Question

Define inherent risk. Can the auditors reduce inherent risk by performing audit procedures?

2. What are the major purposes of obtaining representation letters from audit clients?

3. Simulation

Auditors consider financial statement assertions to identify appropriate audit procedures. For items a through f,

match each assertion with the statement that most closely approximates its meaning. Each statement may be

used only once.

Assertion

Statement

a) Completeness

b) Cutoff

c)

Existence and occurrence

d) Presentation and disclosure

e) Rights and obligations

f)

Valuation

1) There is such an asset.

2) The company legally owns the assets.

3) All assets have been recorded.

4) Transactions are recorded in the correct

accounting period.

5) Assets are recorded at proper amounts.

6) Assets are properly classified.

4. Auditors perform audit procedures to obtain audit evidence that will allow them to draw reasonable

conclusions as to whether the client’s financial statements follow generally accepted accounting principles.

Match each audit procedure with its type. Each type of audit procedure is used; one is used twice.

Audit Procedures

Type of Audit Procedure

g) Prepare a flowchart of internal control

over sales.

h) Calculate the ratio of bad debt expense

to credit sales.

i)

Determine whether disbursements are

properly approved.

j)

Confirm accounts receivable.

k) Compare current financial information

with comparable prior periods.

7) Analytical procedures

8) Tests of controls

9) Risk assessment procedures (other than

analytical procedures)

10) Test of details of account balances,

transactions, or disclosures

Annotations

Answer 1

Inherent Risk

The Susceptibility of an assertion (account balance or class of transactions) to a misstatement that could be material either individually or when in aggregate with misstatement in other balances or classes assuming that there were no  related internal controls.

2. Can the auditors reduce inherent risk by performing audit procedures

Audit risk is the function of risk of material misstatement and detection risk. Inherent and control risk is the function of entity's business and its environment, nature of account balance and classes of transactions, regardless of whether an  audit is conducted .Even though inherent and control cannot controlled by the auditor, auditor can assess them and design his substantive procedure to produce acceptable level of detection risk, thereby reducing audit risk to acceptably low level.

Conclusion:

Auditor cannot eliminate inherent risk completely even audit is planned and performed in accordance standards and applicable law and regulation because audit is suffered from some inherent limitations.Auditor can reduce inherent to an acceptable level .

Major purposes of obtaining representation letters from audit clients:

1. To remind client officers of their primary responsibility for the financial statements.
2. To document in audit working papers the client response to many questions asked by the auditor during the engagement
3. To provide evidence in a area where accounting presentation may be depend upon management's future intention.
4. One of the objective of representation is to support other audit evidence relevant to financial statement or specific assertion in the financial statement by means of written representation.
5. In certain circumstance knowledge of fact confined to management or where matter is principally of intention , representation is only audit evidence which can be reasonably expected to be available for example intention to hold a specific investment for long term.

3. Matching each assertion with the statement

a	Completeness	3).All assets have been recorded.& 5) Assets are recorded at proper amounts
b	Cutoff	4)Transactions are recorded in the correct accounting period.
c	Existence and occurrence	1)There is such an asset
d	Presentation and disclosure	6) Assets are properly classified
e	Rights and obligations	2)The company legally owns the assets.

4.Match each audit procedure with its type

Type of Audit Procedure
g) Prepare a flowchart of internal control over sales.	8) Tests of controls
h) Calculate the ratio of bad debt expense to credit sales.	9) Risk assessment procedures (other than analytical procedures)
i) Determine whether disbursements are properly approved.	8) Tests of controls
j) Confirm accounts receivable.	10) Test of details of account balances,transactions, or disclosures Annotations
k) Compare current financial information with comparable prior periods.	7) Analytical procedures