Question

During your review of the audit field work completed by a new junior employee of the audit firm, John Smith, you have noted many areas which require additional review notes. John, who has just completed the interim audit of Taxon Ltd for the year ended 30 June 2019, has just performed testing of controls. When testing controls over payments made to related parties, there should be evidence of approval and sign-off by the chief financial officer (CFO). John selected a sample of payments made to related parties and vouched them back to the electronic funds transfer (EFT) forms to sight the CFO’s signature of approval. Based on a sample of ten payments, six had been approved by the CFO in writing. However, the remaining four EFT forms (for immaterial amounts) did not have the CFO’s signature, but John noted that the CFO had given verbal approval. John concluded that because all internal controls were working, the audit team could use analytical procedures alone to audit payments made to related parties. Required: Based on the results of the testing of controls outlined above, determine whether John has arrived at the appropriate conclusion? (1 mark) Justify your answer by addressing the following areas: the risks associated with related party transactions, and the reliability of controls at Taxon Ltd. (Please provide answer of Minimum of 150 words. Maximum of 600 words with unique writing than other)

Answer 1

(A)

In my point of view John has not arrived at a appropriate conclusion, because the testing controls over payments made to related parties is that, there should be evidence of approval and sign-off by the chief financial officer (CFO).

But in our case John has noted a verbal approval for the remaining 4 payments, and not taking any evidence.

(B) RISK RELATED TO THE RELATED PARTY TRANSACTION

During the audit the auditors may particularly scrutinize related-party transactions because they do raise concerns about the risk of misstatement or omission in financial reports.

The auditors should focus on these key areas:

1. Related-party transactions, such as those involving directors, executives and their family members
2. Significant unusual transactions (SUTs) that are outside the company’s normal course of business or that otherwise appear to be unusual due to their timing, size or nature
3. Other financial relationships with the company’s executive officers and directors.

Auditors have to obtain an in-depth understanding of every related-party financial relationship and transaction, including their nature, terms and business purpose (or lack thereof). Tougher related-party audit procedures must be performed along with the auditor’s risk assessment procedures, which occur in the planning phase of an audit.

In addition, auditors are expected to communicate with the audit committee throughout the audit regarding the company’s identification of, accounting for and disclosure of its related-party relationships and transactions. They can’t wait until the end of the engagement to communicate their evaluations of these matters.

(C)

The reliability of the test of control is good at the the Taxon ltd, because they are using testing controls over payments made to related parties, of there should be evidence of approval and sign-off by the chief financial officer (CFO).

But John was making a mistake that he is not collecting sufficient evidence for the remaining payments.

The auditor should consider the reliability of the information to be used as audit evidence, an audit rarely
involves the authentication of documentation.

The auditor ordinarily obtains more assurance from consistent audit
evidence obtained from different sources or of a different nature than from
items of audit evidence considered individually. In addition, obtaining audit
evidence from different sources or of a different nature may indicate that an
individual item of audit evidence is not reliable.

So the reliability of the test of control of Taxon ltd is good..but the reliability of the evidence collected by john is bad.