In: Accounting
“Obtaining and documenting appropriate evidence of
auditor’s opinion is one of the main objectives of
auditing financial statements” Based on the above statement, you
are required to answer the following
questions in your own view:
a) Do you agree with the above statement? Explain the major five
problems in obtaining sufficient
appropriate evidences in case of a trading company. (200
Words)
b) Explain in detail the process of obtaining audit evidences in
respect of the following items.
a) Inventory
b) Account receivables
c) Account payables
d) Revenues
e) Expenses
A)Yes,I do agree with the statement.Obtaining and documenting
appropriate evidence of auditor’s opinion is one of the main
objectives of
auditing financial statements.
Following are the five problems in obtaining sufficient appropriate evidences in case of a trading company
1) Inadequate records is one of the major problem.Majority of the trading companies are having incomplete files,excessive adjustments to books and accounts,and transactions are not recorded in accordance with normal procedures and out of balance control accounts:
2)Secondly inadequate documentation of transaction such as lack of proper authorization, supporting documents not available, any alteration to documents etc also resist from getting proper audit evidence.
3)Thirdly,differences between accounting records and third party confirmations are very large,also conflicting audit evidences and unexplainable chainges in operating ratios.
4) Fourthly,Unproper or unreasonable response by management to audit inquiries.
5) Fifthly, Documents being seized by any Government departments also restricts in getting proper audit evidence to auditors.
B)
(a) inventory
The auditor the auditor shall obtain sufficient appropriate audit evidence regarding the existence and condition of inventory by
- Physically Counting the inventories.
- Observe the performance of management's count procedures
- Inspect the inventory
If inventory under the custody and control of a third party,Then
(a)Request confirmation from the third party as to the quantities and condition of inventory held on behalf of the entity.
(b)Perform inspection or other audit procedures appropriate in the circumstances
(b) Account Receivables
The Auditor should contact the customers directly and ask them to confirm the amounts of unpaid accounts receivable as of the end of the reporting period.
The Auditor should take period end Accounts Receivable and Journals and cross check it with supporting documentation, to see if they were billed in the correct amounts, to the correct customers, and on the correct dates
The auditors will review a selection of the credit memos issued during the audit period to see if they were properly authorized.
(c) Account Payables
Auditor Should Review the existing internal controls for accounts payable.
Auditor should cross check Purchase orders,Vendor invoices,Journal entries for Account payable and inventory, and Bank records.
Auditors may send forms to the company’s vendors asking them to “confirm” the balance owed.
(d) Revenues
revenue audit include testing the revenue accounts on income statements followed by an examination of accounts receivable on the balance sheet. The auditors also check for revenue recognition issues, such as side agreements and channel stuffing. Companies often engage in practices to artificially inflate their revenue.Auditor also check invoices to confirm that sales did occur or test ending cash balances
(e) Expenses
The Auditor should confirm that,All expenses that should have been recorded have actually been recorded and in the correct accounting period Also are related to the client.Auditor should Verify Receipts Received and expense report.