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.

 A Credit Controller, or Commercial Credit Controller, is responsible for assessing credit applications and adhering to company payment policies. Their duties include evaluating financial records to determine an applicant’s eligibility, contacting customers or clients to notify them of missed payments and coordinate with marketing sales and accounting professionals to determine payment protocols.

  • 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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