Question

In: Accounting

You are auditing the financial report of fresh star pty limited( fresh star) for the year...

You are auditing the financial report of fresh star pty limited( fresh star) for the year ended 30 June 2019. You have concluded that your team cannot rely on the internal controls of fresh star and the existence of account receivable is at risk.
Questions:
A. Identify and explain very briefly two substantive procedures you could use to test the existence assertion for account receivable
B. How would you answer change, if that all it was established that the internal controls of fresh star operating efficiently
C. You just graduated from tua and joined p&g a big local audit firm as a junior auditor. During the audit planning of a client your audit senior told you that there are differences between revenue/sales cycle and expenditure cycle. He asked you with reference to assertions which assertion is the auditor primary concern in test of balances for liabilities

Solutions

Expert Solution

  1. Since internal control cannot be relied, we need external evidences for existence assertion of internal controls:
    1. External comfirmation of receivables: Where the auditor asks the receivables directly to confirm the account balances unpaid on a specific date.
    2. Tracking payments to external source: Payments received are cross verified from external sources like bank statements. Deposits in transit appearing on Bank Reconciliation to be paid a special attention.
  2. Since the controls are working efficiently the auditor should reduce substantial tests to what is reasonable though not extensive. Hence auditor can verify internal reports and records such as:
    1. Verifying the copy of invoices against the accounting records ie subsidiary ledger
    2. Match the balances in subsidiary ledger and general accounts receivable ledger.
    3. Check for totals.
  3. The concern of an auditor while testing of the balances for liabilities is the completeness of the accounts. The auditor makes sure that no liability is left unrecorded. Also those that have been recorded are not understated or overstated. Usually liabilities iremain unrecorded or understated in order to inflate the income as well as the equity. This would depict wrong financial performance and financial health that is position of the business reporting enterprise. Thus an auditor must verify if this has been properly remedied by placing controls in the place.

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