Question

1. To achieve revenue targets, S Corporation starts selling to customers that are not credit worthy.
Which Controls or substantive audit procedure (the most important), if properly performed,
could have discovered this on a timely basis?

2. From a financial statement perspective, why does a company need to have internal controls?

3. Control risk is the risk that the internal control will fail to prevent or detect material
misstatements. There are three potential circumstances that can give rise to this risk. Describe two.

4. Describe “Tracing”? Generally, what is the most relevant assertion over which tracing provides
audit evidence?

Answer 1

1. A revenue audit is a process that examines the data and information provided on a company's tax returns and the business records. This process monitors and ensure tax compliance. The stages in the revenue audit consists of testing the revenue accounts on the income statement and examination of account receivable on the balance sheet. The auditors also check for revenue recognition issues and channel stuffing. Auditors make use of substantive audit procedures for revenue assessment to detect fraud or misstatement. It can be done in two ways: test of details, which is applied in testing stage and analytical procedures applied over different audit stages. After conducting this tests and based on the results obtained further tests can be carried out. Test of details check the ending balances in accounts and check transactions that affects the balances in accounts to change from year to year. Writing to customers to check the amount they owed,tracing by inspection of invoices, observing amounts received at the end, recomputing bad debt provisions etc are some of the procedures that can reduce revenue manipulation

2. There are various benefits to a company in having effective internal controls in place.Effective internal control reduces the risk of asset loss, ensures accuracy and completeness of information, provides reliability to financial statements, ensures organisational operations are conducted according to applicable rules and regulations.. It reduces the opportunities to commit errors and frauds in the first place and if committed, an effective.internal control system will be helpful in detecting them.

3. (a) The policies and procedures established in the organisation to enhance reliability of reporting being outdated and defective. the internal control procedures existing in the organisation were not adaptable to the changing environment and it being ineffective and inefficient in preventing and detecting any misstatements in the reported financial statements. (b) in effective test of controls implemented in the audit procedure. Test of controls is performed to confirm the efficiency and effectiveness of control over financial reporting so that the audit can conclude whether they could rely on or not.

4. Tracing is a process of following back a transaction in the accounting document to its source document. This involves finding a transaction in the general ledger, then to the subsidiary ledgers and tracing back to its source document in order to track down transaction errors and also to verify whether they are recorded properly. The most relevant financial statement assertion on which tracing provides audit evidence is occurrence- the transactions and events that have been recorded or disclosed, have occurred and such transactions and events pertains to the entity.

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