Audit Final Review Package
Problem Application 10.5
Part A.
(list 4 effective internal controls)
1. The purchase orders and requisition’s card are all pre-numbered which will help us
reduce the completeness assertion and account for any missing orders (preventive)
2. The accounting department performs a 3-way match between the purchase order,
receiving report, and supplier’s invoice before sending the cheque to the controller to
sign (detective)
3. There is a supervisor at the end of the assembly line for inventory which can ensure that
the workers are doing their job (preventive)
4. Inventory (assuming finished inventory) is separated and locked up from the warehouse
which can prevent theft (preventive)
Part B.
(list 3 ineffective internal controls and why they are weak controls)
1. Lack of segregation of duties between the custody and recording/adjustment of
received inventory. There could be potential fraud and theft because the workers could
be able to change the numbers of goods received. Also, the receiving department
shouldn’t have access to adjust the purchase order because the supervisor of the
purchase department should authorize the change.
2. Each operating supervisor hands out a “stock of pre-signed requisition cards” to the
workers. There could potential fraud and theft because the workers could be able to
change the numbers of required goods to take from the stores department
3. Each department should be responsible to creating their own report. For example, the
receiving department and not the accounting department should be creating the
receiving report. If not, then the accounting department can adjust the invoice amount
and over charge the supplier and keep the difference to themselves.
Problem Application 10.6
Part A and B.
Strengths Weaknesses Implication of the Recommendation
weakness
Only one person (ie. Owner is authorizing Risk of fictitious The owner should be
the owner) can the hiring of a new employee & payroll, involved in hiring the
authorize new hires employee WRONG over, occurrence employee but
and they have shouldn’t be the one
priority over authorizing the new
HR/personnel person into the
department system. The
HR/personnel
Good segregation of department should
duties between be involved in the
authorizing and hiring process for the
recording new hires new employee
Payroll clerk is the one Risk of fictitious HR/personnel should
preparing the new employee & payroll, be preparing the
employee package over, occurrence safety orientation,
tax forms, and
and NO ONE IS benefits plan
REVIEWING/CHECKING enrollment for the
THE DATA entered new employee, then
into the data entered a copy of the tax
into the system forms and benefits
plan should be
forwarded to the
payroll clerk
However, at the end
of HR/payroll
preparing the
documents, there
should be a
supervisor reviewing
their work
Payroll manager has Risk of fictitious The HR/personnel
the ability to update employee & payroll, department
the employee master over, occurrence supervisor should be
list the one updating the
master file with a
supervisor reviewing
and NO ONE IS their work. Also, all
REVIEWING/CHECKING forms should be kept
THE DATA entered with HR/personnel
into the data entered regarding the tax
into the system forms and void
cheque.
If there’s any
termination, then
the operating
department
supervisor would
need to inform
HR/personnel as well
as the payroll
department.
Hourly employees
are paid biweekly &
hours are tracked on
time cards which are
prepared/approved
by the supervisor
every day
*good authorization
control
Payroll clerk Payroll clerk compiles Risk of fictitious While the payroll
compiles the hours the hours worked on employee wage & clerk is responsible
worked on the job the job and enters it payroll, over, for inputting the
and enters it into the into the system occurrence data, the data
system entered into the
system needs to be
*good segregation of *good segregation of reviewed/checked
duties between duties between
recording and recording and
authorizing authorizing
WRONG However, there’s a
lack of review
The accounting system With the lack of Have more review
prepares the direct review, the payroll from the accounting
deposit information Masterfile may not department
based on the rates of have been updated, supervisor of the
pay maintained on the accounting system
master list as well as so payroll, over,
calculates the occurrence
withholding taxes
Deposit is
transferred directly
to the bank and a
record of
transmission is
printed and attached
to the payroll run
*reduced risk of
theft and the more
control to verify the
payroll expense
Payroll module is
integrated with the
general ledger and
the payroll clerk
prepares and posts
the journal entry to
the payroll expense
account
*assuming that the
payroll clerk and
supervisor reviews
these amounts via
the remittance
advices sheet
If an employee is With the lack of If there’s any
terminated, the review, payroll, termination, then
company stops paying over, occurrence the operating
them since they won’t department
have time cards supervisor would
submitted need to inform
HR/personnel as well
*assuming there’s no as the payroll
review process department.
When an employee With the lack If an employee has
has been promoted, updating the been promoted, the
the supervisor will employee’s file, systems would
communicate this to payroll could be update the wage;
the payroll manager over/under, however, the system
who will then update valuation and should also update
the payroll master file. allocation the job classification
However, the source to ensure that the
documentation would payroll expense is
only relate to the valuated correctly.
employee’s original
job classification.
Therefore, there
needs to be a job
classification update
documented in writing
Problem Application 11.5
(describe the procedures of an audit during the inventory count day)
During the inventory count day:
Observe the supervisors supervising the count
Inspect if count sheets are pre-numbered and blank
Observe the count teams counting in pairs are they following established
procedures/rules
Observe if there’s segregation between those who count and those who record the
count of the inventory
Observe the separation between the damaged goods and good quality goods, is there
any rust and dust? (eg. inventory boxes actually empty?)
