Auditing and Assurance Services Exam: Substantive Procedures Audit

This document presents a solution to an Auditing and Assurance Services exam. It addresses the application of substantive audit procedures, particularly in scenarios where internal controls are deemed unreliable. The solution emphasizes the importance of vouching material transactions and securing appropriate audit evidence. It further discusses the auditor's responsibilities regarding inadequately insured property, including examining insurance policies, assessing financial records, and identifying potential fraud. The document also covers the handling of post-balance sheet events, such as fire incidents, in financial and audit reports, stressing the need for adjustments and disclosures in financial statements and modifications to audit reports to reflect the impact of such events on the business's financial position and operational continuity. Desklib provides past papers and solved assignments for students.

Auditing and Assurance
Services(online exam)

Table of Contents
Question 23......................................................................................................................................3
QUESTION 24.................................................................................................................................5
REFERENCES................................................................................................................................1

Question 23
Internal Audit (IA) is an audit which is done by internal team management of the
company as it helpful for identifying the risk area and also resolve it with proper strategy
adoption. Thomas is an auditor of Tidmouth Enterprises and need to audit the company to
provide opinion on whether the company's financial statements are showing true and fair view or
not. For this, the auditor need to adopt the correct approach which must be based on their nature
of engagement and clients businesses (Cohen and Rozario, 2019). In this case, Thomas is
advisable to apply Substantive Procedure Audit Approach to audit Tidmouth income
statements and give correct opinion.
Substantive Procedure Audit Approach:
This is an approach which basically used to auditing the financial reports especially
income statement of the company when they feel that internal control over financial reporting is
not reliable. Here, the auditors need not test whole internal control of the company, but they
apply substantive testing to by focusing on the large and material transactions. The material
transactions are those transactions which easily influence the decisions of the users of the
financial statements of Tidmouth company (Saadullah and Elsayed, 2020). This approach is
generally also known as vouching approach where sampling method is need to be adopted by the
auditors to select material transactions from the large amount of transactions. After selecting the
material and relevant transactions, the auditors need to select and identify the appropriate and
reliable supporting documents such as for purchase transaction identifying purchase invoice or
orals and telephonic conversation with suppliers etc.
This is done as per the International Auditing Standard of Audit Documentations.
Further, here the auditor also need to check the recognition and classifications of accounting
transactions are as per the accounting standards and framework or not. For proper audit
documentations, the auditors need to apply proper procedure to acquire audit evidence. The
audit evidence must be sufficient and appropriate along with reliable so that auditors can trust it.
This approach is one of the best way to audit the income statements material transactions as it
dose not require more time because of sampling (Leonov and et.al., 2018). Along with that the
benefit of this approach is that it could help the auditors of the company such as Tidmouth to
minimize the most important risk. This risk is that the reliance of internal control or management
over the financial reports of the company are non-detectable.

In case if the auditor is unable to get proper audit evidence and documentations from the internal
and external sources and in case found any fraud and error where management is involved. Then,
the auditor can apply Analytical Audit Procedure Approach. This is an approach which is only
applied after the application of substantive approach (Gospel and et.al., 2019). The three step
process that need to be followed by Tidmouth auditor is:
 Forming and developing an expectation that the balances and financial relations of the
companies are good enough.
 Now, they need to identify and analyse the difference between the expected and reported
amount.
 Investigating the reason and evaluating the difference is the last stage of process.

