Issues with Auditor's Responsibility | Audit Evidence | Inventory Counting

This document discusses the issues identified with regards to auditor's responsibility, the procedure of obtaining audit evidence, and audit procedures for inventory counting.

Online exam BA7010-
Auditing & Control

Table of Contents
Question: 1.......................................................................................................................................2
QUESTION 2..................................................................................................................................4
(a).................................................................................................................................................4
(b).................................................................................................................................................5
(c) Procedure of obtaining audit evidence involves:...................................................................6
QUESTION 4..................................................................................................................................7
(a) Audit procedure for inventory counting.................................................................................7
b) Five audit procedure for carrying out the ascertainment of the value of CRV’s inventory....7
Question 5........................................................................................................................................8
Difference between external and internal audit...........................................................................8
Requirements to appoint internal auditor....................................................................................9
Internal auditor reply upon external auditor................................................................................9
REFERENCES..............................................................................................................................11
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Question: 1
a)
To
The Audit Senior
From: Audit manager
Subject: Issues identified with regards to Auditor’s responsibility
Date: 6 May, 2021
The various responsibilities stated regarding auditor’s responsibility as an auditors has been
found out to be incorrect on certain ground and there are many issues related to these
mentioned auditor’s responsibilities in the draft audit report of Keynes Ltd has been identified.
First of all, as an auditors are not responsible for preparing financial statements for or of the
companies rather it is the duty of the management of the company to prepare the same, and
auditors are just responsible for presenting their opinion about the fairness of these financial
statements based on the evaluation done (Hajering, 2019).
Second, the statement stating that “our responsibility is to express an opinion on all pages of
the financial statement based on our audit” is found to be incomplete as auditor’s are
responsible for listing out all the components of the financial statement they have audited
which may be balance sheet, income statement, cash flow statement, accounting policies
followed and all other information forming part of the notes to the account (DeZoort and
Harrison, 2018).
Third, in the second responsibility mentioned in the draft audit report which says that most of
the international standards on auditing has been followed is incorrect as auditors are obliged to
comply with all ISAs and there is a need to state to state they all the ISAs has been followed.
Fourth, with regards to obtaining maximum assurance in order to ensure that the financial
statements are free from any kind misstatements is incorrect as it is not possible even for
auditors to provide maximum assurance and no clear cut confirmation can be given that the
financial statements are free from errors due to the reason that practically it is not possible for
auditors to test each and every transactions and balances. And only sample of transactions are
tested upon along with some of the material balances that the auditor thought to be important
and therefore able to give reasonable assurance related to financial statement that they free
from misstatements (Maroun, 2017).
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Fifth, auditor is not in anyways responsible for preventing and detecting frauds and errors as
the same is the responsibility of the management and thus auditors are responsible just for
detecting material misstatements either caused due to fraud or errors.
Sixth, a statement saying that auditors has nothing to do with the presentation of the financial
statements as the same is the duty of the management of the company is not true as auditors
are also responsible for ensuring that the presentation of financial statements is in accordance
with the relevant accounting standards and thus in line with the findings of their auditing.
b) Ten factors indicating that the company has a going concern difficulties are as follows:
 Significant reduction in the sales revenue of the business indicates that the business is not
doing well. The decreased sales always leads to reduction in the overall profitability of
the business and profitability is necessary for any business to ensure long term survival.
 Huge amount due on account of debt and interest payable thereon indicates that there is
financial problems with the company and management needs to resort to bank for the
loans. Such problems may arise on account of operating losses and poor cash flows. A
huge debt and interest payable thereon is a major indicator of business’s going concern as
sometimes financial crisis leads to the closure of the business.
 Due to lack of cash flows there may be large amount of overdrafts and the same may
leads to the more cash outflows in the form of higher interest payable on such overdraft
amounts. And resorting to overdraft in itself is not a good option as bank may anytime
stop extending financial support in the form of overdraft which leads to negative impact
on the business operations. So, this may affect the going concern of the businesses (Chen,
Eshleman and Soileau, 2017).
 Key management of the business when lost to competitors is considered to be a big threat
on the survival of the business as ordinary leaving of key management is also considered
as a negative sign of the company in the market and generally leads to the loss of
customer base too and thus affect the going concern of the business.
 Cash flow problems with the business indicating through its cash flow statements,
balance sheet and liquidity ratios are a major concern for the business management team
as it too indicates going concern objective of the business.
