a) The auditor plays a vital role for the stakeholders as well as investors as the auditor enhances the financial statement’s reliability. Thus, to identify the material misstatement in the company’s financial statements, the auditor is required to be independent as well as competent.
The professional code of conduct states that the auditor must provide auditing services with due diligence and care. The due care implies that the auditor should have possessed the requisite skills, employ skills with due care, and should be unbiased.
The auditor has three types of liabilities that include liability for negligence, fraud, and breach of contract. The auditor also has the liability towards the entity’s stakeholders who appoints them, and towards the known or foreseeable financial statement users.
In the given scenario, the XYZ bank has given a loan of $2,500,000 to the company ABC Ltd. which is shown in the financial statement of the company. Thus, the bank falls under the known user of the financial statements of the company.
The auditor has the liability to conduct the audit as per the requirements of the foreseeable users, to issue the proper report of the audit and should have properly valued the inventory and report the same.
The bank would succeed if the auditor has not properly valued the inventory, showed negligence in performing the duties, and it is proved that the audit has not been conducted by the auditor as per the user’s requirements.
b) Auditors are professional treated with highest integrity so, it is very important very ethical and abide the law of land. Auditors also come under all type of laws including civil and criminal, any breach of law under the contract act or fraud is applicable to them as well. They can be sued by the third parties for any of above breaches, and to do third party need to prove that the basic element of negligence has happened in term of
i) Breach of Duty
ii) Injury done due to his act
iii) Causation
iv) Any Material damage suffered by the injured party
c) Auditor must be an independent professional, as it is about the trust factor attached of so many stakeholders, including shareholders, investors, govt and employees of the company.
Independence cannot be compromised and is a very important factor, they should be given free hand in performing their duties and verify the documents and transaction which they want to.
Independence in facts: - It is used in regard to the unbiased reporting verification and auditing of the facts and its presentation . The report of the auditor must be on independent facts and on the his bias opinions.
Independence in Appearance:- The conduct of the Auditor should be as per professional and ethical values of auditing, it must be visible in appearance also that fair and true statements are prepared in audit observations. it should appear that integrity and safeguard is applied in concluding the facts. It’s more about the presentation part.
The purpose of Auditor for an audit of design and effectiveness of internal control procedures
Explanation:
(a) Tests of details of transactions- This test is used for transaction by the auditors to collect evidence and proofs for balances , disclosures etc. as per client’s financial statements.
(b) Tests of details of balances- Tests of details of balances are used by auditors to collect evidence that the balances which has been shown by the client in their financial statements are correct and not materially misstated
(c) Analytical procedures- Analytical procedures are a type of evidence used during an audit. These procedures can indicate possible problems with the financial records of a client, which can then be investigated more thoroughly. Analytical procedures involve comparisons of different sets of financial and operational information, to see if historical relationships are continuing forward into the period under review. In most cases, these relationships should remain consistent over time. If not, it can imply that the client's financial records are incorrect, possibly due to errors or fraudulent reporting activity. To obtain audit evidence, the auditor performs one - or a combination - of the following procedures: inspection, observation, external confirmation, inquiry, performance, and recalculation.
With reference to above explanation:-
1. Reconcile supplier statements at the year-end with balances in the purchase ledger - B Test of Detail Balances
2. Agree a sample of sales invoices to goods despatch records held in the inventory system.- A Test of detail Transactions
3. Review post year-end receipts from customers to establish the extent of unpaid debts - B Tests of details of balances
4. Calculate gross profit ratios for each branch of a chain of supermarkets and compare month by month and prior year - C Analytical procedure
5. Obtain schedule of asset disposals in the period and agree to supporting sale documents.- Both A & B Test of details of balances & transactions
6. Attend the factory on the final day of the year to review work in progress.- A tests of details of transactions
7. Agree payment to equipment Hire Company to a copy of the lease - B tests of details of balances
8. Calculate expected payroll costs from last year's amount adjusted for staff changes and pay rise in the year. - C Analytical procedure
Audit Sampling techniques
Accepted Audit Procedures
a. Item no 1, 2 , 4, 5, 6 and 7 are likely to be considered as an subsequent event but this does not depend on timing and progress of discussion.
b.
