Identifcation o Issues
This case focus on the Nefret Stores. The Nefret Stores is a large discount cosmetic department store chain and recenlty expanded from 5 to 15 stores. In this case, Nefret Nefret has overstated overstated net income income and understated understated their accounts accounts payable and record recorded ed ctitious ctitious supplier supplier credits credits that further further reduced reduced accounts payable payable !s a result, an Income " Sales Tax Tax #epartment investigation $as critical of the evidence gathered by Nefrets audit rm, !bdul " %l&%mir, in testing accounts payable and the the su supp ppli lier er cred credit its. s. The The comp compan anys ys dec decie ienc ncie ies s in the the su su'c 'cie ienc ncy y and and appropriateness appropriateness of the evidence e vidence in the audit of accounts payable follo$s( )ashir !dvertising *redits + !n insu'cient number of conrmations - $ere sent. The use of alternative alternative procedures procedures is probably acceptable. /o$ever, one credit $as con conrm rmed ed by tele teleph phon one, e, rath rather er than than by $rit $ritte ten n con conrm rmat atio ion. n. !lth !lthou ough gh the the di0erences di0erences found $ere immaterial, the auditors should have determined the reason for the di0erences, and any errors should have been proected to the population. !lso, only 2 conrmations $ere received bac3 and the other 4 $ere not follo$ed up on. Thirty additional credits $ere selected for testing. hether this is a su'cient number is a matter of udgment, and depends on several factors. ith a fairly small sample, it is critical that the items selected for testing ade6uately represent the population. The testing relied on internal documentation, $hich is insu'cient to support the credits. The placing of the ad is insu'cient evidence $ithout supporting evidence from the vendor supporting the reduction in accounts payable. Nash Nash$a $a *red *redit its s + Thes These e cred credit its s $er $ere con conrm rmed ed by tele teleph phon one, e, and and $er $ere not not supported by a $ritten conrmation. The sta0 auditor $as suspicious of the client7s un$illingness to allo$ $ritten conrmation of the amounts, as $ell as the client7s changing explanation of the nature of the credits, but did not perform additional testing to resolve any doubts about the validity of the credits. 8a3i *redits + The auditor obtained an oral conrmation that these credits $ere not valid. The client indicated that the auditors information $as incorrect, but $ould not allo$ the auditor to obtain $ritten conrmation for these credits. credits. In addition, the credit memos had been altered, $hich should have further indicated to the auditor that the credits $ere not valid. !ccounts 9ayable !ccrual + The auditors sent 5: accounts payable conrmations. hether this is a su'cient number of conrmations conrmations is a matter of auditor udgment. /o$ever, the ade6uacy of the conrmations conrmations as evidence is signicantly undermined undermined by the 3no$ledge that the client told suppliers ho$ to respond. !s a result, the auditor should have veried the conrmed balances using alternative procedures. There is no discussion discussion of the performance performance of alternative procedures procedures for non& resp respons onses, es, or the resol resoluti ution on of the six six resp respons onses es that that $ere $ere not recon reconci ciled led to ;rande7s records. There is no action on the <4=:,::: unrecorded liability found through extrapolating conrm testing. The auditors agreed to an adustment of <42:,::: $hen their cuto0 tests indicated a potential liability of <5::,::: for cuto0 and <4=:,::: for conrms. It $ould be appropriate for the auditors to agree to a lo$er amount only if additional testing supported a lo$er accrued liability.
