1 Discuss The Purposes of (1) Substantive Tests of Transactions, (2) Tests of Controls, and (3) Tests of Details of Balances. Give An Example of Each

1 Discuss the purposes of (1) substantive tests of transactions, (2) tests of
controls, and (3) tests of details of balances. Give an example of each.

- The purpose of substantive tests of transactions is to determine whether all
six transaction-related audit objectives have been satisfied for each class of
transactions. For example, as part of the auditor's test of the accuracy
objective for sales, the auditor would compare the amount recorded in the
sales journal for a sample of sales transactions with the total on the
corresponding sales invoices.
- The purpose of tests of controls is to determine the effectiveness of both the
design and operations of specific internal controls. For example, the auditor
might observe for a month whether statements are mailed to all customers.
- The purpose of tests of details of balances is to determine the monetary
correctness of the accounts to which they relate. The confirmation of accounts
receivable is an example.
2. Discuss the actions an auditor should take when an illegal act is identified
or suspected.
1. Consider the effects of the illegal act on the financial statements, including the
adequacy of disclosures. If the auditor concludes that disclosures are inadequate,
the auditor should express a qualified or adverse opinion on the financial statements.
If the auditor is precluded by management or those charged with governance from
obtaining sufficient appropriate evidence to evaluate whether noncompliance that
may be material to the financial statements has occurred or is likely to have
occurred, the auditor should express a qualified opinion or disclaim an opinion on the
financial statements on the basis of the scope limitation.
2. Communicate with those charged with governance matters involving

noncompliance with laws and regulations that came to the auditor's attention during
the course of the audit. If the matter is believed to be intentional and material, it
should be communicated to those charged with governance, such as the board of
directors, as soon as practicable.
3. Identify whether a responsibility exists to report the identified or suspected

noncompliance to parties outside the entity, such as regulatory authorities.
4. Evaluate the effects of the noncompliance on other aspects of the audit, including
the auditor's risk assessment and the reliability of other representations from
management.
3. Describe each of the three broad objectives management typically has for
internal control. With which of these objectives is the auditor primarily
concerned?
The three objectives are:
• Reliability of financial reporting. Management has both a legal and professional
responsibility to be sure that the information is fairly presented in accordance with
reporting requirements such as U.S. GAAP and IFRS.
• Efficiency and effectiveness of operations. Controls within an organization are
meant to encourage efficient and effective use of its resources to optimize the
company's goals.
• Compliance with laws and regulations. Public, non-public, and not-for-profit
organizations are required to follow many laws and regulations. Some relate to
accounting only indirectly, such as environmental protection and civil rights laws.
Others are closely related to accounting, such as income tax regulations and anti-
fraud legal provisions.
The auditor's focus in both the audit of financial statements and the audit of internal
controls is on the controls over the reliability of financial reporting plus those controls
over operations and compliance with laws and regulations that could materially affect
financial reporting.
4. Discuss the essential activities involved in the initial planning of an audit.

There are four essential activities involved in the initial planning of an audit. These
are:
1. Client acceptance or continuation. In the case of a new client, the auditor must
determine whether the client is one with which they wish to be associated with. In the
case of a continuing client, an auditor must determine whether continuing the
relationship is appropriate and in the firm's best interest.
2. The auditor should identify why the client wants or needs an audit. The auditor
should determine the reason for the audit as soon as practical. The remainder of the
planning activities may be impacted by the client's reason for requesting the audit.
3. Obtain an understanding with the client about the terms of the engagement. An
understanding with the client should be obtained to avoid misunderstandings.
Auditors are required to obtain an understanding with their clients. This
understanding must be written.
4. Develop an overall audit strategy. The strategy should consider the reasons for
the audit, including engagement staffing and any required audit specialists. Setting a
strategy helps the auditor determine the resources required for the engagement.
5. Discuss the differences and similarities between the roles of accountants

and auditors. What additional expertise must an auditor possess beyond that
of an accountant?
 The role of accountants is to record, classify, and summarize economic

events in a logical manner for the purpose of providing financial information for
decision making. To do this, accountants must have a sound understanding of the
principles and rules that provide the basis for preparing the financial information. In
addition, accountants are responsible for developing systems to ensure that the
entity's economic events are properly recorded on a timely basis and at a reasonable
cost.
 The role of auditors is to determine whether the financial information prepared
by accountants properly reflects the economic events that occurred. To do this, the
auditor must not only understand the principles and rules that provide the basis for
preparing financial information, but must also possess expertise in the accumulation
and evaluation of audit evidence. It is this latter expertise that distinguishes auditors
from accountants.
5. There are several factors that affect an audit firm's business risk and,
therefore, acceptable audit risk. List the three factors (do not need to provide
explanation).
Answer: Business risk and acceptable audit risk are affected by:
• The degree to which external users will rely on the statements. For large, publicly
held clients, business risk is greater, and acceptable audit risk will be less, than for
small, privately held clients, all things being equal.
• The likelihood that a client will have financial difficulties after the audit report is
issued. Business risk is greater, and acceptable audit risk will be lower, when the
client is experiencing financial difficulties.
• The auditor's evaluation of management's integrity. Business risk is greater and
acceptable audit risk will be lower when the client's management has questionable
integrity.

1 Discuss The Purposes of (1) Substantive Tests of Transactions, (2) Tests of Controls, and (3) Tests of Details of Balances. Give An Example of Each

Uploaded by

Copyright:

Available Formats

1 Discuss The Purposes of (1) Substantive Tests of Transactions, (2) Tests of Controls, and (3) Tests of Details of Balances. Give An Example of Each

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

1 Discuss The Purposes of (1) Substantive Tests of Transactions, (2) Tests of Controls, and (3) Tests of Details of Balances. Give An Example of Each

Uploaded by

Copyright:

Available Formats

1 Discuss the purposes of (1) substantive tests of transactions, (2) tests of

controls, and (3) tests of details of balances. Give an example of each.

2. Communicate with those charged with governance matters involving

3. Identify whether a responsibility exists to report the identified or suspected

4. Discuss the essential activities involved in the initial planning of an audit.

5. Discuss the differences and similarities between the roles of accountants

 The role of accountants is to record, classify, and summarize economic

You might also like