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I’ve developed a FAR strategy when it comes to Research and so far, it has not failed me yet. However, I got this one in AUD. Even though they tell me it’s the answer, I don’t know how it related. Can someone copy/paste the part that is relevant to the question.
The Question/Case:
“Your CPA firm has been auditing the financial statements of XYZ Company for several years. Your assistants have approached you and asked if they can omit the confirmation of XYZ’s accounts receivable. Identify the GAAS paragraph which describes the circumstances under which the confirmation of accounts receivable may be omitted. “
The Answer is: AU-C 505.03
“Other AU-C sections recognize the importance of external confirmations as audit evidence; for example
section 330 discusses the auditor’s responsibility (a) to design and implement overall responses to address the assessed risks of material misstatement at the financial statement level and (b) to design and perform further audit procedures whose nature, timing, and extent are based on, and are responsive to, the assessed risks of material misstatement at the relevant assertion level.fn 3 In addition, section 330 requires that, irrespective of the assessed risks of material misstatement, the auditor design and perform substantive procedures for all relevant assertions related to each material class of transactions, account balance, and disclosure.fn 4 The auditor is required to consider whether external confirmation procedures are to be performed as substantive audit procedures and is required to use external confirmation procedures for accounts receivable unless
the overall account balance is immaterial,
external confirmation procedures would be ineffective, or
the auditor’s assessed level of risk of material misstatement at the relevant assertion level is low, and the other planned substantive procedures address the assessed risk.fn 5
section 330 requires that the auditor obtain more persuasive audit evidence the higher the auditor’s assessment of risk.fn 6 To do this, the auditor may increase the quantity of the evidence or obtain evidence that is more relevant or reliable, or both. For example, the auditor may place more emphasis on obtaining evidence directly from third parties or obtaining corroborating evidence from a number of independent sources. Section 330 also indicates that external confirmation procedures may assist the auditor in obtaining audit evidence with the high level of reliability that the auditor requires to respond to significant risks of material misstatement, whether due to fraud or error.fn 7
section 240, Consideration of Fraud in a Financial Statement Audit, indicates that the auditor may design confirmation requests to obtain additional corroborative information as a response to address the assessed risks of material misstatement due to fraud at the assertion level.fn 8
section 500 indicates that corroborating information obtained from a source independent of the entity (such as external confirmations) may increase the assurance the auditor obtains from evidence existing within the accounting records or representations made by management.”
FAR - 62 (10/2/13), 50 (5/30/14)
AUD - 73 (10/30/13), 66 (5/6/14)
REG - 69 (4/8/14)
BEC - 66 (2/27/13), 73 (4/21/14)
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