AP3.10 (LO 5) Basic Audit strategy The audit partner in charge of the audit of B

Question

AP3.10 (LO 5) Basic Audit strategy The audit partner in charge of the audit of Big Boy Freight Inc. (BBF) planned to obtain evidence of BBF's revenue recognition by relying on internal cont than any substantive tests of detail. BBF receives most freight payments in advance and holds them eferred (unearned) revenue account, transferring the appropriate amount to sales revenue when goods are transported. However, during subsequent testing of internal controls, a significant number of inst tances occurred where revenue was incorrectly recognized immediately upon customers' payments in advance, rather than when goods were actually shipped. Required Discuss the type of strategy planned by the audit partner. Why is it no longer appropriate after the initial testing of controls? Source: Adapted from the CA Program's Audit & assurance exam, July 2010.

Explanation / Answer

The initial audit plan is for obtaining the revenue recognition evidence by relying on internal controls and the usage of analytical procedures. Such types of audit approach decided by the audit partner was based from the control risk his initial assessment which was low. When the control risk is not high, the audit partner will test the operating effectiveness of internal controls.

According to ASA330 Para 17c, when any deviations from controls upon which the auditor planned to rely on are found, the auditor need to make specific enquiries and make decision on whether the potential risks of misstatement are required to be addressed with the usage of substantive procedures. In such a specific scenario, during subsequent testing of internal controls, important deviations from controls occurred where revenue was inaccurately recognised immediately upon advance customer payment. Thus, the revenue recognition controls are not effectively operating, thus, the controls will have to be reassessed as unreliable and less effective. Thus the audit partner needs to changes the approach of audit to a predominantly substantive approach.

The initial planned audit approach of test of controls is inaccurate because the predominantly substantive approach will be more effective as well as efficient in obtaining sufficient accurate evidence of audit.

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