Question

You work for a well-known regional CPA firm and are the senior auditor in charge of the fieldwork for a 

medium sized manufacturing company in the Chicago metro area. The company has been a client for over 

ten years and there have never been any concerns with the company's systems of controls or their 

accounting practices. Accordingly, RMM has been considered to be low and audits have been able to place 

reliance on tests of controls. 

The interim fieldwork included tests of controls and was conducted during October. The tests of controls 

over purchases included a randomly selected sample of 45 disbursement transactions. During this testing, 

the staff accountant found eight instances where the general ledger posting date for inventory purchases 

was earlier than the date when the inventory was received. The dates were all less than three days different, 

but some ofthe dates occurred across a month end. The controller noted the differences, thanked you, and 

said that she would correct these errors. 

As the senior auditor on this engagement, you will need to document the results of the tests of controls and 

the client's response in your working papers. In addition, you need to assess the impact of these findings on 

RMM and on the nature, timing, and extent of the audit procedures for this engagement. 

Think about the findings and form a conclusion. Write a memo for the working papers that describes your 

conclusions as to the effect ofthe findings on inherent risk, control risk, and detection risk. In addition, 

indicate what accounts and assertions may be affected and any changes to the audit plan that you 

recommend, if any, in response. Be specific and clear. 

Answer 1

In audit procedures performed to obtain an understanding of the entity and its environment to identify and assess the risk of material misstatement, a test was conducted over purchases including a selected sample of 45 disbursement transactions where instances were found having inventory posted in General Ledger in earlier dates than the receipt. The differences were bought to knowledge of the controller and was corrected subsequently.

• Inherent risk is the risk of material misstatement in the financial statements arising due to error as a result of factors other than the failure of controls. The company doesn't posses any inherent risk, and have been on clean slate for the past years
• There was sufficient and appropriate controls in the operation of the entity. The organisation have adequate internal control in place to detect and prevent instances of fraud and errors in financial statements.
• The detection risk is comparitively low, audit procedures have been applied to detect material misstatement, Detection risk is reduced by increasing the number of sampled transactions and detailed testing.

The number of procedures were increased subsequent to the detection of error in posting of inventory, and measures were taken to ensure the reliability and reasonableness of the account statements.