a. Describe three reasons why auditors consider a client's internal control when performing the audit b....

a. Describe three reasons why auditors consider a client's internal control when performing the audit

b. Even the best internal control has certain limitations. Identify and explain two of those limitations.

c. An audit client’s population of accounts payable is $1,350,000. After testing a sample from this account, the auditor did not find any misstatements. As a result, the auditor concluded that the account payable is not materially misstated. Does this mean that Accounts payable does not contain any misstatement? Explain

d. Who cares about sampling? Why don’t we just select a bunch of invoices to test from the pile and test those?

Solutions

Expert Solution

a) The auditor should consider the client's internal control for the following reasons

1) The auditors have an obligation to obtain an understanding of internal control that is sufficient to plan the audit. An understanding of the design of the structure is obtained by inspecting control manuals, organization charts, job descriptions, and by interviewing client personnel.

2) The auditors have a responsibility to determine whether significant internal control policies and procedures are implemented in every audit. The auditors may determine whether the controls have been implemented by observation, inspection, and inquiry.

3) The auditors have a responsibility to determine the operating effectiveness of controls that provide the basis for the auditors' assessment of control risk at levels below the maximum. The auditors use observation, inspection, inquiry, and reperformance to test the operating effectiveness of controls.

b) Limitations of internal control

1) Cost considerations often limit the effectiveness of the design of the structure.

2) Top management may override the system

3) Misappropriation of instructions.

c) This doesn't mean the accounts payable has no misstatements, it just means that the misstatement is not sufficiently incorrect that it may impact the economic decisions of someone relying on those statements. Hence accounts payable is said to contain no material misstatements.

d) While selecting a sample, care has to be taken so that the sample is truly representative of the population otherwise the whole effort could go waste or turn out to be a face losing affair for the researcher in case of the sample being biased. So its not recommended to take a bunch out of a pile without considering the different sampling techniques and measures.

ekkarill92 answered 1 year ago

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