Audit

This article covers various aspects of auditing, including audit risk, substantive audit procedures, control measures, test data, CAATs, and analytical procedures. It also provides case studies and examples to help readers understand the concepts better.

Running head: AUDIT
Audit
Name of the Student:
Name of the University:
Author’s Note:

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Table of Contents
Question 1........................................................................................................................................2
Question 2........................................................................................................................................3
Question 3........................................................................................................................................5
Question 4........................................................................................................................................6

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Question 1
Audit risk refers to the risk that there might be some material misstatement in the
financial statements even though the same has been audited. In the given case study of Metha
Restaurant has 4 outlets and is engaged in restaurant business. The audit risks which may be
associated with the auditing of the business are given below:
1. The auditor appointed might lack the experience which is necessary for a detailed
auditing process and lead to detection risk. This is a result of the detection risk which the
audioe faces while conducting an audit.
Responses: With proper training and proper planning this risk can be avoided as the auditor
will become more experience and detection risk will be minimum.
2. Omission of raw material from total inventory recorded by the firm leading to risk of
misstatement in inventory. This is a control risk which is caused due to the weakness of
internal control system.
Response: Physical Stock count and effective internal control implementation can reduce
such a risk.
3. The restaurant has a website which is linked to financial system might fail and lead to
risk of failure of the website system. These are inherent risks which may happen.
Response: Test run the system to see if it is working properly or not.
4. The risk relating to weak internal control which might affect the overall operations of the
business. This forms a part of the control risks of the business.
Response: Development of a strong internal control system as per the need of the
management can reduce the control risks of the business.

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5. There is a risk that the cash might get stolen by the employees of the restaurant. This
forms a part of the inherent risks of the business.
Response: Proper supervision and surveillance can prevent such a situation.
Substantive audit procedures are applied by the business in order to collect audit evidences
for the auditing of the business. In the case of Metha restaurant, the auditor needs to test run the
website which records sales and financial information in order to establish that the system is
working effectively or not. In addition to this, the auditor needs to check the accuracy of the
website system and ensure that each and every transaction are properly recorded. The auditor
also needs to estimate the cost which the management will incur in case of breakdown or fault in
the system. Moreover, the auditor needs to inquire as to why the management has capitalized the
website cost rather than treating the same as expenses.
Auditing is an independent process which is conducted to ensure that the financial statements
are fairly represented or not. The key areas of an audit strategy are given below in details:
1. Audit plan: The audit is prepared on the basis of the nature of the company on which the
audit is being conducted. The audit plan is detailed planned activities which the auditor
will be conducting for collecting evidences.
2. Preliminary Engagement Activities: The preliminary engagement activities of the
business is terms on which the audit process is to be carried out. This the agreement
between the auditor and the management.
3. Field Work Reporting: This refers to the various activities and reporting aspects which
the auditor conducts while conducting the overall audit process.

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4. Communication process: This refers to the various process where the auditor engages in
communication with creditor and other external parties.
In addition to this the nature and scope of audit also determine the audit procedures which is
conducted by the auditor.
Question 2
As per the case study provided of Ross Hill Limited, there are certain deficiencies in the
system followed for cash recording are given below:
1. The cash which is collected by the business is in risk of being stolen if timely deposits
are not made.
2. There is an issue that the cheques of the company might get misused as there is the
requirement of only one signatory.
3. The banks transfer which the company uses are not secured as the security code is
easily accessible.
4. The cheque book is easily accessible by any one and a lot of people can sign the
cheques and missue the funds
5. A large number of staffs have access to online banking system and also has the access
to passwords which makes the system vulnerable.
The various control measures which can be suggested to improve the system of Ross Hills ltd
are:
1. The deposits of the company need to be deposited in a timely manner.
2. The cheques of the company need to be kept in a safe which is not accessible by everyone.

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3. The company need to change the security code and the code must not be provided to
everyone and changed frequently.
4. The company should not extend online banking services to everyone so that security can be
maintained.
5. The staffs of the company should not have access to security codes as well as online banking
services which should be extended to key staff members.
The test control process which the auditor can undertake to ensure whether the recommended
measures are being followed or not
1. Check the cash books to ensure that cash are being deposited regularly or not.
2. The auditor needs to ensure that the cheques are signed by multiple people.
3. Ask the employee if the passwords are changed regularly or not.
4. Analyze if the management offer online services to every customer or only to the
premium customers.
The five controls which should be incorporated in the purchase system of the company are:
1. There should be authorization for the purchasing system at different levels by the top
level management as per the requirement of the company.
2. The management of the company should conduct inventory checks to ensure that the
inventory levels are appropriate.
3. The management must also inspect the quality and the quantity of the goods which the
company had ordered to ensure that the required standards of quality and quantity
ordered are maintained.

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4. The company also needs to match the goods received with the authorized order placed to
ensure the correct delivery is made which was required by the company.
5. The level of purchases which is made by the management should be on the basis of the
requirements of the company as per the manufacturing process.
Question 3
The four example of test data which can be provided which helps in confirming the
completeness and accuracy of input which are entered in the sales system are given below:
1. The management can input a negative number in the system and run the same in order to
ensure that the system only accepts positive numbers in case of quantities ordered.
2. The management can process bulk orders in the system to check whether it is possible to
identify input errors.
3. The test data must contain a confirmation system of inputs made by the business so that
no inputting errors occur.
4. The management can check the price entry system by tying in losses or profits and
processing the same.
The various advantages of using CAATs are given below:
 CAAT’s allows the auditor to test huge volume of data which can be done rapidly and
precisely.
 The use of CAAT’s techniques is very cost effective from the perspective of human
capital it saves the human capital requirements of the audit and also makes the whole
process error free.
The disadvantages which are associated with the use of CAAT’s in audit process are:

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1. The overall set up which is required for CAAT is very costly and relies on the support of
the management.
2. CAAT’s changes with the change in the management of the company or due to a change
in the scope of audit.
Question 4
In the case of Riya Corporation, a customer has made a claim that the goods which were
provided to him were sub-standard and therefore the customer has made acclaim of £ 1.5 million.
The same has not been recorded in the financial statement of the company. If the above issues
are not resolved by the management and not reflected in the financial statement than the auditor
will be issuing a qualified report to the company as there is a material misstatement in the
financial reports. The claim should be disclosed as a contingent liability in the notes to accounts
of the company.
In the second case where the company is still showing the debt which is taken by Tyseley
ltd which as per the opinion of the management will be able to pay off the debt. The
circumstances are which are present around debt payment is on an estimate of the management.
It can be said that the financial statement of the company is showing true and fair view.
Therefore, the auditor must issue an unmodified audit report.
The two purposes for performing analytical procedures at the end of the audit is that the
technique can be used by the auditor to develop an overall conclusion on the basis of analysis of
the financial statement. It is also used to ensure that the understanding of the auditor is consistent
with the financial statements of the company.

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