In: Accounting
1 In the audit of sales account, the amount presented on the financial statement is $5,000,000. You are the auditor and you have determined the level of materiality of sales account to be $50,000.
Q. Assuming you have checked the sales account and have detected that client recorded a sale transaction of $40,000 that did not actually occur during the year. - What management assertions is violated (i.e. at risk) - What would you do if you have determined that this is an error (an unintentional mistake) - What would you do if you have determined that this is intentionally done by the client’s sales manager to achieve the sales target. Also indicate the type of fraud in this situation under Australian auditing standards (ASAs).
In the given situation, the materiality levels are determined at
$ 50,000. An error has been identified which amounted to $
40,000.
- In this case, the assertions that are violated is Occurrence: The
assertion states that transactions which are recorded have actually
taken place. However, in reality this assertion was violated.
- In such case, the auditor should check if in totality, the issues
noted sum up to $ 50,000. Also, sometimes, the nature of
misstatement should be considered in evaluating whether an item is
material or not. In this case, as the error is found in sales
figure, the auditor must expand the audit procedures to identiy if
such errors exist. (The impact on reliability of information
provided must be re-analyzed. Also, the auditor should evaluate if
revision of materiality levels is required.
- If it is confirmed that it is a fraud, the auditor should analyze
if there is any collusion between the management and sales manager.
As it is an issue with sales figure, the auditor should accordingly
consider the opinion to be given in the report. If the management
does not allow the auditor to probe further, he may have to
consider withdrawing from the engagement.
- There are 2 categories of frauds according to the standard -
fradulent financial reporting and misappropriation of assets. This
is an example of fradulent financial reporting, which includes
reporting of transactions that have not occurred (falsified
records).