1. You are in the process of auditing Leonard, LLC as of and for the year ended
ID: 2402212 • Letter: 1
Question
1. You are in the process of auditing Leonard, LLC as of and for the year ended December 31, 2017 (it is now March 2018). Leonard shows $8,540,725 as the balance of accounts payable in the general ledger as of 12/31/17. You foot the 12/31/2017 accounts payable ledger by vendor getting a total of $9,203,529. As the auditor, what steps would need to be taken at this point? What assertions would you be concerned about?
2. Assuming the client corrects the G/L balance and provides a corrected report, you then proceed with test work. Your audit program for this area requires you to obtain the cash disbursements journal for the period subsequent to year-end through the last day of field work and to set a threshold for material misstatements of $197,900 for accounts payable. Upon making selections for those transactions from the C/D journal, you note that $870,720 in subsequent payments related to vendor payables where services were performed during 2017 and were recorded as payables as of December 31, 2017. You find that there are $626,200 in subsequent payments that relate to vendor payables for services that occurred in 2018 and were recorded in 2018. You also note $220,190 in payments to vendors for goods and services related to 2017 and recorded in 2018. What audit assertions should you consider relevant to audit Leonard’s accounts payable balance? What would be the audit response to the results of the procedures performed? Explain the basis for your responses.
Explanation / Answer
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The main objective of the work performed by the auditor in an audit engagement is that of obtaining reasonable assurance as to whether the financial statements, as a whole, are free from material misstatement, so that the auditor is able to express an opinion on the financial statements and report accordingly in the auditor’s report.
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To obtain reasonable assurance about the financial statements, which is a high but not absolute level of assurance, the auditor needs to design and perform audit procedures to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor’s opinion.
ISA (UK and Ireland) 500, Audit Evidence, explains what are the auditor’s responsibilities in obtaining audit evidence that can underpin the auditor’s opinion and what constitutes sufficient appropriate audit evidence for such purpose
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