Audit Report Modifications

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AUDIT REPORT MODIFICATIONS

Audit Report Modifications

Illustrative Audit Case: Keystone Computers & Networks, Inc.

Client Screening

In their investigation of a prospective client, the CPAs should assess the backgrounds and reputations of the prospect and its major shareholders, directors, and officers. Thus, inquiries are made of underwriters, bankers, and attorneys that conduct business with the prospective client. Also, the CPAs are required to make inquiries of the prospect's predecessor auditors to obtain information that might enter into the acceptance decision, such as information regarding the integrity of management. The prospect's financial reports, SEC filings, credit reports, and tax returns are used as sources of financial background information.

The aaudit acommittee aof aa aboard aof adirectors amust abe acomposed aof aat aleast athree aindependent adirectors. a a aIndependent adirectors aare athose awho aare aoutside adirectors a(not aofficers aor aemployees) awho ahave ano arelationships athat amight aimpair atheir aindependence. a aThis awould ainclude arelationships asuch aas aperforming aconsulting aservices afor acompany amanagement. a aIn aaddition, athe amembers amust abe afinancially aliterate, aand athe achairman amust ahave aa afinancial abackground.

An aengagement aletter ais asent ato athe aclient aby athe aauditors ato amake aclear athe anature aof athe aengagement, aany alimitations aon athe ascope aof athe aaudit, awork ato abe aperformed aby athe aclient's astaff, aand athe abasis afor acomputing athe aauditors' afee. a aThe aengagement aletter arepresents athe awritten acontract afor athe aengagement, aand aits aprimary aobjective ais ato aprevent apossible amisunderstandings abetween athe aclient aand athe aauditors. a aIt aconstitutes aan aexecutory acontract abetween athe aauditors and the client

Substantive Tests

This part of athe aaudit acase aillustrates athe amanner ain awhich athe aauditors adesign asubstantive atests aof abalances. aThe asubstantive atests aare aillustrated afor atwo aaccounts-receivables aand arevenue. aThis aaspect aof athe aaudit ais aillustrated awith athe afollowing aaudit adocumentation: a

ABC's arisk aassessment aworking apaper athat acombines athe aauditors' aassessments aof ainherent aand acontrol arisks ainto aan aoverall arisk aof amaterial amisstatement afor athe aassertions. a

The asubstantive aaudit aprogram aof aaccounts areceivable aand arevenue. a

The aaudit asampling aplan afor athe aconfirmation aof aaccounts receivable.

Risk Assessment-Revenue Cycle

Client: aKeystone aComputers a& aNetworks, aInc. aFinancial aStatement aDate: a12/13/X5 a

Assertion a

Inherent aRisk a

Control aRisk a

Overall aRisk a

of aMaterial a

Misstatement a

Existence aof areceivables aand aoccurrence a

Fraud aRisk a

Moderate

High

of arevenue atransactions a

Completeness aof areceivables aand arevenue a

Moderate a

Low a

Low

Rights ato areceivables a

High

Moderate

Moderate

Valuation aof areceivables a

Fraud aRisk a!z.i.J.Ie a

Moderate

High

Presentation aand adisclosure a

Moderate

Maximum

Moderate

Fraud Risks

Description

Management amay abe amotivated ato aoverstate arevenue aand areceivables ato aimprove afinancial aresults adue ato aimpending asale aof abusiness.

Controls

Because Keystone ais aa anonpublic acompany awithout aan aindependent aboard aor aaudit acommittee, athere aare ano asignificant ainternal acontrols ato aprevent amanagement afrom aoverstating results.

Audit Response

The nature, atiming, aand aextent aof aaudit aprocedures awill abe amodified aas adescribed abelow:

Accounts areceivable awill abe aconfirmed aat ayear-end ausing aa a5 apercent arisk aof aincorrect aacceptance.

A areview aof athe amonthly asales areports aby asalesperson awill abe aperformed ato aidentify aany aunusual aindividual asales aor asales avolume.

Credit afiles aof acustomers awith alarge areceivables a(over a$25,000) awill abe areviewed afor aindications aof afictitious ...
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