AUDIT EVIDENCE
Group 5:
1. Muhammad Yasir Bin
Mohd Yurid (10DAT19F1082)
2. Muhammad Asyraf Bin Mohd Noor (10DAT19F1004)
3. Muhammad Alif Bin Abd Malek (10DAT19F1013)
4. Rossalinda Reeana Binti Rosli Raju (10DAT19F1080)
5. Siti Aishah Binti Hassan (10DAT19F1205 )
Introduction
Evidence is
used in all walks of life. For example, a police uses evidence to charge a
person with a crim. The police gathers evidence using proper procedure during
investigations to ensure that the evidence is relevant and competent in proving
that the person commits the crime. In auditing, evidence is importance for an
auditor to draw conclusion as to whether the financial statement, as a whole,
are free from material misstatement. That is, the auditor in an audit
engagement aims to obtain reasonable assurance from the work performed, so that
the auditor can express an opinion on the financial statements and report
accordingly. To gather the evidence on which audit opinion is based, the
auditor shall establish an overall audit strategy that sets the scope, timing
and direction of the audit, and that guides the development of the audit plan.
ISA 500 define
audit evidence as all information used by an auditor in arriving at the
conclusions on which the auditor's opinion is based. Audit evidence comprises
information that supports and corroborates management's assertions, and any
information (for example, management's refusal to provide a requested
representation) is used by the auditors, and therefore, also constitutes audit
evidence. Particularly, audit evidence includes information contained in the
accounting records underlying the financial statement and other information.
Other information consists of information obtained from other sources such as
previous audits, or firm's quality control procedures for client acceptance and
continuance and the work of management's expert. For example, minutes of
meetings, control manuals, analyst reports and third-party confirmations are
other information that can be used as audit evidence.
Reference : https://accountlearning.com/audit-evidence-meaning-definition-importance/
Question
1: Accounting standards
require that revenue must be realized or realizable and earned before it can be
recognized. Discuss what is meant by the terms realized or realizable and
earned.
DEFINITION:
The realization principle is the concept that revenue can only be recognized once the underlying goods or services associated with the revenue have been delivered or rendered, respectively. Thus, revenue can only be recognized after it has been earned. The best way to understand the realization principle is through the following examples:
·
Advance payment for goods.
A customer pays RM1,000 in advance for a custom-designed product. The seller does
not realize the RM1,000 of revenue until its work on the product is complete.
Consequently, the RM1,000 is initially recorded as a liability (in the unearned revenue account), which is then shifted to revenue only after the product has
shipped.
· Delayed payments.
A seller ships goods to a customer on credit, and bills the customer RM2,000 for the goods. The seller has realized the entire RM2,000 as soon as the shipment has been completed, since there are no additional earning activities to complete. The delayed payment is a financing issue that is unrelated to the realization of revenues.
The realization principle is most often violated when a company wants to
accelerate the recognition of revenue, and so books revenues in advance of all
related earning activities being completed.
Auditors pay close attention to this principle when deciding whether the
revenues booked by a client are valid. Application of the
realization principle ensures that the reported performance of an entity, as
evidenced from the income statement, reflects the true extent of revenue earned
during a period rather than the cash inflows generated during a period which
can otherwise be gauged from the cash flow statement. Recognition of revenue on
cash basis may not present a consistent basis for evaluating the performance of
a company over several accounting periods due to the potential volatility in
cash flows.
References : https://www.accountingtools.com/articles/what-is-the-realization-principle.html
Question 2: Describe the credit function’s duties
for monitoring customer payments and handling bad debts.
Answer:
The credit authorization
function has the responsibility for monitoring customer payments. An aged trial
balance of accounts receivable should be prepared and reviewed by the credit
authorization function. Payment should be requested from customers who are
delinquent in making payments for goods or services. The credit function is usually
responsible for preparing a report of customer accounts that may require
write-off as bad debts. However, the final approval for writing off an account
should come from an officer of the company who is not responsible for credit or
collections.
- Develop and monitor a credit control system in
collaboration with sales and marketing, finance and executive team members.
- Establish policies that follow customer
service best practices while ensuring customers submit payments on time.
- Check consumer credit reports, approve or deny
applications and communicate decisions to the appropriate personnel in a
timely manner.
- Negotiate payment plans with consumers and set
loan terms and conditions accordingly.
