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Consider each of the following situations related to auditing practices and assess why the audit assistant’s conclusions may be insufficient or incorrect in each case:

A. The audit assistant assumes that a control over credit limit increases, authorized by the financial controller, is operating effectively solely based on policy documentation, without evidence of actual implementation or testing.

B. A test of controls on 48 sales transactions results in four errors, but because none are material, the audit assistant concludes that the system operates satisfactorily. This overlooks the need to evaluate whether the errors are indicative of broader control weaknesses.

C. Testing a sample of 30 out of 220 creditors by randomly selecting and reconciling their statements may not be sufficient to confirm the entire trade payable balance, especially considering the large number of small creditors and potential sampling risk.

D. Verification of SJO Pty Limited’s ‘other receivable’ by matching bank statements and cash payments, despite ongoing disputes with tax authorities and payments made under protest, may not provide sufficient evidence of the receivable’s recoverability or accuracy.

Paper For Above Instructions

The core of an audit lies in obtaining sufficient appropriate audit evidence to support conclusions and assertions in financial statements. Each of these situations reflects a potential gap in evidence collection or analysis that could compromise the auditor’s opinion.

In case A, reliance is placed on documented control policies without verifying their operation through procedures such as observation, re-performance, or testing of actual transactions. Merely noting that a control "is required" does not confirm its operational effectiveness. For sufficient evidence, the audit assistant should have performed walkthroughs or sample testing of credit limit increases to ensure that the control functions as intended in practice.

For B, although the errors found were deemed immaterial, their occurrence indicates a potential control weakness or misstatement risk. Satisfactory operation of controls cannot be confirmed without broader sampling or testing over different periods or transaction types. The conclusion that “the system is operating satisfactorily” might be premature without considering the nature and frequency of errors, particularly if controls are manual or susceptible to override.

Regarding C, testing only 30 creditors randomly from a large population does not ascertain the complete accuracy of the trade payables balance. Small creditors often comprise numerous small balances that could be material collectively or individually. A more comprehensive approach might include stratified sampling, confirmation procedures, or items selected based on risk factors, to mitigate sampling risk and enhance evidence quality.

In scenario D, verifying the ‘other receivable’ by bank statement and cash payments assumes the receivable’s current validity and realizability without considering the dispute’s nature. Since SJO’s payment was made under protest amid ongoing tax disputes, the initial recognition of the receivable might not be appropriate, or the amount could be unrecoverable if the tax assessment is upheld. The auditor should have evaluated the dispute’s status, subsequent events, and possible impairments, rather than solely relying on correspondence and cash records.

In summary, effective audit procedures require more than documentation or limited testing. They involve critical evaluation, corroboration from multiple sources, and testing of controls and transactions in a manner that minimizes risk of misstatement and provides reasonable assurance for audit opinions.

References

• Arens, A. A., Elder, R. J., & Beasley, M. S. (2019). Auditing and Assurance Services (16th ed.). Pearson.
• Gray, I., & Manson, S. (2018). The Audit Process (7th ed.). Cengage Learning.
• IAASB. (2016). International Standards on Auditing (ISA) 330 - Performing Audit Procedures in Response to Assessed Risks.
• Joyce, A., & McKeown, J. (2020). Auditing: A Practical Approach (3rd ed.). Wiley.
• Kinney, W. R. (2017). Auditing and Assurance Services. Cengage Learning.
• Public Company Accounting Oversight Board (PCAOB). (2018). Auditing Standard No. 2201 – An Audit of Internal Control Over Financial Reporting.
• Rezaee, Z., & El Sayed, M. (2020). Internal Audit and Risk Management. Routledge.
• Simnett, R., & Huggins, A. (2019). Auditing and Assurance Services in Australia. McGraw-Hill Education.
• USAID. (2016). Audit Evidence and Quality Control. International Standards on Auditing (ISA).
• Whittington, O. R., & Pany, K. (2019). Principles of Auditing & Other Assurance Services. McGraw-Hill Education.