Advanced Auditing Assignment

Topics: Auditing, Audit, Financial audit Pages: 14 (4312 words) Published: December 4, 2013
QUESTION 1 (16 marks)
Cash is the most vulnerable asset to audit. Answer the following questions; a)What are the three assertions an audit needs to establish? (6 marks) SOLUTION:
Cash balances include cash on hand and at bank. Cash on hand includes undeposited receipts and petty cash. Cash at bank includes cash held in current and savings accounts which is available on demand. Unlike any other account balance, cash may be either an asset or a liability. The latter arises where the bank with which the entity holds an account allows the entity to write cheques in excess of the balance in the account up to an agreed limit known as an overdraft. Using the assertions described in SAS 400 (ISA 500) the audit objectives to be achieved in verifying cash balances are identified in Table 1. Table 1: Specific audit objectives for cash balances

Assertion Account balance audit objective
ExistenceRecorded cash balances exist at the balance sheet date. CompletenessRecorded cash balances include the effects of all cash transactions that have occurred. Rights and obligations The entity has legal title to all cash balances shown at the balance sheet date. ValuationRecorded cash balances are realisable at the amounts stated on the balance sheet. Presentation and disclosure Cash balances are properly identified and classified in the balance sheet.

Lines of credit, loan guarantees and other restrictions on cash balances are appropriately disclosed.

Therefore of the 5 assertions and audit objectives listed above the 3 assertions applicable to direct test of cash balances are Existence, Completeness and Valuation. b)List 4 audit procedures to use in auditing cash. (4 marks) SOLUTION:

Because of the large volume of transactions and the small account balance, the audit strategy is invariably to concentrate on verifying the account balance rather than the transactions. Moreover, because of the significance of cash to an entity's liquidity, auditors tend to plan their procedures to detect much smaller levels of misstatements than for other accounts. In verifying cash, the auditors must remember that the closing balance may be an overdraft. The assertions of existence and completeness are thus equally important, given that the balance may be either an asset or a liability. See Table 2. Table 2: Possible substantive procedures for cash balance assertions Category Substantive procedure Table 2Cash balance audit objective Initial procedures

1 Perform initial procedures on cash balances and records:Valuation (a)trace opening balances to prior year's working papers;
(b) review activity in general ledger accounts for cash;
(c) obtain and verify mathematical accuracy of entity-prepared summaries. Analytical procedures
2Perform analytical procedures.
Tests of details of transactions
3 Perform cash cut-off tests (note — these tests may have been performed as part of the audit programmes for debtors and creditors). Existence and Completeness Tests of details of balances
4 Count undeposited cash on hand. Existence, Completeness, Rights and Valuation 5Confirm bank balances.
6Verify reconciliations as appropriate.
7Obtain and use subsequent period's statements.
Presentation and disclosure
8Compare report presentation with applicable Accounting Standards.Presentation and disclosure

Therefore the four audit procedures are
1.Initial Procedure involves tracing, inspecting, confirming, reperforming 2.Analytical Procedure involves analysing
3.Test of details of Transactions involves confirming
4.Test of details of Balances involves counting, confirmation, inspecting

QUESTION 2 (10 marks)
List the five different audit opinions and identify the situation(s) under which each one is expressed for a financial report audit.

Table 3: 5 Difference audit opinions and scenarios in a financial report audit OpinionSituation where opinion is expressed

1...
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