 When some major projects of the business are lost in the hand of the competitors then it
might create a problem for the business going concern as continuous loss of projects may
lead to the closure of the business (Näsman, 2019).
 When businesses reliance on excessive short term borrowing for financing its long term
projects is the indicator of business going concern difficulties.
 When there is a withdrawal from financial institutions, banks and creditors from lending
any additional finance to the business indicates that the business is facing an issue of
ensuring its going concern.
 Adversity depicted by company’s financial ratios is a key indicators of business’s going
concern difficulties.
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 Discontinuance in paying dividends and making arrears in paying back creditors on due
dates.
QUESTION 2
(a)
As per ISA 500 “Audit Evidence”, it refers to the evidence the external and independent
auditors acquire from the internal and external sources of the organization in order to provide
opinion on the financial statement of the business. The evidence that the auditor acquire must be
relevant and reliable which help the auditor in reflecting true and fair opinion on the financial
information.
Sufficient Audit Evidence
As per the standard, the audit evidence must meet the criteria of sufficient and appropriateness.
The sufficiency of audit evidence is measure in the term of quantity and describe that as
measuring the evidence in volume is subjective so the auditor needs to use their professional
judgement for this purpose. The standard also reflect that the sufficiency of audit evidence is also
depends upon the procedure of the audit which must be appropriate as per the circumstances. For
example: Documentation and Inspection (Lessambo, 2018).
Appropriate Audit Evidence
As sufficiency is measured in quantity the appropriateness is measured in quality as describe in
the standard. This means that the quality of the information must be consider by the independent
auditor at the time of conducting audit of the company. The standard defines that to measure the
appropriateness of audit evidence the auditor needs to check reliability and relevance of audit
evidence. For example: Analytical procedure and external confirmation.
 Relevance of audit evidence: The purpose of audit procedure by the auditor is the base
which defines that whether the evidence is relevant or not. The direction of testing the
evidence is important for defining the relevance of the evidences. For example;
inspection of fixed assets is relevant for the purpose of auditing, verifying the existence
of plants and equipment is also relevant evidence etc.
 Reliability of audit evidence: The reliability of evidence is depending upon the source,
nature and circumstance of the auditor while receiving audit evidences. As per standard,
these all three factors are play crucial role is measuring the reliability of any sources and
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evidences. For example: external evidence is more reliable than the internal evidence
(LU, and Hai, 2021).
(b)
As per the ISA 500, the reliability of audit evidence is depending upon the following factors:
 Audit evidence obtained from independent sources are more reliable than the evidence
obtained from internal and dependent sources.
 The direct involvement of auditor while collecting audit evidence is more reliable that not
having any direct involvement in collecting audit evidence.
 Audit evidence in written form is more reliable than the evidence in oral form.
 The original document of evidences is more reliable as compared to evidences in the
photocopy form.
 The control and circumstance matter a lot when the audit evidence comes or generates
from the clients and company (Aouira and et.al., 2020).
(1) Bank reconciliation statement is the reliable audit evidence as per the ISA 500 because it is
basically prepared by the bank accountant which reflect that this particular source of evidences is
external to the company and reliable. The auditor can also use the cash book and pass book of
the clients in order to check the exact difference and figures of the cash and bank balance.
(2) A payables confirmation letter is considered as external confirmation is reliable audit
evidence as per the Indian accounting standards. Along with that such confirmation letter is in
written form which increases their reliability and relevance. But for this the additionally the
auditor also has to ask the suppliers orally about their concern and issues via phone or personal
visit.
(3) The copy of article is a not a reliable source because it is not an original document as defined
by the standard. So, to obtain reliable audit evidence the auditor needs to ask for the original
article because articles always reflect correct information because it is available to public for
access purpose. The auditor can also analyse the performance of the company which are acquired
by the superb lift plc.
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(4) As per the factors of the reliability it is clear that if the auditor involves personally in the
auditing process via inspection and observation than such audit evidence must be considered as
reliable. So, in this case inspection of registration document of directors’ car is reliable audit
evidence as per the standard guild lines and provision (Appelbaum, Kogan and Vasarhelyi,
2017).
(5) Accounts receivable confirmation letter is a reliable audit evidence as per the accounting
standard 500 because it is not only reflecting the external confirmation but it also involves
auditor in to the auditing process. It is because the auditors select particular customers having
high amount of outstanding and ask them for their total amount of accounts receivables in order
to match it with the amount reflect by company’s books.
