Discussion # 1 AM

An auditor is always expected to exercise professional skepticism, lack of it often leads to errors and fraud. One of the major reasons for the lack of skepticism is excessive close relations with clients. Regulatory bodies have suggested that auditors enhanced professional skepticism will contribute to enhance the quality of audits (accountingweb, 2019).

               Although the controller has requested that the auditor inform her of which warehouse locations are going to be visited it is necessary that the auditor do not disclose which warehouses locations are going to be visited.

This selection needs to be done as a surprise so no previous arrangements can be made by the client to cover up any misstatements or fraud otherwise it will defeat the purpose of physical verification.

The controller have requested the auditor to share the observations of the physical inventory, the same can be shared by the auditor but it need to be done with enough skepticism and with the purpose to obtain additional information that can explain the findings by the auditor (AICPA, 1191).

Discussion # 2 NZ

Analytical procedures contain a variety of techniques and tests such as a comparison of recorded amounts, or ratios developed from those amounts, and expectations developed by the auditor. In the case of depreciation expense, the analytical procedure involves relationships among elements of financial information within the period. “For example, the auditor might consider the interaction of related accounts, such as property, plant, and equipment and depreciation expense” (Mancuso, 1992, para 5).

     The company sets the appropriate useful life and the residual values related to the long-lived assets. Those elements are the basis for the company’s depreciation policy where “can be identified three variables that allow the influence on the company’s performance i.e.: the depreciation period, the depreciation method and residual value” (Gherai & Balaciu, 2011, para. 16). To examine the company’s depreciation policy, the auditor can include in analytical procedure following ratios:

– depreciation expenses to assets – this ratio indicates changes in the equipment age according to depreciation policy;

– fixed asset percentage – this the ratio shows changes, decrease or increase, that can be compared with the relative changes in depreciation for a particular period.

     If the company’s management takes advantage of flexibility in depreciation policy, they can manipulate the variables to receive favorable results in earnings. “Seeking to artificially increase earnings, either by setting service lives too high or too increased amounts of the residual value, it is reached a situation where the depreciation charges would be underestimated. Consequently, the current result will be overestimated, as well as the book values of the assets involved. In the event that, at a later date, it is found that those book values are higher than the net cash flows which are not updated and will be obtained by using the assets, a viable solution is represented by reducing these” (Gherai & Balaciu, 2011, para. 16).