Was there any consignment inventory? (ie. inventory held by outside third parties?
These can be accounting these items by inquiring management, inquiring bank to tell us
money owned, any security owned, or any asset that’s pledged, inquiring supplier to see
if we owe any money)
Inspect if incoming goods are separated and if outgoing goods needs to be recorded (ie.
test of cutoff, so we need to inspect the purchases/receipts and perform block sampling
25 receipts before and after year end to see if the purchases/receipts are recorded in
the correct period
Problem Application 11.12
Part A.
(describe the audit work to check whether the valuator has provided an accurate and
independent valuation of the land and buildings)
In order to validate accuracy, the auditor can inspect the documentation of the mortgage
certificate, bank loan statements and previous year’s recordings of the capital asset cost and
deprecation. Then, we can use the information regarding the in the rates and cost to
recalculate the rate of payment, depreciation and potentially compare the amount to other
industries and company’s benchmarks.
In order to validate the independent valuation of the valuator, we can inspect their credentials
and inspect the whether the company he/she works for is reliable.
When relying the work of an “expert”, we must consider CAS 620
Assess the professional competence of the expert
Assess the objectivity of the expert
Obtain sufficient appropriate audit evidence that the scope of the expert’s work
is adequate for the purposes of the audit
Part B.
(describe the audit work to check the existence and completeness of plant and machinery in
the fixed asset Masterfile)
In order to validate existence (ie. the risk of overstatement) and completeness (ie. the risk of
understatement), we can be able to sample each PPE, inspect documentation of ownership for
each high risked asset and inspect if the asset is actually still being used in the company. The
auditor can then prove that asset exists/moved/depleted while confirming the asset’s account
balance.
Existence Testing (ie. grave to cradle)
work from the fixed asset register and select high value items for inspection
MAIN CONCERN are unrecorded disposals, because if we don’t record the
disposals then fixed assets would be overstated
Also, focus on analyzing miscellaneous revenue account activity to see if any
asset additions are replacing assets disposed of (ie. more assets, so do those
additions exist?)
Completeness Testing (ie. cradle to grave)
Inspect for additions that have not been recorded properly
Consider repairs that should be capitalized instead of expensed
Problem Application 12.3
Scenario Control to reduce the Audit procedure to detect (ie.
likelihood of the scenario catch the misstatement)
Finding an unreconciled item Have the accounting Inspect the variance schedule
that is “immaterial” department preform a bank to confirm that the item is
reconciliation then inquire if immaterial
they can create a variance
schedule detailing any WRONG
unreconciled item
The auditor should
REPERFORM the bank
reconciliation
2 deposits relating to AR Have the accounting Inspect and audit every
were recorded as cash department supervisor number in the bank
receipts sample and inspect bank reconciliation and observe
reconciliations and verify the accountant’s performing
The deposit posting error is that the performance was their work to ensure that
related to cutoff accurate lapping doesn’t exist (ie. take
money from one AR payment
To prevent the recording of then use another AR
deposits in the incorrect payment to pay off the
period, have the accounting account that you originally
department supervisor stole from)
review the deposits before
and after year to ensure that WRONG
the recordings are in the
correct period, then signoff The auditor should
REPERFORM the bank
*ensure that the matching reconciliation
principle is satisfied between
the purchase/sale of *the error would be detected
inventory by the auditor when
vouching deposits from the
general ledger bank deposits
to supporting documentation
An amount was deposited in Inquire the bank that Inspect loan statements and
the bank before the YE and supporting documents such bank statements, then match
then paid back one year later as loan statements and bank it to the bank confirmation
confirmations are attached letter
to the bank statement and
directly sent to the auditor to
verify the deposit and
payment
WRONG WRONG
Any bank transfers must Inspect all related company
ALWAYS be approved by a transactions in detail for any
responsible/independent bank transfer concerns
manager
*significant $$ transfers
involving related companies
should require approval of
the BOD and/or the audit
committee
A cheque was omitted on the To reduce risk in cut-off, the Inspect the subsequent bank
bank reconciliation at YE and accounting department statement and bank
then cleared the bank after should enquire the bank to confirmation, then match the
year end attach the subsequent bank amounts to the bank
statement and bank reconciliation
*ie. error in the preparation confirmation to the bank
of the bank reconciliation reconciliation and send them
directly to the auditor to
ensure that the cheque was
actually cleared
WRONG WRONG
At the end of each month, a The auditor should trace
comparison of ALL cheques outstanding cheques to the
drawn (ie. withdrawn) should subsequent bank statement
be made to cheques cleared
through the bank statement
to produce the outstanding
cheque list
A bank transfer was included Have both accounts with the Inspect both end of the
as a deposit in transit amount of the transfer be transfer to ensure that the
sent to the auditor to trace risk of kiting doesn’t exist (ie.
deposit from one account is
Any bank transfers must recorded but the withdrawal
ALWAYS be approved by a from the correct source isn’t)
responsible/independent
manager
* with significant ## of bank
transfer at the year-end, the
auditor should prepare a
bank transfer schedule to
test for kiting
(ie. recording only the
deposits from the receiving
source, but not recording the
withdrawal from the other
source can lead to
overstating cash on both
accounts)
Problem Application 12.8
Part A.
