You are an audit manager on the yearend audit of Nicolas manufacturing. Your team was assigned a new junior audit staff member Michelle, who recently graduated from Schulich School of Business at York University. Michelle performed the following two audit procedures and provided you with a written explanation about the reliability of audit evidence that she obtained as part of conducting each procedure.
Procedure # 1
To verify the valuation of accounts receivable, I obtained from the A/R manager the excel schedule where he calculated the yearend adjustment posted to the allowance-for doubtful accounts. I reviewed the formulas used in the calculation and recalculated all the totals. Since the recalculation was done directly by me, (auditor), the reliability of this audit evidence is very high and I confirm that the accounts receivable balance at yearend is valued and stated correctly.
Procedure # 2
To verify the existence of inventory, I attended the yearend inventory count. While walking around the warehouse I enquired employees who were taking the count about any possible inventory items that could have been missed. For example, those located on top shelves. All the employees told me that they haven’t missed any items and that inventory on top shelves was counted. The reliability of this evidence is very high as the enquiry was done directly by me (auditor).
Review each of the procedures and the explanations provided by Michelle:
Procedure # 1 (Yes or No)
Procedure # 2 (Yes or No)
2. If not, what is the reliability of audit evidence obtained by Michelle ? and why?
Procedure # 1 :
Procedure # 2 :
3. Review the assertions covered by each procedure. Does Michelle’s work cover the stated assertion? If not, what assertion did Michelle’s work cover?
Procedure # 1 :
Procedure # 2 :
Michelle’s Explanation: Michelle states that she obtained the Excel schedule used by the Accounts Receivable (A/R) manager to calculate the year-end adjustment posted to the allowance for doubtful accounts. She reviewed the formulas used in the calculation and recalculated the totals. She asserts that since the recalculation was performed directly by her, the reliability of this evidence is very high, and she confirms the correctness of the accounts receivable balance at year-end.
Assessment of Procedure #1
Michelle’s explanation is not entirely correct. While Michelle’s review of the calculations and her recalculations add a level of reliability, the evidence is still dependent on the accuracy of the original calculations performed by the A/R manager. Additionally, the allowance for doubtful accounts involves an estimate, which requires assessing the reasonableness of assumptions and inputs used in the calculation. Michelle’s procedure focuses on the mathematical accuracy, but it doesn’t necessarily address the appropriateness of the estimates used.
Procedure #2: Attending Year-End Inventory Count
Michelle’s Explanation: Michelle attended the year-end inventory count and inquired with employees taking the count about any possible missed inventory items, particularly those on top shelves. She states that all employees confirmed that no items were missed, and that even inventory on top shelves was counted. She believes that since she conducted these inquiries directly, the reliability of this evidence is very high.
Assessment of Procedure #2
Michelle’s explanation is partially correct. Attending the inventory count and inquiring about potential discrepancies is a standard procedure to verify the existence assertion. However, while Michelle’s inquiries provide some level of evidence, the reliability is not as high as she claims. Employees might not always be aware of items that were inadvertently missed or might provide incorrect information unintentionally. The reliability of this evidence could be enhanced through more rigorous procedures, such as test counting a sample of items and reconciling it with the recorded inventory.
Overall Assessment
Procedure #1: No
Procedure #2: Partially Yes
Reliability of Audit Evidence Obtained by Michelle:
The reliability of the evidence obtained by Michelle is moderate. While her procedures have added some level of reliability, there are limitations and potential biases in the evidence she gathered.
Assertions Covered by Each Procedure:
Procedure #1: Michelle’s work primarily covers the accuracy assertion of the accounts receivable valuation. However, it does not fully address the valuation assertion since it does not assess the reasonableness of the allowance for doubtful accounts calculation.
Procedure #2: Michelle’s work covers the existence assertion of inventory. However, it does not fully address the completeness assertion since reliance solely on employee inquiries might not detect all potential inventory omissions.
In conclusion, while Michelle’s efforts to gather evidence are commendable, it’s important for her to recognize the limitations of certain procedures and to implement more comprehensive audit strategies to address the assertions effectively. This would include considering alternative procedures to validate the estimates used in financial calculations and conducting more extensive inventory testing to enhance the reliability of the evidence obtained.
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