropriateness of the evidence can be broken down into reliability and relevance.
Auditors should always attempt to obtain evidence from the most trustworthy and
dependable source available, this ensures the evidence is more reliable. To be
relevant the evidence has to address the objective/purpose of a procedure and the
assertion being considered.
Auditors are only requires to perform procedures to give reasonable assurance that the
financial statements are free from material misstatement; they can never give absolute
assurance.
Auditors must identify, through enquiry, how management assesses and responds to
the risk of fraud. They must also enquire of management, internal auditors and those
charged with governance if they are aware of any actual or suspected fraudulent
activity.
Directors Responsibilities
The directors have a primary responsibility for the prevention and detection of fraud,
by implementing an effective system of internal control they should reduce the
possibility of undetected fraud occurring to a minimum.
The directors should be aware of the potential for fraud and this should feature as an
element of their risk assessment and corporate governance procedures.
5. (a) Auditors have two fundamental duties; to form an opinion on whether the
financial statement give a true and fair view and are prepared in accordance with
applicable reporting framework, and issue an audit report.
In addition to this national law may impose duties upon the auditor. UK auditors are
required to incorporate the following implicit matters into their consideration of the audit
opinion;
(b) In most cases it is the directors that negotiate an audit contract with the auditors. This
may cause problems. Audit firms on occasions quote low prices to directors to ensure
repeat business, or to get new clients. By doing so the firm may not be able to perform
the audit fully as they do not have enough income to pay for a thorough investigation.
Cutting corners could mean the audit team would be reporting without all the
evidence required which will affect the quality of the report. This would bring into
question their independence. It is common for the audit firm of a company to provide
extra services as well as performing the audit.
Having this additional working relationship with the client would result in
questions being asked of the independence of the audit firm. If non-audit fees are
substantial in retaliation to audit fees suspicions will arise that auditing standards may
be compromised. The firm would no longer be unbiased, as it would want the
company to perform well so it can continue to earn the addition fee for their
consultancy. This would mean the audit firm would be dependent on the directors and
they would no longer be working with independence.
(e) Before accepting the appointment as auditor to Lopit, the following issues will need to
be addressed;
Risk Analysis
• Obtain references to check on management integrity.
• Check on past performance of business.
• Check internal controls.
• Unusual transactions.
Ethical Issues
• If changing auditor, need to ask permission to get in contact with existing
auditor and then wait for clearance. If no response consider the new
appointment carefully.
Legal Issues
• The directors of Lopit seem very casual, they are willing to indemnify against
any legal action as a consequence of taking the position, not professional.
• They state that the board remains the right to dismiss at anytime without
reason. The directors cannot dismiss an auditor, only the shareholders can.
The auditor has to have a secure tenure of office, to maintain independence of
management.
3. (a)
(i) Audit Risk – the risk of that the auditor expresses an inappropriate audit
opinion. i.e. that they give an unmodified audit opinion when the financial
statements contain a material misstatement.
Audit Risk
(c) If the auditor concludes there is a high inherent risk in the audit engagement, there
are risks resulting from conditions, events, circumstances, actions or inactions that
could adversely affect an entity’s ability to achieve its business objectives and
goals. Ultimately these business risks can lead to complications and deficiencies in
the accounting process, which can lead to fraud, error or omission.
1 (a)
(i)
Deficiencies in the Sales and Receivables System; invoicing incorrectly,
despatch notes not retained, input of week’s invoices into the computerised
computer ledger, computer system for receivables ledger not used, orders
recorded on 2 part order form.
(ii)
Invoicing incorrectly – The invoice is sent to the customer after the completed order
has been despatched from the warehouse, the customer may not pay for the product,
that would result in unpaid goods. Voyager should credit check their customers and
release goods after the invoice has been paid.
Despatch notes not retained – despatch notes are not retained because the filing
system is limited, no record of the despatched product is kept. If a customer does
not receive the product Voyager has no way of identifying if the product was
despatched or not, therefore they would have to send out another product. This can
be overcome if Voyager scans the despatch notes onto their system as they have no
filing space.
Input of week’s invoices into the computerised revenue ledger – Mr- Jones inputs
all the invoices into computerised ledger, the deficiency here is that Mr. Jones could
make a mistake and miss something out, this would mean missing income. Voyager
can overcome by having a second employee to check all the figures for all the
invoices inputted into the system.
Computer system for receivables ledger not used – Currently receivables are
inputted manually, there is a chance of error, Mr. Jones could make a mistake and
miss something off. Voyager can overcome this by implementing the computer
system as this way they have records on computer, and it would be less time
consuming.
Orders recorded on 2 part order form – The orders are currently taken on a 2 part
form by the sales representative, if the 2 part form is lost that will mean the sale is
lost. Voyager could create a control where once the sale is made the sales
executive calls it through to the accounts department and it is recorded on the
computer. Or order forms with 3 copies so the customer can have one as well. The
order forms should have unique numbers on the according date to make them easily
traceable.
(b)
(i)
Deficiencies in the purchases and wages control system; 25% of expense claims not
supported by receipt, send cheques to suppliers 60 days or older, Supplier
statements not retained, amending payables master file with details of new supplier.
(ii)
25% of expense claims not supported by receipt –Voyager are paying out for 25% of
employee expenses which might not have been for business use. Voyager can over
come this by making it a rule whereas expenses cannot be claimed unless a receipt is
shown; they could also introduce corporate cards where all expenses are put on the
card.
Send cheques to suppliers 60 days or older – Currently Mrs.Singh sends the cheques
to all suppliers that are older than 60 days, this is a deficiency as the amount the
cheques are going out for could be wrong. Mrs.Singh should wait for the invoices,
check it against the supplier details for payables and then send the cheque off.
Supplier statements are not retained – this is a deficiency because there is a chance the
new supplier statement could come in and put the reconciliation off balance, then
there would be no previous supplier statements to refer to. To overcome this Voyager
could implement a system where all supplier statements are either filed away or
scanned onto the computer.
Amending payables master file with details of new supplier – this is a deficiency as
the new suppliers are on the payables master file due to the verbal authority of the
executive director, they may not have been approved by the policy the Voyager use to
select their suppliers. The deficiency here is that because a printout of the
amendments is not recorded it will not be known which suppliers made are on the list
due the executive directors authority.
4 (a)
The management threat assumes that independence and objectivity will be impaired if
the auditor acts in a management role on behalf of the client.
As the auditor had decided to join Mart, there are a few issues here. Firstly Mart is
growing steadily and is in the acquisition process of companies in the same industry
sector, there is a chance once the auditor joins the board of directors of Mart, he/she
could disclose vital information regarding the financial position of Mart’s
competitors.
Objectivity – members should not allow bias, conflicts of interests or undue influence
of others to override professional or business judgements.
Professional behaviour – Members should comply with relevant laws and regulations
and should avoid any action that discredits the profession.
Professional competence and due care – Members have a continuing duty to maintain
professional knowledge and skill at a level required to ensure that a client or employer
receives competent professional service based on current developments in practice,
legislation and techniques.
To mitigate any threats to objectivity which may arise, the audit firm first has to
identify the threats, then evaluate the risk, evaluate whether the safeguards are in
place, and then take necessary corrective action.