Business Finance
Prince Sultan University Application Audit Procedures Questions

Prince Sultan University

Question Description

I need support with this Accounting question so I can learn better.

Please answer all of the questions attached but the most important thing about plagiarism (there wont be any similarity)

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Audit Group Project: Application of Audit Procedures (25%) 1. (a) Define substantive procedures. (b) Can substantive procedures be omitted in an audit? (c) List three substantive procedures which are recorded to be performed in every audit. 2. With reference to substantive procedures to be performed on Tangible non-current assets: (a) State principal risks of misstatement in tangible non-current assets. (b) State the disclosures which must be included in notes to the accounts. (c) Describe TWO substantive procedures the external auditor should adopt to verify EACH of the following assertions in relation to an entity’s property, plant and equipment; (i) Valuation and allocation; (ii) Completeness; (iii) Rights and obligations. (iv) Existence (v) Presentation and Disclosures (d) Describe substantive procedures you should perform at the year end to confirm each of the following for plant and equipment: (i) Additions; and (ii) Disposals (e) Briefly state test of details for verifying the valuation assertion of tangible non current assets where the company follows revaluation policy for valuation of such assets. 3. With reference to substantive procedures to be performed on Inventory: (a) State why inventory is considered a high risk area in most of the audit clients. (b) State principal risks of misstatement in inventory. (c) Explain the steps which the auditor should perform to ensure that carrying value of inventories are based on lower of cost and net realisable value. (d) With reference to substantive procedures to be performed on Inventory: (i) Why is it necessary for auditor to attend physical inventory counting of client. (ii) Describe audit procedures you would perform during the audit of your client BEFORE, DURING, and AFTER the inventory count. 4. With reference to substantive procedures to be performed on Trade Receivables: (a) State principal risks of misstatement in trade receivable. (b) List down any five key audit procedures for verification of provisions against doubtful receivables. (c) How would you ensure that cut-off on sales have been applied correctly. (d) State the assertions which checked by direct confirmation. Explain. 5. With reference to substantive procedures to be performed on Cash and Bank: (a) State principal risks of misstatement in Cash and Bank. (b) Identify any 4 types of information which you would verify from the confirmations received directly from the bank. (c) Explain at least five audit procedures undertaken by the auditor in respect of bank reconciliation statement. (d) List the audit assertions relevant to the audit of cash in hand and state how you would obtain audit evidence to support those assertions. 6. With reference to substantive procedures to be performed on Trade Payables: (a) State principal risks of misstatement in audit of liabilities. (b) What audit procedures available for trade payables. © What procedures would you perform to ensure that trade payables have been completely recorded in accounts. (d) How would you ensure that cut-off on purchases have been applied correctly. 7. Identify substantive procedures to be performed on Accruals, Provisions and Contingencies: (a) State why these areas are considered difficult for auditor. (b) List any five substantive procedures for the verification of each of the following: (i) Provisions (ii) Contingencies 8. List the substantive procedures which may be performed by the auditor to verify the Long Term Bank Loan. 9. With reference to substantive procedures to be performed on Equity: (a) Identify the substantive procedures for verifying share capital. (b) State four substantive procedures for verification of reserves appearing in the statement of financial position. 10. With reference to substantive procedures to be performed on Income Statement, describe the audit work you would undertake in order to ensure that following items are fairly stated. (a) Sales. (b) Purchases. (c) Payroll Cost (d) Interest paid and received (e) Expenses ...
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Final Answer

Attached.

Running Head: APPLICATION OF AUDIT PROCEDURES

Application of Audit Procedures
Student’s Name
Professor’s Name
Course Title
Date

1

APPLICATION OF AUDIT PROCEDURES

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Application of Audit Procedures
1. With reference to Tangible non-current assets:
a) Risks of assertions


Completeness: In auditing, the management is expected to avail all the
financial statements to the auditors for review. One of the assertions made
in completeness is that everything has been availed as required for a
comprehensive audit. However, there is the risk of the company not
indicating all the assets that are owned by the firm on the financial
statement, especially those that have contentious issues.



Existence. There is also a risk that some of the assets that have been
included in the financial statement no longer exist. They could have been
sold after preparation of the financial statement or even discarded due to
tear and wear.



Valuation. This has probably the greatest assertion risks. Primarily, there
is the risk of the data recorded being incorrectly entered into the financial
statement. The valuation process could also have been conducted wrongly
and thus undervaluing or overvaluing done. Also, there could be mistakes
in the calculation of the depreciation rate of the tangible non-current
assets.



Rights and obligations. The risk here is that there could be assets that are
entered into the financial statement but are not under the ownership and
control of the firm.

APPLICATION OF AUDIT PROCEDURES


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Presentation and disclosure. The company could have done improper
disclosures. This falsifies the data contained in the financial statements.

b) Disclosures that should be included in notes


Accounting changes: Changes in the accounting policy should be
indicated



Accounting errors: If errors occur during accounting calculations they
should be corrected, and the action noted on the disclosure note



Assets that have been retired should also be included.



Modifications such as those involving contracts of the company with other
firms



Events that have a significant impact on the financial statements

c) Substantive procedures of an external auditor


Valuation. The external auditor should primarily conduct a review of the
company’s depreciation policy while comparing them with those of the
previous years. The external auditor may also evaluate the valuer involved
in the process by analyzing the experience, credibility and applicability to
the particular valuation task.



Accuracy. The auditor can select a sample of assets in the company’s
premises and evaluate the register provided to see whether they are
included as they should. Additionally, the auditor can investigate on the
transition of the entries from the assets register to the general ledger for
accuracy and total inclusivity of all the assets.

