Virginia Creepers - Substantive Testing and Other Detection Options - Case Study Example

Auditing Assignment Name Course Instructor College Date of Submission The Case of Virginia Creepers Testing Report Deficiencies When preparing an audit report two elements are of major importance; the audit evidence gathered along with the risks of material misstatement. It is very essential to acquire sufficient and appropriate audit evidence. The evidence gathered should be of a larger quantity, it should also be relevant and reliable in propping up or detecting misstatements (Moroney, 2011). The amount of audit evidence required is pretentious of the auditor’s evaluation of the risks of misstatement. According to ASA 500, the higher the reviewed risks, extra audit evidence is expected to be necessary and furthermore by the quality of such audit evidence, the higher the quality, the less may be necessary. Appropriateness is the appraisal of the quality of audit evidence; how relevant and its reliable in offering support for the determinations on which the auditor’s outlook is founded. The reliability of evidence is subjective to its source and by its nature, and is reliant on the specific conditions under which it is acquired (Moroney, 2011). As soon as information presented by the entity is used by the auditor to carry out audit procedures, the auditor is required find audit evidence in relation to the accuracy as well as completeness of the information (Stephanie, 2012). The statements provided by the audit assistant do not convincingly display the concepts of sufficiency and appropriateness. Moreover, the audit seems to have placed greater reliance on evidence adduced by the entity without taking the extra step of gathering more evidence to establish its accuracy as well as completeness (Stephanie, 2012). Substantive Testing and Other Detection Options The outcome of the tests of controls indicates how probable material misstatements exist in the accounts. If it is not likely that misstatements are present, in that case, the auditor gains some assertion from the control tests in relation to the fair presentation of the inventory accounts. The auditor afterwards is required to collect just a narrow quantity of facts from substantive tests, which can be less expensive and less extensive. However, if it is probable that misstatements exist in the accounts, then the auditor obtains merely partial assurance from the control tests in relation to the fair presentation of the inventory accounts. This calls for additional assurance from substantive tests and carried out under more effective and extensive substantive procedures (Claire, 2012). In this case, substantive testing (more effective and extensive substantive procedures) owing to the ineffectiveness of the test of controls would be necessary (Claire, 2012). However, before shifting attention to substantive testing, it is appropriate for the auditor to evaluate any control exceptions or deviations identified in the course of carrying out the tests to establish the practical causes, quantity’s involved, financial accounts affected along with the probable effects on extra audit procedures. Control deviations or else exceptions are test controls that have not performed as expected. In this eventuality, the auditor is expected to record the finding of any control deviations plus their possible impact on additional audit procedures and report them in a management letter to those the administrators. This is because they are regarded as matters of governance interest (ASA 260). If testing is broadened to other areas and an additional control deviation is spotted reliance on that test control is abolished. This will call for substituting to a compensating control for the control being tested. Further, if the compensating control is not on hand, or is classified as not efficient to carry on testing controls, bring up to date or probably augment the being, timing along with the coverage of intended substantive procedures the control ought not to be relied upon. As a result, the audit strategy is modified and detection risk is lessened (Claire, 2012). Extra comprehensive test of controls should be conducted after considering several aspects (Moroney, 2011) that include: Outcome of enquiries plus observations. If during this process the auditor spots that substantial modifications to the processes as well as controls have taken place, the earlier test of control possibly will not offer a foundation for placing reliance on those controls. Evidence obtained from prior tests. To the level that other audit procedures offer sufficient substantiation of the effectiveness of controls from the date of provisional work to the close of the period under audit, extra tests that otherwise could be required are abridged. Reasons for Full Explanation of Working Papers A working paper is a document that contains the outcome of test of controls. As a rule, the auditor is expected to state the purpose of the test of controls identified. The purpose keeps reminding the auditor of their general role in testing the controls. The document produced by the audit assistant lacks the purpose of the test of controls (Claire, 2012). The working paper should as well contain the test performed, the detailed controls chosen for testing along with the outcome of the testing. Although the audit assistant jots down the results obtained from the test of controls, he does not offer any detail as regards the controls applied to enable his senior, Anne Adams, to have another look at the working paper, re-perform the tests (if called for), and arrive at similar conclusions (Stephanie, 2012). Habitually, the results are recorded in a table to ease the process of reviewing as well as to promptly spot any exemptions identified in the course of conducting the test of controls. Before making a general conclusion, the table also would facilitate Anne Adams to assess whether sufficient work was carried out and if the correct findings as regards the tests of controls were arrived at. As noted, the results are just reported in simple English sentences which are against the custom