Assignment 3 Marks 10, 375 Course Auditing Principles And Pr

Assignment3marks10 375courseauditing Principles And Procedurescodea

Assignment 3 Marks 10 (3.75) Course Auditing Principles and Procedures Code ACCT 401 Uploading End week 10 Submission End week 11 Date Sat 25/11/2017 Dates Sat 02/12/2017 Instructions : (Please READ the instructions carefully and FOLLOW them) · First of all, ask ALLAH for help and do your best. · The answer must be in English. · Students must include your details (Name, Student ID, CRN, Date of submission) · Answer the ALL questions. · DO NOT write the questions in the answer papers JUST write the question number. · Assignments should be submitted in MS Word format · Font should be Times New Roman with 14 points. · You are required to work in this assignment individually. And DO NOT copy from others. · You should submit the assignment via the Blackboard. · Students who submit assignments after deadline, will get ZERO. · DO NOT PUT images, you must TYPE answers. · If you engaged in plagiarism, you will get ZERO marks in the assignment or course.

Paper For Above instruction

The assignment this week focuses on fundamental auditing principles, procedures, and the evaluation of risk factors associated with specific audit components. The questions compel students to demonstrate a clear understanding of physical inventory observations, inherent risks in intangible assets, substantive analytical procedures in property, plant, and equipment, and analytical methods used in income statement audits. These topics are crucial for developing audit competence, understanding risk assessment, and applying analytical procedures effectively in practice.

Question 1: Physical Inventory Observation

When performing an audit, the auditor should undertake specific observations during the physical inventory count to ensure accuracy and completeness. The key observation procedure involves watching the actual counting process to verify that it is performed properly and in accordance with the company's policies and accounting standards. This includes assessing whether the inventory is identified correctly, counted carefully, and counted only once to avoid duplication.

For example, the auditor may observe the counting process to ensure that inventory tags are correctly used and that counts are documented properly. They should also verify that the physical count occurs at the appropriate time, typically at the period-end, and that physical procedures are conducted in a manner that minimizes the risk of theft or loss.

Relevant procedures involve verifying the existence and condition of inventory, reconciling counts with inventory records, and performing test counts whereby the auditor counts a sample of items independently to compare with the company’s figures. The use of inventory tags, proper segregation of duties among staff, and detailed documentation of the count process are essential components of effective observation during inventory counts.

In conclusion, a comprehensive physical inventory observation includes supervising the counting process, performing test counts, reviewing inventory documentation, and assessing the control environment surrounding inventory management.

Question 2: Inherent Risks of Assessing Intangible Assets

Intangible assets, unlike tangible assets, lack physical substance, which makes their assessment inherently risky during audits. The primary inherent risks involve valuation, identification, and impairment issues. Because intangible assets often involve significant judgment and estimation, auditors need to be meticulous in evaluating these risks.

One significant risk is the improper valuation of intangible assets. Many such assets are recorded at their fair value or acquisition cost, but fluctuations in market value, obsolescence, or technological advancements can rapidly affect their worth. For example, brand value or patents may become obsolete or diminish in value, leading to potential overstatement if impairment is not recognized timely.

Another risk pertains to the recognition criteria. Management might improperly capitalize expenses or assets to inflate financial position. For instance, research and development costs might be improperly capitalized rather than expensed, overstating assets and income.

The risk of impairment is also prominent; intangible assets are susceptible to impairment if their recoverable amount falls below carrying values, especially in technology or pharmaceutical industries where innovation accelerates. Auditors must perform thorough testing of impairment assessments and ensure management’s estimates are reasonable and supportable.

Additionally, issues such as incomplete identification of intangible assets during acquisitions or mergers pose risks. These assets are often difficult to identify, separate, and measure, requiring auditors to examine contractual rights, legal rights, and other documentation carefully to verify existence and ownership.

Question 3: Substantive Analytical Procedures for Property, Plant, and Equipment

Substantive analytical procedures involve evaluating financial information through plausible relationships among data or other analytical techniques. For property, plant, and equipment (PP&E), these procedures help auditors identify unusual fluctuations or inconsistencies that require further investigation.

One common procedure includes comparing the current year's balances of PP&E with prior periods, adjusting for purchases, disposals, and impairments. For example, significant increases in asset balances should be supported by corresponding purchase details or capital expenditure reports, while decreases may indicate disposals or impairment losses.

Additionally, auditors can compare book values of assets with industry averages or historical data to detect abnormal deviations. For example, if the book value of machinery increases substantially without corresponding capital expenditure, it warrants further review.

Another analytical technique involves examining depreciation expenses relative to asset bases and useful lives to verify consistency. A significant variance from expected depreciation rates might suggest errors in estimates or misclassification of assets.

Furthermore, auditors may analyze repair and maintenance expenses as a percentage of asset values to identify possible capitalization of expenses that should be expensed. If repair costs are unusually high, it might indicate asset impairments or unrecorded disposals.

Question 4: Substantive Analytical Procedures for Income Statements

In auditing income statements, substantive analytical procedures focus on evaluating revenues, expenses, and profit margins to identify inconsistencies or unusual patterns. For example, auditors may analyze gross profit margins, operating expenses, and net income compared to prior periods or industry benchmarks.

One method involves trend analysis, where current period figures are compared with historical data. Significant deviations may prompt further inquiry; for example, a sudden increase in selling expenses might indicate unrecorded liabilities or misclassification.

Ratio analysis also plays a vital role; auditors calculate ratios such as gross profit margin, net profit margin, expense ratios, and other relevant metrics to assess reasonableness. An unexpected change in these ratios can highlight potential errors or fraudulent activities.

Additionally, budgets and forecasts serve as benchmarks to evaluate actual results. Large variances from planned budgets may point to misstatements, operational inefficiencies, or revenue recognition issues.

In summary, analytical procedures used during income statement audits include comparing current data with prior periods, industry data, budgets, and analyzing key ratios to detect anomalies requiring detailed tests.

References

  • Arens, A. A., Elder, R. J., & Beasley, M. S. (2017). Auditing and Assurance Services: An Integrated Approach. Pearson.
  • Kinney, W. R., & Reichelstein, S. (2002). Management accounting: Concepts, techniques and strategies. South-Western College Publishing.
  • Arens, A. A., Beasley, M. S., & Hogan, C. E. (2014). Auditing & Assurance Services. Pearson.
  • Messier, W. F., Glover, S. M., & Prawitt, D. F. (2018). Auditing & Assurance Services. McGraw-Hill Education.
  • Heintz, J. & Parry, R. (2018). Financial Accounting. Cengage Learning.
  • Arnold, V., & Chun, T. (2015). Auditing: Principles and Practice. Cengage Learning.
  • International Federation of Accountants (IFAC). (2018). International Standards on Auditing (ISA).
  • Public Company Accounting Oversight Board (PCAOB). (2020). Auditing Standard No. 15, Audit Evidence.
  • Government Accountability Office (GAO). (2015). Standards for Audit of Governmental Organizations.
  • Alleyne, P., & Sarpong, D. (2020). Risk assessment and internal control in auditing. Journal of Accounting & Organizational Change, 16(2), 263-278.

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