Auditing Theory and Assurance

The report evaluates the internal control system of MPP Limited and develops an audit strategy to reduce substantive work. It addresses weaknesses in the internal control of sales and trade receivables and provides recommendations for improvement.

Running head: AUDITING THEORY AND ASSURANCE
Auditing theory and assurance
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AUDITING THEORY AND ASSURANCE
Executive summary:
The report has been prepared for developing the audit strategy of MPP limited that would be
reliable only on the internal control testing. The developed strategy is intended to reduce the
substantive work of auditors. For this, the effectiveness of the internal control system of MPP
limited is evaluated by developing the test of control and addressing how such control would
help in eliminating the risks associated with the control system. Furthermore, the weakness in
the internal control of sales and trade receivables are evaluated and analyzed along with
determining the measures required for addressing the issues identified.

AUDITING THEORY AND ASSURANCE
Table of Contents
Introduction:...............................................................................................................................3
Discussion:.................................................................................................................................3
Answer to Part A:.......................................................................................................................3
Answer to Part B:.......................................................................................................................3
Answer to Part C:.......................................................................................................................3
Conclusion:................................................................................................................................3

AUDITING THEORY AND ASSURANCE
Introduction:
The report is prepared to evaluate the internal control system of MPP limited and
whether the newly developed internal control system would help in addressing the existing
control issues of the company. The report also seeks to make recommendation on the audit
strategy that would help in reducing the substantive work of auditors that relies on the system
of internal control. For this purpose, the effectiveness of the internal control system in
addressing the risks is evaluated and one test of control is developed for each of the
potentially effective control. Therefore, the effectiveness of internal control system is
determined by the appointed audit team if MPP limited by developing the test of control so
that they are not required to adopt substantive auditing procedures for conducting the audit of
financial information.
Discussion:
Answer to Part A:
Effective control Risk alleviated Test of control
Creation of delivery note
The delivery note for recording
the total amount of tiles
dispatched and total amount of
tiles returned serve as the
checklist and can be used as a
proof of delivery. The
organization would be able to
get the overview of the products
The delivery note serves as the
proof that the goods have been
delivered and in the event when
the goods have not been
delivered, the reason for the
same can be ascertained. The
errors in comparing the
products that is actually
received and have been actually
The auditors can obtain
objective assurance about the
accounts receivable from the
customers that the balance is
correct by sending the
confirmation letter to
customers. In addition to this, a
random sample of transactions
can be selected by auditors to

AUDITING THEORY AND ASSURANCE
that have been ordered. sold can be reduced with the
preparation of delivery notes
(Abbott et al. 2016).
examine the details related to
the invoices. The auditor
should check the validity and
completeness of the documents
by reviewing the documents in
the sales order (Barr et al.
2017).
Computerized accounting
system
The computerized system helps
in raising the invoice and
automatically retrieves the price
of stock code from selling price.
In addition to this, the system
also prepares the sales journal
summarizing all the invoices of
sales along with an aged
analysis of month (Axelsen et
al. 2017).
This system is of moderate
concern to the external auditors
because the control is usually
exercised by senior managers
and they are less relevant to the
processing of transactions. The
master file control helps in
ensuring the ongoing entity of
the data that is standing in the
file.
The test of control that can be
used by auditors is to perform
compatibility checks for
ensuring that the data inserted
in preparing the age analysis
and other invoices are from two
or more filed are compatible. In
addition to this, the auditors can
use the digital verification as a
test of control for ensuring that
the data input is correct
(Farooq and De Villiers
2017).
Reconciliation of trade
receivable ledger
Reconciliation of the trade
receivable ledger helps in
ensuring that there are no errors
in recording the amount of
creditors and debtors and it
Reconciliation of the trade
receivable ledger helps business
in ensuring that the risk of error
and fraud is reduced and the
accounting information
produced by it is complete and
accurate. When preparing such
The reconciliation of the trade
receivables ledger to the debtors
control account in the general
ledger can be tested by
reconciling the confirmation
exceptions by sending main
request along with reviewing

