Question

Questions Requiring Analysis Assume that you have been assigned to the audit of Lockyer Manufacturing Company. You have completed the procedures for gathering information about the company and its environment, including internal control. Required: a. Describe the next stage of the audit process. b. Explain how the auditors may respond to high-risk audit engagements and high-risk audit assertions. c. Describe the nature of further audit procedures, including when the procedures should include tests of controls.

Answer 1

a. There are Four Stages of Audit

1. Planning-Lockyer Manufacturing Company engages with the auditing firm to establish details, such as the level of engagement, procedures, and objectives- This is already done by Lockyer Manufacturing engages

2. Internal control- Gather financial records and any other information necessary to conduct their audits. The information is necessary to evaluate the accuracy of the financial statements. This is also already done by Lockyer Manufacturing engages

3.Testing- This is to be performed after evaluating internal controls. Auditors of Lockyer Manufacturing Company. now have to check the accuracy of the financial statements by using various methods.

3a. Inventory Observation- In this stage auditor physically evaluate stock/ inventory of Lockyer Manufacturing Company. This procedure is required to avoid accounting frauds caused by falsification of inventory records

There are two technique of inventory checking

i.. Floor to Sheet- Auditor selects items from the warehouse and ensures that all the items selected are included in the record

ii. Sheet to Floor- Auditor selects items from the record and ensures that all the items selected are included in the warehouse

3b. Price Testing- After conducting an inventory observation that focuses more on the quantity of inventory, the auditor must then test the costs on the company’s inventory. The price testing is carried out to verify the costs incurred by the company for materials, labor, and operating costs involved in the production process and inventory management. The auditor must select items from the company’s inventory and then verify( like with invoice, bill of lading, Bill of Entry, etc.)

3c. Result Analysis-During a field study, auditors conduct a number of interviews, collect various documents and receive information in other formats. All of this data needs to be sorted and analysed to determine what is relevant and to be able to evaluate the situation in the audited sector. Expectations to an audit report are generally very high and mistakes therefore need to be avoided.

The audit report has to provide well-founded, objective and complete information, analysis and assessments that add value for decision-makers and stakeholders

3d. Evaluation of the Audit Evidence- auditor must make an evaluation report of all audit activities carried out. The report must be submitted to the party who appointed them to carry out the audit. In this report, the auditor must also provide advice and recommendations that help improve the company’s financial management.

4. Reporting- After completing all tests, auditors prepare a report that expresses an opinion on the accuracy of the financial statements

b

The auditor should design and perform further audit procedures whose nature, timing, and extent are responsive to the assessed risks of material misstatement at the relevant assertion level. The purpose is to provide a clear linkage between the nature, timing, and extent of the auditor's further audit procedures and the risk assessments. In designing further audit procedures, the auditor should consider such matters as: • The significance of the risk • The likelihood that a material misstatement will occur • The characteristics of the class of transactions, account balance, or disclosure involved • The nature of the specific controls used by the entity, in particular, whether they are manual or automated • Whether the auditor expects to obtain audit evidence to determine if the entity's controls are effective in preventing or detecting material misstatements

The nature of the audit procedures is of most importance in responding to the assessed risks

c. The auditor should select audit procedures to obtain assurance about the operating effectiveness of controls. As the planned level of assurance increases, the auditor should seek more reliable or more extensive audit evidence. In circumstances in which the auditor adopts an approach consisting primarily of tests of controls, in particular related to those risks where it is not possible or practicable to obtain sufficient appropriate audit evidence only from substantive procedures, the auditor should perform tests of controls to obtain a higher level of assurance about their operating effectiveness. Tests of the operating effectiveness of controls ordinarily include procedures such as inquiries of appropriate entity personnel; inspection of documents, reports, or electronic files, indicating performance of the control; observation of the application of the control; and reperformance of the application of the control by the auditor