Question

#1

Mo has been assigned to the audit of Aurora Landscaping Co. Ltd, a new client. His job is to meet each one of the department managers in payroll, accounts receivable and payable. Mo must determine and document how each one of these systems of internal controls work. He has been given an audit program for each one of these cycles. When he arrived at Aurora this morning, the first thing he did was review the planning section of the working paper file his senior had prepared. He distinctly remembers reading that his senior had concluded on a substantive approach for all cycles. He is thinking, “What a waste of time! Why do I need to document these three systems of internal control when I know that we are not going to rely on any of the controls that I expect to find?”

Required:

Can you answer Mo’s question?

#2

Jonathan has been assigned to be in attendance (as auditor) with an inventory count to take place at December 31. Jonathan is not happy at all…he had great plans for New Year’s Eve and now he has to tell his friends that he is not able to attend.

He doesn’t get it….He did internal control testing over the year and the perpetual inventory system seemed to be working. Why do I have to change my plans just because the client only does a formal inventory count at year? Why can’t we just rely on internal control?

Required

Can you answer Jonathan’s question?

Case 3

Jagdip has been assigned to the year end audit of Risky Business Oil and Gas Company, a large multinational publicly traded oil and gas company. Jagdip had spent the summer doing lots of internal control testing at Risky Business. His senior is thrilled with the progress that Jagdip has made since he started with the firm and wants for him to be in charge of the long term debt section of the balance sheet. His senior has provided to Jagdip the planning section of the file and Jagdip will be responsible for confirming long term debt at year end as well as doing some analytical procedures on interest expense. Jagdip is confused…..after doing all of the internal control testing during the summer months why on earth are we doing substantive procedures at year end? Especially on something as easy as long term debt. Can’t I just look at the loan agreements and bank statements and be done with this?

Required

Can you answer Jagdip’s question?

Case 4

Jane has been assigned to the audit Lucie Lemon Ltd. She has just started performing tests of controls in the sales, receivables cycle. Every test she has performed during the month of January is not working out the way she thought. She is thinking that there must be a problem. Jane is new to the public accounting profession and is thinking, “Now what???”

Required:

Provide some advice to Jane. What should Jane do?

Case 5

Brad has been assigned to the audit of Kitchen Cupboards Manufacturing Ltd.

He has been assigned the responsibility of sending out accounts receivable confirmations at the nine months ended September 30, 2012. He thinks that someone has made a serious mistake. On his first audit, the partner told him he had to send out lots of accounts receivable confirmations and they had to be sent out at the company’s year-end. Brad doesn’t understand how two partners in the same firm can use such a different approach to audit accounts receivable.

Required:

Can you answer Brad’s question?

Answer 1

“What a waste of time! Why do I need to document these three systems of internal control when I know that we are not going to rely on any of the controls that I expect to find?”

Understanding of clients internal control assist the auditor in assessing the risk of material misstatement which helps in implementation of auditor's reponses. Without understanding controls auditor may not be able to identify risk and may not be able to design responses. Audit procedures are linked to assessed risk so not gaining knowledge about clients internal controls will lead to failure in obtaining sufficient appropriate audit evidences that are crucial to form audit opinion. So understanding clients internal controls is really important in conducting audit.

Since no particular question was asked answer for first question has been provided.