January 12, 2011

[FINANCIAL SYSTEMS AND AUDITING ASSIGNMENT]

Table of Contents

Table of Contents..............................................................................................................1 Case study No. 1...............................................................................................................2 The auditor did not receive the first confirmation letter..................................................3 The auditor received the confirmation letter but the figures in the CL are different from ones in the balance sheet and other documents...........................................................3 Case study No. 2...............................................................................................................4 References.........................................................................................................................6

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Case study No. 1

In order to check on the accuracy of management-prepared financial statement, the auditors use confirmation letter. The confirmation letter is prepared by the auditors then it will be sent to the auditee to be signed and sealed. After that, the confirmation letter will be returned to the auditor and the auditor will sent it to the third parties (customers, suppliers, banks) to confirm various items on the company's books and records such as account receivables, account payables and cash balances. When the confirmation letter is returned from the third parties, the auditor will check and compare the information with the records of the company.

The confirmation objective is to obtain audit evidence and considerations for performing confirmation procedures. The auditor will evaluate whether the response can be relied upon and give the opinions. Therefore, the evidence from confirmation letter is considered to be more reliable than the evidence which was provided by the auditee. In two situations below, there are the suggestions which the auditor should do and give opinion when making confirmation letter (CL) of receivables. Bui Thanh Hong - 1013104113 Page 2

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The auditor did not receive the first confirmation letter If the auditor did not receive the first confirmation letter, the second letter will continue to be sent to third parties with explanation about the need of confirmation letter. In the case that the third party still ignore to confirm the letter, the auditor will implement the alternative procedures to prove the existence of the receivable balance through examining the economic contracts, sales invoice. For example, the auditor will: Check the bank deposit, cash receipts which related to the customer from closing date to the time of the audit. Investigate the inventory invoices or completion record provides service for the customer. The auditor received the confirmation letter but the figures in the CL are different from ones in the balance sheet and other documents In the confirmation letter, the reliability of the evidences is very important and need to be evaluated carefully. In the case that the auditor received the confirmation letter and the figure in the confirmation letter is match with the ones provides by auditee, the auditor will accept the receivables balance of the client at a specific time. On the other hand, if the figures in the confirmation letter are different from ones in the balance sheet and other document, the auditor has to consider the differences between them and implement the additional procedures. There are two main levels of the differences that the auditor needs to consider:

The differences between the figures provided by the confirmation letter and the

ones in balance sheet are not too big. In this case, there is no need for adjustment and the auditor can accept the data in financial statements. These differences are considered as immaterial finance errors which are not effect to financial statement, thus the auditor can ignore. Bui Thanh Hong - 1013104113 Page 3

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The differences between the figures in the confirmation letter and the ones in the

financial statements are considered as the serious mistake. In this case, the auditor has to define an appropriate adjustment and require the firm administration to adjust the figures according to the suggestion of auditor. If the managers agree to adjust the financial statement based on the auditors recommendation, the auditor will give the total acceptance to the financial statement which was adjusted. In contrast, the auditor will give the qualified opinion if the managers do not adjust and still remain their financial statement.

Case study No. 2

In order to express audit opinion based on the accounts and financial operations of the auditee, the auditors have to obtain such evidence from tests that determine the accounting controls work and tests of accounting details. Firstly, the auditors carry out the Test of control to verify if the organization's financial statements are worth relying upon. After that, if the auditor does not get satisfied with the result, then the Substantive test which is a comprehensive analysis will be implemented.

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Test of control is created in order to help the auditors evaluate the effectiveness in operating of internal control. Tests of control are aimed at detecting deviations from laid down procedures such as documents not properly approved, reconciliations not regularly performed or failure to enforce the required segregation of duty 1. If the tests do not confirm the operation of the control as planned, the auditor need to carry out the substantive procedures. Substantive test is design in order to help the auditor verify the correctness of the amounts in financial records. The substantive tests include three forms such as tests of transactions, tests of balances and analytical review procedures. Based on these tests, the auditor can gather evidence of the validity of the accounting treatment of transactions and balances which are designed to identify errors and irregularities2. Besides, the auditor can also ensure that transaction was recorded in the correct account for the correct amount. The internal control system plays an important part in determining the scope of tests. If the internal control system is considered as a strong system with the high reliable, the audit scope can be narrowed by applying the test of control and reducing the level of substantive procedures. On the other hand, if the internal control system is

Available from: http://www.accaglobal.com/archive/sa_oldarticles/49870 Available from: http://www.allbusiness.com/glossaries/substantive-test/4946727-1.html

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considers as a weak system, the audit scope needs to be expanded and the auditor has to check carefully in the accounting details with more extensive substantive procedures. The general misconception is that internal control weaknesses require the performance of additional tests of control. In fact, the risk model requires the performance of fewer or even no tests of control where controls are weak, but the performance of additional substantive procedures. Besides, whether the internal control system is designed well or not, this system cannot detect all the misstatement in the operating of the company. In every control system, there are always inherent the limit and some latent risks which will affect to the financial statement. Therefore, the auditor still needs to test of details for collecting audit evidences even if internal control system is assessed to be reliable.

References

1. Book sources BPP Professional Education, 2004, Financial Report, London: BPP Professional Education BPP Professional Education, 2004, Financial Systems and Auditing, London: BPP Professional Education 2. Internet sources Lawyer Links, Audit Confirmation Letter [Online], Available from: http://content.lawyerlinks.com/default.htm#http://content.lawyerlinks.com/sec/Aud its_Auditors/audit_confirmation_letters.htm [Accessed: January 11, 2011] Ernst and Young, Concept release on possible revision to the PCAOBs standard on audit confirmation [Online], Available from: Page 6

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http://www.ey.com/Global/assets.nsf/United %20Accounting/ATG_CL_BB1763/$file/ATG_CL_BB1763.pdf January 11, 2011 ] All Business, Substantive test [Online], Available from: [Accessed:

http://www.allbusiness.com/glossaries/substantive-test/4946727-1.html [Accessed: January 11, 2011] Graham 2011] Cosserat, Audit strategy [Online], Available from:

http://www.accaglobal.com/archive/sa_oldarticles/49870 [Assessed: January 11,

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