Question;Problem 3.53 General Audit Procedures and Financial Statement Assertions. The eight generalaudit procedures produce evidence about the principal management assertions in financialstatements. However, some procedures are useful for producing evidence about certainassertions, and other procedures are useful for producing evidence about other assertions. Theassertion being audited can influence the auditors? choice of procedures.Required:Opposite each general audit procedure, write the management assertions most usefully auditedby using each procedure.Answer:Audit Proceduresa. Inspection of records ordocuments(vouching)b. Inspection of records or documents(tracing)c. Inspection of records or documents(scanning)d. Inspection of tangible assetse. Observationf. Confirmationg. Inquiryh. Recalculationi.Reperformancej. Analytical proceduresPCAOB Assertions****************************Problem 4.61 Risk AssessmentThis question consists of a number of items pertaining to an auditor?s risk analysis for acompany. Your task is to tell how each item affects overall audit risk-that is, the probability ofissuing an unmodified audit report on materially misleading financial statements.Bond, CPA, is considering audit risk at the financial statement level in planning the audit of ToxicWaste Disposal (TWD) Company?s financial statements for the year ended December 31, 2014.TWD is a privately owned company that contracts with municipal governments to removeenvironmental wastes. Audit risk at the overall financial statement level is influenced by the riskof material misstatements, which may be indicated by a combination of factors related tomanagement, the industry, and the company.Required:Based only on the following information, indicate whether each of the following factors (Items 1through 15) would most likely increase overall audit risk, decrease overall audit risk, or have noeffect on overall audit risk. Discuss your reasoning.Answer:Company profile1 This was the first year TWD operated at a profit since 2009 because the municipalitiesreceived increased federal and state funding for environmental purposes.2 TWD?S board of directors is controlled by Mead, the majority stockholder, who also acts as thechief executive officer.3 The internal auditor reports to the controller, and the controller reports to Mead.4The accounting department has experienced a high rate of turnover of key personnel.5 TWD?s bank has a loan officer who meets regularly with TWD?s CEO and controller to monitorTWD?s financial performance.6TWD?s employees are paid biweekly.7Bond has audited TWD for five years.Recent Developments8 During 2014, TWD changed the method of preparing its financial statements from the cashbasis to the accrual basis under generally accepted accounting principles.9 During 2014, TWD sold one-half of its controlling interest in United Equipment Leasing (UEL)Co. TWD retained significant interest in UEL.10 During 2014, the state dropped litigation filed against TWD in 2010 alleging that the companydischarged pollutants into state waterways. Loss contingency disclosures that TWD included inprior-years? financial statements are being removed for the 2013 financial statements.11 During December 2014, TWD signed a contract to lease disposal equipment from an entityowned by Mead?s parents. This related-party transaction is not disclosed in TWD?s note to its2014 financial statements.12 During December 2014, TWD completed a barter transaction with a municipality. TWDremoved waste from a municipally owned site and acquired title to another contaminated site atbelow-market price. TWD intends to service this new site in 2015.13 During December 2014, TWD increased its casualty insurance coverage on several piecesof sophisticated machinery from historical cost to replacement cost.14 Inquiries about the substantial increase in revenue that TWD recorded in the fourth quarter of2014 disclosed a new policy. TWD guaranteed several municipalities that it would refund thefederal and state funding paid to it if any municipality fails federal or state site cleanupinspection in 2015.15 An initial public offering of TWD?s stock is planned for late 2015.
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