TASK I

Auditing & Assurance 2

Lecture:
Drs. Sudarmadji Herry Sutrisno, Ak., MM., CPA., CA.

Created By:
Raisafira Astriani (023001800054)
Mutia Rasya Azzahra (023001801148)
Saviera Fasha (023001801199)

JURUSAN AKUNTANSI
FAKULTAS EKONOMI DAN BISNIS
UNIVERSITAS TRISAKTI
JAKARTA
2020
Case 10.21.
Inquire, Analytical Procedures and Observation.
In the examination of financial statement, auditors must judge the validity of the audit
evidence they obtain. For the following questions, assume that the auditors have considered
internal control and found it satisfactory.
Required:
A. In the course of examination, the auditors and many questions of the client officers and
employees.
1. Describe the factors that the auditors should consider in evaluating one evidence
provided by client officers and employees.
Answer:
When receiving one evidence, and auditor must consider and evaluate the factors such
as materiality, audit risk, the economy, the size and the characteristic of the sampling
and population. For the materiality, does the company have a good internal control? if
not will it effect the materiality. For the audit risk, with the amount of audit evidence
required has an inverse relationship. Low audit risk means that the level of certainty
the auditor believes in the accuracy of his opinion is high. The high level of certainty
requires the auditors to collect more audit evidence. Performing audits faces time and
cost constraints when gathering audit evidence. The auditor has limited resources that
will be used to obtain the evidence needed as a reference in providing an opinion on
the entity's financial statements. The auditor should consider if any additional time
and cost to gather audit evidence will benefit the quantity and quality of evidence
gathered. Population size and the amount of audit evidence sampling have a
unidirectional relationship. The larger the population, the greater the number of audit
evidence samples that must be taken from the population. Preferably, the smaller the
population size, the smaller the sample size of audit evidence to be drawn from the
population. Population characteristics are related to the homogeneity or variability of
individual elements who are members of the population. Auditors need a larger
sample of audit evidence and more robust or supportive information about a diverse
population of members than a uniform population.

2. Discuss the validity and imitations of oral evidence.

Answer:
This evidence is done by the auditor by asking directly the manager or the client's
employee to produce written or oral information. Generally oral evidence requires
further investigation to substantiate this evidence. Questions and answers are carried
out to company personnel or parties. Anything that is not clear, may be asked of the
company, for example regarding the method of recording, the production process, the
process of paying salaries / wages and so on. But in this question and answer one
must be careful, because the company is not an independent party, so the possibility
of obtaining biased answers remains. In question and answer, it should be done using
a communication tool that is understood by the party being asked, so that the
information obtained is better. Some of the results of this question and answer may be
strengthened or checked for conformity with other evidence such as observations or
documents that can be checked for conformity with questions and answers, such as:
a. Independence of the evidence provider
Evidence obtained from outside the entity is more reliable than evidence obtained
from within the entity. Like communications from banks, lawyers, or customers,
documents originating from outside the organization such as insurance policies
will be more trusted than communications or interviews obtained from clients and
documents that originate within the company even those that have never been sent
outside the organization such as purchase requests. .
b. The effectiveness of the client's internal control
Audit evidence is more reliable if the client's internal controls are effective, not
weak.
c. Auditor's direct knowledge
Audit evidence obtained directly by the auditor through physical examination,
observation, recalculation, and inspection will be more reliable than information
obtained indirectly.
d. Qualifications of individuals who provide information
Although the sources of information are independent, audit evidence is not
reliable unless the individual providing the information is qualified to do so. In
addition, evidence obtained directly by the auditor cannot be relied upon if the
auditor does not qualify to evaluate that evidence.
B. Analytical procedures include the computation of various balance sheet and operating
ratios for comparison to prior years and industry averages. Discuss the validity and
limitations of ratio analysis as evidential matter.
Answer:
The validation of the ratio analysis depends on how is the internal control is within the
company. As an auditor we have to be skeptic and be aware of the ratio analysis, of
course the company willl be biased because they want the ratio to look good for investors
and stakeholder so we have to re-count the ratios to prove its validity. The limitation of
the ratio analysis are as follows:
a. Historical Information: Information used in the analysis is based on real past results
that are released by the company. Therefore, ratio analysis metrics do not necessarily
represent future company performance.
b. Inflationary effects: Financial statements are released periodically and, therefore,
there are time differences between each release. If inflation has occurred in between
periods, then real prices are not reflected in the financial statements. Thus, the
numbers across different periods are not comparable until they are adjusted for
inflation.
c. Changes in accounting policies: If the company has changed its accounting policies
and procedures, this may significantly affect financial reporting. In this case, the key
financial metrics utilized in ratio analysis are altered and the financial results recorded
after the change are not comparable to the results recorded prior to the change. It is up
to the analyst to be up to date with changes to accounting policies. Changes made are
generally found in the notes to the financial statements section.
d. Operational changes: A company may significantly change its operational structure,
anything from their supply chain strategy to the product that they are selling. When
significant operational changes occur, the comparison of financial metrics before and
after the operational change may lead to misleading conclusions about the company’s
performance and future prospects.
e. Seasonal effects: An analyst should be aware of seasonal factors that could potentially
result in limitations of ratio analysis. The inability to adjust the ratio analysis to the
seasonality effects may lead to false interpretations of the results from the analysis.
f. Manipulation of financial statements: Ratio analysis is based on information that is
reported by the company in its financial statements. This information may be
manipulated by the company’s management to report a better result than its actual
 performance. Hence, ratio analysis may not accurately reflect the true nature of the
business, as the misrepresentation of information is not detected by simple analysis. It
is important that an analyst is aware of these possible manipulations and always
complete extensive due diligence before reaching any conclusions.

C. In connection with an examination of the financial statement of a manufacturing

company, the auditors are observing the physical inventory of finished goods, when
consist of expansive, highly complex electronic equipment. Discuss the validity and
limitations of the audit evidence provided by this procedure.