in audit working paper documentation (Stephanie, 2012). The Case of Colorado Park IT Systems Test of Controls and Audit Procedures Settling on which controls to employ for testing and determination of the level of audit testing to be executed is an area that calls for a large degree of professional judgement. Controls are enacted to either detect or prevent errors from arising. In choosing controls testing, auditors settle on those controls that offer the most efficient along with effective audit substantiation; those that present required confirmation that the controls are functioning. To enhance efficiency those controls believed to be crucial to the auditor’s judgment are selected. The choice of the controls to test is prejudiced by the kind of controls, how often the controls are performed as well as the degree of assurance the auditor needs to obtain from the controls being planned and put into operation effectively. In an IT environment the auditor should follow a number of procedures before testing the controls (Claire, 2012). First the auditor is supposed to have adequate understanding of the software application so as to conduct the audit. The auditor must deem whether expert software application knowledge is required in an audit. This will assist in acquiring ample familiarity of the accounting as well as internal control systems as regards the sales activities, find out the effect of the software application on the assessment of overall risk plus of risk at the account balance along with the class of transactions level and to plan and carry out appropriate tests of controls (Claire, 2012). If expert skills are desired, the auditor will have to look for the support of a trained person with such knowledge, who may well, be either on the auditor’s staff or an external expert. This should be conducted in accordance with ASA 620 (Le Grand, 2012; ASA, 2013). According to ASA 400 then the auditor must gain familiarity as regards the importance along with the intricacy of the IT operations and the accessibility of data to be used the audit. In the case of Colorado Park, the auditor should get hold of the meaning and intricacy of computer software processes of all major bookkeeping applications (Le Grand, 2012; ASA, 2013). When the auditor understands the importance of the software applications, he should too become familiarized concerning the IT setting and whether it may perhaps manipulate the appraisal of inherent and control risks (Ami & Eva, 2012). Then the auditor should evaluate the inherent and control risks for material financial statement assertions. The inherent risks and control risks in an IT setting possibly will have both a pervasive effect and an account-specific effect on the possibility of material misstatements. The risks may upshot from insufficiencies in persistent IT operations including program improvement and preservation, systems software maintenance, processes, substantial IT systems protection, plus control over right to use to exceptional right utility programs. These shortages have a propensity of causing pervasive impact on all application systems processed on the computer (Ami & Eva, 2012). The risks may as well amplify the likelihood for errors or deceitful actions in particular applications, in particular databases or master files, or in particular processing actions. For instance, errors are frequent in systems that carry out compound logic or calculations, or that must deal with a lot of dissimilar exception situations. Systems that are in command of cash disbursements or other liquid assets are vulnerable to deceitful dealings by users or by IT systems workforce (Le Grand, 2012; ASA, 2013). As fresh IT technologies come out, they are regularly applied by patrons to put up more and more composite computer systems that possibly will incorporate micro-to mainframe links, dispersed databases, end-user processing, along with business running systems that feed information straightforwardly into the accounting systems. Such systems amplify the general complexity of IT systems and the intricacy of the particular applications that they have an effect on. Consequently, they may possibly raise risk and call for additional thoughtfulness (Le Grand, 2012). The main procedures to be taken on by the auditor in the application of the software include: I. Lay down the purpose of software application; II. Establish the substance as well as ease of access of the Colorado Park’s files; III. Classify the definite files or databases to be scrutinized; IV. Be aware of the association between the data tables where a database is to be scrutinized; V. Identify the explicit tests or procedures along with allied dealings and balances affected; VI. Label the output necessities; VII. Organize with the user and IT departments, if suitable, for reproduction of the pertinent files or database tables to be made at the fitting cutoff date and time; VIII. Name the personnel who might contribute in the planning and use of the software; IX. Purify the approximation of costs and benefits; X. Guarantee that the use of the software is appropriately managed; XI. Put together the clerical actions, together with the required expertise and workstation facilities; XII. Bring together data to be used for the software with the accounting and other records; XIII. Carry out the software application; XIV. Assess the outcome; XV. File the software to be used together with objectives, high level flowcharts and run instructions; and XVI. Assess the effect of changes to the programs/system on the use of the software application. References List Amir, G. and Eva, T. (2012) Auditing, Assurance and Ethics, Pearson Australian Auditing Standards, (2013) retrieved 14 May 2014, Claire, L. (2012), Financial Reporting Handbook, Wiley Le Grand, C.H, 2012, Performing the IT General Controls Audit, retrieved 12 May 2013, < http://www.tandfonline.com/doi/abs/10.1080/07366981.2012.654422#.UZXpPKKjHXc> Moroney, C.H. (2011), Auditing: A Practical Approach, Milton, Wiley Mark, S. and Ram, S. (2012), Accounting Handbook, Pearson Stephanie, K. (2012) Auditing and Assurance Handbook, Wiley Read More