Audit & Assurance: Limitations, Internal Controls, and Ethical Threats

This document discusses the limitations of internal controls, ethical threats in auditing, and the contents of an unmodified audit report. It also covers accounting treatment and audit evidence collection. The subjects covered include Audit & Assurance, internal controls, ethical threats, unmodified audit report, accounting treatment, and audit evidence collection.

Audit & Assurance

TABLE OF CONTENTS
QUESTION 1.............................................................................................................................3
QUESTION- 2...........................................................................................................................4
QUESTION 3.............................................................................................................................5
QUESTION 4.............................................................................................................................6
QUESTION 5.............................................................................................................................8
REFERENCES.........................................................................................................................10

QUESTION 1
a.
Five inherent limitations of internal controls are stated below:
Management judgement: With respect to the nature and the extent of risk which the
company chooses to assume along with the nature and the extent of the internal controls it
decides to impose. For instance, the management might adopt a low risk exposure to the
extent of loss of non-current assets through the way of implementing an ongoing system of
monitoring and inspection of the non-current assets which is then centred around the
operation of a expansively exhaustive non-current asset register.
Inappropriate management override of controls: The management might purposefully
override the existing controls therefore, rendering the stated control systems to be ineffective
(Camilleri, 2018). For example, the sales director of a corporate chooses to extend the credit
term for the long standing customers with the purpose of creating a customer goodwill in
contrast to the stated credit control procedures.
Human judgement: It involves faulty decision making or the human mistake or error that
leads to breaking down the internal control. For instance, error in respect to the designing of
the computer processing controls.
Collusion by two or more people: It involves authorization of power among two or more
people such as among the factory worker, factory manager and the wage data processing
clerk to claim and the process the fraudulent payment in respect to the overtime wages
(Ibrahim, Diibuzie and Abubakari, 2017).
Cost benefit consideration: Under this, pragmatic approach is required to be followed
particularly in small companies. For instance, the expense of employing new accounting
employees for the purpose of ensuring adequate segregation of duties in the important areas
might outweigh the maximum benefit which is to be derived from the internal control
systems.
b.
To: Audit Team
Subject: Internal control identified
Based upon eth information provided in respect to the Dartmouth Construction Ltd there
are five internal controls which has been found within the payroll department of Dartmouth
Construction Ltd which are described below.
 Collusion by two or more people: There are large number of people working within
Dartmouth Construction Ltd and is having 20 office staff at its head office, 20
regional staff apart from eth 350 construction workers. The payroll department

works for all which results into requiring effective internal control system for
handling large number of workers and heads.
 Cost benefit consideration: The regional sales staff starts the enquiries for the
construction work and are generally paid low as basic salary along with monthly
commission payment which is based upon the sales made by them.
 Human judgement: The directors of the firm receive a yearly bonus which is a
certain percentage of the increase in the profit. This is generally paid 3 months after
the year after the preparation of the financial statement. This requires human
judgement which might result into errors.
 Failure to understand or take action: The each of the construction worker is
required to use a phone app through which they mark their attendance at the site.
The payroll department download that data to calculate pay and tax for each of the
worker. Under this, there are chances of failure to understand the system by the
workers.
 Inappropriate management override of controls: Since, there are have twenty office
staff at their Head office who are paid monthly while there are twenty regional sales
staff with lower pay and the roles and responsibilities of these two might collide or
interrupted which results into inappropriate management of controls.
Thank You.
QUESTION- 2
a) Contents of an unmodified audit report
An unmodified audit report is one that is issued by the auditor showing that the
financial statements of the company are providing true and fair view in respect of its financial
health. The contents of the report are similar as per the format prescribed by the auditing
principles. Some essential elements of the report are:- Title- The first requirement is the title depicting that the report is presented by the
independent auditor. Addressee- To whom the auditor's report is addressed as per the law or regulations. Introductory paragraph- It contains the details related to the financial statements of
the entity, period of accounting and explanatory accounting policies. Management's responsibility for the financial statements- It shall quote the
responsibility of management in terms of preparation of the statements as per the
financial reporting framework, managing internal control related to frauds, errors and
material misstatements (Louwers and et.al., 2018). Auditor's responsibility- Specifies that the audit is conducted in accordance with
International Standards on Auditing and fulfils ethical requirements by maintaining
reasonable assurance.

