Area of Audit Assignment

Question:

Identify one substantive audit procedure for each of the account balances above that will provide sufficient appropriate audit evidence regarding the accuracy of that account balance.

Answer:

This assignment covers the subject area of Audit. During this particular assignment, the analysis is made on two separate case studies. In the analysis of the first case study, the assignment tries to identify the proper procedure of audit in respect to the account balances of the accounts like, Wages and Salaries, Electricity and Repairs and maintenance. This analysis also shows the evidence about the accuracy of the account balances. On the other side, in case of the second case study, the assignment provides a comment regarding the appropriateness of the conclusion given by the audit assistant in the case study. At last, the conclusion of the overall study is given based on the findings of the two case studies.

Identification of the substantive audit procedure

Audit for wages and salaries are generally done during the interim audit of the company (Vera-Muñoz, 2015). However, in case of the confirmation regarding the total costs for the wages accrual and salaries that is the payroll system, the substantive procedure of audit is done at the time of final audit. In general, the substantive procedure of audit for wages includes the steps like recording, evaluation and the testing for the internal control (Anastasopoulos & Anastasopoulos, 2012). The substantive procedure of auditing for account balances of wages and salaries are as under:

Verification for employee: At the time of auditing for the wages and salaries, the first step is to verify whether the employee is active in the company or not (Glover, Prawitt & Drake, 2014). The auditor must be sure that the employee for whom the wage or salary audit is going on is presently active in the organization.

Verification for the pay rate: The next step is the verification of the pay rate. The auditor needs to check whether the pay rate for the wages and salaries is approved by the owner or the manager or not (Jans, Alles & Vasarhelyi, 2014).

Review of the hours of payment: It is the third step in which the auditor reviews the total hour for which the company is paying the wages and salaries to the employees. The review must be done separately for each employee. At this stage, the auditor also reviews whether there is any overtime or time deduction or not (Vera-Muñoz, 2015).

Comparison between payroll report and ledger accounts: In this step, the auditor compares the ledgers account balances for the wages and salaries with the payroll report. The mismatch between these two indicates the mistakes in the calculation.

Evaluation of the submission of payroll tax: At this stage, the auditor determines how much tax the employee needs to pay from his or her wages and salaries (Anastasopoulos & Anastasopoulos, 2012).

Review of bank reconciliation: In this last stage, the auditor checks whether all the cheques are cleared out or not as per the amount issued. If any stale-dated payroll exists, then a special note is needed to be mentioned (Mauldin & Wolfe, 2014).

Apart from the wages and salaries, the substantive audit procedure for electricity, repairs and maintenance expenses are as under:

Substantive audit procedure for electricity:

• For the electricity expense, the auditor at first needs to check the total units of electricity that the organization has used for the particular financial year, in which the auditing is taking place.

• The next step is to check the per unit rate of electricity usage. This step is important for checking whether the company has charged whether the company has charged the right amount or it has charged more or less the actual amount that has been spent.

• Next, the auditor must check the calculation of total electricity expenses and tally the amount as per the total usage and per unit rate

• After that the auditor needs to check the vouching for the payment of electricity (Cao, Chychyla & Stewart, 2015)

• Lastly, the auditor must check the payment with the bank reconciliation statement

The substantive procedure for the audit of repairs and maintenance is as under:

• For this, the auditor needs to check for which assets the company has charged the maintenance and repairing charges. At this stage the auditor also check whether these assets are actually used by the company or not.

• The next thing that the auditor needs to check is the voucher for payment. In case of cash payment, the auditor needs to check whether there is proper voucher for payment and whether there is the signature of the recipient or not (Cannon & Bedard, 2014). On the other side, in case of the cheque payment, the auditor will check the payment with the bank reconciliation statement.

Therefore, from the above discussion, it can be said that if Robert Smith follows the above

mentioned procedures, then it is expected that the reliability and control of the account balances can be maintained.

Case study 2

Comment on the appropriateness of the audit assistant’s conclusion

As per the assistant’s conclusion regarding audit of the company, the audit is done by taking a sample of $2, 565, 650 from the total amount of accounts payable of $5, 168, 000, which is more or less half of the total amount of accounts payable. After auditing the sample, it has been identified that the percentage of error is 4%. On the other side, the company has considered the error tolerance level as 5%. This indicates that if the error is in between 0% to 5%, the company will not take any further work of audit. 

Therefore, as after the sample audit the assistant has identified the error level is 4%, the assistant has not taken any further work. According to the company’s assumption or estimated tolerance level, this was right. However, in this case, it is needed to be mentioned that the audit is done on half of the total amount of accounts payable and for that half amount the total error was 4%. Therefore, if the company had conducted the audit of the total amount of accounts payable, then it can be expected that the error percentage would be higher or more than 5% of tolerance level.

Therefore, in this situation, it can be said that it is important for the company to conduct the audit of the full amount of accounts payable in order to identify its accuracy level or level of errors. Otherwise, the audit will include errors (Lobo & Zhao, 2013). Therefore, the overall decision or strategy taken by the board of directors or the higher authority of the company will also be inappropriate.

Conclusion 

In this study, it has been identified that there are different substantive procedures for auditing the account balances of the accounts like, wages and salaries, electricity payment and the expenses for repairs and maintenance. The study has indicated that generally, the audit for wages and salaries are done during the interim audit, however, in some cases, the audit for wages and salaries is done at the time of final audit. 

It has also been understood during the analysis that if the auditors of the companies follow these particular procedures at the time of auditing, then there are less chances of occurring mistakes. In the other words it can be said that the accuracy level of the auditing report will increase. On the other side, by analyzing the case study 2 of the assignment, it has been found out that the auditors must consider the whole amount of the accounts at the time of auditing. Otherwise there will be more chances of error in the process or result of auditing. ?

Reference List:

Anastasopoulos, N. P., & Anastasopoulos, M. P. (2012). The evolutionary dynamics of audit. European Journal of Operational Research, 216(2), 469-476.

Cannon, N. H., & Bedard, J. C. (2014). Auditing challenging fair value measurements: Evidence from the field. Available at SSRN 2220445.

Cao, M., Chychyla, R., & Stewart, T. (2015). Big Data analytics in financial statement audits. Accounting Horizons, 29(2), 423-429.

Glover, S. M., Prawitt, D. F., & Drake, M. S. (2014). Between a Rock and a Hard Place: A Path Forward for Using Substantive Analytical Procedures in Auditing Large P&L Accounts: Commentary and Analysis. Auditing: A Journal of Practice & Theory, 34(3), 161-179.

Jans, M., Alles, M. G., & Vasarhelyi, M. A. (2014). A field study on the use of process mining of event logs as an analytical procedure in auditing. The Accounting Review, 89(5), 1751-1773.

Lobo, G. J., & Zhao, Y. (2013). Relation between audit effort and financial report misstatements: Evidence from quarterly and annual restatements. The Accounting Review, 88(4), 1385-1412.

Mauldin, E. G., & Wolfe, C. J. (2014). How Do Auditors Address Control Deficiencies that Bias Accounting Estimates?. Contemporary Accounting Research, 31(3), 658-680.

Vera-Muñoz, S. C. (2015). Commentary on “The effect of an audit judgment rule on audit committee members’ professional skepticism: The case of accounting estimates”(Kang, Trotman, and Trotman). Accounting, Organizations and Society, 46, 77-80.

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