QUESTION 24
a) There are various responsibilities that fall due on the audit partner when they came across the
situation like inadequately insured property as given in the present case, such as the following:
 The audit partner must examine the policy taken and accordingly determine the liabilities
of the insurer to ensure that CMG must get maximum benefit out of the policy taken and
to the extent to which the cafeteria is being covered under the policy (Appelbaum, Kogan
and Vasarhelyi, 2018).
 They must calculate the risk involved in the matter of cafeteria fire along with the
assessing the documents associated with the tax and financial records of the insurance
policy.
 Auditor should ensure that CMG has maintain the required and appropriate record of
documents and also investigate the same. Accordingly, auditor would get an idea about
whether CMG is entitled to get compensated against the policy taken by them and to
what extent they can be compensated (Hickman and et.al., 2020).
 Audit firm must determine that whether each and every entry associated with the
insurance policy has been made by CMG's accountant or not and that whether its claim is
true or not.
 Auditor also has a responsibility of identifying that either the insurer or insured is being
involved in any kind of fraudulent act. The books of accounts of insured or CMG should
not contain any kind of faulty entry (Li, Zhang and Chang, 2018).
 Auditor must also identify that the occurrence of fire should be free from any kind of
intentional act which is meant for encouraging or broking up of fire in the cafeteria
(Jaafar and et.al., 2017).
b) Handling of fire broking event in financial and audit report can be done in the following
manner:
 Sometime events like broking fire in the cafeteria occur after the balance sheet bur before
the issuance of financial statement and that could have a material impact on the financial
statements must be disclosed and adjusted in the financial statements (Hasanaj and Kuqi,
2019). In the given case, there must be settlement done with regard to amount indicated
in the liability as at balance sheet date and the actual liability occurred. Also, the loss that

has been occurred must be reported in the financial reports after taking into account the
particulars of the fire broking events.
 As in the given case the event has occurred post balance sheet date that 30th June 2020
and today is 13th July 2020, so the financial statements with respect to assets and
liabilities must be adjusted for the event. Also, the loss occurred due to non-
compensation from insurance company on the ground of inadequate coverage must be
accounted for in the financial statements (Ihrig and et.al., 2018). As the cafeteria is ceases
to operate due to fire occurrence, this must be accounted for and the appropriateness of
using the fundamental accounting assumption of going concern must be checked for by
the accountant.
 Audit report must be changed when such events occurred post balance sheet date and the
scenario before the occurrence of fire was highly different from the current scenario that
is after the fire has broken. When there are material facts associated with the event like
fire, and they are likely to change the opinion of the users of audit reports then the report
must be modified accordingly by including the effect of such fire broking event in the
audit reports (Michels, 2017). Auditor in this regard can do so by adding a footnote to the
financial statement or an additional paragraph in their report in order to summarize the
event and its effect on the business. The information in the audit report must reflect that
how much loss the business has suffered due to the fire occurrence and how much of it
can be compensated through insurance and how much will be charged against the profit
of the business and for how long such treatment will be carried on.

REFERENCES
Books and journals
Cohen, M. and Rozario, A., 2019. Exploring the use of robotic process automation (RPA) in
substantive audit procedures. The CPA Journal. 89(7). pp.49-53.
Saadullah, S. M. and Elsayed, N., 2020. An audit simulation of the substantive procedures in the
revenue process–A teaching case incorporating Bloom’s taxonomy. Journal of
Accounting Education. 52. p.100678.
Leonov, P. Y. and et.al., 2018. General scheme of risk–oriented audit stages. KnE Engineering,
pp.402-415.
Gospel, J. and et.al., 2019. Sufficiency and Appropriateness of Audit Evidence for Giving an
Opinion on the True and Fair View of Financial Statements. International Journal of
Innovative Development and Policy Studies. 7(3). pp.36-43.
Appelbaum, D. A., Kogan, A. and Vasarhelyi, M. A., 2018. Analytical procedures in external
auditing: A comprehensive literature survey and framework for external audit
analytics. Journal of Accounting Literature. 40. pp.83-101.
Hickman, L. E. and et.al., 2020. The influence of client corporate social responsibility
performance information on auditor judgments. Accounting and the Public
Interest. 20(1). pp.1-27.
Jaafar, I. and et.al., 2017. Waste Audit in UMT Campus: Generation and Management of Waste
in Cafeteria and Food Kiosk. Journal of BIMP-EAGA Regional Development. 3(1).
pp.84-94.
Ihrig, J. and et.al., 2018. Expectations about the Federal Reserve's balance sheet and the term
structure of interest rates. 53rd issue (March 2018) of the International Journal of
Central Banking.
Michels, J., 2017. Disclosure versus recognition: Inferences from subsequent events. Journal of
Accounting Research. 55(1). pp.3-34.
Li, Y., Zhang, X. and Chang, X., 2018. China's National Balance Sheet (2015): Leverage
Adjustment and Risk Management. Springer.
Hasanaj, P. and Kuqi, B., 2019. Analysis of financial statements. Humanities and Social Science
Research. 2(2). pp.p17-p17.
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