Question

Angela Walsh is a new staff auditor. On her first three engage- ments, she was assigned to perform tests of controls for acquisitions and payments and test of details of balances for accounts payable.

The approach taken in each audit is briefly described below:

Audit 1– The client is a medium-sized company. Extensive tests of controls were per- formed for acquisitions and payments. Fairly extensive substantive analytical proce- dures were also performed. The tests of details of balances of the year-end accounts payable balance were minimal, and no confirmations were sent (confirmations are not required for testing accounts payable).

Audit 2– This company is also medium-sized. Extensive tests of controls were also performed, but after these tests were completed, additional substantive tests of trans- actions were performed. Extensive tests of the year-end accounts payable balance were performed, although no confirmations were sent.

Audit 3– Although the auditors gained an understanding of internal control, no tests of controls were performed over acquisitions and payments. However, extensive sub- stantive tests of transactions were performed, and confirmations were sent as part of the extensive testing of year-end accounts payable. Although this company was smaller than the first two companies, the total audit time spent testing accounts pay- able was greater than for the first two audits.
Angela is confused by the apparent inconsistency in the audit approach on the three audits, and concludes that the audit approach and amount of audit evidence to collect de- pends on the audit partner in charge of the engagement.

(A.) Match each engagement with one of the following descriptions:

(1) Extensive reliance on controls was planned for this audit engagement, but con- trol risk was increased after tests of controls.

(2.) This audit is likely for a public company, and is also the most efficient audit.

(3.) This company has ineffective controls, and may also have fraud risks present.

(B.) What other factors likely explain the different approaches to the audit of acquisitions
       and payments and accounts payable for these three engagements?

(C.) What could Angela’s supervisors have done to improve her understanding of the audit strategy for each engagement?

Answer 1

(A) Matching Engagement with description:

1.Extensive reliance on controls was planned for this audit engagement, but con- trol risk was increased after tests of controls - Audit 1

2.This audit is likely for a public company, and is also the most efficient audit.- Audit 3

3. This company has ineffective controls, and may also have fraud risks present. - Audit 2

(B) Following are the factors that are likely to explain the different approaches to the audit of acquisitions, payments and accounts payable:

• Internal Control procedures followed by the company

• Results of the tests of control will direct us towards further processes

• If the account balances are material then it is necessary to send confirmations

• Comparison of audit procedure followed in the previous assignments for the same type of firms

• Results of current audit

(C) An audit strategy sets the direction, timing, and scope of an audit. The strategy is then used as a guideline when developing an audit plan. The strategy document usually includes a statement of the key decisions needed to properly plan the audit.

Angela's supervisors must have given her a brief understanding of the organisation as well as the different procedures(audit plans) followed for diffrenet sort of organisations, which could have helped her in understanding the audit engagements for which she was sent.