For each of the following routine audit decisions, use Figure \(17-2\) as a guide and apply each step of the decision process to the audit decision.

a. The business process that will require the most attention/resources for a retail clothing chain

b. The type of specialists to employ on an audit of a diversified manufacturing firm

c. The level of materiality to set for an engagement

d. How many staff auditors to assign to an engagement

Figure 17-2

Transcribed Image Text:

Step Define the choice context Identify the evaluation criteria Weight the criteria Generate alternatives Rate each alternative Select an al- ternative Audit Evidence Decision. What type and quantity of sub- stantive evidence should an audi- tor obtain to verify the valuation assertion for accounts receivable? (1) Time and effort to obtain evidence (2) Relevance of evidence (3) Availability of evidence (4) Level of sampling risk (5) Ease of interpretation of evidence (6) Quality of client internal control An auditor may consider criteria (1) to be the most important consideration, with (2) a close second, but all six can be relevant to the auditor's decision. Criteria (5) may depend on the experience of the audit personnel. Criteria (4) will depend on whether a sampling approach is being used. Criteria (6) will affect the reliability of internally generated evidence. Send confirmations (positive or negative) Vouch sales and receipt transactions Audit Opinion Decision What form of audit report should an auditor issue after completing the acquisition and evaluation of evidence? (1) Compliance with GAAP (2) Materiality (3) Risk of undetected misstatements (4) Risk of going concern problems (5) Potential costs of incorrect opinion (6) Duty to society to identify and correct misstatements An auditor may consider criteria (5) and (6) to be the most important consideration but all six have relevance to the auditor's decision. Criteria (1) and (2) are always important. The importance of criterias (3) and (4) will depend on whether there is any evidence to indicate that those problems may exist. Standard unqualified opinion Modified unqualified opinion Perform analytical procedures Qualified opinion Confirmations: Costly to obtain, of minimal value for valuation, time sensitive (done after year end), good when controls are poor, subject to sampling risk. Vouching: Moderately easy to perform, not time sensitive (can be performed any time), acceptable when controls are poor, some sampling risk. Analytical procedures: Easy to perform, good when controls are good, no sampling risk, may be difficult to interpret and require other tests as follow-up, most useful after year end but can be used anytime. The auditor may choose to send some positive confirmations, test a few transactions, and per- form extensive analytical proce- dures if detection risk is moder- ate to high. Disclaimer The choice of audit opinion depends on the conditions described in Chapter 15. Other than the standard unqualified opinion, each of the other alternatives will normally involve an ethical balancing of man- agement's desires and the auditor's responsibility to foster accurate financial reporting. The auditor may select the standard unqualified opinion because there is no evidence of misstatement or going concern problems, GAAP is correctly applied, and the auditor has enough evidence to alleviate his or her worry about reaching the wrong conclusion.