Auditing Theory and Practice

Running head: AUDITING THEORY AND PRACTICE
Auditing theory and practice
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AUDITING THEORY AND PRACTICE
Table of Contents
Answer to question 1:.................................................................................................................2
Performing analytical procedures to assess the likelihood of misstatements of each of the
general objectives of accounts:..................................................................................................3
Answer to question 2:.................................................................................................................4
Identification of internal control to the audit objectives of sales revenue and inventory
account:......................................................................................................................................4
Explanation of internal controls in detecting the material misstatement of accounts:...............5
Answer to question 3:.................................................................................................................5
Answer to question 4:.................................................................................................................6
References list:...........................................................................................................................8
Anderson, J. and Fleming, D., 2016. Analytical procedures decision aids for generating
explanations: Current state of theoretical development and implications of their use. Journal
of Accounting and Taxation, 8(5), pp.51-58..............................................................................8

AUDITING THEORY AND PRACTICE
Answer to question 1:
The overall objective of sales revenue account is to evaluate whether there is a fair
presentation of the balances, disclosures and account transactions according to the applicable
accounting standards. In achieving the occurrence general objective of sales revenue account,
the objective of auditor is to obtain an assurance that all the transactions related to revenue
are recorded properly. Inherent risk is the susceptibility of a relevant assertion to a material
misstatement by assuming that there are no other related controls. For some assertions and
related class of transactions, account balances and disclosures, the risk of material
misstatement is greater. Inherited risk is also influenced because of rising business risk that is
associated with the external circumstances (Appelbaum et al. 2017).
The inherent risk related to particular specific relevant assertion is also influenced by
factors of the entity that are related to various of all the accounts balances, classes of
transaction and disclosures (accaglobal.com 2019). In the given case, Quarter limited is
facing inherent risk indicated by marking down of the selling price of the items that is aims at
making sales revenue account more susceptible to understatement. In addition to this, the
trend of sales in the previous years has made the products less popular with customers.
Some of the inherent risk that is associated with the sales revenue account includes
the timing of recognizing revenue, proper treatment of sales transactions done and customers
right to return the product (Byrnes et al. 2018). From the analysis of the case study of Quarter
limited, it has been found that the inherent risk associated with inventory account is the
complexities of inventory procedure and prior period misstatement. The financial statement
of Quarter ltd for year 2018 do not record allowance and expense related to obsolescence
account which would mislead investors about the valuation of inventory. In addition to this,
the signed delivery documents in the sale transaction of inventory management system are

AUDITING THEORY AND PRACTICE
not verified and the accountant might miss out on the invoice which would mislead the
prepared inventory report.
Performing analytical procedures to assess the likelihood of misstatements of each of the
general objectives of accounts:
The analytical procedures of inventory account can be assessed by developing an
independent expectation which require predicting the recorded ratio concerning that
particular account. Next step requires defining the observed significant difference and then
computing the difference along with reason for such difference and drawing the conclusion
(Lakis and Masiulevičius 2017).
From the given information on the figures of sales revenue account, it is observed that
the growth of profit has improved year on year with the current figure recorded at 1.06. It is
expected that the profit growth would be accelerated further because of introduction of online
stores and refreshment of existing stores to catch up with competitors and to increase the
profits generated (Appelbaum et al. 2018).
It can be observed from the given case study that the inventory turnover ratio is
recorded at 5.88 in the first 10 months of 2018 which is less that the ratio recorded in the
previous year’s indicating that the ratio has fallen. This has been because of changing trend
and increased competition. Moreover, the company has not made any clearance sale for the
old inventories. Furthermore, the inspection of inventories is not done because the staffs have
been busy with the disruptions in delivery.