 Opinion paragraph- It shall notify that financial statements give true and fair view. Signature of the auditor- The name and signature of auditor or the audit firm. Date of auditor's report- The date should be post obtaining sufficient and appropriate
audit evidence.
 Auditor's address- Location of auditor's practices.
b) Emphasis of Matter
The emphasis of matter paragraph is the part of the auditor's report that is in their
judgement relevant and important for the users of financial statements (Lessambo, Lessambo
and Weis, 2018). It is specified in such paragraph when the auditor wishes to draw the
attention of users towards the matter or the facts that are disclosed in the report pertaining to
the financial statements of the entity.
The two examples are:-
 Uncertainties pertaining to litigation and its future outcome
 Catastrophe
c) Qualified: -
1) GAAP not followed by company
2) Negative financial status
Disclaimer
1) Non-satisfactory explanation for the questions
2) Incorrect nature of transaction
Adverse
1) High level material misstatement
2) Fraudulent practices of management
QUESTION 3
a.
To: Audit Team
Subject: Ethical threats identified
In reference to the information provided, it can be stated that there are five major ethical
issues which has been identified with respect to Tusla Motors Ltd and Bimbola & Co. and
has been discussed below.
1. The assistant finance director of Tusla Motors Ltd joined the audit firm and was
even suggested that because of his familiarity with the company can be appointed
as the independent partner review for the audit. This is not right as the person
having an interest within the company cannot become a part of it in regard to audit
and is also ethical not right.

2. In order to complete the audit procedures quickly, the directors of Tusla Motors Ltd
also offered to take the audit team to a go-karting event just before starting the
audit.
3. The company also invited the key engagement partner and his wide over a meal in a
five-star restaurant and also collected and returned home in the chauffer driven
Rolls Royce motor car.
4. Tusla Motors Ltd for celebrating its 50-year anniversary along with eth impending
floatation, the firm has even commissioned the limited-edition scale models of its
cars, which has been offered to each audit team member.
5. In addition to this, the company also offered Tusla Motors Ltd a 25% reduction in
its selling price of the vehicles in case if the audit team would like to purchase a car
from the.
These are the key ethical threats which are being identified from eth given scenario.
Thank You.
b.
1. It can be mitigated by not allowing the given audit firm Tusla Motors Ltd to involve
the assistant finance director within the audit team (Shailer, 2020).
2. It is recommended to BimBola & Co to not engage into any of the activity which is
not right or unethical and this is being done so that the audit team do not ack much
questions and complete the audit quickly.
3. Also, the company should not involve the key engagement partner into such activities
as it will affect the true and fairness of the audit report. Avoiding such things will help
in mitigating the ethical threat.
4. Provided commissioned limited edition vehicle to the team members is unethical and
eth company should involve in such activities with its audit team as it might incur
government interference, thus, it should be avoided (Tahir, 2017).
5. Offering vehicles at 25% reduced price is an unethical tactic for covering wrongful
deed right or avoided. In order to mitigate this, the audit team which not work for this
client.
QUESTION 4
A
The sufficient appropriate evidence is being defined as the evidence which is
essential for the better and effective working and completion of auditing (Louwers and et.al.,
2018). Audit evidence is being defined as the information which audit undertakes in the used
for arriving at the conclusion that whether the financial statements of the company was made

in accordance with the accounting standards or not. This fact is that this sufficient mounting
evidence is necessary for the effective evaluation of the financial statements of the company.
B
There are many different sources through which the audit evidence can be collected
and analysis of the financial statements first of the major sources of audit evidence are being
defined as follows-
 The major audit evidence is the financial statements of the company. These
statements are more reliable and effective in order to analyse and ordered the
performance of the company. the example of the financial statements are the profit
and loss account balance sheet and cash flow statement first of all these data is
reliable and effective (Turker and Bicer, 2020).
 In addition to this audit evidence is Bank account statement. this is also good
evidence because in the bank account statement as well all the transactions are being
recorded in the same and effective and can be used effectively for auditing.
C
Different audit procedures to virtual auditor can obtain evidence. The major procedure for
audit evidence is as follows-
 The first procedure is the observation under which the auditors observes the financial
statements and evaluate that whether the standards are being followed or not (Farooq
and De Villiers, 2017).
 In addition to this an automated procedure which can be used to for audit evidence
collection is the inspection. This is the method through which the auditor inspects the
financial statement and all transactions of the business to evaluate whether the
company has made the financial statement in accordance with the standards or not.
D
Items i) Audit
objective
ii) Degree of
reliability
iii) Supporting
evidence
A local newspaper
report stating that if
the expansion to the
local airport is
approved, it will
mean that part of the
This transaction is not
of much audit
importance as this
will not have much
impact over the
auditing.
There is high degree
of reliability as this
is published in
newspaper.
The supporting
evidence is the
newspaper.

