W5
Discussion No. 1
Why is it important to determine whether the difference between the customer's balance shown in the client's records and the amount confirmed by the customer is the client's error or fraud, the customer's error, or a timing difference? What are the implications of this determination on the conduct of the audit and further investigation of the account balance?
Discussion No. 2
Evaluate the following statement made by a third-year auditor: "In comparison wit other accounts, such as accounts receivable or property, plant, and equipment, it is my assessment that cash contains less inherent risk. There are no significant valuation problems with cash." Do you agree or disagree with the auditor's assessment of inherent risk? Explain.
Comment to NZ
Inherent risk is “the probability that an assertion is materially misstated assuming the client has no related internal control structure policies and procedures” (Levine & Fitzsimons, 1992, para. 14). The inherent risk will vary depending on assertions. For example, accounts with simple calculations would have a lower level of inherent risk and the accounts with complex calculations tend to have a higher level of inherent risk because they are more susceptible to error. The same theory we can apply from accounts to transactions. Transactions that are routine and noncomplex may have a lower level of inherent risk. However, “some routine transactions, such as cash transactions, are more susceptible to fraud and, therefore, have greater inherent risk” (Clack, 2009, para. 9).
In comparison cash with the account such as plant and equipment, “the inherent risk of error in cash could be higher than for plant and equipment since it is more likely to be stolen” (Levine & Fitzsimons, 1992, para. 14). The inherent risk for cash is set at the maximum level (i.e. 100%) and at a reduced amount for accounts and classes of transactions that have less inherent risk - e.g. fixed assets (Levine & Fitzsimons, 1992, para. 14).
Auditors must support their assessments with audit documentation. To make sure if the evaluation is correct, the auditor should apply an alternative procedure to a significant nonresponding account. “For example, in confirming accounts receivable, subsequent cash received on account as well as shipping documents may provide satisfactory sources of evidence of the existence of accounts receivable. On the other hand, for accounts payable, the examination of subsequent cash disbursements and correspondence from third parties provide evidence of completeness” (Levine & Fitzsimons, 1992, para. 34).
Fraud is the biggest issues for auditors. As soon as the word ‘fraud’ is mentioned in any audit room around the country the entire engagement goes quiet. No one expects to find fraud, we as auditors are generally trusting people but that doesn’t mean we don’t look for it. When an auditor sees a difference between a client document and a confirmation letter, we must find why it was different.
There are 4 key reasons that there is a difference: client error, customer error, timing difference, and fraud. As auditors we must determine where misstatements found fit into these 4 categories, this is because if a misstatement is found it is telling for auditors what to look for (Messier & Glover & Prawitt, 2018). Say we have a bank confirmation come in for cash account 100 and it is $4,000 off what the client says, if we find it is a timing difference, we can conclude that we have to be cautious for the rest of the audit about timing differences. If it is a customer error, we will conclude that the customer confirmations should not be relied on completely and thus we have to find more evidence to support our conclusion. If it is a client error, we can conclude that there is an issue with their internal controls that we should address with the audit committee. If it is fraud, we will have to bring it up to the audit committee and do further investigation into the extent of the fraud. (Messier & Glover & Prawitt, 2018)