Question

for each of the following audit procedures, (a) state the type of audit procedure used (e.g., observation), (b) state the general audit objective(s) tested by the procedure (no additional explanation is required), and (c) evaluate and briefly explain the reliability of the evidence produced by the audit procedure.

Select a sample of the audit client’s suppliers’ invoices to see if these transactions have been recorded in the accounting records. Write to the audit client’s banks to ask for financial year-end bank statements to check the balance of Cash at Bank. Briefly explain the basic steps for using the audit risk model to determine the amount of audit evidence required. You do NOT need to define the components of the audit risk model.

When would an auditor choose the predominantly substantive audit strategy? Briefly explain how this strategy affects the combination of tests of control and substantive tests.

Analytical procedures must be performed at which of the following stages? You can choose more than one answer. (A) Audit planning. (B) Audit testing. (C) Audit completion.

If the audit client’s debt to assets ratio this year is unexpectedly low relative to the last few years, are total liabilities likely to be overstated or understated? Suggest two management assertions that are least likely to require further investigation for total liabilities. (1.5 marks)

Answer 1

Select a sample of the audit client’s suppliers’ invoices :

Audit sampling is used in this case

the general audit objective(s) by audit sampling :

To ensure that all items has an equal chance of selection.

To ensure that the audit is completed withing the given time period.

To gather the evidence from the audit procedure being performed.

Audit sampling provides a certain degree of reliability instead of complete reliable results.If, there is a satisfactory internal control system in any organization, a lesser degree of reliability of sample result may be acceptable.

The basic steps for using the audit risk model :

1) Understand your client and its environment

2) Understand your client's internal control

3) Use risk of material misstatement to drive detection risk

Component of audit risk model :

1) Control risk

2) Detection risk

3) Inherent risk

An auditor choose the predominantly substantive audit strategy :

A substantive audit strategy is used when an 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.

while using substantive audit strategy audit performs test of control and substantive tests to support the lower level assessed control risk.

Analytical procedures must be performed at three stages of audit :

1) Audit planning

2) Audit execution

3) Audit completion

helps in serving three primary purposes : risk assessment , obtain assurance and financial analytical review

If the audit client’s debt to assets ratio this year is unexpectedly low :

Low debt to asset ratio means  the company owns more assets than liabilities . This means the liabilities are understated.