freehold properties
belonging to Tong
See Ltd will be
demolished.
A letter from Tong
See’s bank
indicating the
agreed overdraft
facilities for the next
year.
The objective of this
is the fact that the
company is having
the overdraft next
year and this will
form the image that
company is having
overdraft.
There is high degree
of reliability
(Lessambo,
Lessambo and Weis,
2018).
The letter will be
the supportive
evidence.
A comment by the
Procurement
Director over lunch
that the air
conditioning and
heating controls in
the warehouse were
in a bad state of
repair and were in
need of upgrading.
This will not make
much effect on
forming opinion over
the financial
statements.
The reliability of the
data is also high as it
is being marked by
the procurement
director.
The comment of the
director will be the
supportive evidence.
The sample of items
that were physically
counted by the audit
junior when he
attended Tong See
Ltd.’syear- end
inventory count.
This will make a part
of forming the
opinion as last year
this was done.
The reliability is
high
The supportive
evidence is the audit
done by junior.
QUESTION 5
A

Both the events and facts on the financial statements relating to the period but
becomes known or occurring after the end of the accounting period. The reason underlying
this fact is that both event and the facts affect the financial statements of the company. For
instance as there was locked I want you to pandemic it also affected the allowances treatment
of the company this was an event but then also it affected the financial statements of the
company (Larrinaga and et.al., 2020). The reason underlying this fact is that you to lock
down the businesses were shut and the profitability of the company reduced. The decision of
the company for not adjusting its financial statement is not acceptable. The reason underline
this fact is that in change within the financial statement for the transaction affecting the
financial statement need to be adjusted in order to provide a clear picture. The decision of the
company to not adjust its financial statement is not acceptable at all.
B
i) Accounting treatment of the first transaction is that I'm it will not be included in
the current year’s financial statement. The reason underline this fact is that the
letter was found dated 1st February 2020 hence it will be adjusted in the year end
ii) Accounting treatment of the second transaction is that the redundancy payment of
the amount will be treated as the expenses of the company.
iii) In case of the third transaction it was identified that inventory was sold for fewer
amounts from stock hence the difference amount will be credited as sales
(COŞKUN ARSLAN and DEMİRKAN, 2017).
iv) The last transaction it was evaluated that the accounting treatment of this will
include having a difference amount at the market value.

REFERENCES
Books and Journals
Camilleri, M. A., 2018. Theoretical insights on integrated reporting. Corporate
Communications: An International Journal.
COŞKUN ARSLAN, M. and DEMİRKAN, S., 2017. Auditing And Assurance Services.
Journal of Accounting & Finance.
Farooq, M.B. and De Villiers, C., 2017. The market for sustainability assurance services.
Pacific Accounting Review.
Ibrahim, S., Diibuzie, G. and Abubakari, M., 2017. The impact of internal control systems on
financial performance: The case of health institutions in upper west region of
Ghana. International Journal of Academic Research in Business and Social
Sciences. 7(4). pp.684-696.
Larrinaga, C., and et.al., 2020. Institutionalization of the contents of sustainability assurance
services: A comparison between Italy and United States. Journal of Business Ethics,
163(1), pp.67-83.
Lessambo, F. I., Lessambo, F. I. and Weis, 2018. Auditing, Assurance Services, and
Forensics. Springer International Publishing.
Lessambo, F.I., Lessambo, F.I. and Weis, 2018. Auditing, Assurance Services, and Forensics.
Springer International Publishing.
Louwers, T. J. and et.al., 2018. Auditing & assurance services. McGraw-Hill Education.
Louwers, T.J., and et.al., 2018. Auditing & assurance services. McGraw-Hill Education.
Shailer, G., 2020. Ethics in the Independent Audits of Financial Statements. Handbook on
Ethics in Finance, pp.1-17.
Tahir, F. A., 2017. Exploring the Influence of Ethical Culture and Auditor Objectivity on
Auditor Integrity among Nigerian Auditors: A Proposed Study.
Turker, I. and Bicer, A.A., 2020. How to Use Blockchain Effectively in Auditing and
Assurance Services. In Digital Business Strategies in Blockchain Ecosystems (pp.
457-471). Springer, Cham.