Question

Assignment Question(s):​​​​​​(Marks 5)

1- What are the functions of audit documentation?

2- Describe in detail the substantive analytical procedures can be used in auditing the revenue?

3- Explain in detail the inherent risks factors are involved while assessing the risks for the intangible assets?

4- The testing of hierarchy is considered to be more effective and more efficient. Why?

5- Contrast reliance strategy VS substantive strategy?

Answer 1

1.

Assisting the engagement team to plan and perform the audit.

Assisting members of the engagement team responsible for supervision to direct and supervise the audit work, and to discharge their review responsibilities in accordance with ISA 220.2.

Enabling the engagement team to be accountable for its work .

Retaining a record of matters of continuing significance to future audits.

Enabling the conduct of quality control reviews and inspections in accordance with ISQC 13 or national requirements that are at least as demanding.

Enabling the conduct of external inspections in accordance with applicable legal, regulatory or other requirements.

2.

An analytical review in accounting is used by auditors to assess the reasonableness of account balances.

When discussing examples of analytical procedures related to revenue accounts, it's important to look at audit procedures for deferred revenue, revenue analytics examples and analytical procedures in audit planning.

Audit procedures for deferred revenue, revenue analytics examples and analytical procedures in audit planning all fall under the umbrella of how to audit revenue.

Obtain an understanding of the firm’s products or services.

Obtain an understanding of the company’s revenue-recognition policies and related internal controls.

Assess the risks of misstatements related to all relevant assertions then perform tests addressed to the related balance sheet accounts.

Apply substantive procedures, such as analytical or tests of details, or a combination of both, to respond to identified risks of material misstatement at the assertion level.

But when auditing revenue, ensure that:

Persuasive evidence of arrangement exists.

The earnings process is complete.

The sales price is fixed or determinable.

Collectability is reasonably assured.

3.  Inherent risk factors of intangible assets

•Technological advances may affect the competitiveness of the product under development

•There are difficult to audit transactions, e.g. the research and development process is complicated and difficult to separate

•There are complex accounting issues such as impairment of the value of subsidiary, fair value of the trade marks, etc.

•Significant changes have occurred in the economic environment compared with previous years.

4.

After the auditor has gathered sufficient evidence about the entity and its environment using risk assessment procedures, the audit testing hierarchy starts with tests of controls and substantive analytical procedures. Starting with tests of controls and substantive analytical procedures is generally both more effective and more efficient than starting with tests of details.

• Applying the audit testing hierarchy is more effective. The auditor's understanding and testing of controls will influence the nature, timing, and extent of substantive testing and will enhance the auditor's ability to hone in on areas where misstatements are more likely to be found. If controls are highly effective, less extensive substantive procedures (i.e., substantive analytical procedures and tests of details) will need to be performed. Similarly, substantive analytical procedures can direct attention to higher-risk areas where the auditor can design and conduct focused tests of details.

Applying the audit testing hierarchy is more efficient. Generally, tests of controls and substantive analytical procedures are less costly to perform than arc tests of details. This is usually because tests of controls and substantive analytical procedures provide assurance on multiple transactions. In other words, by testing controls and related processes, the auditor generally gains a degree of assurance over thousands or even millions of transactions. Further more, substantive analytical procedures often provide evidence related to more than one assertion and often more than one balance or class of to one or two specific assertions pertaining to the specific transaction(s) or balance tested.

5.

Substantive audit strategy means that the auditor has made a decision not to rely on the entity's controls and to audit the related financial statement accounts directly. Control risk is set at the maximum when a substantive audit strategy is followed. With a reliance strategy, the auditor relies on the entity's controls and sets control risk below the maximum.

The reliance strategy requires a more detailed understanding and documentation of internal control than does the substantive strategy. The auditor also plans and performs tests of controls to support the lower assessed level of control risk.