Auditing and Assurance: Case Study Analysis and Audit Planning Process

This article analyzes a case study on auditing and assurance, including the auditor's approach towards different audit engagements, risks associated with IT systems, and sales and collection cycle functions. It also discusses the audit planning process and how supervisors can help auditors understand financial statements.

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Auditing and Assurance
Name of the Student:
Name of the University:
Author’s Note:

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Table of Contents
Question 1A.....................................................................................................................................2
Question 1B.....................................................................................................................................3
Question 2........................................................................................................................................4
Question 3........................................................................................................................................6
Reference.........................................................................................................................................9

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Question 1A
a. As per the Case Study provided in the question, Alexis Dunbar is a staff auditor who is
engaged in the audit of three companies which are given below in details:
1. As per the requirement the first situation matches with Audit 2. As per the situation the
auditor had placed extensive reliance on the internal control of the company and when the
test of control was performed it revealed that there was certain control risk which arise.
Therefore, the auditor increased the substantive tests for transactions like account payable
(Griffiths, 2016).
2. As per the case which is given, it matches with Audit 1 engagements. In this case
extensive tests of control were performed and fairly analytical procedure was also
conducted. The auditor does not require external confirmation to confirm account payable
balances (Messier, Glover & Prawitt, 2015). Hence, it can be said that the internal control
of the company in this case is very strong (Jali, Abas & Ariffin, 2017).
3. As per the case given in the question, it matches with the engagement which the auditor
enters in Audit 3. The auditor is certain that the company does not have an effective
internal control structure. Hence the reliance on the internal control of the company will
be minimum. The auditor applies substantive procedure test in order to establish the true
and fair view of the entries (Glover, Prawitt & Drake, 2014). The company is smaller in
size as compared to the other two audit engagements and yet the time taken on the audit
is more than the previous two engagements which suggests that there might be possibility
of fraud or error therefore the auditor has increased audit procedures on the account
payable area to confirm or dismiss the possibility of frauds (William Jr, Glover &
Prawitt, 2016).

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b. The other factors which likely affect the auditor’s approach towards the audit of
acquisition and payments and account payables for the three different audit engagements
are nature of the business, size of the business, complexity of the transactions and similar
other factors. In all cases the nature of the business will be determining the auditor’s
approach towards the audit and also affect his reliance on the internal control system. The
size of the business is also another factor as mention in the 3 audit engagements, two out
of three business are medium sized companies and one is small. It is quite natural that the
auditor will be conducting more audit procedures in medium size firms and not that much
in small sized business in normal circumstances (Yang & Jia, 2013). The complexity of
the transaction is also a case to be considered as depending from business to business the
complexity of transactions might differ.
c. The supervisors of Alexis can help her in better understanding of the financial statements
of the companies by providing the audit documentation or working paper of previous
year so that Alexis can understand the nature of the business as well as take assistance
from the work of the previous auditors of the company. Alternatively, they can also
advice Alexis to first obtain a basic understanding of the nature of the business and then
proceed with the audit planning process.
Question 1B
As per the question, during an audit planning process the auditor analyzes the nature of
the business, assess the potential risks involved in the business, perform preliminary analytical
procedures and also decide the source through which audit evidences are to be collected. The
audit planning process can be sub dividend into areas where specific activities are required which
are discussed below:

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1. Accepting Client and Performing initial audit planning: The auditor will be determining
the users of the financial statements of the company and also sending the client the
engagement letter stating the terms of engagement of the audit. The auditor also needs to
identify whether any specialist will be required in the audit of the company such as an
expert.
2. Understanding Client’s Business and Industry: The auditor will be touring the plants and
office of the client to get a knowledge of the operations of the business. The audit will
also be reviewing the accounting policies of the business so that the auditor can
understand the policies which are followed by the company.
3. Assess Client’s business risks: For the purpose of assessing the client’s business risks, the
auditor will be reviewing the risk management controls and procedures of the business. It
also includes identifying potential related parties which are not disclosed but will be
requiring disclosure.
4. Preliminary Analytical Procedure: For such a purpose the auditor will be comparing the
key ratios of the company with the industry competitors.
Question 2
a. The case study provided states that Two Time bank has made a contract with Solution IT
to host all financial reporting application of the bank. Two Timer Bank has also made a
contract with Solution IT to provide a highly secure environment for data transmission
from a data center. The various risks which the business faces due to such an arrangement
are given below in details:
1. Other businesses which are similar to Two Timer Bank has also contracted with
Solution IT to host application from the same data center. There is a risk that there

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might be a mix up by the Solution IT of the for application which is to be hosted and
thus resulting data swap, data mix up and other related problems (Knechel & Salterio,
2016).
2. The bank personnel are the ones who enter the data, run application on the IT system
provided by Solution IT. There is a risk that the data might be wrongly entered which
will be result in errors. Such errors cannot be rectified by such a software.
b. With the implementation of the IT system and installment of the same, the internal
control of the Banks will strengthen as the system will automatically run the data and
provide reports, summarizing every detail. Even though there is a risk which is associated
with the manual entry of data in the system which might be wrongly entered by the
employee, the IT system will be appropriate for the Banking business. The internal
control of the business will be effective and efficient as it will be able to provide every
data which is entered in a summarize and report form (Badara & Saidin, 2013). In
addition to this, the arithmetical accuracy of the information entered can also be
established. Thus, it can be said that with the introduction of the IT system Two Timer
Banks will have better internal control system.
c. As per the question Two Timer Bank has contracted Solution IT to host the accounting
applications and also provide a data center from where data can be send and received. In
such circumstances after the installation of the IT system the internal control of the Bank
will be strong and therefore the auditor will be able to rely on the reports which are
generated by the system. However, the auditor will at first be testing the system in order
to ensure that the system is working effective or not (Pizzini, Lin & Ziegenfuss, 2014).

