Answer The Following Questions 11 It Seems From The Discussi

Answer The Following Questions11 It Seems From The Discussion In The

1. It seems from the discussion in the book that positive confirmations are more useful in detecting misstatements. Do you think there are any instances when negative confirmations are justified? When? What are the benefits of negative confirmation? Are these benefits worth the costs?

Negative confirmations are justified in specific audit scenarios, particularly when the assessed risk of material misstatement is low, and the controls over the confirmations are effective. They are typically used to corroborate the absence of errors rather than uncover deliberate misstatements. Negative confirmations request recipients to respond only if they disagree with the stated information, making them less intrusive and easier to administer in large sample sizes. The benefits of negative confirmations include lower costs, less administrative effort, and reduced likelihood of auditor bias since the respondent only responds if they disagree. However, these benefits may not always outweigh the risks, as negative confirmations tend to have a lower response rate and may be less reliable in detecting misstatements compared to positive confirmations. The decision to use negative confirmation should be based on the risk assessment, the control environment, and the specific audit objectives.

2. Which of the actions on pages do you prefer? Why? Do you think all these actions are valid? Why or why not?

Without specific context from the pages referenced, generally, the preferred actions in auditing relate to procedures that effectively identify and address risks of material misstatement. For instance, performing substantive analytical procedures combined with detailed tests of transactions and balances can provide comprehensive assurance. All suggested actions are valid if they align with the assessed risks and are supported by professional judgment and auditing standards. Valid actions are those that sufficiently reduce audit risk to an acceptable level while maintaining efficiency. It is critical to evaluate each action’s relevance, effectiveness, and compliance with auditing standards to determine their appropriateness.

3. How does the auditor determine the tolerable misstatement rate? What factors affect that determination? What are the consequences of increasing (decreasing) the tolerable misstatement?

The auditor determines the tolerable misstatement rate based on the overall audit plan, considering the acceptable level of risk and materiality thresholds. Factors influencing this determination include the nature of the account or transaction, historical error rates, control risk, and the importance of the account balance to financial statement users. Tolerable misstatement is set at a level that, if exceeded, would lead to the auditor issuing a modified opinion. Increasing the tolerable misstatement rate generally allows for less extensive testing, potentially reducing audit effort but increasing the risk of undetected material misstatements. Conversely, decreasing the tolerable misstatement prompts more detailed testing, enhancing detection but increasing audit costs and effort.

4. Why is this step very important in auditing? What information can these misstatements provide when analyzed?

This step is crucial because it helps the auditor assess the reliability of account balances and transactions. Analyzing misstatements provides insight into potential weaknesses in internal controls, areas prone to error or fraud, and the overall accuracy of financial reporting. Detecting patterns or recurring errors can inform control improvements, guide audit procedures, and influence the auditor’s opinion. Furthermore, understanding misstatements aids in evaluating whether identified errors are within tolerable limits or require adjustment, ensuring the financial statements present a true and fair view.

Paper For Above instruction

The process of auditing involves meticulous procedures designed to ensure the accuracy and fairness of financial statements. Among these procedures, the use of confirmation techniques, specifically positive and negative confirmations, plays a vital role in detecting misstatements. The selection between positive and negative confirmations hinges on the assessed risks and the specific circumstances of the audit engagement.

Positive confirmations require recipients to respond directly to the auditor, confirming the accuracy of specific account balances or transactions. These confirmations are generally more effective in uncovering errors or fraud because they demand active response, thereby increasing the likelihood of detecting misstatements. Positive confirmations are especially appropriate when there is a higher risk of material misstatement or when previous audit evidence is weak, necessitating more assertive procedures to validate account figures. Moreover, positive confirmations provide direct evidence that can be used to substantiate account balances, reducing audit risk effectively.

