In: Accounting
1. Enumerate, and explain, each audit procedure classified according to purpose and according to nature.
2. Define external confirmation. Give examples of situations involving external confirmation.
3.What are the different forms of confirmation request? What are the situations where each type may be used?
4. Explain the typical approach followed in performing analytical procedures.
5. Define substantive tests. What are the different types of substantive tests?
6. Differentiate fraud from error.
Answer 1:- Audit procedures are the processes, technique, and methods that auditors perform to obtain audit evidence which enables them to make a conclusion on the set audit objective and express their opinion. Sometimes we call audit procedures as audit programs Auditors normally prepare audit procedures at the planning stages once they identified audit objectives, audit scope, audit approach, and audit risks
List of Five Types of Procedures
1- Analytical Review:- Analytical review is not the procedure that uses to obtain audit evidence, but it is the procedure used to assess the unusual transactions or events as the principle or basic to perform other procedures
2 Inquiry: Auditors inquire accountant and related management to gather information and obtain an explanation on the mater that found by auditors
3) Observation:Observation is one of the audit procedures that auditors use to obtain an understanding and gather audit evidence mainly to the real process or the ways how clients have done some specific business process
4) Inspection: Inspection refers to verification or vouching documents. This is one of the most important and it can be 60% of audit work involve with the inspection of documents.
5) Recalculation: Recalculation is the type of audit procedure that normally done by re-performing the works performed by the client in the purpose of assessing if there any difference between the audit’s work and the client’s work.
Answer 2:- External confirmation is the process of obtaining and evaluating audit evidence through a representation of information or an existing condition directly from a third party in response to a request for information about a particular item affecting assertions in the financial statements or related disclosures. For Example in the case of goods held on consignment, evidence will be obtained about existence and rights and obligations assertions, but not about the value. Confirmation about the completeness assertion can be obtained by contacting certain parties.
Answer 3:- Performing analytical procedures generally follows this four-step process:
1. Form an expectation. Here, the auditor develops an expectation of an account balance or financial relationship. Developing an independent expectation helps the auditor apply professional skepticism when evaluating reported amounts. Expectations are formed by identifying relationships based on the auditor’s understanding of the company and its industry.
2. Identify differences between expected and reported amounts. The auditor must compare his or her expectation with the amount recorded in the company’s accounting system. Then any difference is compared to the auditor’s threshold for analytical testing. If the difference is less than the threshold, the auditor generally accepts the recorded amount without further investigation and the analytical procedure is complete. If the difference is greater than the threshold, the next step is to investigate the source of the discrepancy.
3. Investigate the reason. The auditor brainstorms all possible causes and then determines the most probable cause(s) for the discrepancy. Sometimes, the analytical test or the data itself is problematic, and the auditor needs to apply additional analytical procedures with more precise data.
4. Evaluate differences. The auditor evaluates the likelihood of material misstatement and then determines the nature and extent of any additional auditing procedures. Plausible explanations require corroborating audit evidence.
Answer 5:- Substantive testing is an audit procedure that examines the financial statements and supporting documentation to see if they contain errors. These tests are needed as evidence to support the assertion that the financial records of an entity are complete, valid, and accurate. There are many substantive tests that an auditor can use.
There are two types of Substantive Procedures
1:- Analytical procedures:- Analytical procedures are an important part of the audit process and consist of evaluations of financial information made by a study of plausible relationships among both financial and nonfinancial data.
2:- Tests of details:- Tests of details are usually categorized into two types:
(i) Substantive tests of transactions
(ii) Tests of details of account balances and disclosures focus
Answer 6 :- The difference between fraud and error lies in the intention. Simply put, fraud is an act that is intentionally carried out to benefit certain individuals or groups and causes detrimental effect to others, while errors are acts of unintentional mistake or negligence