Question

13-32 (Objectives 13-3, 13-4) Following are several decisions that the auditor must make in an audit of a nonpublic company. Letters indicate alternative conclusions that could be made.

Decisions	Alternative Conclusions
1. Determine whether it is cost effective to perform tests of controls.	A. It is cost effective B. It is not cost effective
2. Perform substantive tests of details of balances.	C. Perform reduced tests D. Perform expanded tests
3. Complete initial assessment of control risk.	E. Controls are effective F. Controls are ineffective
4. Perform tests of controls.	G. Controls are effective H. Controls are ineffective

Required

1. Identify the sequence in which the auditor should make decisions 1 to 4.

2. For the audit of the sales and collection cycle and accounts receivable, an auditor reached the following conclusions: A, D, E, H. Put the letters in the appropriate sequence and evaluate whether the auditor’s logic was reasonable. Explain your answer.

3. For the audit of property, plant, and equipment and related acquisition records, an auditor reached the following conclusions: A, C, F, G. Put the letters in the appropriate sequence and evaluate whether the auditor used good professional judgment. Explain your answer.

4. For the audit of payroll expenses and related liabilities, an auditor recorded the following conclusions: D, F. Put the letters in the appropriate sequence and evaluate whether the auditor used good professional judgment. Explain your answer.

5. For the audit of inventory and related inventory cost records, an auditor reached the following conclusions: B, C, E, G. Put the letters in the appropriate sequence and evaluate whether the auditor used good professional judgment. Explain your answer.

Answer 1

Page-1 Answer: According to the given question, Auditors should determine whether the financial statements are stated fairly. There are 5 types of tests to be performed by the auditoo. Risk assessment procedures are used to assess the risk of material misstatement in financial statements. There are the combination of assessing inherent risk and control visk. 1. The four types of audit procedures are test of controls, substantive test of transactions, analytical procedures, and test of details of balances. The combination is known as Evidence mix. a) Auditor decisions are shown below: © Complete initial assessment of control risks. @ Determine whether it is cost effective to perform test of controls. @ Perfoom test of controls. ® Perform substantive tests of details of balances.

3 Page-2 b) An auditor reached the following - conclusions while auditing the sales and collection cycle. By the table below the logic used by auditoo is Deasonable? conclusions Decisions Explanations. in Sequencel . . E Auditor reached a conclusion that the controls are effective while assessing the control fisk. Then determine the extent of testing contools based on the | cost effectiveness. cohile doing the test of controls 4. it was found that the controls are ineffective. Iso, the auditor decided to perform expanded substantive test of details for sales & collection cycle and accounts receivable.

3 @ An auditor page-3 pached the following conclusions while auditing the inventory and related inventory cost records: conclusio | Decisions Explanations in sequence Auditor reached a conclusion Hhat the controls are effective while assessing the control risk. then determine the extent of Hesting contools based on the cost effectiveness. It was observed that the test of controls are not cost effective I while doing the test of controls it was found that the controls are effective so, the auditor decided to perform reduced substantive test of details for inventory and inventory cost records. from the above table we can conclude that the logic used by the auditor was reasonable.

@ An page-4 auditor seeached the following shile conclusions auditing the property, plant, equipment and related acquisition de coods. [ conclusion Decisions Explanations in sequencel - 3 Auditor reached a conclusion that the contools are ineffectivel I while assessing the control risk. then determine the extent of testing controls based on the cost effectiveness it was observed that the test of controls are cost effective I while doing the test of . contools it was found that the controls are effective. Iso, the auditor decided to perform reduced substantive test of details for property. / plant , Equipment and Delated acquisition records foom the above table we can conclude that the logic used by the auditor was reasonable.

page- @ An auditor reached the following conclusion while auditing the payroll expenses and Selated liabilities: conclusion Decisions Explanations. in sequence/ Auditor reached a conclusion that the I controls are ineffective while assessing the controll risk. Auditor directly performed substantive test of details without peoforming test of controls. * Auditors should first understand the entity and its internal controly by performing Disk assessment poocedures. * Here, the auditor performed substantive test of details without performing test of controls is not correct.