Auditing and Assurance revision question and answer

Auditing and Assurance Revision Questions and Answers

Write short notes on the following:
a) Self-review threat (2.5 Marks July 2015)
b) Teeming and lading (2.5 Marks July 2015)
c) Audit risk at the financial statement level (5 Marks June 2016)
d) Use of flow chart in evaluation of internal control (2.5 Marks June 2014)

a. Answer
It is the threat that a professional accountant will not appropriately evaluate the results of a previous judgment made or service performed the professional accountant, or another individual within the professional accountant‟s firm or employing organization, on which the accountant will rely when forming a judgment as part of providing a current service.

b. Answer
It is a fraud arrangement whereamount received from a customer being misappropriated; also to prevent its detection the money received from another customer subsequently being credited to the account of the customer who has paid earlier. Similarly, moneys received from the customer who has paid thereafter being credited to the account of the second customer and such a practice is continued so that no one account is outstanding for payment for any length of time, which may lead the management to either send out a statement of account to him or communicate with him.

c. Answer
Audit risk is considered at the financial statement level during the audit planning process. At this time, the auditor should undertake an overall audit risk assessment based on his knowledge of the client‟s business, industry, management, control environment and operations. Such an assessment provides preliminary information about the general approach to the engagement, the auditor‟s staffing needs and the framework within which materiality and audit risk assessments can be made at the individual account balance or class of transactions level. As part of this overall risk assessment, the auditor should consider whether there is potential for pervasive problems, for example, liquidity or going concern problems.

d. Answer
Use of Flow Charts in evaluation of internal control: It is a graphic presentation of each part of the company‟s system of internal control. A flow chart is considered to be the most concise way of recording the auditor‟s review of the system. It minimizes the amount of narrative explanation and thereachieves a consideration or presentation not possible in any other form. It gives bird‟s eye view of the system and the flow of transactions and integration and in documentation, can be easily spotted and improvements can be suggested. It is also necessary for the auditor to study the significant features of the business carried on the concern; the nature of its activities and various channels of goods and materials as well as cash, both inward and outward; and also a comprehensive study of the entire process of manufacturing, trading and administration. This will help him to understand and evaluate the internal controls in the correct perspective.

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