(6) Photocopy of title deed is not reliable audit evidence because it is not an original document
which do not meet the criteria of the reliable audit evidence. For this the auditor need to adopt
original deed because they have right to access the deed in order to give opinion on the true and
fair view of financial statement (Kokina and Davenport, 2017).
(c) Procedure of obtaining audit evidence involves:
 Audit inquiry: In order to obtain understanding audit evidence and to confirm some
related issues and assertion the auditor have to inquires the management of the company
on certain business transaction and events.
 Analytical observation: This is the procedure have to followed by the auditor for the
purpose of obtaining sufficient and appropriate audit evidence. The need to observe the
way through which the controls is related to the performance of the financial reporting.
 Audit Inspection: The auditor has to inspect certain document and evidences of the
company which required attention of the stakeholders of the company. For example:
inspection of plants and assets, inspection of provision is made by the company or not in
case of any uncertainty.
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QUESTION 4
(a) Audit procedure for inventory counting
 Cut-off analysis: This involves the examination of the procedure of halting of any further
receiving and shipment of inventory in the organization by the auditors. The auditor
needs to record the time of shipment of the inventory and match it with the physical
inventory time. So, that any extra time will be excluded from the inventory record
keeping (Buyurgan, Zhang and Okyay, 2019).
 Observe the physical inventory count: For taking appropriate audit evidence and
providing true and fair opinion to the company on their financial statement the auditor
has to physical observe all the inventory by themselves. To make it more reliable and
relevant auditor also need to test, count and trace some of the inventory by themselves.
 Reconcile the inventory count to the general ledger: After analysing and observing all
the inventory physically, the auditor has to match the inventory count with the general
ledger book which is prepared by the company. If they do not have any difference than
auditor must give them clear opinion but in case if any difference arises the auditor must
apply analytical procedure.
 Test inventory in transit: The auditor also needs to adopt the information regarding the
inventory which are in transit and yet not received by the company. Because it helps them
in analysing the figure of closing inventory which must include inventory in transit
because of accrual accounting.
 Finished goods cost analysis: This is another procedure the auditor has to do in order to
analyse the cost of the good that is actually available to sale. This helps the auditor in
comparing the cost with the selling price so that they can identify the profit percentage of
the company (Han, Bae and Lee, 2018).
b) Five audit procedure for carrying out the ascertainment of the value of CRV’s inventory
 First procedure towards valuing inventory is to confirm the existence of inventory
through physical verification and the auditor can do so by joining year-end inventory
count or perform their own with the help of sampling. Physical verification does not only
ensures the existence but also confirms on the condition of the inventories. The procedure
of inventory count is helpful in identifying errors related to the quantity of inventory
reported in the balance sheet by the client.
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 Second procedure involves reviewing the ownership of the client over the inventories by
checking quotations, invoices, contracts and delivery notes. Terms and conditions
mentioned in the contracts so audited by the auditor is very useful in determining the
ownership of the inventory.
 Third procedure involves assessment of the value of the inventory. As per the IAS and
IFRS standards related to inventory valuation, it allows for measuring inventories on
lowest of cost or net value that could be realized from its sale. The auditor here is
responsible for reviewing the method of costing and policy of accounting that has been
followed by the company in valuing its inventories (Mitra, 2017). For the inventories of
WIP and finished goods, review of cost of conversion must be done that leads to the
conversion of raw material to WIP and WIP to finished goods. And at last review must be
done on account of identifying any unnecessary costs or cost not allowed by IAS2 are
included in the inventory’s cost.
 Fourth procedure involves review of cut off. Cut off can be best reviewed through
shipping documents and any more documents that depicts and prove the delivery and
receive dates. This helps auditors in ensuring that the inventories are being recorded in
the period from which it is belonging to (Safonova and Alekseenko, 2019).
 Analytical review is the fifth procedure to determine any kind of unreasonable events and
transactions related to the inventory. Analytical review allows for reducing risk related to
inventory more efficiently. Trends in revenue from sales and COGS is the best way to
determine what happens to the inventory during the accounting period, so that better
understanding can be developed by the auditor related to the valuation of inventory.
Question 5
Difference between external and internal audit
Point of difference Internal audit External audit
Objectives Review the routine activates
and provides suggestion of
improvement.
