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January 12, 2011 [FINANCIAL SYSTEMS AND AUDITING ASSIGNMENT]

Table of Contents

Table of Contents .............................................................................................................. 1

Case study No. 1 ...............................................................................................................2

The auditor did not receive the first confirmation letter .................................................. 3

The auditor received the confirmation letter but the figures in the CL are different from

ones in the balance sheet and other documents ........................................................... 3

Case study No. 2 ...............................................................................................................4

References .........................................................................................................................6

Bui Thanh Hong - 1013104113 Page 1

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Case study No. 1

In order to check on the accuracy of management-prepared financial statement, the

auditors use confirmation letter. The confirmation letter is prepared by the auditors then

it will be sent to the auditee to be signed and sealed. After that, the confirmation letter

will be returned to the auditor and the auditor will sent it to the third parties (customers,

suppliers, banks) to confirm various items on the company's books and records such as

account receivables, account payables and cash balances. When the confirmation letter

is returned from the third parties, the auditor will check and compare the information

with the records of the company.

The confirmation objective is to obtain audit evidence and considerations for

performing confirmation procedures. The auditor will evaluate whether the response can

be relied upon and give the opinions. Therefore, the evidence from confirmation letter is

considered to be more reliable than the evidence which was provided by the auditee.

In two situations below, there are the suggestions which the auditor should do and

give opinion when making confirmation letter (CL) of receivables.


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The auditor did not receive the first confirmation letter

If the auditor did not receive the first confirmation letter, the second letter will

continue to be sent to third parties with explanation about the need of confirmation

letter. In the case that the third party still ignore to confirm the letter, the auditor will

implement the alternative procedures to prove the existence of the receivable balance

through examining the economic contracts, sales invoice. For example, the auditor will:

Check the bank deposit, cash receipts which related to the customer from

closing date to the time of the audit.

Investigate the inventory invoices or completion record provides service for the

customer.

The auditor received the confirmation letter but the figures in the CL are different

from ones in the balance sheet and other documents

In the confirmation letter, the reliability of the evidences is very important and need

to be evaluated carefully. In the case that the auditor received the confirmation letter

and the figure in the confirmation letter is match with the ones provides by auditee, the

auditor will accept the receivables balance of the client at a specific time.

On the other hand, if the figures in the confirmation letter are different from ones in

the balance sheet and other document, the auditor has to consider the differences

between them and implement the additional procedures. There are two main levels of

the differences that the auditor needs to consider:

The differences between the figures provided by the confirmation letter and the

ones in balance sheet are not too big.

In this case, there is no need for adjustment and the auditor can accept the data in

financial statements. These differences are considered as immaterial finance errors

which are not effect to financial statement, thus the auditor can ignore.


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The differences between the figures in the confirmation letter and the ones in the

financial statements are considered as the serious mistake.

In this case, the auditor has to define an appropriate adjustment and require the firm

administration to adjust the figures according to the suggestion of auditor. If the

managers agree to adjust the financial statement based on the auditors

recommendation, the auditor will give the total acceptance to the financial statement

which was adjusted. In contrast, the auditor will give the qualified opinion if the

managers do not adjust and still remain their financial statement.

Case study No. 2

In order to express audit opinion based on the accounts and financial operations of

the auditee, the auditors have to obtain such evidence from tests that determine the

accounting controls work and tests of accounting details. Firstly, the auditors carry outthe Test of controlto verify if the organization's financial statements are worth relying

upon. After that, if the auditor does not get satisfied with the result, then the

Substantive testwhich is a comprehensive analysis will be implemented.


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Test of controlis created in order to help the auditors evaluate the effectiveness in

operating of internal control. Tests of control are aimed at detecting deviations from laiddown procedures such as documents not properly approved, reconciliations not

regularly performed or failure to enforce the required segregation of duty 1. If the tests do

not confirm the operation of the control as planned, the auditor need to carry out the

substantive procedures.

Substantive testis design in order to help the auditor verify the correctness of the

amounts in financial records. The substantive tests include three forms such as tests of

transactions, tests of balances and analytical review procedures. Based on these tests,the auditor can gather evidence of the validity of the accounting treatment of

transactions and balances which are designed to identify errors and irregularities2.

