Auditing Assignment - This assignment consists of FOUR questions.
Question 1 - Below are six situations that involve the audit risk model as it is used for planning audit evidence gathering requirements.
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Situation
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Risk
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1
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2
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3
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4
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5
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6
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Acceptable audit risk
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5%
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5%
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5%
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5%
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1%
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1%
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Inherent risk
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100%
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40%
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60%
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20%
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100%
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40%
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Control risk
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100%
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60%
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40%
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30%
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100%
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60%
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Planned Detection risk
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---
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---
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---
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---
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---
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---
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Required:
(i) Calculate the planned detection risk for each of the above six situations.
(ii) Identify and explain which situation of these 6 situations requires the greatest amount of evidence and which situation requires the least amount of evidence?
Question 2 - The audit of Educational Books Distributer Ltd is being conducted by John Jones Auditors. This company supplies books to over 1,000 schools throughout Australia and New Zealand. The accounts receivable records are maintained on the company computer system.
John is planning the end of year audit and has held discussions with the IT department. His aim is to get help in achieving the balance-related audit objectives. The accounts receivable file contains the following details:
Customer code; customer name; customer address; unpaid invoices details; details of all invoices issued in the current month; details of all cash receipts for the current month; records of all journals entries this month.
Required: Describe FIVE ways by which a software program provided by the IT department could help John in the audit of the accounts receivable balance of Educational Books Distributer Ltd.
Question 3 - The following misstatements are found in the sales and collection cycle accounts:
1. Several cash receipts have not been recorded in the accounts
2. A customer received a bill for items priced at last year's (lower) rate
3. A shipment made (and payment agreed to) in the current financial year is recorded in the next financial year's records.
4. A customer purchased goods, and returned half of the goods on 30 June last financial year, but the return was recorded in the current financial year.
5. A small loan was made to a related party of the company's directors. The loan was recorded in Accounts Receivable until it was paid back
6. An industry boom has created an upsurge in the economy. The Allowance for Doubtful Debts was maintained at the same level as last year.
7. Several Accounts Receivables are in dispute because the delivery truck breakdown required shipments to be made in numerous small instalments. This made it difficult for customers and your company to track the orders.
REQUIRED: For each misstatement(s) in each of the 7 observations above:
A. Identify the balance-related audit objective for each observation.
B. List an Internal Control that should prevent each misstatement.
C. List one of the Test of Details of Balances type of audit procedure that an auditor could use to detect for each of the misstatements
Question 4 - Describe two examples of situations when an auditor may use Stratified Random Sampling.
Give an example describing the different strata for these two examples situations
Explain how the sample selection would differ between your different Strata for these two examples situations. (Refer to how much of the population you would include in your sample)
Describe how sample selection (how much of the population you would include in your sample) would provide better effectiveness/accuracy or better economy for your client for these two examples situations.