Question

1a. How does the auditor verify the existence of assets such as cash and inventory; liabilities such as notes payable?-Discuss How would the auditor verify Completeness of sales revenue?-Discuss

1b. Discuss the concept of “reasonable assurance” and the degree of confidence that financial statement users should have in the financial statements?

Answer 1

VERIFICATION OF EXISTENCE OF ASSETS:

Cash on hand: Physical verification

Cash at Bank: Updated Bank Statement, verification of Bank Reconciliation Statement

Inventory: Checking physical inventory records, observing physical inventory taking   and sample verification of physical inventory. Verify system of inventory valuation and whether these are valued accurately. Compare gross profit margin with previous year and ascertain reasons for material cost variance.

Liabilities: Matching records with sales and goods shipped, third party verification with customers. Match liabilities with expenses and verify that these are recorded in the proper period.

Notes payable: Physical verification of documents, confirmation from lenders and verify that cash was received when the liability was recognized. Auditor also should verify directors approval of borrowing when the notes payable is of high value.

To some extent auditor relies on the certificates given by the management as a collateral evidence   of existence of assets and liabilities. The internal audit report also gives some assurance on the effectiveness of internal process of the management of verification of assets and liabilities.

The auditor can decide on the extent of verification by him based on the certificates given by the management and the internal audit reports.

VERIFICATION OF COMPLETENESS OF SALES REVENE:

• Analytical Procedures:

Comparing revenue with trend , comparing cash flow with net income ,ratio analysis

• Ensure sales are recognized in the proper period and all sales returns are recorded
• Match receivable with sales and obtain third party confirmation on receivables
• Verify internal control procedures to ensure sales are recorded only when shipment takes place and all valid sales and return transactions are recorded.

CONCEPT OF REASONABLE ASSURANCE AND DEGREE OF CONFIDENCE are inter related. Reasonable assurance means that the auditor has followed the professional standards of auditing and applied competence and due professional care while auditing. Reasonable assurance is the level of confidence that the financial statements are not materially misstated.

The auditor cannot attain absolute confidence because of numerous factors like impractality of checking every transaction. It is sufficient if the auditor gives reasonable assurance and confidence that the financial statement are free from materialdefects