AUDITING THEORY AND ASSURANCE
helps in identifying the
discrepancies between the
control accounts (Earley et al.
2016).
reconciliation, the differences
between the two balances can
be investigated and any
discrepancies can be indentified
easily.
the age subsidiary ledger for
individual accounts.
The auditors can develop test of
control that seeks investigation
into the accounts receivable
aged analysis prepared by the
computer system. In addition to
this, the reconciling items can
be investigated by reviewing the
justification made by the trade
receivable clerks.
Summary of sales journal
Summarizing the sales journal
would help in grouping of sales
of merchandize on credit. It
helps in evaluating the facts
about the transaction and the
information can be gained from
one single line. In addition to
this, such sales journal allows
for greater division of labor so
that only one person can be put
in charge for entering the value
(Simnett et al. 2016).
Preparation of the sales journal
using the computer system
helps in preventing errors and
conducting of any fraud when
entering the data from the sales
invoices. Before the
transactions are recorded and
executed, they are usually
authorized. The risk of losing
information stored in the
computer file would be reduced
by the use of check digits, back
up files and conversion
verification. The occurrence of
computational errors associated
with the manual processing is
eliminated because of the
It would be appropriate for
auditors to use the integrated
test facility for reducing the
substantive work involved in
evaluating the effectiveness of
the internal control system of
MPP limited. The auditor can
use the application system for
tracing the complex logic path
along with verifying the
accuracy of processing that is
concurrent with the processing
(Briem and Wald 2018). In
addition to this, the transactions
in the application system should
be monitored continuously.

AUDITING THEORY AND ASSURANCE
preparation of sales journal by
computer system.
However, the trade receivable
clerk is responsible for posting
the items and data retrieved
from the journal to the ledger.
In such activities, there is the
possibility of conducting an
error while putting and inserting
the input data.
Answer to Part B:
This section demonstrates the weakness of internal control for sales and trade
receivables for MPP limited which are listed below:
Internal control weakness What might go wrong
Committing error by trade receivable when
generating invoice on the computer system and
the raising the credit note.
Entering of the data by trade receivable clerk can
be regarded as the deficiency in the internal
control function of MPP limited. The control over
the trade receivable initiates with the creation of
the invoice and therefore, it is essential to
minimize the issue associated with the creation of
the invoice (Velte and Stawinoga 2017). In this
regard, the weakness lies in the internal control
system in terms of committing of error by the
trade receivable clerk who might input the data
wrongly. There is a chance of committing error
when recording the stock code on delivery note

AUDITING THEORY AND ASSURANCE
and inputting the total quantity that has been
delivered. The debtor accounts prepared by the
computer system would be wrong due to wrong
input which can misrepresent the financial
statement and therefore, there arises the risk of
material misstatement.
Invoices are forwarded to the customer merely on
the basis of customers order.
In such situation, there is a high risk that the
revenue generated from the sales of tiles will be
recorded incorrectly before the goods that have
been sold are received by the customers
(Michelon et al. 2018). As a consequence of the
risk, it carries a similar risk that there will be
overstatement of the profits in the financial
statements prepared by MPP limited that have
been recorded. in order to facilitate efficiency and
ease of communication, a copy of completed
goods delivery notes should be forwarded to the
sales department of MPP limited.
There is inadequate audit trails for the
transactions pertaining to sales. The details for
doubtful debts should recorded after the
transactions have been made and nit when it is
felt necessary by the financial controller.
Recognition of the revenue pertaining to the
transactions should be recognized at the point of
delivery of tiles to the customers. This is so
because one of the keys to the accounting
function of MPP limited is the signed delivery
notes receipt that is acknowledged by the
customers. This is important in determining the
date of the sales transaction which should be
recognized in the records of the company’s

AUDITING THEORY AND ASSURANCE
account (Donelson et al. 2016). In the absence
of such recording, there is the risk that the
accounting record of the company will be
inaccurate and incomplete with regard to the
sales of tiles.
Lax computer password policy might give
unauthorized staff members access to the
accounting data. It is quite possible that the
computer system that is used by the MPP limited
might lack password or are not adequately
password protected and thereby there is a
problem of lax password management. In such
scenario, there is a high chance of committing of
errors by the accountants and the person having
unauthorized access (Pcaobus.org 2019).
Such lax password management might result in
occurrence of fraud and errors in preparation of
class of transactions and accounts balance. One
of the most common fraudulent acts that can be
experienced by MPP limited due to lax password
is overstating of the revenue account by
recording the amount of revenues fictitiously pr
prematurely. The misrepresentation of revenue
account can result in materially misstating the
statement of profit and loss prepared by MPP
limited. The significance and extent of these
potential errors can be determined by the auditors
using analysis routines and data retrieval
(Omoteso 2016).
Answer to Part C:
The audit team is providing with direct assistance in auditing the financial statements
of MPP Limited. Internal auditor is responsible for evaluating, analyzing, recommending,
assuring and other information to the management and board of director of entity. The audit
team in obtaining the audit evidence expects to use the work of the internal audit function.
Usage of that work results in the modification of timing and nature and reduces the extent of

