Question

4. An audit program is designed to generate appropriate evidence on which the auditor can base an opinion.
How does the auditor know when sufficient evidence has been accumulated?
5. What is the quality of the evidence that is gathered by analytical procedures? More specifically, how
competent is evidence provided by analytical procedures compared with other types of evidence?
6. In performing analytical procedures, how extensive should an auditor’s knowledge of a client’s industry
be and how does the auditor go about getting this type of information?
7. Assume that price competition with other CPA firms was an important factor in securing this audit
engagement. What are the potential problems for a CPA firm that can arise from acquiring clients
through price competition?

Answer 1

Question 4

The "Sufficient evidence" is intended to validate the different assertions related to an audit. An audit program is generally designed to cover and document all the different aspects of a business in order to validate such assertion. An auditor will know that he has accumulated sufficient evidence, when he has tested all material transactions, accounts and disclosures and ensured that sufficient documentation in relation to each of these are adequetely obtained.

Question 5

Analytical procedures use expectations, estimates and comparisons in order to validate the reasonableness of account balances. The quality of analytical evidence depends upon the account balance and assertion being tested as well as the assumption of the auditor in developing these expectations. It also depends upon the auditors understanding of the entity. For example, an analytical procedure used in a Car manufacturing company cannot be replicated in a food processing company since a variety of factors and underlying assumption are significantly different in these 2. Compared to substantive tests of transactions and test of details of balances, analytical procedures are considered to be less reliable and less comprehensive. However, where the quality of data is assured using control testing and the assumptions used are solid and tested, analytical testing evidence can be very useful in performing an efficient and effective audit.

Question 6

The auditor''s knowledge of the client's industry is extremely critical in analytical testing as this would form the underlying basis for whether analytical procedures should be applied and if yes, based on what assumptions and criteria.

The extend of understanding that an auditor would need to acquire includes:

a. Internal and External Environment of the company

b. Business Operations and Processes

c. Management and Governance structures

d. Client objectives and strategy

e. Measurement and Performance crieteria

The general sources for information external to the Company is through industrial journals, communications with customers, vendors and employees, 10Ks of SEC listed Companies in the industry, company charter and minutes of the board and stockholder meetings, prior year audit documentation.

Question 7

Some of the potential problems arising from acuiring clients through price competition include:

a. More time/cost spent on client acquisition than on audit affecting the quality of audit.

b. Issues in relation to auditors objectivity and independence since price competition will cause bias.

c. Not acquiring depth of knowledge in clients company due to focus on acquisition.

d. Less focus and effort on audit due to lower client fee causing audit quality to reduce.