Question

a. Identify the three types of substantive procedures and discuss the effectiveness
of each.
Required:
Suggested Answer for part a:
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b. Lisa is a highly competent employee of the XYZ Ltd. She is responsible for
accounting-related matters for more than 15 years. Her devotion to the firm
and her duties had always been exceptional, and over the years, she has
been given increased responsibility. Recently, the managing director of XYZ
Ltd and the audit partner of an independent accounting firm in charge of the
audit were shocked and dismayed to discover that Lisa had embezzled more
than $1000,000 over the five year period by not recording billings in the sales
journal and subsequently diverting cash receipts.
Required:
Discuss the major factors that permitted the defalcation to take place.

Answer 1

a. The three types of substantive procedures are:

• Analytical procedures consist of the study and comparison of relationships between the data. These procedures are quite effective in detecting large misstatements in the financial reports and tend to be least costly of substantive procedures.
• Test of details of transactions primarily involve tracing and vouching the individual debit and credit entries in the account. When these procedures involve highly appropriate evidence such as externally generated documents, they can be quite effective. They tend to be more costly than analytical procedures, but less costly than tests of details of balances.
• Tests of details of balances verify the ending account balances directly, without any explicit reference to the individual debit and credit entries. These procedures tend to be the most effective and costly since they often involve the most competent forms of evidence.

b. The most significant lack or deficiency on entity's internal control which permitted the defalcation to happen was the incapable to appropriately isolate the accounting obligation to record billing in the sales journal from the custodial duty of cash receipts .Separation of the authority of assets from accounting work force is proposed to maintain a strategic distance from misappropriation of assets when the two capacities are performed by one faculty it might be happened that he can misuse the assets for their staff profit and change the records to relieve him of charge of assets with exposure increment.

Notwithstanding how dependable I showed up no worker must be given the joined duty or combined responsibility of accounting the assets and custody of those assets.