Chapter 11B, Problem 1P

To determine

Review the audit plan and identify the substantive audit procedures designed to address the risks of material misstatement.

Explanation of Solution

Substantive audit procedure: The particular accounts balances from the financial statements are again investigated to substantiate those balances to address the risk of material misstatement of the financial statements identified during the audit procedure.

The risk of material misstatement: Risk of material misstatement arises when the financial statement carries the misstatement before the audit. This could result in two cases, inherent risk and control risk.

Material misstatement: Risk assessment procedures performed by the auditors is aimed at identifying any misstated information in the financial statements that will lead to any fraud if not audited then it is called the material misstatement of financial records. Some matters are indispensable for the fair representation of the financial statements and to keep the financial statements free from any such material misstatement audit is performed.

Identify the substantive audit procedure to address the risk of material misstatement:

1. 1. Review the aging of accounts receivables trial balances with the respective third parties.
2. 2. The customer’s account sample should be confirmed.
3. 3. Determine the sales transactions in the last week of the current year with the delivery receipts inspection from the sales records.
4. 4. Sales returns should be reviewed through the credit receipts and credit allowances.
5. 5. Review the sales return in order to decide whether any adjustments are required to record as the year-end items.
6. 6. Inspecting and reviewing the delivery receipts of sales records occurred during the year-end.
7. 7. Salesman’s modifications should be inquired and reviewed to discover if they are allowed by the management like providing an extra period for returning goods.
8. 8. Reviewing and confirming the contract terms for consulting with the customers as well as how the existing contracts are progressing.
9. 9. Comparing actual billing and basis for that billing for the consulting contracts by examining time records and the duration of the job performed.