Reference no: EM132518087

ACC 405 Auditing - Emirates College of Technology

Learning Outcome 1: Demonstrate and understand what constitutes evidential matter.
Learning Outcome 2: Understand the process of revenue and expense cycle audit.
Learning Outcome 3: Prepare an Auditor's Report and be able to explain the types of opinions expressed on the fair presentation of financial statements

You are an auditor for Rodgers & Co. and have recently taken on a new client, ABC Manufacturing Company. You are in the initial stages and your manager asks you to respond to all inquiries regarding the audit evidence, the process of revenue and purchase cycle, and the audit report.

Section A:Audit evidence

During the planning phase, you come to the conclusion that analytical examination of some operating accounts, reveals the following facts:

- Sales growth is significant while the market is experiencing flow difficulties.
- Receivable turnover ratio increased considerably and the accounts receivable balance at the closing date have doubled.
- Increase of inventories purchase paid in cash, while production remains at a stable level compared to that of the previous year.

Required:

1- One purpose of performing analytical procedures in the planning phase of an audit is to assess the client's financial condition. Explain how the assessment of a client's financial condition can affect the auditor's decisions regarding evidence accumulation in later stages of the audit.

2- Specify the worrying facts noted by the analytical examination (do not copy the text) and the necessary controls to be carried out and type of evidence.

3- The trial balance taken from the books of ABC Company before year-end is presented as follows:

Accounts	Debit	Credit
Cash in bank Accounts receivables Inventories                Land                             Building                    Accounts payable       Capital stock           Retained earnings     Sales                            CGS                              Interest payable Collateral for loans        Total	90,000 345,000 225,000 465,000 440,000                 1,565,000	235,000 200,000 210,000 500,000 300,000 20,000 100,000     1,565,000

Indicate which accounts should be confirmed with outside sources and by whom they should be confirmed?

Section B:The process of revenue and purchase cycle

In the audit of the acquisition and payment cycle, the main goal is to make sure that the goods and services acquired, along with any cash disbursementby ABC company, are presented fairly and comply with GAAP. In order to determine this, you must test the controls that are in place. These tests that will be administered to ABC company incorporate the business functions in a single cycle.

a- Discuss the business functions that comprise the acquisition and payment cycle.

b- During the audit, you detect a lapping of accounts receivable. Explain what lapping means, indicate the internal control deficiency that allows it to occur, and the procedures performed to detect lapping.

c- During auditing sales transaction, you have discovered the following misstatements:
- Sales included in the journals for which there was no shipment;
- Sale recorded more than once;
- Shipments made to nonexistent customers and recorded as sales.

Provide one potential audit test used to detect each misstatement.

Section C: The audit report

During the audit, you detect thatABC has a materialinvestment in XYZ Co., Foreign subsidiary whose net worth has been fully/ substantially eroded. The management has not provided any evidence of how they valued the investment to conclude on the carrying amount. The auditor was also unable to obtain sufficient appropriate audit evidence about the carrying amount of ABC Ltd's investment in XYZ Co., because you were denied access to the financial information, management & the auditors of XYZ.

a- Indicate the conditions that must be met before an auditor can issue a standard unmodified opinion.

b- Explain the conditions for issuing audit reports with modified opinion while specifying the types audit opinion.

c- Based on the information above, identify the issues detectedand the type of audit opinion that you would express in the report (Justify your answer).

Attachment:- Auditing.rar