Accounting Principles and Auditing

This accounting assignment delves into various concepts including analyzing accounts for abnormalities, understanding the impact of research losses and stock overvaluation, addressing audit risks associated with mineral content changes and legal disputes, and navigating tax implications and internal control weaknesses. The questions require applying accounting principles to real-world scenarios and demonstrating an understanding of auditing procedures.

Running head: AUDITING AND ASSURANCE
Auditing and Assurance
Student’s Name:
University Name:
Author Note

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Table of Contents
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Answer to Question 7.23
IT Application control, IT General Control, Manual control
Part (a)
If the users cannot process transactions when the customer balance exceeds the credit
limit, then it will be definitely a manual control. This is because the effect of such a regulation
lies in posting of an invoice which definitely is a manual act.
Part (b)
Users cannot change data field is an IT General control because the mentioned fields in
the question such as invoice date, discount rates, unit sell price, GST rate, stock descriptions and
payment terms will not be highlighted when the database is accessed by users.
Part (c)
Users not being able to override the customer name when entering an account code also
falls under IT General Control because similar to the above case, the concerned field will not be
highlighted when the database is accessed by the user.
Part (d)
Reconciling the postings in the general ledger to the sales report everyday is definitely a
manual control as because it is done manually by the head of accounting.
Part (e)
All data being backed up on a nightly basis falls under the category of IT Application
control because it is done automatically with the help of an IT Application.

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Part (f)
Users cannot post a transaction if there are incomplete data fields, fall under the category
of IT Application control. This is because this activity can only be achieved with the help of a
technical application.
Part (g)
Users cannot enter negative values for quantity or price will fall under IT Application
control. This is because this can only be achieved with the help of an application.
Part (h)
All authorised accounting staff trained specifically in the use of new accounting system
fall under the domain of manual control. This is because training employees is always done
manually.
Part (i)
Logins to any computer that has the accounting program installed on it being restricted
falls under the domain of IT General control. This is because the IT department controls the
entire system therefore it will be controlled by the IT General team. Accounting staff who can
access the computers with the help of unique passwords fall under the domain of IT Application
control. This is because passwords can only be controlled by applications.
Answer to Question 7.24
Part a (i)
In the question it has been asked to identify two specific audit risks that Cool Air Ltd is
under due to the recent changes in the company. The two specific audit risks that can be

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associated with Cool Air Ltd are detection risk and risk of material misstatement. Now the
meaning of detection risk has to be understood. Detection risk is a type of risk that generally
occurs due to carelessness on the part of the accountant, recording the financial statements of the
concerned company. At times when the same mistake is made to happen that is a particular
amount is avoided or not inserted in a particular account then the risk associated with it changes
from detection risk to risk of fraud. In case of Cool Air Ltd. the new invoicing system
implemented in the company makes it more prone towards detection risk. Secondly another risk
that can be associated with the current situation of the company is risk of material misstatement.
Risk of material misstatement refers to the risk which arises when a particular account is
understated or overstated. The new invoicing system may increase the chances of material
misstatement as according to the question the employees have not been trained to work upon it.
Part a (ii)
Two controls in order to mitigate the above mentioned risks are that in addition to the
annual audit that is conducted on a yearly basis, internal audit should also be conducted at
regular intervals in order to keep a watch on the financial statements as to whether any
misstatement or fault in relation to detection is occurring in the books of accounts. Surprise
audits or checks on the part of the management may also be conducted in order to minimize the
chances of risks.
Answer to Question 8.22
The first control as mentioned in the question is that requisitions by the production
department are required before purchase orders are prepared by the purchasing department. Now
an auditor in order to test this particular control should obtain the statements where the past

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requisitions that have already been sent by the production department to the purchase department
have been recorded. The auditor should check all the details that have been provided in the
statements and match it further with the books of accounts maintained by both the purchase and
production department separately.
The second control as mentioned in the question is that purchase orders are placed with
approved suppliers only. The auditor in order to test this particular type of control should take up
a sample of names from the suppliers list with whom business has been done and then again
should take up a name at random from the sample list and check whether all the regulations have
been followed while making the transaction. Most importantly it should also be checked whether
the supplier is an approved supplier or not.
The third control, as mentioned in the question is that purchase order and receiving report
are reconciled before a voucher package. The auditor in order to test this kind of control should
himself check and reconcile both the statements and make an opinion of his own.
The fourth control as mentioned in the question is that purchasing, receiving, accounts
payable and cash payment functions are segregated. Now this would be a bit laborious on the
part of the auditor for testing this particular control. This is because he has to conduct a scrutiny
of all the accounts individually in order to remove the chances of misstatement that is a common
occurring in these accounts. In addition to this the auditor has to obtain the debit and credit notes
and back check them in order to test the effectiveness of such a control.

