AU1

Assignment 3

Question 1

Evaluating the auditors’ procedures for assessing client’s internal control (provide four points):

The auditors should apply three phases in evaluating internal control:
Understand the internal control
Assess preliminary control risk to determine audit approach
Perform test of controls when assessing control risk below maximum

In addition to using flowcharts, questionnaires, and narratives, the auditors should inspect documents and records, and observe a walk-through of activities and operations go through transactions

After obtaining an understanding of the internal control procedures, the auditors should assess control risk level to determine what approach to proceed

The auditors should perform tests of control (on those controls that the auditors believe to be strong) to evaluate the operating effectiveness of the control procedures at the interim period; any deficiencies should be communicated to management to prevent further misstatements

Question 2

Four concerns auditor would have regarding the controls over the Internet sales:

The system should verify inventory levels before approving the sales order

The system should generate a sales order control number to prevent duplicate orders

Customer credit card information should be encrypted and only accessible by authorized personnel

There should be an audit trail documenting all activities in the system

Question 3

a) Three additional steps to determine collectability of accounts receivable:

Review payments received after the year end – vouching deposit slips to bank statements

Compare accounts receivable turnover to prior years

Compare the relative changes (current year and prior years) between sales and accounts receivable, such as if the percentage change in accounts receivable is higher than the percentage change in sales, then it may be a sign of collectability problem

b) The confirmations are positive confirmations. The procedure requires customers to send confirmation regardless they agreed to the balance or not.

Question 4

Five mistakes John has made in his audit of the inventory account:

Fail to observe the inventory physical count

Fail to review the inventory counting instructions prior to the inventory count so that he can observe the process to evaluate the effectiveness of the client’s inventory count procedures

Fail to control the count sheets such as numbering the sheets, so that unused sheets are not used to count for an inventory twice, and so that all inventory are counted for

Fail to investigate the errors he found before making any adjusting entries to bring inventory account to actual value

Fail to perform cut-off analysis – vouch last shipping and receiving balance obtained at year-end inventory count to source documents to make sure inventory are recorded in proper period

Question 5
a) Ethical / independence issues (include three points):
CGAs are professional and have first obligation to society. Roy, as a CGA and a business owner, he understands the business more than his neighbour. For Roy to disclose simple instructions to not take more debt to the new business owner, it implies that he is not disclosing all the information necessary to the new buyer. It is unethical for Roy to sell his business without