ACCT 460 Principles of Auditing: Internal Controls & Risk Analysis

This assignment solution for ACCT 460: Principles of Auditing addresses key concepts such as risk assessment, internal controls, and audit procedures. It identifies risks associated with accounting record handling at Frankincense Machining, including potential for manipulation and lack of audit trails. The document outlines activities to handle sales, accounts receivable, cash disbursement, and payroll, emphasizing the importance of assessing material misstatements and fraud. It discusses attaining sufficient evidence regarding litigation and claims, stressing the value of external confirmations. Furthermore, it explains tests of controls and substantive audit procedures, detailing sampling units and attributes tested to evaluate the accuracy and completeness of financial information. Desklib offers a platform to access similar solved assignments and past papers for students.

ACCT 460: Principles of Auditing
Assignment 2, Version C

TABLE OF CONTENTS
Question 1..................................................................................................................................3
A.............................................................................................................................................3
B.............................................................................................................................................3
Question 2..................................................................................................................................4
Question 3..................................................................................................................................5
A.............................................................................................................................................5
B.............................................................................................................................................5
C.............................................................................................................................................5
References..................................................................................................................................7

QUESTION 1
A
The risk associated with the current method of handling accounting records at Frankincense
Machining accounts
Audit standards specifies inherent risk as the susceptibility of assertion relating to the class of
a transaction or account balance or disclosure to a misstatement which could be material prior
considering related controls. Inherent risk is significantly associated in the present method of
accounting as all the records are handled at one place and it has become easy to manipulate
books of accounts or to make any fraud. Another issue which exists in the present case in the
absence of audit trail, i.e. no evidence is available of initiating the transaction as well as
ending transaction due to which it could not be assessed that when the transaction initiated
and accomplished as well. Internal control can be referred to as a procedure which is
designed in order to accomplish the objective of the reliability of financial reporting and
effectiveness of operations. In present case risk relating to internal control also exists as the
reliable financial reports are dependent on the efficiency of new accounting suite. Risk
relating to duplication of the invoice is one the main issue to be assessed while application of
an accounting suite. Thus, in order to assess same, it should be checked that no invoice is
entered twice.
B
The main objective of auditor is to ascertain and assess the risk relating to material
misstatement due to error or fraud in accounting records and at assertion level through
understanding the nature of entity along with its internal control. Activities which can be
conducted by Frank in order to handle sales, accounts receivable, cash disbursement and
payroll:
As per assertions, cancelled and returned check is not a normal business activity. Thus the
same should be assessed in detail in order to ascertain its validity and appropriateness of
sales.
An average of payments to a particular vendor should be ascertained, and the amount above
same should be checked in detail manner.

Payroll could be rechecked or cross-checked from staff register in order to ascertain whether
the payments are made in an appropriate manner or not. Moreover, it could be assessed that
no additional payment or payment to dummy staff is being made.
Usually, dummy entries are done in round-off figures. The same can be reassessed through
the application of MOD function in excel. Ranking can be done in order to assess sales
exceeding general sales amount of rounded-amount invoices. In case any unusual transaction
is assessed than same could be rechecked in detail.
QUESTION 2
Audit standards deals with specific consideration relating to attainment of sufficient
appropriate evidence regarding litigation and claim in which an entity is involved for an audit
of financial statements. In order to attain appropriate evidence statement from management
could be attained relating to internal control structure and the manner in which it ascertains
and records outstanding loans. Further, a list of existing outstanding loans should be attained
in order to analyze them in an appropriate manner. Analysis of manner in which organization
deals with outstanding loans could assist in ascertaining the extent to which internal control
of organization could be trusted as same will assist in taking further steps relating to the
assessment of the validity of outstanding loans.
The most appropriate evidence is the loan agreement and claims relating to the outstanding
loan, the same could be attained form management. Further information could also be
attained from concerning guarantees from bank confirmation in case it exists. Direct
communication with the parties or asking for confirmation statement against the outstanding
loan is sufficient appropriate evidence against same. The reason behind the same is that this
source of evidence is not under the control of the organization. Thus the same cannot be
manipulated. Thus, the same can be trusted easily.
Canadian audit standard asserts external confirmation as a process which is being applied in
order to obtain and evaluate audit evidence through the representation of information from
the third party in response to request information relating to outstanding loan or related
disclosure. A positive confirmation is asked to respond in all the cases either through
agreeing with the confirmation or by providing the required information. It is believed to be
more reliable as it can be assessed exactly that whether the outstanding loan exists or not. The

result of the confirmation process is required to be assessed on the basis of sufficient audit
evidence required during the procedure
QUESTION 3
A
A test of controls is a audit procedure could be tested through application of attribute
sampling. As, while performing the same auditor will make an assessment of the rate of error
in order to ascertain the population to be tested for the development of appropriate opinion
relating to financial statements. The attributes which will be considered in order to implement
the test of control are conditions which constitute an error after considering the objectives of
audit procedure. The same assists in the attainment of accuracy and completeness of the
information provided by the organization can also be conducted through attribute sampling.
Substantive audit procedures can be accomplished through attribute sampling as they require
the existence of specific attributes (variants), i.e. existence or validity in order to assess the
material misstatement or level of fraud at the assertion level.
B
Example of a sampling unit of a test of control: Signature of credit manager on sales bill
which represents the credit approval or any other evidence of authorization of data entered to
a microcomputer which is dependent on the data processing system
Example of a sampling unit of Substantive audit procedure: Existence of accounts payable or
any other account which is being cross-checked or verified. Value of obsolete inventories is
also an instance of sampling unit.
C
Attributes tested for a test of control
 Increase in rate of deviation in comparison from expected control activity which the
auditor is expected to accept. The main objective behind the same is to ascertain the
appropriate population of sample size, as the lower the deviation; auditor is
estimating, the higher the quantum of the population is required.

 Enhancement in no. of sampling units in the population in order to conclude
appropriate opinion.
 Enhancement in the expected rate of a confidence level or decrease in the quantum /
level of risk expected, i.e. conclusion is being provided by the auditor that the risk of
material misstatement is lower than expected. The main objective is to compare the
result of the sample with indicative actual incidence expected by the auditor.
Attributes tested for the substantive procedure
 Enhancement in auditor’s assessment of the risk of material misstatement. The audit
objective behind the same is to assess the required detail verification procedure for
ascertaining the validity of transactions or account balances.
 Increase in quantum of risk expected by the auditor to find appropriate population
sample. The main objective behind is to ascertain the appropriateness of sample
quantum as the decision relating to the opinion of financial statements or any account
is dependent on same.