James Rowe, CPA, is the independent auditor of Raleigh Corporation. Rowe is cons

Question

James Rowe, CPA, is the independent auditor of Raleigh Corporation. Rowe is considering the audit work to be performed in the accounts payable area for the current year's engagement. The prior year's working papers show the confirmation requests were mailed to 100 of Raleigh's 1,000 supplies. The selected suppliers were based on Rowe's sample that was designed to select accounts with large dollar balances. A substantial number of hours were spent by Raleigh employees and by Rowe resolving relatively minor differences between the confirmation replies and Raleigh's accounting records. Alternative audit procedures were used for those supplies that did not respond to the confirmation requests. Required: a. Identify the accounts payable audit objectives the Rowe must consider in determining the audit procedures to be followed. b. Identity situations in which Rowe should use accounts payable confirmations and discuss whether Rowe is required to use them. c. Discussion why the use of large dollar balances as the basis for selecting accounts payable for confirmation might not be the most efficient approach, and indicate what more efficient procedures could be followed when selecting accounts payable for confirmation. Chapter sixteen Debt and Equity Capital Stan Jones, CPA, the continuing auditor of Sussex, Inc. is beginning the audit of the common stock and treasury stock accounts. Jones has decided to design substantive procedures with the risk of material misstatement specified at a high level. Sussex has no par, no stated value common stock and acts as its own registrar and transfer agent. During the past year Sussex both issued and reacquired shares of its own common stock, some of which the company still owned at year-end. Additional common stock transactions occurred among the shareholders during the year. Common stock transactions can be traced to individual shareholders' accounts in a subsidiary ledger and to a stock certificate book. The company has not paid cash or stock dividends. There are no other classes of stock, stock rights, warrants, or option plans Required: What substantive audit procedures should Jones apply in examining the common stock and treasury stock accounts? Work-up homework and post in Drop box

Explanation / Answer

The following substantive audit procedures should be applied:

Analytic Review:

An overall analytic review is required in every audit and is also a great tool for management analysis of company financial information. To perform an analytic review, an auditor compares income statement and balance sheet accounts from the previous and current years and examines any differences that are greater than a predefined threshold. This process focuses attention on the areas of the business that have changed since the last year. The advantage of this technique is that it provides a systematic manner to examine the entire business. However, a disadvantage is that this technique assumes that if there is no change, there is no concern, when this might not always be the case.

Substantive Analytic Procedures :

When testing individual account balances, auditors may choose to perform a substantive analytic procedure. This technique uses both financial and non-financial information to build an expectation of an account balance. This expected account balance is then compared with the actual account balance. If the difference is within a predetermined threshold, the auditor concludes that the substantive analytic procedure did not reveal evidence of misstatement. However, if the difference is greater than the threshold, the auditor must obtain additional evidence to corroborate the account balance or propose that the company books an adjustment to fairly state the account.

Tests of Details

Testing individual account balances by sampling journal entry activity and examining supporting documentation is referred to as a test of details. As some companies complete many transactions, an auditor may select a statistical sample of transactions to examine. For each selection, an auditor may request to see sales records and bank statements, examine equipment or even send requests for third parties to confirm the recorded business activity. Tests of details can be time-consuming, but for some high-risk account balances, audit standards require that an auditor performs more detailed testing than a substantive analytic procedure. In these cases, tests of details are frequently employed.

Disclosure Testing

Once the financial statement balances are audited, the auditor turns to the notes to the financial statements. The disclosures, tables and figures included in the notes to the financial statements must be compared back to the audited financial statements or other supporting company documentation. While this isn't usually considered part of substantive testing, it is important to know that the auditor may still be requesting documentation during this period of the audit.

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