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TEST 2 AUD339 DEC19 SS - Lecture notes 1.2
Auditing (AUD339)
Universiti Teknologi MARA
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SUGGESTED SOLUTION
TEST 2 AUD
QUESTION 1
a) Define analytical procedures. Analytical procedure is the use of comparisons and relationships√ to assess whether account balances or other data appear reasonable√. (2√ x 1 mark = 2 marks)
b) FOUR (4) sources of data commonly used by auditors for performing analytical procedures: 1) Financial information for prior periods√ 2) Expected or planned results from budgets and forecasts√ 3) Comparison of linked accounts relationship √ 4) Ratios of financial information (such as common-size financial statements) √ 5) Company and industry trends√ 6) Relevant non-financial information√ (4√ x 1 mark = 4 marks)
c) TWO (2) benefits for auditors when performing analytical procedures. 1) Provide auditors with any indication of possible problem areas which can be discussed further with management and investigated√ 2) Aids the auditor’s planning process in understanding the client and its activities√ (2√ x 1 mark = 2 marks)
d) FOUR (4) quantitative factors that might affect the judgement on materiality. 1) Total assets√ 2) Total revenue√ 3) Net profit before tax√ 4) Gross profit√ (4√ x 1 mark = 4 marks)
e)
Relationship between AR, ML and Audit Sampling:
AR and ML has an inverse relationship which mean when the audit risk is set as high, the auditor need to lower the level of materiality in order to perform more substantive tests and obtain more evidence √
While, AR has a positive relationship with audit sampling (the higher the risk, the more sample of transactions that auditor need to cover) due to the fact that auditors need to perform more tests to satisfy themselves that the financial statements are free from material misstatements √
(2 √ x 1 marks = 3 marks)
(Total: 15 marks)
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QUESTION 2
a. Audit risk is illustrated as below
AR = IR X CR X DR √
Where; AR is defined as the risk that the auditor gives an inappropriate audit opinion when the financial is materially misstated. √
IR is defined as the risk of a material misstatement in the financial statements arising due to error or omission as a result of factors other than the failure of controls (factors that may cause a misstatement due to absence or lapse of controls are considered separately in the assessment of control risk √
CR is defined as the risk of a material misstatement in the financial statements arising due to absence or failure in the operation of relevant controls of the entity √
DR is defined as the risk that the auditors fail to detect a material misstatement in the financial statements √ (5√ x 1 mark = 5 marks)
b. Components of audit risks: i. Control risk√ ii. Control risk√ iii. Detection risk√ iv. Inherent risk√ (4 √ x 1 mark = 4 marks)
c. 3 ways to minimize audit risk:
i. Set the materiality level as low √ ii. Select experienced staffs to be included in the audit team √ iii. Increase the sample size √ (any other acceptable answer) (3 √ x 1 mark = 3 marks)
d. Audit sampling is the application of audit procedures to less than 100% of the items within an account balance or class of transactions, to enable auditors to obtain and evaluate audit evidence about some characteristic of the items selected in order to form or assist in forming a conclusion concerning the population. √
TWO (2) methods in selecting sample are: 1. Random selection√ 2. Systematic selection√ 3. Haphazard selection 4. Monetary unit selection 5. Block selection (3 √ x 1 mark each = 3 marks) (Total: 15 marks)
TEST 2 AUD339 DEC19 SS - Lecture notes 1.2
Course: Auditing (AUD339)
University: Universiti Teknologi MARA
