Chester Dominic O.

de Guzman

BSA 4

Discussion Questions:

2. The auditor’s judgment as to what is sufficient appropriate evidential matter is influenced by such
factors as:

 The degree of risk of misstatement. This risk may be affected by the nature of the item, the
adequacy of internal control, the nature of the business carried on by the entity, situations
which may exert an unusual influence on management, and the financial position of the entity
 The materiality of the item in relation to the financial statements taken as a whole
 The experience gained during the previous audits
 The results of auditing procedures, including fraud or error which may have been found
 The type of information available

4. Generalizations about the reliability of evidence are as follows:

 Independence of the source – evidential matter obtained by the auditor from independent
sources outside the client is usually more reliable than that from within the client.
 Qualifications of the source – it must be obtained from the people who are competent and
have the qualifications to make the information free from error.
 Internal control – audit evidence that is generated internally is more reliable when the related
controls imposed by the entity are effective.
 Nature of evidence – audit evidence obtained directly by the auditor is more reliable than audit
evidence obtained indirectly or by inference.
 Form of evidence – audit evidence is more reliable when it exists in documentary form, whether
paper, electronic, or other medium.

6. Audit procedures according to purpose are:

 The auditor always performs risk assessment procedures to provide a satisfactory basis for the
assessment of risks at the financial statement and assertion levels.
 Test of controls are necessary in two circumstances; when the auditor’s risk assessment includes
an expectation of the operating effectiveness of controls and when substantive procedures
alone do not provide sufficient appropriate audit evidence

Audit procedures according to nature include:

 Inspection of records or documents – examining records or documents, whether internal or

external, in paper form, electronic form, or other media.
 Inspection of tangible assets – physical examination of the assets.
  Direction of the test – important in establishing the assertion being tested by a certain
procedure (vouching and tracing).
 Observation – looking at a process or procedure being performed by others.
 Inquiry – seeking information of knowledgeable persons, both financial and non-financial,
throughout the entity or outside the entity.
 Recalculation – checking the mathematical accuracy of documents or records.
 Re-performance – auditor’s independent execution of procedures or controls that were
originally performed as part of the entity’s internal control, either manually or through the use
of Computer Aided Auditing Techniques (CAATs).
 Confirmation – process of obtaining a representation of information or of an existing condition
directly from a third party.
 Analytical procedures – evaluations of financial information made by a study of plausible
relationships among both financial and non-financial data.

8. The auditor may use positive or negative external confirmation requests or a combination of both.
Positive external confirmation request asks the respondent to reply to the auditor in all cases either by
indicating he respondent’s agreement with the given information,, or by asking the respondent to fill in
information while negative external confirmation request asks the respondent to reply only in the
event of disagreement with the information provided in the request.

10. Substantive tests are used to detect material misstatements in account balances, classes of
transactions and disclosures. There are two general types of substantive tests: test of details of
transaction, balances and disclosures & analytical review procedures.

12. The auditor’s procedures related to fraud or error are summarized as follows:

a) Identify if there are circumstances that indicate a possible misstatement in the financial
statements.
b) Determine whether the financial statements are materially misstated.
c) If misstatements are identified, the auditor should consider whether such a misstatement may
be indicative of fraud. If indicative of fraud, the auditor should consider the implications on the
audit (particularly the reliability of management representations).
d) In evaluating and disposing of misstatements, consider materiality (PSA 450, Evaluation of
Misstatements Identified During the Audit). The effect on the auditor’s report depends on the
evaluation and disposition of these misstatements.
e) The auditor should document:
 Fraud risk factors identified as being present during the risk assessment process, and
during the performance of the audit.
 The auditor’s responses to the fraud risk factors.

14. Audit documentation or working papers are the record of audit procedures performed, relevant
audit evidence obtained, and conclusions the auditor achieved. Preparing sufficient and appropriate
audit documentation on a timely basis helps to enhance the quality of the audit and facilitates the
effective review and evaluation of the audit evidence obtained and conclusions reached before the
auditor’s work is finalized.

Discussion Case:

1. Internal controls weaknesses present in the company relates to their inability and lack of effort to
segregate each account separately which may result in a higher risk of misstatement in the financial
statements of the company.

2. Audit assertions that affect accounts receivable includes existence or occurrence and valuation and
allocation while audit assertions that affect sales include existence or occurrence, accuracy and cut-off.

3. The auditor can use test of details and confirm each individual accounts of sales/accounts receivable
to ensure that a large portion of it must be confirmed to be that amount. Thus, when responses are
received and when the balances have been reconciled, the auditor has actually tested the detail
supporting the account; the existence of the accounts has been confirmed. The auditor must also review
key performance indicators, such as information relevant to the accounts (invoice price, supporting
documents to sales, subsequent receipts), to help in the confirmation of the audit assertions concerning
the company’s accounts receivables and sales.

Case Study:

1. Audit assertions affecting purchases or accounts payable include the following:

 Occurrence
 Completeness
 Accuracy
 Cut-off
 Classification
 Existence
 Rights and obligations
 Completeness
 Valuation and allocation

2.

Fraud Company

99 High Street

Anytown, TX77666
January 7, 2018

Joneses Supply Company

10 Low end Street

Anytown, TX77666

Dear__________:

Our auditors, CPA Firm, LLP, are conducting an audit of our financial statements as of December 31,
2017 and for the year then ended. Please confirm directly to them the amount of our liability to you as
of December 31, 2017. If there is a balance due, please attach a statement of the items comprising such
balance. If no balance is due, please indicate this by checking the appropriate box below.

After checking the appropriate response below, please sign and date your reply and mail it directly to
our auditors in the enclosed return envelope.

Thank you for your anticipated timely cooperation with this request.

Respectfully,

Cmpany: ______________Fraud Company_______________

Signature: _________________________________________

Title: ______________________________________________

***********************************************

TO: CPA Firm, LLP

( ) Our records indicate that a balance of tug______ was due from Fraud Company as of December 31,
2017, as shown in the attached statement.

( ) Our records indicate that no balance is due from Fraud Company as of December 31, 2017.

Signature: ______________________________________________

Title: ______________________________________________

Date: ______________________________________________
3. Substantive audit procedures for occurrence include sighting supporting documentation; sighting
remittance advice for receipt and sighting documents supporting payment for cash payment.
Substantive audit procedures for completeness include undertaking sequence check of transaction
details, remittance advices and cheques. For accuracy, sighting supporting documents to verify dollar
amount of transactions is used. For cut-off, checking last cash receipts and cash payments before
balance date and first cash receipt and cash payments after the balance date are recorded in the correct
period is used. And for classification, substantive procedure used is checking the cash receipts and cash
payments recorded correctly in accordance with the cart of accounts.

4. a) External confirmation is used to obtain and evaluate audit evidence through a representation of
information or an existing condition directly from a third party in response to a request for information
about a particular item affecting assertions in the financial statements or related disclosures. An
example of this is a request for bank balances and other information from bankers which, in the case of
auditing Mejos and Associates, could help confirm audit assertions as to the rights and obligations,
valuation and allocation, completeness and occurrence of the purchase of non-current assets with the
use of bank loans. The auditor may choose to use between positive confirmation form and negative
confirmation form in acquiring a bank report from the banking institution.

b) Further substantive procedures include reading minutes of meetings, substantive analytical

procedures, examination of contracts and agreements, inspection of share registers, review debt
agreements, undertake general procedures, recalculate, vouch and trace to debt instrument, and test
clerical accuracy of listing of non-current liabilities.