A new, complex costing system introduces a significant change that disrupts the predictability of relationships in the financial data. This undermines the effectiveness and reliability of analytical procedures, which depend on stable, predictable relationships and consistent application of accounting policies. The auditor would need to shift towards more detailed testing, such as testing cost accumulation and computation, to gain sufficient appropriate audit evidence for inventory valuation.

Tracing from source documents (shipping documents) to the accounting records (sales journal) is a classic test for completeness. It tests whether all transactions that occurred (goods shipped) have been recorded in the correct period. Testing for Existence/Occurrence would involve the reverse direction: selecting from the sales journal and vouching back to source documents like shipping records.

Under AU-C 250, the auditor’s responsibility is to obtain reasonable assurance that the financial statements are free of material misstatement, whether caused by fraud or error. Noncompliance with laws and regulations (like grant terms) can have a direct and material effect on the financial statements (e.g., requiring repayment of funds, affecting revenue recognition). Therefore, the auditor must design the audit to provide reasonable assurance of detecting such material misstatements arising from noncompliance.

To test operating effectiveness, the auditor examines evidence that the control was performed as designed throughout the period. Inspecting a sample of the actual reconciliation documents provides direct evidence that the control procedure (preparation and review/approval) was completed and operated effectively. Inquiring (A) provides less reliable evidence. Re-performing (C) tests the accuracy of the account balance, not the control. Observing (D) is a valid procedure but only provides evidence for the point in time observed, not for the entire audit period under review.

As required by AU-C 580, management must provide written representation that they have fulfilled their responsibility to provide the auditor with all relevant information and access, and that all transactions have been recorded and are reflected in the financial statements. Representation A is not required; management only needs to acknowledge the effect of uncorrected misstatements. Representation C is incorrect because management acknowledges responsibility for fair presentation, but does not make an absolute statement of being free from all misstatement. Representation D relates to management’s own responsibilities, not a representation about the auditor’s work.

This scenario describes a lack of segregation of duties—a key control activity. The controller (a record-keeping/custodial function) is also involved in authorizing transactions (contract negotiation). This concentration of authority increases the risk that the individual could perpetrate and conceal fraudulent financial reporting by overriding controls, for example, by recording fictitious liabilities or manipulating contract terms to alter expenses.

The allowance for doubtful accounts is a management estimate. Auditing an estimate involves evaluating the reasonableness of the methods and assumptions used by management. Reviewing the aging schedule, historical loss experience, and current conditions are all procedures to assess whether management’s estimate of uncollectible amounts is reasonable and in accordance with the applicable financial reporting framework (e.g., ASC 450 or ASC 310).

AU-C 402 requires the user auditor (you) to obtain an understanding of the controls at the service organization that are relevant to the user entity’s (your client’s) financial statements. This understanding can be obtained through various means, including making inquiries of the service organization, using a SOC 1 report (if it provides appropriate evidence), or even visiting the service organization. A Type II SOC 1 report can be a efficient source of evidence, but it is not the only way, and the user auditor must assess its suitability and timeliness. Substantive procedures alone (C) are not a substitute for obtaining the required understanding.

The authorization of significant transactions, such as issuing new debt or refinancing existing debt, is typically documented in the minutes of board of directors’ meetings. Reading the minutes provides evidence about the occurrence and completeness of debt transactions by confirming that they were properly authorized, which relates to the assertion of occurrence and rights & obligations. The other options are addressed by different procedures: recalculating interest (A), sending confirmations (C), and reviewing amortization schedules (D).

A new, complex costing system introduces a significant change that disrupts the predictability of relationships in the financial data. This undermines the effectiveness and reliability of analytical procedures, which depend on stable, predictable relationships and consistent application of accounting policies. The auditor would need to shift towards more detailed testing, such as testing cost accumulation and computation, to gain sufficient appropriate audit evidence for inventory valuation.0