Connection to Theoretical and Empirical Research Audit Evidence of Nefret Store Case •
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When it came to the audit of the Nefret Store there was insufficient numbers (eight out of 2,500) to be an eact for the confirmations that were made regarding what was s!ent b" Nashwa Credits# With 250 !ages, $,000 vendors and %500,000 at &east $' shou&d have been audited for each vendor# etting information to confirm b" an outsider who has the ua&ifications is re&iab&e and acce!tab&e but it shou&d be in written form# *he auditors of Nefret Store used the !hone# *his a&ternative !rocedure might be acce!tab&e but it shou&d never be used# *he auditors fe&t the differences in the audit were immateria&, but the auditors shou&d have went further and found out the reason for these differences# +f the auditors had e!t trac of the differences the" might have found that there were man" errors this causing them to find the reason wh" there were so man" differences (Arens, E&der, - .eas&e", 20$2, !!# $/5201)# When it came to testing the ads the auditors shou&d never re&" on 3ust interna& documentation# ." trusting the interna& documentation the" did not have sufficient enough evidence to su!!ort the credits# 4&acing an ad is not sufficient enough evidences without ua&it" su!!orting evidences from the vendor that it was a reduction in accounts !a"ab&e# When using such a sma&& sam!&e it is critica& that the items se&ected can adeuate&" re!resent the entire !o!u&ation of the &ist# anagement is res!onsib&e for the !re!aration of the financia& statements based on the accounting records of the entit"# *he auditor shou&d obtain audit evidence b" testing the accounting records, for eam!&e, through ana&"sis and review, re !erforming !rocedures fo&&owed in the financia& re!orting !rocess, and reconci&ing re&ated t"!es and a!!&ications of the same information# *hrough the !erformance of such audit !rocedures, the auditor ma" determine that the accounting records are interna&&" consistent and agree to the financia& statements# 6owever, because accounting records a&one do not !rovide sufficient a!!ro!riate audit evidence on which to base an audit o!inion on the financia& statements, the auditor shou&d obtain other audit evidence#(4aragra!h 07#) *he re&iabi&it" of audit evidence is inf&uenced b" its source and b" its nature and is de!endent on the individua& circumstances under which it is obtained# enera&i8ations about the re&iabi&it" of various inds of audit evidence can be made9 however, such genera&i8ations are sub3ect to im!ortant ece!tions# Even when audit evidence is obtained from sources eterna& to the entit", circumstances ma" eist that cou&d affect the re&iabi&it" of the information obtained# :or eam!&e, audit evidence obtained from an inde!endent eterna& source ma" not be re&iab&e if the source is not now&edgeab&e# Whi&e recogni8ing that ece!tions ma" eist, the fo&&owing genera&i8ations about the re&iabi&it" of audit evidence are usefu&; Audit evidence is more re&iab&e when it is obtained from now&edgeab&e o inde!endent sources outside the entit"# Audit evidence that is generated interna&&" is more re&iab&e when the re&ated o contro&s im!osed b" the entit" are effective# Audit evidence is more re&iab&e when it eists in documentar" form, whether o !a!er, e&ectronic, or other medium (for eam!&e, a contem!oraneous&" written record of a meeting is more re&iab&e than a subseuent ora& re!resentation of the matters discussed)#(4aragra!h <#Sec =2<#aic!a#org)
Analysis and Evaluation
*he Nefret Stores is a &arge discount cosmetic de!artment store chain and recent&" e!anded from 5 to $5 stores# Nefret Stores has overstated net income and understated their accounts !a"ab&e and recorded fictitious su!!&ier credits that further reduced accounts !a"ab&e# As a resu&t, an +ncome and Sa&es *a >e!artment investigation was critica& of the evidence gathered b" Nefret?s audit firm, Abdu& and E&Emir, in testing accounts !a"ab&e and the su!!&ier credits# An insufficient number of confirmations < were sent# *he use of a&ternative !rocedures is !robab&" acce!tab&e but one debt confirmed b" !hone and did not use a written confirmation# +n addition, a&though the difference was found the amount is not materia&, but the auditor shou&d ee! &ooing because the differences that occur so that the errors found can be !ro3ected to the tota& !o!u&ation# With a ver" few sam!&es, it is im!ortant to ensure that the sam!&es taen tru&" re!resents the entire !o!u&ation# *he test is high&" de!endent on interna& documentation, which is insufficient to su!!ort the evidence of a credit account# Advertising is insufficient evidence if it is not su!!orted b" the data vendor associated in the decrease of accounts !a"ab&e# *he accounts 4a"ab&e Nashwa confirmed of credit were conducted b" te&e!hone and not su!!orted b" written confirmation# *he staff auditor actua&&" sus!ect?s ob3ection to the c&ient to a&&ow the written confirmation of the amount and an e!&anation of changing the credit memos, but the auditor does not !erform additiona& test to address the doubts re&ated to whether or not the debts are va&id# *he accounts 4a"ab&e the auditor obtained from @ai direct&" confirms that the credits is not va&id# *he c&ient indicated that the information obtained b" the auditor is not true, but wou&d not a&&ow the auditor to obtain written confirmation of the credit# +n addition, the credit memo has been changed, and shou&d be a strong indication for the auditor that the credit is not va&id# Accrua& oans Auditor sending 50 sam!&es to be confirmed# As a resu&t, the auditor shou&d have verified the confirmed ba&ances using a&ternative !rocedures# *here is no discussion of the !erformance of a&ternative !rocedures for nonres!onses, or the reso&ution of the si res!onses that were not reconci&ed to randes records# *here is no action on the %2B0,000 unrecorded &iabi&it" found through etra!o&ating confirm testing# *he auditors agreed to an ad3ustment of %210,000 when their cutoff tests indicated a !otentia& &iabi&it" of %500,000 for cutoff and %2B0,000 for confirms# +t wou&d be a!!ro!riate for the auditors to agree to a &ower amount on&" if additiona& testing su!!orted a &ower accrued &iabi&it"#