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Answer to Question 8.23
Part (a)
As asked in the question the assertion addressed by the first control implemented by the
company is that if a purchase requisition form is initiated by a person other than the authoriser
of the purchase order then the chances of committing any careless mistake or fraud as the case
may be is minimized. This is because the person authorising the purchase order is only
concerned with the fact that if all the required steps have been followed in placing the order or
not and whether the terms and conditions of the agreement is clear to both the parties or not. But
another person initiating a purchase requisition form can make sure whether the purchaser is
really interested in the deal or not.
The second assertion regarding the control as mentioned in the question is that an
authorised purchase order not only is beneficial on the part of the buyer but also on the part of
the seller. This is because it leads to enough recorded proof about the nature of transaction both
on the part of the buyer and seller.
The third assertion addressed to the control as mentioned in the question is that if the
purchase falls under $5000 then it will be approved by a department manager. If the purchase
order ranges within $5001 to $50000 then it would be approved by department manager and
chief financial officer and lastly if the purchase order is of more than $50000 then it has to be
approved by the board of directors. Now the assertion made by the management in case of such a
control is that higher the value of a particular purchase order, higher will be the hierarchy of
authority approving it. This is because in general purchase orders of high monetary value will
have greater complications and risks attached to them, which if not handled with proper
precision and skill may result in huge loss for the company.

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The fourth assertion addressed to the particular control that mentions that an
approved for payment form from the purchase requisitioner confirming that the service was
received is implemented by the management in order to make sure that both the purchaser and
the seller has enough proof with them regarding the proceedings of the transaction.
Answer to Question 9.18
Part (a)
The key account at risk of misstatement as asked in the question is the accounts
receivable account. This is because if this particular account is misstated, that is, if it is
understated then the net profit of the company will also be less as a result of which the annual
bonus that is decided to be paid by the company to the staff will also be less in amount.
The two key audit assertions at risk are that the accuracy and completeness of the
financial statements might be hampered as because the decision of payment of annual bonus has
been taken by the management in order to retain the staff. Now in order to keep up with the
decision of the management the general employees not only have to put in more effort but also
show enough profit in the financial statements so that the payment of bonus looks justified.
Secondly the disclosures that are presented by the management in the financial statements of the
company may also not reflect the true and fair view of the company’s affairs in order to manage
the extra bonus payment. Therefore these are the two audit assertion at risk.
Part (b)
The audit procedures that one has to perform in order to gain sufficient appropriate audit
evidence on each assertion is that the financial statements especially the accounts such as stock,
accounts receivable, dividend receivable should be checked in order to remove or minimize the

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chances of material misstatement. The internal audit should be conducted at regular intervals and
the nature of the financial statements that is the disclosures presented by the management should
be checked regularly in order to avoid any kind of discrepancy.
Answer to Question 9.20
Part (a)
As asked in the question the assertion that is vulnerable to high risk of material
misstatement is the assertion in which it is mentioned that all expenses of the group are paid by
Reliable Communications and these expenses include the cost of technology operations. This
assertion is at high risk of material misstatement because the account very easily can be
overstated thus obtaining more than what was incurred.
Secondly the assertion that is most at risk is the one in which Sarah prepares a schedule
of transfers each quarter and reconciles each of the bank accounts monthly. This is because if
Sarah does not prepare the accounts with enough precision then the entire process including the
amount of transfers and the balance of the bank will be affected too finally resulting in
misstatement of accounts.
Part (b)
Three audit procedures that may be used to test whether these risks will result in a
material misstatement are that the auditor should at first identify as to which are the accounts that
are at stake of material misstatement. This can be done by scrutinizing the financial statements
prepared for the last financial year and then comparing it with the accounting statements of the
current year. Accounts that represent erratic increase or decrease in balance may be affected by
risk of misstatements.

