Situation Where Confirmations Are Not So Reliable Accounting Essay

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(a) Explain four matters that your audit firm should consider before deciding whether to accept the client.

First, Suasa should explain to HijauSdnbhd the need to make an inquiry of LGT. Suasa should request permission to do so in order to get the basis of the client's business and reason on change of auditor.

Suasa should ask HijauSdnbhd to authorise LGT to respond fully to Suasa's inquiries. Without the authorise, LGT can be refuse to respond to Suasa.

If LGT refuses to permit HijauSdnbhd to respond or limits HijauSdnbhd's response, Suasa should inquire to the reasons and consider the effect in deciding whether to accept or reject the engagement.

Suasa should make specific inquiries such as,

Facts that might be bear on the integrity of the management.

Disagreements with the management such as auditing procedures, accounting principles or any other significant matters.

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HijauSdnbhd should understand the reasons of the change of auditors.

(b) Explain why it is necessary for your audit firm to write to the present auditors.

First, the new audit firm should understand the reason regarding the change of auditor. It prevents the new audit firm engage with a client that has non compliance with standard required.

The new audit firm should know whether there are potential threats for client to compliance with the fundamental principles by inquiring present audit firm. It refers to a short way and low cost method to have basis knowledge about the client's business. Based on the written document to evaluate whether there are any questions over the integrity of the potential client which create unacceptable risk.

(c) Letter of engagement will be issued once Suasa Audit decided to accept being Hijrah's auditor.

i. State three purposes of the letter of engagement.

An engagement letter helps in avoiding misunderstandings regarding with the engagement.

It documents and confirms the auditor's acceptance of the appointment, the objective and scope of the audit, the auditor's responsibilities to the client and any of the reports.

It defines management responsibilities such as internal controls, management's responsibility to prevent and detect fraud.

ii. Who will prepare the engagement letter above?

Auditor or Suasa Audit SdnBhd

(d) State two differences between internal auditor and external auditors.

Appointment.

External auditors are appointed by the client's shareholders and they must be independent of the company. However, internal auditors are normally employees of the organisation.

Responsibility.

External auditors are responsible and report to the owners of the company and audit firm. However, internal auditors are responsible and report to senior management.

Question 2

(a) Internal document

d. Credit memo in client's file.

e. The board's minutes of meetings from the manager's file.

f. Unpaid vouchers from the vouchers file.

g. Copies of sales invoices from client's file.

h. Copies of raw material requisitions from storekeeper.

k. Copy of next year's budget from the accountant.

l. Copy of internal auditor's report to the audit committee.

m. Letter from the finance manager, in client's file, as authority to write off a debt.

External documents

a. Statement from a supplier obtained by the auditor from client's file.

b. Bank statement sent directly to the auditor.

c. Punch card obtained from the salaries department.

i. Bank statements from client's file.

j. Letter from debt collector from client's file.

(b) Why are external documents more reliable than internal documents?

External document is more reliable compare to internal document. It is because external document is derived from outside independent parties. Auditor believes that the external document has higher independence and verifiability. The internal document only the record made up and kept within the auditee during the accounting period. Internal document only consider as reliable when the related internal control is satisfactory.

However, the external document that obtained by auditor from outside is more reliable than obtained from auditee. The external document in form of document or in writing form is more reliable than in oral form.

(c) Discuss the reliability of each document.

Item

Reliability

Reasons

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a. Statement from a supplier obtained by the auditor from client's file.

Average

It obtained from auditee

b. Bank statement sent directly to the auditor.

High

It obtained directly from outsiders

c. Punch card obtained from the salaries department.

Average

It obtained from entity instead of employee

d. Credit memo in client's file.

Low

Internal record prepared and obtained by auditee

e. The board's minutes of meetings from the manager's file.

Low

Internal record prepared by auditee

f. Unpaid vouchers from the vouchers file.

Low

Copies prepared and obtained from auditee

g. Copies of sales invoices from client's file.

Low

Copies prepared and obtained from auditee

h. Copies of raw material requisitions from storekeeper.

Low

Copies prepaid and obtained from auditee

i. Bank statements from client's file.

Average

Document obtained from auditee's file.

j. Letter from debt collector from client's file.

Average

Document obtained from auditee's file.

k. Copy of next year's budget from the accountant.

Low

Internal record prepared by auditee

l. Copy of internal auditor's report to the audit committee.

Low

Internal record prepared by auditee's employee

m. Letter from the finance manager, in client's file, as authority to write off a debt.

Low

Letter prepared and obtained from auditee

Question 3

(a) Analytical procedures are not so reliable but are very important to the auditor.

Normally, it is perform based on the auditor's judgement instead of other documentation from outsider. The documentation is derived from the auditee. So it is consider less reliable. According to SAS No. 56 is required auditor uses the analytical procedures when perform the audit procedure. Besides that, It is important and efficiency for auditor as it is relatively low cost and effectiveness in determine the potential misstatement.

(b) Inquiries of the client are not so reliable.

It is because it normally in oral form. Therefore, auditor should required written documentation or certified by independent party for any oral inquiry. Document that derived from client is less reliable compare to outsider due to low independence. Inquiry is not sufficient to perform the operation of control. Therefore, auditor should perform additional audit procedure if inquiry incurs in order to get sufficient and appropriate audit evidence.

(c) Observations are less reliable compared with confirmation.

Observation does not involve any documentation or writing document. It is limited to the time at which the observation carries out. There may be a misleading or maniplated act of being observed.

Confirmation is more reliable due to higher independence of the outsider confirming the document.

(d) Physical examinations and the examination of documents can be reliable under certain conditions.

It depends on the nature and the source of the document being examination. The examination of the external document considers reliable compare to internal document.

While the physical examination of tangible assets such as fixed assets consider high reliable compare to intangible assets such as stock or share. It is because auditor able to verify the existence the tangible assets by physical examination. The physical examination that carries out by auditor is more reliable than other party.

(e) Factors that can contribute towards the reliability of evidence obtained orally.

The nature of the evidence. The oral representation that confirm by the written document is more reliable than only oral representation. As it is in physical evidence.

The sources of the evidence. Oral representation from outsider such as attorney is more reliable compare to the memo record in the entity.

The resources keeper. The resources obtained directly from outsider is more reliable than the orally representation from auditee file.

(f) Situation where confirmations are not so reliable

First, confirmation obtained from auditee instead of outsider. It may be manipulated by the auditee.

Second, copies of confirmation instead of original obtained from auditee file. A photocopy of document is less reliable than original document.

Next, the confirmation is in oral form instead of written document. Oral representation is less reliable than written documentation.

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All of the above situation may reduce the reliability of the confirmation as audit evidence.