Case Study

The auditing firm of Baxter, Williams and Jones agreed to facilitate the final-year students in the Bachelor of Science Degree in Accounting programme for six months of work experience. Two of these students, Angella and Andre, were assigned to work with an audit team currently auditing the financial statements of two large clients. Angella and Andre are concerned that members of the auditing team believe that the students are knowledgeable in the field of auditing and often use terms without providing relevant explanations. For example, Mr. Foster, the Audit Senior, mentioned that accounts payables and accounts receivables were possible areas for inherent risks, control risks and detection risks; therefore, the audit team must ensure that sufficient audit evidence is collected in these areas. Mrs. Bailey, another senior member of the audit team implored the junior auditors to ensure that they minimize material errors by ensuring that adequate sampling is carried out using substantive testing and analytical review techniques. Angella and Andre wanted to maximize the benefits of their work experience and consulted you for information so that they can understand the discussions at the auditing firm. With reference to the above case study, you are required to answer the following questions:

A. Explain to Angella and Andre the following terms: inherent risk, control risk and detection risk.

B. Define the term ‘audit evidence’ and distinguish between internal and external audit evidence?

C. Provide FOUR (4) methods which can be used to collect audit evidence for accounts payables and accounts receivables?

D. Distinguish between substantive testing and analytical review techniques? (6 marks)

Answer rating: 100% (QA)

A In auditing inherent risk is the level of risk that is present in an account or area of a companys financial statements without considering any inte... View the full answer