Audit Assertions, Procedures, Internal Controls and Reports
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This study material from Desklib covers topics such as audit assertions, procedures, internal controls and reports. It includes information on testing existing assertions, two audit procedures for testing assertions, the importance of internal controls, key controls and tests of control, and types of audit reports. References are also provided.
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1 By student name Professor University Date: February 17 , 2018. 1|P a g e
2 Contents Question 3…………………………………………………………………........................................................3 Question 4…………………………………………………………………………………………………………………….…4 Question 5………………………………………………………………………………………………………………..………5 Question 6………………………………………………………………………………………………………………..………6 Refrences.....……………………………………………………………...........................................................8 2|P a g e
3 3. AssertionsAccount BalancesJustify your choices a.The assertion that the auditoristestingis occuarnce It relates to the sales account and the total revenue that the company has earned Themanagementofthe company might be motivated to overstatetherevenueofthe company. b.CompletenessItrelatestotheinventory balance of the client Incaseofaudittrail,tracing helps in identifying the overall sourceoftheaccounting records and helps in identifying whetheralltherelated products, materials and supplies that should have been included are there in the records. c.Existenceand Occurrence Itrelatestotheaccounts receivablebalanceofthe company Thisisdonetojudgethe existence and genuiness of the accounts receivable recorded by the company. d.Cut off AnalysisItrelatestotheaccounts payables of the client It helps in identifying whether theaccountspayablewere genuinelyrecordedandthe client has not understated the same(Alexander, 2016). e. Existence and OccurrenceItrelatestotheaccounts receivable and the provision of doubtful debts accounts. It helps in identifying the overall provision of debts that must be recordedandtracingofthe 3|P a g e
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4 creditdocumentshelpsin reducing the overall collection efforts of the company. 4. Two audit procedures that will help in testing the existing assertion- •Inventory Check the physical count of the inventory – The auditor can conduct the physical count of the inventory to check whether the inventory stated in the books are correct or not. It helps in asserting the completeness of the books of accounts, and helps the auditor to conduct a check on the internal controls employed by the management for effective management of the inventory. Reconciling the inventory count to the general ledger – This will help the auditors in analysing whether correct amount is recorded in the books or not, on the basis of the invoices that the auditor has at present. •Accounts Receivable Matching the receivables invoices to the shipping log – This will help the aduitors in examining whether the invoice dates matches to the shipment dates and also to conclude whether sales are being recorded in the accounting period in which they are incurred.All the invoices post the accounting period can be examined to keep a check whether the same has been recorded in the prior period. Examing through the customers – One of the major procedure to judge the viability of the accounts receivable balance is to ask the customers directly. This will help in major confirmation whether correct balances are recorded in the period . The auditors can ask the customers to confirm the unpaid balance at the end of the accounting period. b) Internal controls refer to the policy and programs of the company as per which the management operates to ensure the maximum efficiency of the work that is being done within the company. In this 4|P a g e
5 given case the auditors were given an indication that the overall internal controls of the company were not reliable, therefore the auditor had to perform extensive audit procedures to judge the same. In case the internal controls are strong enough, the auditor can depend upon the same for the validity of the accounts but it does not let go of the responsibility of the auditor in asserting the true and fair view of the accounts of the company and thus even though the internal controls are in place and very active, the auditor needs to validate the same from his end. 5) Key ControlTest of Control Segregation of DutiesThe cash collection and recording happens in four different stages that includes receiving, depositing, recording and reconciling. It is important that segregation of duties must be there in this procedure and no single person should be allowed to all this work. In the given case Sharon does all the work related to cash collection and recording and hence it is important that proper segregation of duties is there to ascertain responsibility(Guragai, et al., 2017). DocumentationIt is a very important test of control and henceitisnecessarythatproper documentationisdoneofallthecash receipts and it must be updated daily and proper sequence must be followed in relation to the same. This will help in identifying any frauds. Tensor limited should adopt such a practice and make sure that proper sequence wise recording of data is being done. 5|P a g e
6 Surprise ChecksIt is important that companies should go for surprise check on a timely basis, as it will help in establishing proper security and help in assertion of any fraud elements. It will also keep a check on the employees. Tesor limited shouldgoforsuchcheckstoassertthe validity of the internal control system with relation to the collection of the cash(Burke & Clark, 2016). 6) Audit ReportReason a.Adverse OpinionThiskindofauditreportisgivenwhenthe auditor of the company identify a major material misstatementinthebooksofrecordofthe company which may be an indication of fraud by the company.. In case of Santa Ltd, the books of thecompanywerenotproperlymaintained, many information were missing and till the end of the year the same was not resolved. Hence the auditor should give a adverse opinion, because the auditor is not having accurate data related to the financials of the company. And the books of the company do not matches with the balance provided in the financial statements. b.Modified OpinionThis kind of audit report is issued when the 6|P a g e
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7 auditorsofthecompanyfindscertain misstatementsinthebooksofthecompany which may not effect the present data but have significant impact in the future. This states that thefinancialstatementsofthecompanyare correct , but there are certain points that needs to be highlighted.In the given case there was a misstatement with relation to the property plant and equipment and no proper accounting policies were followed by the company in valuation of the same, but apart from that the accounts were accurate.Hencetheauditorofthecompany should give a modified opinion. 7|P a g e
8 References Alexander, F., 2016. The Changing Face of Accountability.The Journal of Higher Education,71(4), pp. 411-431. Burke, J. & Clark, C., 2016. The business case for integrated reporting: Insights from leading practitioners, regulators, and academics.Business Horizons,59(3), pp. 273-283. Dichev, I., 2017. On the conceptual foundations of financial reporting.Accounting and Business Research,47(6), pp. 617-632. Guragai, B., Hunt, N., Neri, M. & Taylor, E., 2017. Accounting Information Systems and Ethics Research: Review, Synthesis, and the Future.Journal of Information Systems: Summer 2017,31(2), pp. 65-81. 8|P a g e