Question

Which of the following are causes of misstatements? (Select all that apply.)

1.Inaccurate substantive procedure used

2. Inappropriate selection of accounting policies

3. Omission of an amount or disclosure

4. Incorrect accounting estimate caused by a misinterpretation of facts

Which of the following initial procedures do auditors perform before applying substantive procedures when auditing an account balance? (Select all that apply.)

1. Check if appropriate and understandable terminology is used, as prescribed by the applicable financial reporting framework.

2. Trace the beginning balance of the prepaid insurance account to the auditor’s working papers from the prior year’s audit.

3. Obtain a trial balance or other detailed report for the account.

4. Scan the transactions in the account for unusual items.

Answer 1

A) The following are the cause of misstatements

1) Inappropriate selection of accounting policies

2) Omission of an amount or disclosure

3) Incorrect accounting estimate caused by a misinterpretation of facts.

Reason:

Financial statements are required to be reported by following set of accounting policies and the estimates of accounts should be made diligently based on the nature of such accounts, any vital information as may be requirement by Accounting Standard should be adequately disclosed to provide complete information to the users of financial statements.

where as inaccurate substantive procedures would impact auditors decision making but will not cause misstatements in financial statements of such entity.

B) Following are the initial procedures auditors perform before applying substantive procedures when auditing an account balance:

1) Check if appropriate and understandable terminology is used, as prescribed by the applicable financial reporting framework.

2. Trace the beginning balance of the prepaid insurance account to the auditor’s working papers from the prior year’s audit.

3. Obtain a trial balance or other detailed report for the account.

Reason:

Before applying substantive procedures, auditors are required to collect information about the account balance through trail balance and its detailed report,check initial opening balances with respect to previous audit working papers and go through the accounting terminology used if it is as per the applicable financial reporting framework.

once the above procedures are completed,auditors would likely proceed with substantive procedures by scanning the transactions in the account for unusual items and other details thoroughly based on nature,time and extent of audit.