Conversely, negative confirmations ask recipients to respond only if they disagree with the stated information. They are less intrusive and more cost-effective, making them suitable in situations where the risk of misstatement is low and internal controls are considered effective. Negative confirmations are justified when the auditor has reason to believe that the respondent will review the confirmation carefully and respond only in case of discrepancies. The benefits of negative confirmations include lower administrative costs, less effort required to obtain responses, and reduced auditor bias since the client must verify only if they disagree.

Despite these benefits, negative confirmations tend to have lower response rates, making them less reliable in detecting misstatements. Consequently, their use should be carefully justified, and they should be supplemented with other substantive procedures when the risk assessment indicates higher risks. The decision to use negative confirmations depends heavily on the auditor’s judgment of control effectiveness, the materiality of the account, and prior audit evidence.

When selecting audit procedures, including confirmation strategies, auditors consider various factors outlined in auditing standards such as those from the PCAOB or IAASB. An appropriate choice balances effectiveness, cost, and risk, aiming to provide sufficient appropriate audit evidence. Ultimately, the goal is to reduce audit risk to an acceptably low level while maintaining audit efficiency.

Determining the tolerable misstatement rate is another pivotal aspect of the audit process. This rate signifies the maximum amount of misstatement that can exist in a financial statement account without causing a material misstatement in the overall financial statements. Auditors base this determination on materiality thresholds established during planning. Factors influencing this include the nature of the account, its size relative to overall financial statements, previous error history, and the control environment.

Setting the tolerable misstatement involves a trade-off. Increasing it allows for less extensive testing but risks missing material errors, potentially compromising the audit opinion. Conversely, decreasing the tolerable misstatement reduces the likelihood of undetected errors but increases audit workload and costs. The auditor must balance these considerations to ensure audit efficiency without sacrificing adequacy of evidence.

Throughout the audit, the identification and analysis of misstatements obtained from substantive tests and confirmations are vital. These misstatements can signal internal control weaknesses, suggest areas prone to errors, or reveal possible fraudulent activities. Analyzing patterns or trends in misstatements allows auditors to refine their risk assessments and focus their procedures more effectively.

Furthermore, understanding the nature and causes of misstatements assists auditors in recommending control improvements to management, thereby enhancing the overall integrity of financial reporting. The evaluation of misstatements relative to tolerable levels enables auditors to determine whether adjustments are necessary and whether the financial statements as a whole can be considered free from material misstatement.

In conclusion, the thoughtful application of confirmation procedures and the careful determination of tolerable misstatement are fundamental to an effective audit. These steps enable auditors to collect sufficient appropriate evidence, assess risks accurately, and ultimately provide reasonable assurance regarding the fairness of financial statements. Analyzing misstatements offers valuable insights into a company's control environment and reporting accuracy, contributing to the integrity of financial disclosures and maintaining stakeholder trust.

References

• Arens, A. A., Elder, R. J., & Beasley, M. S. (2017). Auditing and Assurance Services: An Integrated Approach. Pearson.
• International Federation of Accountants (IFAC). (2018). International Standards on Auditing (ISA) 330, Performing Audit Procedures in Response to assessed Risks.
• Public Company Accounting Oversight Board (PCAOB). (2012). Auditing Standard No. 15 – Audit Evidence.
• Robson, K., & McLeay, S. (2013). Auditing: A Risk-Based Approach. McGraw-Hill Education.
• Shafer, W. E., & Raval, V. (2016). Auditing & Assurance Services. Wiley.
• IAASB. (2015). International Standard on Auditing 330 (ISA 330).
• Simnett, R., & Huggins, A. (2015). Auditing: A Risk-Based Approach. McGraw-Hill Education.
• Govindarajan, V., & Gupta, A. K. (2015). Business Strategy: A Guide to the Process. McGraw-Hill Education.
• Benjamin, B. W. (2014). Principles of Auditing & Other Assurance Services. Cengage Learning.
• Hogan, C. E., & Krawczyk, K. I. (2018). The Effectiveness of External Confirmation Requests. The Accounting Review.