MINI PROJECT : AUDIT EVIDENCE GROUP 5 (DAT5B)

 

COMMERCE DEPARTMENT
DPA50153
-AUDIT 2
MINI PROJECT : AUDIT EVIDENCE (CLO 2)
PROGRAMME: DAT5B
SESSION:1 2021/2022

LECTURER: MRS JULIANA BINTI MOHD ARIFFIN

Group 5 (DAT5B)

1.      NURUL NAZIHAH BINTI ABD WALID (10DAT19F1028)

2.      NURUL SHUHADA BINTI  MOHD SHARIFF (10DAT19F1034)

3.      NURUL ARDILLA BINTI ABD RAZAK (10DAT19F1022)

4.      NUR DANIA NATASHA BINTI MOHD ILLIYAS (10DAT19F1059)

5.      YUSRINA BINTI JEFRY (10DAT19F1057)



Introduction

Scope of this ISA 520.For the purposes of the ISA, the term “analytical procedures” means evaluations of financial information through analysis of plausible relationships among both financial and non-financial data. Analytical procedures also encompass such investigation as is necessary of identified fluctuations or relationships that are inconsistent with other relevant information or that differ from expected values by a significant amount.

 

Question 1

Why are analytical procedures of limited use in the audit of the cash balance?

Ø  The analytical procedures are of limited use in the audit of the cash balance because the cash has a residual nature and therefore it does not have a relationship with other financial accounts.As a result, the auditor's use of analytical procedures for auditing cash is limited to comparisons with prior years' cash balances and to budgeted amounts

Ø  Since cash does not have a predictable relationship with other financial statement accounts because of its residual nature, therefore, the auditor’s use of analytical procedures for auditing cash balances is limited to:

 

(a)Compare with prior years’ cash balances and to budgeted amount.

(b)Identify receipts of the next accounting period and investigate the long outstanding cheques, determine whether they should be reflected in the balances at year end period.

 


 

Analytical Procedures in Audit of Cash

Ø  Financial statement line item like cash doesn’t have a very predictable relationship with other accounts or non-financial information such as sales with the cost of goods sold or salaries expense with the number of employees. As a result, there won’t be many analytical procedures available to use in the audit of cash.

Ø  Auditor may perform analytical procedures by comparing cash to prior-period and budgeted figures, as they are useful in alerting to the risks.

 

Comparing cash to prior-period

Ø  Comparing balances to the prior-period is very useful to examine the fluctuation of cash between the two periods. This way, we can evaluate the reasons behind any major fluctuation of cash balances in order to alert to the risks involving cash.

Ø  It is very useful in the audit of petty cash this way. This is due to petty cash should always be the same as the prior period. For example, in a normal circumstance, the petty cash balance at the end of last period should be the same as the petty cash balance at the end of the current period; it is because of the imprest system.

 

Ø  What offsets the analytical procedures of limited use in the  audit of the cash balance? 

-This limited use of analytical procedures is normally offset by:

(1) extensive tests of controls and/or substantive tests of transactions for cash receipts and cash disbursements or

(2) extensive tests of the entity's bank reconciliations

 

Question 2

Explain why the standard bank confirmation form does not identify all information about an entity’s bank account or loan?

 

ISA 500 states that reliability of audit evidence is influenced by its source and by its nature. Comment on the following external confirmation.

1. Bank confirmation

2. Receivable confirmation

3. Confirmation from consignee for inventory held on behalf of client

4. Confirmation from lawyers.

 

1. Bank confirmation

Ø  Bank confirmation is a strong evidence as regards existence, ownership and valuation assertion as it is external confirmation directly received by the auditor.

Ø  The limitation is that it does not provide evidence of completeness assertion for those accounts not disclosed by the client.

Ø  Bank confirmation is the process to ask for verification or confirmation to the third party, which is the bank, on the cash accounts and balances that the company has at the bank.

Ø  It is done through bank confirmation letter which is usually used for inquiry about outstanding interests, contingent liabilities and guarantees in addition to the cash amount that the company has with the bank.

Ø  Bank confirmation letter is usually sent out at the early date of the audit fieldwork as the confirmation process may take sometimes.

Ø  The request for confirmation from the bank may also include loans and other accounts in addition to the client’s cash.

 

The following procedures are usually performed for bank confirmation in audit cash:

Ø  Obtain written authority from the client to have in bank confirmation letter in order for the bank to disclose the necessary information.

Ø  Send bank confirmation letter in a standard format to the bank

Ø  When the confirmation letter is received from the bank, check whether the bank has answered all the questions requested for confirmation in the letter

Ø  Follow up all points in the bank letter

 

The standard bank confirmation form does not identify all information about an entity's bank deposits or loans because it does not require bank personnel to conduct a comprehensive, detailed search of the bank's records beyond the account information requested on the confirmation

 

Question 3

Why does an auditor obtain a cut off bank statement when auditing a bank account?

 

Bank Statement :

 

Ø  Bank Statement is a document printed in a paper that being sent by the bank to the holder or account every month. This is the summary of all transactions happened in the account of the client during the month. Bank Statement contains account details of the client, all deposits and withdrawals, and copies of all checks cleared during the month.

Ø  A cutoff bank statement is obtained to test the reconciling items included in the bank reconciliation.

Ø  A cutoff bank statement is a partial-period bank statement and the related canceled checks, duplicate deposit slips, and other documents included in bank statements, mailed by the bank directly to the CPA firm’s office. The purpose of the cutoff bank statements is to verify the reconciling items on the client’s year-end bank reconciliation with evidence that is inaccessible to the client.

 

Whenever a cutoff bank statement is not received directly from the bank, the auditor may verify the bank statement for the month subsequent to year-end. The audit procedures used for the verification are as follows:

 

1.Foot all of the cancelled checks, debit memos, deposits, and credit memos.

2.Check to see that the bank statement balances when the totals in 1 are used.

3.Review the items included in 1 to make sure they were cancelled by the bank in the proper period and do not include any erasures or alterations.

 

Conclusion

In conclusion, the analytical procedure is used as an overall review of financial information in the final review stage of the Audit. The importance of bank confirmation in an audit to verify the accuracy of some information in account balances. The cutoff bank statement sent from the bank shows all transactions in a partial period. Audit procedures are required before the auditor has sufficient information to decide whether the client's financial statements fairly represent its financial results, financial position and cash flows

 

References

1) Audit Cash | Assertion | Procedure - Accountinguide

2) Chapter 16 Flashcards | Quizlet

3) https://www.summaryplanet.com/industrial-economics/Audit-of-Cash-and-Bank-Balances.html

4) https://pcaobus.org/oversight/standards/auditing-standards/details/AS2310

5) https://www.mia.org.my/v2/downloads/handbook/standards/ISA/2018/06/01/ISA_520.pdf

 

 

Youtube video

https://youtu.be/JvpX8SoJtFM

 

Thank You.

 




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