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The auditor can also enquire to Solution IT to get a basic idea about the working of the
system and identify id there are any risks involved with the same.
Question 3
a. The eight functions of Sales and Collection cycle are Processing customer orders,
Granting credits, Shipping Goods, Billing customers and recording sales, Processing and
recording cash receipts, Processing and recording sales return and allowances, Writing
off Uncollectible accounts, Providing for bad debts. The cases which are given in the
questions are analyzed below:
1. In case of Universities where the main customers of the business are the students of
the university. In case of a university, the customers are the students of the university.
The courses which are offered and which are applied by students can be considered a
processing of orders. Granting Credits in this case as full payment of course fee is
necessary and no credit is allowed. This is not also applicable as the university is
providing educational services and therefore there is no goods involved. The shipping
goods does not apply to such a business. In the case of University, when the student
enrolls for a course, he needs to clear his fees and this is considered to be sales of the
business. The billing for the services is to be done in advance for the student. The
cash which is generated from fees collected from part time and full-time students
which are mostly tuition fees are recorded accordingly. Processing and recording
Sales return and Allowances is not applicable to the business as university do not
provide any refunds of fess (Osadchy & Akhmetshin, 2015). Writing off of
uncollectable accounts is not applicable in such a business and therefore bad debts
also does not arise.

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2. In the case of Aroma Coffee business, the order processing is done when the
customers order coffee or teas from the business. The business does not grant credit
for the products which are provided by the business. The shipping of goods for
Aroma Coffee is not applicable (Whitehouse, 2014). The customers are billed for the
orders which are made by the customers and similarly record the sales and cash is
received for the products. In case of any problems in the coffee, the business will
provide free coffee if the claim is genuine. There is no uncollectible accounts or bad
debts for the business.
3. In case of a Physician services, the patients make appointments with the Physicians
where the processing of orders are made. Patients who are insured by insurance
company are provided credit for treatment as the amount will be recoverable from
insurance company. In this case also there is no shipping of goods as the business
provides services in the Medical center itself. The bills are generated on the basis of
the medical services which are taken by the patients and same is recorded in the
registrar. The cash is received in advance for general patients and for patients covered
by Insurance company credits are provided. There is no case of sales return or bad
debts. Uncollectible amount can occur when the business has to collect money from
the insurance companies.
4. The business of Buku.com is an online website which provides all kinds of products
to its customers and the business specializes in selling of books and used books. The
order is processed when customer orders a product in the website. The business
provides a credit in the form of 30 days period from receiving the order. As it is
global brand therefore certain products which have to be shipped in or out depending

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on the location of the customers. Such transport cost forms a part of the cost of the
product. The customers are billed and the customers have the option of make
immediate online payments or cash on delivery as preferred. In case of any defective
goods or if the customers are not satisfied goods are returned and replacement of the
same is made. Uncollected amounts and bad debts are rare but it occurs which is
written off by the company.
b. The eight sales and collection cycle functions will be different for different cases of
business. For example, in a manufacturing concern, all the eight functions will be
applicable and the business might also have bad debts (Lidstone & MacLennan, 2017).
Similarly, in case of a business which provides services, all the sales and collection
function might not be applicable.

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Reference
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Glover, S. M., Prawitt, D. F., & Drake, M. S. (2014). Between a rock and a hard place: A path
forward for using substantive analytical procedures in auditing large P&L accounts:
Commentary and analysis. Auditing: A Journal of Practice & Theory, 34(3), 161-179.
Griffiths, P. (2016). Risk-based auditing. Routledge.
Jali, M. N., Abas, Z., & Ariffin, A. S. (2017). Auditing and Internal Control. In SHS Web of
Conferences (Vol. 34). EDP Sciences.
Knechel, W. R., & Salterio, S. E. (2016). Auditing: Assurance and risk. Taylor & Francis.
Lidstone, J., & MacLennan, J. (2017). Marketing planning for the pharmaceutical industry.
Routledge.
Messier, W. F., Glover, S. M., & Prawitt, D. F. (2015). Auditing & Assurance Services: A
Systematic Approach. Qing hua da xue chu ban she.
Osadchy, E. A., & Akhmetshin, E. M. (2015). Development of the financial control system in the
company in crisis. Mediterranean Journal of Social Sciences, 6(5), 390.
Pizzini, M., Lin, S., & Ziegenfuss, D. E. (2014). The impact of internal audit function quality and
contribution on audit delay. Auditing: A Journal of Practice & Theory, 34(1), 25-58.

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Whitehouse, T. (2014). Auditing in the era of big data. Compliance Week, 11(126), 28.
William Jr, M., Glover, S., & Prawitt, D. (2016). Auditing and assurance services: A systematic
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