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You plan to review the legal correspondence relating to the claims made by those customers to whom South sold contaminated meat.
Which TWO of the following are valid objectives of this audit procedure?
*To determine whether South’s reputation will have been damaged within the local area
*To confirm whether there are deficiencies in South’s internal controls relating to food hygiene
*To assess whether a provision for customer compensation is required in South’s financial statements
*To determine whether disclosure of the nature and financial effect of the legal claim is required in South’s financial statements.
the correct answers shown are:
to assess whether a provision for customer compensation is required in South’s financial statementsTo determine whether disclosure of the nature and financial effect of the legal claim is required in South’s financial statements.
why are those two correct and the other two are not correct options?
Because you are auditing and reporting on the financial statements – so every audit procedure must be related to the relevant assertions – thankfully, there is a finite number of these.
So “To assess whether a provision for customer compensation is required in South’s
financial statements” – is relevant to COMPLETENESS of liabilities and “To determine whether disclosure of the nature and financial effect of the legal claim is required in South’s financial statements” is relevant too COMPLETENESS of disclosure (of said liability). (This is not really a very good question because it’s a “dead giveaway” that these two options mention financial statements.)Deficiencies in food hygiene has no bearing on deficiencies in controls that affect the risk of misstatement in the financial statements and “so what?” if local reputation is damaged – reputation is not measured in the financial statements.
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