Question

When confirmations are not received or are received with discrepancies, describe the audit procedures necessary to address the discrepancy or absence. Identify the procedures in order of effectiveness - the most effective first to the least effective.

Answer 1

Answer to the question:

When confirmations are not received or are received with discrepancies, the overall risk associated with the assessment increases. In such situations, the auditors are needed to follow the following procedures:

• The auditors have to follow with second and sometimes third request with those parties from whom the confirmations are not received or received with discrepancies.
• Even after repeated requests confirmations are not received, auditors need to focus on alternative procedures depending on the risk assessment of the parties. Such procedures may include thorough verification of cash receipts for the audit period, shipping documents and even requirement of data/information from third party.
• After receipt of the data/information, the same is evaluated by the auditors for risk assessment and accordingly, whether additional audit evidence is needed.

There are normally five types of audit procedures in order of effectiveness and the same are discussed below according to the most effective to the least effective:

• Computer assisted audit technique: This method is very much effective in case of analysis of voluminous data and each and every transaction is analyzed instead on sample basis analysis. A specialized software is used for analysis and it is helpful with much less probability of error.
• Re-performance: This method is used when other audit techniques (except computer assisted audit technique) fail. This technique requires the auditors to manually execute the calculation. With its help, efficiency of the information can be tested to find about its reliability and risk assessment.
• Examination of evidence: In this method, thorough inspection of all the documentary evidences is carried out to evaluate whether they are properly maintained with correct entries, whether all the database are properly maintained, etc.
• Observation: In this method, the activities of any company are observed for the specific period, without evaluating any documentary evidence. The company's progress and growth is observed for the past period and risk factor is assessed.
• Inquiry: In this method, the companies are just enquired by the auditors about the company's financial management and data. This is the least effective method.