- Maintain loan records, conduct regular
analysis of the credit-control system and implement changes as needed to
reduce bad debts.
- Report any payment issues to management or the
appropriate team.
- Follow up on overdue invoices and payments and
implement company collections procedures as necessary.
- Look for ways to improve debt collection processes.
Question 3: Distinguish between positive and negative confirmations. Under what circumstances would positive confirmations be more appropriate than negative confirmations?
Answer:
Positive confirmation is an auditing inquiry that requires the customer to respond, confirming the accuracy of an item. Positive confirmation requires proof of accuracy by affirming that the original information was correct or by providing the correct information if incorrect.
Positive confirmation is part of the confirmation
procedures that auditors use to confirm specific pieces of information. The
recipient of the letter is to reply to confirm accuracy or supply information
and send it back to the auditor. Some examples of the information required from
auditors include confirming the following:
- The amounts and descriptions of various
types of liabilities
- Bank account information including
balances
- Inventory amounts and types
- Investments or securities
- Copies of sales invoices to ensure sales
were made
- Information or copies of shipping
invoices to ensure products were shipped
Auditors also use positive confirmation letters to verify accounts payable and accounts receivable or companies. Accounts payables are short-term debts owed by companies to their suppliers. Accounts receivables represent money owed by a company's customers for the sale of goods. Receivables and payables typically have payment terms of 30, 60, or 90 days—meaning a payment needs to be made within that time frame.
An auditor can verify the accuracy of the accounts
receivable records being examined by determining if the records accurately
reflect the transactions that have occurred between the company and its
customers. Contacting customers directly helps auditors verify that listed
accounts actually exist, that balances shown as owed are correct, and that
payments marked as received are true.
Accounts receivables are short-term assets and can be used by companies as collateral to obtain loans or financing from banks. As a result, it's important that the receivables are audited to confirm that the sales were made as well as confirm that the funds from the sales are being collected on time.
If a company wishes to audit its accounts payable
records, it must review any outgoing funds associated with debt obligations or
creditor payments. The process may require a review of billings and a
reconciliation of those amounts with payments that were recorded as being made.
Additionally, the business may choose to match the aforementioned amounts to
actual withdrawals from payment accounts to confirm accuracy.
References : https://www.investopedia.com/terms/p/positive-confirmation.asp
Positive vs. Negative Confirmation
While positive confirmation requires supporting
information despite the accuracy of the original records, negative
confirmation requires a response
only if there is a discrepancy. During a negative confirmation request, a
business may be asked to confirm that an account balance is listed at a
specific amount, such as RM100,000. If the current account balance is RM100,000,
no additional action is required.
If the balance differs, additional information must be
provided to explain the difference. Negative confirmation letters are also used
to ascertain if the recipient wants to opt out of an event outlined in the
letter.
Negative confirmation is more commonly used if the
individual's or business's records are generally considered to be highly
accurate. Typically, the company receiving a negative confirmation is believed
to have stringent internal requirements and business practices. As a result, negative
confirmation is much less costly and time-intensive for auditors since they
usually only need to send one letter out.
Conversely, positive confirmation requests are more
involved since financial records must be furnished, even if the original information
in the letter was correct. Also, positive confirmation requests are more likely
to be used if the company's books are suspected of having errors. However, a
positive confirmation letter is more common in complex transactions since it's
more accurate and ensures that everyone is on the same page or has the same
financial information. In lending, for example, auditors use positive
confirmations to banks and companies to ascertain the exact amount of a debt.
As a result, a positive confirmation tends to be a better
representation of the financial information than a negative confirmation since
it's an explicit request that has been returned by the recipient. If any
dispute arises, a positive confirmation is physical evidence that the
information was confirmed.
Example of Positive Confirmation
If an individual or business entity is selected for an
audit by the Internal Revenue
Service (IRS), the taxpayer must
produce records to affirm the information listed on the selected tax returns.
The audit might include a positive confirmation request for all sources of
income, verification of applicable deductions taken, and proof of claimed gains
or losses.
Even if the information required for the audit matches
what was reported, all evidence must be submitted to satisfy the audit
requirements.
Conclusion
In the conclusion and opinion formulation stage, audit
evidence also knows as information that the auditor is to consider whether the
financial statements as a whole presents with completeness, validity, accuracy
and consistency with the auditor's understanding of the entity.
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