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1- The primary audit objective for accounts payable is completeness. Completeness implies that there are no material additions forthcoming for the payable. In the drug wholesaling business, where inventory turnover is extremely high, accounts payable are an important source of operating cash flows.The auditors in this case used two tests on the client’s accounts payable – the search for unrecorded liabilities and reconciliation that the liabilities were ultimately paid as booked. It appears that the auditors failed to reconcile payables for the client’s biggest creditors and instead relied on a sample of clients. In addition, it appears that the auditor may have failed to fully examine the relevant documents to ensure that the services paid for were actually the services payable – the auditors seemed to just reconcile the statement amounts. If the auditors had properly conducted these audit procedures, it seems reasonable that they might have uncovered issues related to the account. The auditors were subject to undue influence from client management (which insisted that they change the lead member of the audit team), threatening the independent nature of the audit. In addition, the auditor appears to have failed to investigate why the new CFO resigned after a week on the job (citing grey accounting) in a timely manner. Under the general audit standard suggesting that if one standard is violated more are (catch-all), it seems reasonable that the auditor was not diligent in audit process.

2-Confirmation procedures are not generally required when auditing a client’s accounts payable. In this case (a drug distributor), accounts payable represents a primary source of operating cash flow and is extremely important in an industry where operating margins can be less then 1%.
Confirmation procedures look for evidence to support the existence, valuation and allocation (timing) when applied to accounts receivable. Confirmation procedures for accounts payable are generally less rigorous and focus primarily on whether the payables completely recognize the allocation. In this case, the auditor should have used confirmation procedures, however, they should have been more extensive than those typically used for accounts payable. The nature of the client’s business suggests that its payables were concentrated to relatively few accounts and involved large amounts; therefore, the auditor should have been able to obtain externally-generated evidence tied to those payables. In addition, given the concerns raised in the client’s previous audits, auditors should have sought multiple confirmations on payables (for example by fax, phone and mail)

3-The standard covering “subsequent discovery of facts” in auditing suggest that the auditor has a responsibility to inform parties who may be relying on previous audit information if that information would materially impact a previous audit report. In this case, as the client was privately-held, those parties would include company management and the major shareholder.
The auditor’s failure to notify parties in this matter may have been related to its interest in retaining the audit client.


4-An auditor’s primary responsibility is to ensure that the personnel on a particular audit assignment meet the requisite skill and experience levels needed to properly conduct the audit.
It is reasonable that a management seek a change in audit team members if they believe that certain members are not qualified to perform the audit or perhaps in the case that the client believes that some trade secrets or competitive information may be compromised. However, it is not reasonable for a management to insist that an audit member be removed because they are “inquisitive” (which might be taken as a synonym for problematic).


5-High-risk audit clients provide a chance for auditors to hone their competencies, test procedures and likely bring in higher fees. The audit firm, however, also needs to consider the potential downside to taking on high-risk audit clients in terms of potential litigation, damage to a firm’s reputation and the resulting loss of clients. In addition, audit firms (as with most professional service firms) have very high fixed costs, in the form of personnel, and need to cover those costs by keeping its teams active as much as possible.
Many audit firms have “risk management” groups that will assess whether it is reasonable to take on a high-risk audit client. In addition, the decision to accept a high-risk client should be discussed at senior levels across the firm. In this example, the audit partner recommended that they drop the audit client despite having issued an unqualified audit opinion and his recommendation was overruled. So the procedures for accepting/retaining high-risk clients are not foolproof.

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