Question

a. Describe three reasons why auditors consider a client's internal control when performing the audit 1. 1.

2.

3.

b. Even the best internal control has certain limitations. Identify and explain two of those limitations.

1.

2.

c. An audit client’s population of accounts payable is $1,350,000. After testing a sample from this account, the auditor did not find any misstatements. As a result, the auditor concluded that the account payable is not materially misstated. Does this mean that Accounts payable does not contain any misstatement? Explain

1.

d. Who cares about sampling? Why don’t we just select a bunch of invoices to test from the pile and test those?

Answer 1

Answer (a) –

1. To assess the risks of material misstatement in the financial statements
2. To design the nature, timing and extent of further audit procedures
3. To place reliance on the management in high-risk areas where errors or frauds may arise

Answer (b) –

1. Carelessness.
2. Misunderstanding of instructions.
3. Top management may override the system

Answer (c) –

After testing a sample from this account, the auditor did not find any misstatements. This does not mean that the account is not having any misstatement. The auditor only checked the account on sampling basis. The work of auditor is to place only reasonable assurance over the affairs of a company. Hence, not having any misstatement in the sample does not mean that the whole account is not having any misstatement at all.

Answer (d) –

Sampling should not be done on ad-hoc basis. It should be chosen after exercising due diligence. The sample should be chosen in a way that every item in the whole population has equal chance of being chosen as a sample.

Nature, size and materiality of transactions are the basis while choosing a sample. For example, if in an account 500 transactions are there aggregating $50,000,000. The transactions having complexities, large amount, transactions with related parties, and transactions with regular customers should contain a higher weight in the whole sample against the regular/ordinary transactions.