Besides, the auditor can also ensure that transaction was recorded in the correct

account for the correct amount.

The internal control system plays an important part in determining the scope of

tests. If the internal control system is considered as a strong system with the high

reliable, the audit scope can be narrowed by applying the test of control and reducing

the level of substantive procedures. On the other hand, if the internal control system is

1 Available from: http://www.accaglobal.com/archive/sa_oldarticles/49870

2 Available from: http://www.allbusiness.com/glossaries/substantive-test/4946727-1.html

http://www.accaglobal.com/archive/sa_oldarticles/49870http://www.allbusiness.com/glossaries/substantive-test/4946727-1.htmlhttp://www.accaglobal.com/archive/sa_oldarticles/49870http://www.allbusiness.com/glossaries/substantive-test/4946727-1.html

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considers as a weak system, the audit scope needs to be expanded and the auditor has

to check carefully in the accounting details with more extensive substantive procedures.

The general misconception is that internal control weaknesses require the

performance of additional tests of control. In fact, the risk model requires the

performance of fewer or even no tests of control where controls are weak, but the

performance of additional substantive procedures. Besides, whether the internal control

system is designed well or not, this system cannot detect all the misstatement in the

operating of the company. In every control system, there are always inherent the limit

and some latent risks which will affect to the financial statement. Therefore, the auditor

still needs to test of details for collecting audit evidences even if internal control system

is assessed to be reliable.

References

1. Book sources

BPP Professional Education, 2004, Financial Report, London: BPP Professional

Education

BPP Professional Education, 2004, Financial Systems and Auditing, London:

BPP Professional Education

2. Internet sources

Lawyer Links, Audit Confirmation Letter [Online], Available from:

http://content.lawyerlinks.com/default.htm#http://content.lawyerlinks.com/sec/Aud

its_Auditors/audit_confirmation_letters.htm [Accessed: January 11, 2011]

Ernst and Young, Concept release on possible revision to the PCAOBs standard

on audit confirmation [Online], Available from:

http://content.lawyerlinks.com/default.htm#http://content.lawyerlinks.com/sec/Audits_Auditors/audit_confirmation_letters.htmhttp://content.lawyerlinks.com/default.htm#http://content.lawyerlinks.com/sec/Audits_Auditors/audit_confirmation_letters.htmhttp://content.lawyerlinks.com/default.htm#http://content.lawyerlinks.com/sec/Audits_Auditors/audit_confirmation_letters.htmhttp://content.lawyerlinks.com/default.htm#http://content.lawyerlinks.com/sec/Audits_Auditors/audit_confirmation_letters.htm

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http://www.ey.com/Global/assets.nsf/United

%20Accounting/ATG_CL_BB1763/$file/ATG_CL_BB1763.pdf [Accessed:

January 11, 2011 ]

All Business, Substantive test [Online], Available from:

http://www.allbusiness.com/glossaries/substantive-test/4946727-1.html

[Accessed: January 11, 2011]

Graham Cosserat, Audit strategy [Online], Available from:

http://www.accaglobal.com/archive/sa_oldarticles/49870 [Assessed: January 11,

2011]

http://www.ey.com/Global/assets.nsf/United%20Accounting/ATG_CL_BB1763/$file/ATG_CL_BB1763.pdfhttp://www.ey.com/Global/assets.nsf/United%20Accounting/ATG_CL_BB1763/$file/ATG_CL_BB1763.pdfhttp://www.allbusiness.com/glossaries/substantive-test/4946727-1.htmlhttp://www.accaglobal.com/archive/sa_oldarticles/49870http://www.accaglobal.com/archive/sa_oldarticles/49870http://www.ey.com/Global/assets.nsf/United%20Accounting/ATG_CL_BB1763/$file/ATG_CL_BB1763.pdfhttp://www.ey.com/Global/assets.nsf/United%20Accounting/ATG_CL_BB1763/$file/ATG_CL_BB1763.pdfhttp://www.allbusiness.com/glossaries/substantive-test/4946727-1.htmlhttp://www.accaglobal.com/archive/sa_oldarticles/49870

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