All audits should have a well-developed time budget, which is used to determine the audit fee....

All audits should have a well-developed time budget, which is used to determine the audit fee. Suppose your client representative reviewed the time budget and noticed a significant amount of time is being allocated to inventory observation. To reduce audit fees, she proposes a significant reduction in time by offering to provide a representation letter regarding the inventory balance. Please discuss the sufficiency of this audit evidence. Discuss and explain the additional information you will need to determine how to respond to the client.

Be sure to support your statements with logic and argument, citing any sources referenced. Post your initial response early, and check back often to continue the discussion. Be sure to respond to your peers’ and instructor’s posts, as well.

Expert Solution

The purpose of an audit is to provide an independent opinion to the management of the company on te\he truth and genuineness of the financial statements of the company. It also verifies if the financial statements have been prepared fairly and in accordance with the Companies Act. Hence, it is important to verify/ examine each and every document and financial statements which leads to the income of the company as well as forms a part of the taxable income.

Some of the important auditing processes are:

- Undersand internal control system.

- Observe physical inventory count.

- Testing documents supporting account balances or classes of transactions.

- Inquire management and others as per requirements to understand the functioning of an organization itself, its operation and other necessary transactions.

To perform the audit, the auditor may gather appropriate and sufficient evidence to observe and test, compare and analyze until it leads to a valid conclusion.

Hence, even after issuing the letter of representation for inventory balance, it is the role of the auditor to verify and reassure that the letter is true to its information. Therefore, auditing is required for the inventory and same amount of time will be required after the issue of letter of representation, if not more compared to the time required originally.

ekkarill92 answered 1 year ago

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