Question

Auditing 2

Indicate whether you agree or disagree with the following statements and explain your reasoning.
a) Svetlana Petrova was reviewing the risk profile of Gaz Prom Industries in order to determine detection risk. She concluded: “Both my inherent and control risks are low. I guess I should be willing to accept high detection risk.”
b) Boris Ivanov had performed an assessment of the accounts payable system at Magnitogirsk Iron and Steel Works Operations in the Urals. His focus was on the completeness assertion for accounts payable balances. Inherent risk and control risk were both high. He decided that because the overall risk assessment was high he would have to set his detection risk high.
c)Jana Novotna, the auditor-in-charge of the Mosenergo petroleum giant, was explaining to Valentin Titov the importance of the timing of substantive procedures: “Although we associate examinations of internal controls with interim work and substantive procedures with year-end work, we can perform substantive procedures before yearend if there exists an effective control environment.”
d)Susan Martin, the audit senior at Canadian National Railways, was explaining to the junior auditor how vouching works: “we take a balance or a transaction from the underlying accounting records and agree it to the supporting evidence inside the company.”

Answer 1

a) The statement given by Svetlana Petrova is correct.

There is an inverse relationship between Detection risk and combined risk of inherent risk and control risk. That is, if the inherent risk and control risk of an entity is low, there is a high detection risk. The auditors procedures may not completely identify the potential mistatements in the records.

b) The given statement by Boris Ivanov is incorrect.

There is an inverse relationship between Detection risk and combined risk of inherent risk and control risk. That is, if the inherent risk and control risk of an entity is high, there is a low detection risk. The auditors procedures shall be sufficient to identify the potential misstatements in the records.

c) The given statement by Jana Novotna is incorrect.

Substantive procedures are the activities performed by the auditor to detect material misstatement or fraud at the assertion level. Substantive procedures are carried out on the year end balances to obtain an assurance about the genuineness of the balance. Hence it cannot be done before year end.

d) The statement by Susan Martin is correct.

Vouching is the critical examination of a transaction in the underlying records with the available transaction documents to assure the authenticity or accuracy of the transaction. Vouching ensures the accuracy, authenticity and nature of a business transaction.