Question

3. Discuss the risk of material misstatement in the acquisition and expenditure cycle.

4. Apply your knowledge to perform audit procedures in the acquisition and expenditure cycle

and evaluate the findings of your tests.

please answer the question do not use pictures thanks

Answer 1

Solution 3 and 4

The objective of the auditor is to identify and appropriately assess the risks of material misstatement, thereby providing a basis for designing and implementing responses to the risks of material misstatement.

The auditor should perform risk assessment procedures that are sufficient to provide a reasonable basis for identifying and assessing the risks of material misstatement, whether due to error or fraud and designing further audit procedures.

The auditor should obtain an understanding of the company and its environment to understand the events, conditions, and company activities that might reasonably be expected to have a significant effect on the risks of material misstatement.

For risks of material misstatement associated with the acquisition and expenditure cycle, auditor should perform the following steps

The auditor should obtain an understanding of management's process for:

1. Identifying risks relevant to financial reporting objectives, including risks of material misstatement due to fraud ("fraud risks");
2. Assessing the likelihood and significance of misstatements resulting from those risks; and
3. Deciding about actions to address those risks.

The auditor should perform analytical procedures that are designed to:

1. Enhance the auditor's understanding of the client's business and the significant transactions and events that have occurred since the prior year end; and
2. Identify areas that might represent specific risks relevant to the audit, including the existence of unusual transactions and events, and amounts, ratios, and trends that warrant investigation.

• In applying analytical procedures as risk assessment procedures, the auditor should perform analytical procedures relating to revenue with the objective of identifying unusual or unexpected relationships involving revenue accounts that might indicate a material misstatement, including material misstatement due to fraud.
• The discussion among the key engagement team members about the potential for material misstatement due to fraud should occur with an attitude that includes a questioning mind, and the key engagement team members should set aside any prior beliefs they might have that management is honest and has integrity.

Risks of material misstatement associated with the Expenditure cycles are as follows

The Expenditure cycle consists of activities related to the acquisition of and payment for the goods and services. The core expenditure cycle activities are

1. Purchasing goods and services – Purchase transactions
2. Making payments – Cash Disbursement transactions
3. Purchase adjustments – Purchase Returns and Price adjustments

Now Auditor has to develop Audit Procedures to obtain sufficient, competent evidence for each audit objective pertaining to purchase cycle transactions.

For Assessing the Risk of Material Misstatement, the Auditor should take care of the following

• Concerns about purchase cutoff at year-end.
• Concerns about potential unrecorded liabilities
• Vendors often offer price concessions or terms such that goods do not have to be paid for until manufactured product is resold, leading to concerns about consignment traits of inventory.
• Concerns for accounting of advertising allowances and other price concessions to stock merchandise.
• Purchases and account payable are less central to core business, resulting in reduced potential for unrecorded liabilities.
• It is common to have significant unearned income.