Standards

(a)

(i) The file of copy credit sales invoices is the most pertinent evidence which the auditor can obtain of the credit sales figure in the accounts. This is because the sales figure is built up from the individual sales which the copy sales invoices represent.

The auditor’s assessment of its validity as evidence will however depend upon the degree to which it is supported by other evidence. It is a general rule that documents created within the organization, such as the copy invoices, form weak audit evidence.

The auditor may for example assess the internal controls designed to ensure the completeness, accuracy and validity of sales invoices in the file or seek evidence from outside the organization such as customers’ remittance advices.

(ii) The most pertinent evidence which the auditor could seek would be inventory returned and credit notes issued after the year end in relation to the garments in the hands of customers at the year end. However, because of the tight deadline for the audit the auditor will have to rely on calculations of expected returns based on previous experience. In order to accept the validity of this evidence the auditor would check the calculations and confirm that they were made on reasonable assumptions about trends in the numbers of dresses presented by customers and any problematical styles.

(iii) When considering the acceptability of a certificate from a third party as audit evidence the auditor would be influenced by the following.

(1) the fact that the evidence is documentary;

(2) the fact that it has come from a third party, particularly if it has been sent directly to the auditor by the third party;

(3) the integrity of the third party implied by his status or by his membership of a profession. For example an auditor would place more reliance on a statement from a bank manager than one from a member of the general public;

(4) the qualification of the third party relating to the subject on which he certifies;

(5) the independence of the third party from the client;

(6) any unusual disclaimer made in the certificate;

(7) the extent to which the certificate is supported by other evidence.

(iv) The evidence required would include:

(1) the controls operating over the costing records;

(2) documents such as purchase invoices supporting material individual entries in the costing record for the office;

(3) the calculation of overheads included in the cost of the office, which must not include any element of profit;

(4) an independent valuer’s opinion may be obtained if other evidence is not sufficiently reliable;

(5) the amount for which the building is insured;

(6) confirmation of cost and method of costing in the letter of representation.

(v) The main differences between the audit evidence which can be obtained from large and small companies are:

(1) Internal Control

In a large company audit it will normally be possible to rely extensively upon internal controls as a sophisticated system of internal control will exist. On the other hand a small company will not need such a complex system so the auditor will not be able to obtain evidence from the operation of internal controls.

(2) Substantive testing

Large companies will have a very large number of transactions, so it will not be practicable to rely entirely on substantive tests. A small company will, however, have a small number of transactions and the auditor will be able to rely on the evidence of substantive tests.

(3) Involvement of directors

The directors of a large company will not be involved in the detail of the operation. Therefore in order to assess the reliability of any representations they make the auditor must assess the reliability of the reports they receive from the managers.

In a small company the directors will be involved in the day to day running of their company, so their representation will be based on a detailed knowledge and understanding. It may also be possible to rely to some extent on the supervision they exercise over the company’s accounting. An assessment of evidence from the directors of a small company will therefore depend among other things upon an assessment of their integrity, and on supporting evidence from other sources.

(b)

The major advantages and disadvantages of auditing standards can be summarized as follows.

Advantages

(1) They give a framework for all audits around which a particular audit can be developed.

(2) They help to standardise the approach of all auditors to the common objective of producing an opinion.

(3) They assist the court in interpretation of the concept of ‘due professional care’ and may assist auditors when defending their work.

(4) They increase public awareness of what an audit comprises and the work behind the production of an auditor’s report.

(5) They provide support for auditors in potential disputes with clients regarding the audit work necessary.

Disadvantages

(1) It may appear that they impinge on, rather than assist, professional judgement.

(2) They are considered by some to stifle initiative and developments of new auditing methods.

(3) They may create additional and unnecessary work and thus raise fees, particularly in the audit of small companies.

Consequences

If auditing standards were to be enforceable by statute it would mean that there would be government intervention in areas currently controlled solely by the profession itself. This might ultimately lead to a diminished role of self-regulation. To be enforceable by statute the standards would have to be applicable to all circumstance and thus need to be very general and broad in their instructions. This might reduce their usefulness to the auditors. Auditors might spend unnecessary time ensuring that they have complied with the law rather than considering the quality of service to their clients.

Finally, it should be considered whether full statutory backing for standards would force auditors into narrow views and approaches which might gradually impair the quality of accounting and auditing practices.