AUDITING THEORY AND ASSURANCE
the extent of audit procedures that has to be directly performed by the audit team. It is
required by the external auditors to determine whether the audit evidence can be obtained
using the internal audit function. Such determination is done to the extent to which the
objectives of internal auditors are supported by the relevant policies and the organizational
status of the audit function. In order to obtain the nature and extent of the performed internal
audit function, it is required by the auditors to obtain an understanding of the same. The
reliance of the audit team on the work of internal audit function and in obtaining audit
evidence is to the extent to which the objectivity of the internal auditors are supported by the
relevant procedures and policies and the organizational status of internal audit function
(DeFond and Lennox 2017).
The audit team of MPP limited has the sole responsibility for expressing the audit
opinion and they are required to make considerable judgment in the engagement of audit such
as evaluating the sufficiency of tests performed, assessing the material misstatement risk,
evaluating the estimates in accounting and evaluating the disclosure adequacy in the
preparation of the financial statements of the company. In addition to this, the audit team
while performing the audit of MPP limited might seek direct assistance from the internal
auditor and such assistance is related to the work performed by the internal auditor in order to
complete the aspect of the work of audit (Bentley et al. 2017). While receiving direct
assistance, it is required by the audit team to assess the objectivity and competence of the
internal auditors and evaluate, review and test the work to the extent of appropriateness in the
circumstances. For any particular class of transactions, accounts of balance and disclosure, it
is required by the audit team of MPP limited to involve more judgment in performing and
planning the procedures of audit and conduct the evaluation of results. Furthermore, in order
to obtain sufficient appropriate audit evidence, the external auditor should make less use of
audit work and should perform procedures in accordance with the prescribed auditing

AUDITING THEORY AND ASSURANCE
standards. They are required to have more persuasive audit evidence when the assessed risk
of material misstatement is higher and in such situation, the more of direct work has to be
performed by the audit team (Ahmed and Anifowose 2016).
The reporting of the internal auditor should be done in specific formats by the audit
team appointed for auditing the financial report of MPP limited. If the auditors found that the
audit evidence found by the internal auditors are supported with relevant documents and
justification, then the filing of the sufficient appropriate evidence of the audit evidence by the
audit team if MPP limited should be consistent with the evidence of internal auditors. The
significance and extent of the potential errors committed by the computer system can be done
by performing routine analysis and data retrieval (accaglobal.com 2019). In addition to this,
the results of test data can be evaluated by the audit team for determining the record type that
should be retrieved for the purpose of analysis.
Conclusion:
From the analysis of the given case of MPP limited, it can be inferred that the internal
control system of MPP limited has improved because of the introduction of computer system.
This has been observed from the preparation of delivery notes, sales journal and cross
checking done by the trade receivables clerk. Therefore, the audit team appointed for auditing
the financial statements of MPP limited is not required to develop analytical and substantive
procedures for obtaining sufficient appropriate audit evidences. However, there are some
accounts balances such as revenue account for which the auditor are required to adopt a
substantive audit procedures as there exist inadequacy relating to the verification of the sales
transactions and probability of occurrence of error sand fraud activities when inputting the
data into the computer system. Such fraud can occur due to the lax password management

AUDITING THEORY AND ASSURANCE
that might provide unauthorized person with the access to accounting data who might
materially influence the financial statement of MPP limited.
Recommendation:
It can be deduced from the evaluation of the internal control system of MPP limited
due to the improvement brought by the changes in the accounting system that the audit team
can develop audit strategy that rests on the test of control except for the evaluation of some
classes of transactions. Therefore, it can be inferred from the detailed evaluation of the
internal control system that the extent of substantive work of the auditors can be reduced by
placing reliance on the work of internal auditor brought by the effectiveness of internal
control system. In addition to the introduction of computerized accounting system, MPP
limited should also introduce robust procedures that help in facilitating the certainty and
clarity in inputting the data into the computer system. Furthermore, there should also be
modification of the process to ensure authorization and checking as a means of providing
additional control.

AUDITING THEORY AND ASSURANCE
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