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Secondly the auditor should very logically fix the amount of materiality. The amount of
materiality refers to that amount that is permissible if the accounts are overstated or understated
by that amount. The auditor essentially overlooks disparity in the accounts if the amount is
within the stipulated range of materiality. Thus the second procedure is fixing the amount of
materiality.
Thirdly the auditor should also make sure that the accounts prepared by the company
should be according to the laid down policies and regulations of the accounting standards. This
automatically reduces the chances of the occurrence of misstatements in the books of accounts.
Answer too Question 10.17
Part (a)
As mentioned in the question in order to gather evidence about the existence and
completeness of assertions, the samples that should be selected from the population that is not a
regular customer of the company. This is because the disparities or any kind of discrepancy that
may occur while handling customers may most probably occur with the population of customers
who are not regular. Regular customers are generally well aware of the knits and grits of the
company. Thus sample from the less regular population should be chosen.
Part (b)
The auditor in order to select samples should consider the account balances or
transactions that are most exposed to the risk of material misstatement. He may also select the
sample on the basis of the value of transactions that are executed during the stock take. This
would definitely result in proper recording of the transactions taking place at different locations.

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The auditor will also be able to reconcile the stock listing at every location with the stock sheet
paper, thus minimizing the chances of occurrence of misstatements.
Answer to Question 10.18
As mentioned in the question the sample Tom selected will provide sufficient audit
evidence for the valuation and allocation of accounts receivable as at 30 June 2015. This is
because as observed in the random ten transactions as selected by Tom, certain balances are
irrelevantly less than the others. Like a certain transaction on 6th July, 2015 amounts to $39.80
and that on 9th June, 2015 amounts to $31.25. Another receivable that is abnormally high has
been executed on the date of 3rd July, 2015 is of the amount $9655.90. These abnormalities
should be checked into as to why the balance of the particular account did go so low or high on
these particular dates. Tom will get enough audit evidence from these abnormalities in these
accounts. The debit notes should be checked and backtracked with the particular debtor in order
to check the details of the transactions.
Answer to Question 11.18
As it has been asked in the question the first event that took place was that PPL did lose
upon its new research of photocopy paper because a similar patent had already been registered
by another company previously. This would essentially be recorded in the financial statements as
a loss because the cost involved in the research of the product could not be turned into revenue.
The second amendment that is required is in the area where a part of PPL sells books and
because of that the stock is overvalued by one third of its previous value. This should be very
well kept in mind while preparing the financial statements and should also be included within the

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disclosure of the accounting statements. These are the major amendments that should be done
while preparing the financial report.
Answer to Question 11.19
Part (a)
As it can be observed in the question, the iron ore purchased had an estimated mineral
content of seventy five percent but when the shipment was received the mineral content
increased to eighty five percent. Thus the liability also increased. Now this is very important to
be disclosed to all the stakeholders and should be included in the disclosure of the financial
statements. Otherwise it may lead to audit risk of material misstatement.
The second issue is that Brooks came to know that a particular customer is taking legal
actions in regards to disputed warranty claim. The customer had first informed Brooks of the
issue within one month of purchasing the good. Therefore the company should immediately
attain to the particular customer or else it may face a huge loss due to the legal obligations.
The third issue as stated in the question will probably be a loss for the company as the
entire investment cannot be turned into revenue.
Fourthly the settling of the law suit with twice the liability accrued in the financial
report should also be properly documented and provided in the disclosure of the accounts so that
the audit risk can be averted.
Part (b)
Additional information regarding the problem faced by the customer should be obtained
as to what exact issue was the customer facing with the goods. Secondly the settling of the

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lawsuit should also be looked into as to why the lawsuit was settled with twice the liability
accrued.
Answer to Question 12.21
Part a
If the management refuses to disclose the facts in a note to the financial report or to
adjust the financial report then the company shall be found guilty of the committing
misstatement in the books of accounts in order to evade income tax.
Part b
If the management agrees then the legal obligations taken against it by the ATO may be
reduced with proper justifications provided and accurate disclosures done.
Answer to Question 12.29
The further actions that should be taken in order to control the errors and weaknesses of
the company is that the financial statements should be subjected to internal audit at regular
frequent intervals. Another point is that the hedging strategy though appears to be advantageous
for the company but excessive hedging may lead to unexpected losses. Therefore the process of
hedging should be kept in balance by the management. The management should also take
initiative to scrutinize the entire accounting system, surprise audits should be conducted and
lastly a vigilant eye should be kept upon whether the accounting or recording of the financial
statements are done in accordance to the laid down standards or not. In this way the accounting
of the company may be made accurate.

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