Question

What are some of the inherent risks associated with the revenue, cash and marketable securities accounts? What are some of substantive tests associate with auditing these accounts?

Answer 1

Following are the main inherent risks associated with revenue account;

1. Quality of company’s management

2. Change in accounting principles

3. Non-armed transactions

4. Slashing expenses

5. Old plants etc.

Following are the main inherent risks associated with cash account;

1. Volume of activity

2. Liquidity

3. Automated systems

4. Debt covenants

5. Easily stolen etc.

Following are the main inherent risks associated with marketable securities account;

1. Risk of sudden market decline

2. Management manipulation of classification

3. Management manipulation of valuation of fair value

What are some of substantive tests associate with auditing these accounts?

For cash account;

1. Independent bank reconciliation

2. Bank cutoff statement

3. Bank confirmation

4. Obtaining year-end cutoff information etc.

For revenue account;

1. Identify about the accuracy of existence of sales transactions.

2. Identify accuracy of existence of accounts receivable.

3. Identify whether balance in allowance account is reasonable or not.

4. Make sure that there is no fraudulent transactions in the financial statements etc.

For marketable securities account;

1. Existence of securities owned should be verified by physically examining or by confirmation of brokers.

2. Current market values should be verified through market sources.

3. Auditor should cross verify interest and dividend, realized gains, unrealized gains, realized loss and unrealized losse.

4. Auditor should verify any changes in the expected holding period with the help of management.

5. Auditor should verify various financial agreements etc.