(what further work should the auditor have done)
If 14000 of cash receipts were not recorded in the bank until a week after YE, try to inspect the
delay to reduce the risk of cut-off error and potential lapping fraud. The auditor should have
inquired management as to what the credit amount is relating to and inquire the bank to
directly send a bank confirmation to match with the accounting department’s bank
reconciliation. If there’s a difference between the bank and book amount, there would need to
be more investigation/inspection especially because the nature of cash is already a high-risk
account (ie. subject to more theft and fraud).
MAIN CONCERN the delay in deposits and/or theft of cash receipts, which could be an
indicator of lapping
*(lapping taking one from on AR payment and using the second AR payment to pay off the
first AR)
Audit procedures we need to focus on verifying/vouching outstanding deposits that are
actually cleared on a timely basis (ie. compare details of cash receipt journal entries on GL with
the details of corresponding daily deposit slips)
Part B.
(should this have been reported? If so, to whom?)
If the auditor notices a difference in the bank reconciliation performed by the accounting
department, the auditor should report it to management and to the board of directors.
Whenever the auditor suspects there might be a fraud, it should be reported to the next level
of management once it has been verified (eg. board of directors)
Problem Application 13.3
Part A.
Factors that would raise questions about the Mitigating factors (ie. factors that would
going concern assumption reduce the risk of a going concern)
Sales are slowing down Inquire management why sales are going
down? Inquire how much management has
been spending on costs? Inquire
management accounting for a future
forecast/trend analysis on sales
Extreme price competition of the Inspect the prices of MMF and compare it to
construction industry the bench mark of industry/similar
corporations
Since the company is well established, they
may be able to sell off assets or implement
cost cutting strategies which will mitigate
going concern risk
Highly leveraged, yet the bank has not Inquire management their next step and how
agreed to renew the loan. Also, Management they would obtain the money to pay off the
is already negotiating with another bank for a initial bank that gave them a loan. Perform
loan an analytical review on what the trend on
income may be in the future. Inspect
previous year’s financial statements to figure
out a reasonable trend on net income.
Part B.
(what reporting options are available to MMF & refer to CAS 570)
CAS 570 – auditor must consider the reasonableness of their assessment
The evaluation of the going concern assumption requires only a disclosure. An auditor is not
required to state whether the company is doing bad/good, but to evaluate the risk of material
misstatement within the company by evaluating/assessing the inherent and control risk. If the
assessment of controls is good then we can provide an unqualified report- with an emphasis of
matter to management/governance/BOD; however, if the controls are bad then we can provide
either a qualified/qualified- emphasis of matter/disclaimer of opinion (scope
limitation)/adverse report (GAPP limitation).
If a disclosure is not adequate, a report modification may be required (eg. qualified/qualified-
emphasis of matter/disclaimer of opinion (scope limitation)/adverse report (GAPP limitation).
Problem Application 13.10
Part A.
Ethical issues faced How to comply with the code of professional
conduct independence requirements
Inconsiderate CEO
CEO keeps dismissing the summary of Based on her ethical/professional duty as an
asset write-downs and audit engagement partner, the assets must be
recommendations prepared by the marked down to its true value to inform the
engagement partner and experts users of the financial statements what’s
happening within the company and the
market
*ie. threats to engagement partner’s To document her concerns, she should write
professional integrity a letter to the audit committee (since
management isn’t co-operating) and express
her significant disagreements with
management, serious difficulties
encountered while performing the audit, and
any matter that has a significant effect on the
qualitative aspects of the accounting
principles used in the financial statements
The energy market derivatives and The engagement partner and the experts
instruments traded in foreign markets are should report this to the audit committee to
hard to evaluate, so the engagement partner detail how the company’s CEO is dealing with
hired experts to help her value the assets and the market value of the company’s assets
other liabilities that are critical to the and liabilities and the associated effects on
assessment of the company’s solvency and net income and retained earnings
profitability. However, the CEO is not willing
to reevaluate to notify what’s happening to
the company’s assets/liabilities to the
company’s shareholders and users of the
financial statements.
Part B.
(audit report options)
Because of the inconsiderate CEO, the audit report should be an adverse opinion because the
amounts are considered material and pervasive to the financial statements due to not following
GAAP procedures of writing down assets to NBV or cost based on the expert’s opinion.
If management/CEO is unwilling to accept ANY of the reporting options (other than
unqualified), then the engagement partner will have no option but to resign otherwise, the
audit report signed off by her will affect her professional integrity
Part C.
(course of action for the engagement partner)
The engagement partner should strongly suggest to the CEO that the write down of assets is
important to shareholders and the users of the financial statement because it’s best to be
reporting the worst-case scenario instead of window dressing the financial statements (ie.
making the financial statements look better than they are now). Assuming that the engagement
partner has reported to the board of ethics and the whole BOD, she can now just wait for the
consequences.
The engagement partner should try to resolve the issue with the help of the client’s BOD, if
possible