APPLICATION OF AUDIT PROCEDURES


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Rights and Obligations: The auditor can analyze the ownership documents
such as title deeds to verify the credibility of the rights claims in the
financial statements. Also, the auditor can simulate purchases to confirm if
the provided invoices actually belong to the company.



Existence. The auditor can sample a few tangible non-current assets and
investigate their existence by asking to see the actual items. The auditor
can also ask for the latest documents such as fuelling records for assets
such as motor vehicle to clarify whether they still exist in reality.



Cut-off/ Timing. Investigations on whether all the information contained
in the disclosures is correct can be conducted. Also, the gap in changes
during the creation of the financial statements that were not indicated in
the disclosures can be investigated.

d) Substantive procedures for additions and disposals
Additions and disposals need to be evaluated for a credible assertion to be carried
out. An auditor needs to ask for documents of all the addition in the companies
and check on their accuracy. The auditor can also ask to visit the companies
premise to see the assets that are said to be added in the financial year. For
disposed assets, certificates indicating the process much be provided. The auditor
should also check for the reasons to dispose the items.
e) Details for the verifying of valuation assertion
It is imperative that the auditor keenly looks into the valuation procedure for
possible gaps and breaches in order to make a good valuation assertion. The
auditor needs to investigate whether the auditor is competent for the task. In this

APPLICATION OF AUDIT PROCEDURES

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case, aspects such as the individual’s qualifications and association with credible
valuation firms should be checked. The auditor also needs to clarify if the
valuation process was conducted with or without bias. In this case, a conflict of
interest probability should be checked. Thirdly, the auditor needs to check the
valuation against the former valuers.
Additionally, the valuation should be checked for compliance with the set
standards for the assets in the various categories. Lastly, the auditor should check
whether the report is in line with the depreciation of the assets. In this case, the
depreciation value should be checked.
2. Substantive Procedures on an Inventory
a. Impact of inventory misstatement
Misstatement of the inventory has a significant impact on the financial statements
in a number of ways. Primarily misstating the assets is capable of delivering false
information on the performance of the company. It would misguide the investors
who would invest in the company expecting large returns only to become
disappointed as the reported assets are not true representations of the reality.
Misstatement of inventory is also a precursor to the downfall of the firm.
Everything in the financial statement must be a representation of the actual
position of the company. Falsification of the inventory record makes decision
making difficult, and this hamstrings the company’s chances of competing fairly
and remaining profitable.
b. Impact of inventory misstatement of the income statement

APPLICATION OF AUDIT PROCEDURES

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Misstatement of the inventory is capable of affecting the income statement and
consequently, the company’s balance sheet. For instance, a misstatement of the
inventory sold is indicated and a net income. Therefore, on the income statement,
a false value would be indicated, and this would be translated to the balance sheet.
This leads to the risk of affecting the company’s income computation.
c. Steps to explain adherence to lower of cost and net realizable value
Auditors have the task of certifying if the inventory valuation is conducted
following the proper manner. Essentially the auditor should check on the assigned
costs of the assets against the market value of the assets. If there is no
relationship, the auditor should propose a reevaluation of the assets to meet the
lower of cost value. Secondly, the auditor should check on the depreciation value
of the assets that have been assigned. If this value is not in sync with the actual
depreciation rate, recommendations should be provided. Thirdly the auditor
should check whether various aspects such as obsolescence of the assets, price
reduction and many other negative impacts have been taken care of. Once all the
above-listed considerations are made, the auditor can accurately declare if the
assets meet the lower of cost and the net realizable value.
d. Audit procedures BEFORE, DURING, and AFTER the inventory count
Before: The auditor should request for the inventory record from the company.
An audit should be done on the mathematical accuracy of the inventory report in
comparison to the financial statements.
During inventory count: during the count, the auditors should check on the
presence of the tangible non-current assets. During the check, the auditor is

APPLICATION OF AUDIT PROCEDURES

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supposed to sample a few items among the physical assets and check for their
existence in the item list. It is also important that the auditor checks for
deformities on the items and investigate whether it is indicated on the list.
After the inventory county: The auditor should check on the company
reconciliation records of the physical inventory and the booked inventory.
3. Substantive procedures on trade receivables

i.

Principle risks of misstatement in trade receivables
Most firms, especially those that operate on credit, have many trade
receivables. Some of the risks involved in a misstatement of the trade
receivables include:


Existence. The company can report of trade receivables that are
inexistent.



Completeness. The company can report the trade receivables in an
incomplete manner while skipping out others



Rights and obligations. There is a risk of the recorded trade
receivable not being under the ownership of the company.



Valuation or allocation. A risk exists of the company overvaluing
the risk receivables



Presentation and disclosure. The risk of the disclosure terms being
incomplete in the reporting of the trade receivables also exists.

ii.

Key audit procedures against doubtful receivables

APPLICATION OF AUDIT PROCEDURES


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Use of analytical procedures. The auditors analyze the company’s
financial statements reports for the particular year against other
years.



Verification via validation. The auditors involve the debtors and
other players who are party to the account receivables in question.
From the confirmations, the auditors can clarify on the doubtful
receivables.



Use of alternative tracing procedures. This is mainly applied if the
debtors are not responsive as expected for validation of the trade
receivables. In this case, the auditors evaluate supporting
documents for the validity of the trade receivables claims.



Confirmation against the standards. In many countries, there are
set standards regarding the reporting of trade receivables. The
auditors evaluate the company’s account re...

MercyK254 (19625)
New York University

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