Analysis and evaluate the
financial statement of the
business entity.
Conducted by Employees of company Third part
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Audiot appointed by Employees of company Members
User of report Management of company Stakeholders of company
Period Continuous process Once in year
Requirements to appoint internal auditor
To,
The Manager
Sub: Requirements of setting up an internal auditor
Respected sir,
Internal auditor department can be established in any organisation. It is important to
ensure the responsibility in regards to the different provisions applicable over the internal
auditor of company. Asses and approval of the internal auditor charter is also important.
Ensuring close working prelateship with the internal auditor is also necessary. Assessment of
the resources for the internal auditor functions in company. Monitoring on a regular basis the
quality of work that is produced by the internal auditor. Risk based annual internal audit plan
is also require to evaluate in case of internal audit. Oversee the relationship between internal
auditor and centralised risk monitoring is also essential. All the legislative requirements
require meeting in case of the internal audit. The responsibility of the audit committee is that
it has to meet all legal requirements in the best way possible. Proper records should be
maintained. Regular reporting must also be done so that all processes should have been
improved by the internal auditor. All these are the mandatory requirements that need to be
fulfilled in order to achieve the best level of outcomes against the internal auditor
appointment.
Thank you
Internal auditor reply upon external auditor
Internal auditor has to rely upon the external auditor in respect to the financial statement
of the company. Every year end the financial records are presented in front of the stakeholders.
Internal auditor has to rely over such financial records. Another situation is that external auditor
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present the audit report demonstrate the position of business in the auditor report. Internal auditor
also has to rely over all such factors external auditor demonstrates in its audit report.
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REFERENCES
Books and journals
Lessambo, F. I., 2018. Audit Evidence and Documentation. In Auditing, Assurance Services, and
Forensics (pp. 155-182). Palgrave Macmillan, Cham.
LU, H. and Hai, L.U., 2021. Structural analysis of audit evidence using belief functions.
(2002). Fuzzy Set and Systems. 131(1). pp.107-120.
Aouira, N. and et.al., 2020. Paper based vs. electronic records for clinical audit: Evidence of
documentation of medication safety monitoring in youth prescribed
antipsychotics. Children and Youth Services Review. 109. p.104666.
Appelbaum, D., Kogan, A. and Vasarhelyi, M. A., 2017. Big Data and analytics in the modern
audit engagement: Research needs. Auditing: A Journal of Practice & Theory. 36(4).
pp.1-27.
Kokina, J. and Davenport, T. H., 2017. The emergence of artificial intelligence: How automation
is changing auditing. Journal of emerging technologies in accounting. 14(1). pp.115-122.
Buyurgan, N., Zhang, S. and Okyay, H. K., 2019. Methodical analysis of inventory discrepancy
under conditions of uncertainty in supply chain management. International Journal of
Logistics Systems and Management. 32(2). pp.272-290.
Han, K. H., Bae, S. M. and Lee, W., 2018, March. Integrated inventory management system for
outdoors stocks based on small UAV and Beacon. In World Conference on Information
Systems and Technologies (pp. 533-541). Springer, Cham.
Maroun, W., 2017. Assuring the integrated report: Insights and recommendations from auditors
and preparers. The British Accounting Review, 49(3), pp.329-346.
DeZoort, F. T. and Harrison, P. D., 2018. Understanding auditors’ sense of responsibility for
detecting fraud within organizations. Journal of Business Ethics, 149(4), pp.857-874.
Hajering, M. S., 2019. Moderating Ethics Auditors Influence of Competence, Accountability on
Audit Quality. Jurnal Akuntansi, 23(3), pp.468-481.
Mitra, U. P., 2017. Inventory management process and internal audit procedure of Square
Toiletries Ltd.
Safonova, M. and Alekseenko, A., 2019, November. Information and analytical support for
internal audit of inventories. In International Conference on Sustainable Development of
Cross-Border Regions: Economic, Social and Security Challenges (ICSDCBR 2019) (pp.
49-53). Atlantis Press.
Näsman, L., 2019. A Qualitative Look into Going Concern Reports: From the Auditor's
Perspective.
Chen, Y., Eshleman, J. D. and Soileau, J. S., 2017. Business strategy and auditor
reporting. Auditing: A Journal of Practice & Theory, 36(2), pp.63-86.
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