1. Adjustment of balances in current year’s financial statement.
2. Note disclosure only (no adjustments).
3. No treatment / action is necessary.
4. Adjustment of balances in current year’s financial statement.
5. Adjustment of balances in current year’s financial.
6. Note disclosure for contingent liability.
7. Probably no disclosure needed, or note disclosure if talks have proceeded to point where merger or acquisitions seems sufficiently likely.
c.
1. Perusal of major post-balance date transactions (sales).
2. Inquiries of management (regarding capital transactions or events).
Perusal/review of minutes of Board of Directors meeting or relevant sub-committee.
3. Perusal of major post-balance date transactions (purchases) or enquiries of management.
4. Review of adjustments and write-offs.
5. Enquiries of management. Correspondence with client’s lawyers.
6. Enquiries of management (regarding the possibility of unrecorded contingencies). Analysis of legal expenses and review of invoices/statements from lawyers for indications of potential contingencies. Correspondence with client’s lawyers.
7. Enquiries of management. Perusal of minutes of Board of Directors meeting.
a) Journal entries
1 No adjustment entry required as it should be done at the time of issue that it in year2021 but in 2020 only disclosure is required.
2. These were unrecorded debit memos for purchases. The year-end balances of purchase and accounts payable should be decreased by the total amount of $30000 of the debit memos that pertain to 20X0, but were recorded after the year-end
Accounts Payables Account Dr 30000
Purchase Return Account Cr 30000
3. Purchase Account Dr. 35000
Accounts Payable Account Cr. 35000
4. Electricity and Utilities Account Dr 37000
Accured Expenes Account Cr. 37000
5. Loss from Obsolence Account Dr. 33000
Inventory obsolesce reserve A.c Cr. 33000
6. Bad Debt A/c Dr 42000
Allowance for Doubtful debt A/c Cr 42000
7. no entry Required
8 no entry required
b) Although auditor is responsible for ensuring that the financial statements are true and fair in all material respects and prepared in accordance with the financial reporting framework but, the responsibility for preparation of the financial statements lies in the hands of the management.
Accordingly, if the management is reluctant in making these adjustments in the financial statements, the auditor must disclose the fact that reliance cannot be placed on the internal control over financial reporting of the company and this disclosure should be followed by a qualified opinion.
i) Five deficiencies as required are:
1. Requisition forms are not authorized: the requisition form for purchase of any item shall be authorized by the head of the respective department making requisition for the items, so that only the genuine items can be purchased.
2. No reference to Current Inventory Levels: A Practice of making reference to current inventory levels shall be adopted by the Company so that the items already in inventory can be utilized and unnecessary cost can be reduced. It may be so that the item requisitioned by the department was already there in inventory and was again purchased.
3. List of Approved Suppliers very old: a list of Approved suppliers shall be updated frequently, so that the purchases can be made from the genuine supplier at the competitive rates.
4. No comparison of the quotations: it has been found the orders are directly authorized by the purchasing directors before being sent to the supplier, but there is no reference to the comparison of the different quotations from the different suppliers, which help to acquire the best product at the best price from the market.
5. Payments not made as per the agreed Terms and Conditions: it has been noticed that the payments are made after the 60 days of invoice input into the system but idealy the payments shall be made as per the mutual agreed terms and conditions between the xyz company and the suppliers.
1. Materiality: Material
Type of Report: Qualified Opinion
Explanation: In this case is not pervasive but material, since the accounts are not a as Accounting Standards.
2. Materiality: Immaterial
Type of Report: Unmodified opinion
Explanation: Since the client is still following GAAP procedure and disclosed their financial difficulties in a note to its financial report Auditor can give unmodified opinion in Audit report. And add emphasis of matter paragraph, after opinion, and reference note that must have "going concern" line
3. Materiality: material
Type of Report: Qualified opinion
Explanation: Because the auditors have doubts over the accuracy of the complied figures but cannot verify these , there is a scope of material balances and limitation problem auditors can issued qualified Audit Report.
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