Question

Connie is the recently appointed engagement partner of the audit of Camel Inc. Connie has just taken over the audit from Mathew Pate, a partner who will be retiring soon. Mathew had a small portfolio of clients and completed most substantive testing for Camel at year-end. Connie is unable to do this because she is facing difficulties with two of her other large clients. These clients have just been advised that their financing arrangements with banks may not be renewed, raising doubts about their ability to continue as going concerns. The banks will make their financing decisions very close to the clients’ year-end, forcing Connie to spend considerable time in this period with these clients.
The financing problems at Connie’s existing clients have created demands on Connie’s audit team that she must resolve. The accounting firm cannot provide her with the additional staff she has requested for the year-end period because several other partners’ clients are also facing financing difficulties.
It is too late to find new partners for any of her other clients, so Connie must find a way to continue with the audit and still meet all professional standards. So far, the audit team has conducted the preliminary risk assessment for Camel and early control testing results confirm that Camel has excellent controls.
Connie calls a meeting with her senior audit team members to discuss the issue.
Explain how Connie could vary the timing of the substantive testing at Camel to help her meet her audit obligations. Specifically:

A. Propose different substantive procedures that could be performed prior to year-end.

B. Discuss how Connie will use roll-forward procedures to complete the audit.

C. Explain any other considerations that would affect the timing of substantive procedures for Camel.

Answer 1

A. Propose different substantive procedures that could be performed prior to year-end.

Answer:

1. Before applying the substantive procedures, Connie should assess the level of difficulty in stemming the incremental audit risk.

2. She can chose which type of substantive procedure needs to be adopted ie., Analytical, Test of Details or Tests of details of balances.

3. Assess the cost of substantive tests for the remaining period

4. If Connie assesses control risk at the maximum during the remaining period, she should consider whether the effectiveness of certain of the substantive tests to cover that period will be impaired.

5. Substantive tests covering the remaining period that relate to the existence assertion at the balance-sheet date may be ineffective if effective controls over the custody and physical movement of assets are not present.

6. Connie should consider whether the business conditions are stable or changing substantially to assess the risk of adopting substantive procedures before confirming the accuracy

7. Ponder upon the year end balances of the selected assets and liability items are reasonable acceptable with respect to their composition, significance and amount.

8. She should think on 3 pronged strategy of

8.1. Planned Detection Risk-Low or High

8.2. Audit Strategy-Predominantly substantive or Lower level of control approach

8.3. High Substantive test or Low

9. Test details to include-Tracing and vouching, Supporting sourcing documents and Accounting Books.

10. She can adopt CAAT procedure (Computer Assisted audit techniques), using sampling techniques, recalculating interest, identifying inconsistencies, reperforming calculations

B.  Discuss how Connie will use roll-forward procedures to complete the audit.

1. The Roll forward testing Procedures is generally applicable to the period from last tests until the end of the year. If the company's inventory count is not made at the end of the day on the last day of the fiscal year, inventory roll-forward procedures must be conducted by both the company and the auditor.

2. Roll-forward is the process of using the inventory count, sales figure and purchases of inventory to determine what the year-end inventory balance should be. Once this is determined, this balance is compared with the inventory balance given by the company. Any discrepancies are noted and investigated.

3. There are two ways of roll forward procedures- Roll forward both assets and liabilities on a consistent basis from an earlier date or take the most up to date asset and liabilities from the starting point to produce roll forward estimates.

C.  Explain any other considerations that would affect the timing of substantive procedures for Camel.

1. The Timing of substantive procedures is dependent on the level of detection risk

2. IF detention risk is high, then certain procedures may be performed a few months before the year end. If it is low, then it would be done at the year end or closer to the year end.

3. If Connie is convinced that internal control is effective early substantive testing could be avoided.

4. Any conditions that may prompt that management might not misstate the financial statements in the remaining period.

5. Entity’s accounting system

6. Sample size

7. Other factors like Occurrence, Completeness, Accuracy, Cut-off, Classification, Existence, Completeness, Rights and obligations, Valuation and allocation also determine the need for substantive procedures.