Tests of Controls and Substantive Audit

Advanced managerial accounting

The term fixed costs can be defined as those expenses that are not affected by the changes in the level of production or delivery of services. For example, one can speak about the costs which are required for renting offices, administration or leasing equipment (Garrison, Noreen, & Brewer, 2013, p. 100). Fixed costs can rise or drop with time passing; but they are usually not influenced by the volume of output. As a rule, they are not relevant for short-term decisions of the management because business administrators cannot change them within a short period. In many cases, these expenses are not even recoverable. For instance, a manager may not change the price of purchased equipment or monthly rent that should be paid in advance. In this case, it is more important to consider variable costs such as labor expenses.

Nevertheless, it is important to consider fixed-costs while taking long-term decisions. This information can be needed to estimate the time when a particular project can break even. Additionally, the management should take into account that high fixed costs can make a company very vulnerable because this organization may not be able to reduce its operational expenses. Furthermore, fixed costs can be avoidable in the future. For instance, the management can adopt a more efficient production process; therefore, the company will no longer need to rent a large factory. So, the expenses related to renting can be reduced significantly. Furthermore, one should note that in the long-term fixed costs can become variable as well. For instance, administrative costs can increase dramatically, as the production of an organization increases and its size grows dramatically. Such changes usually take place in the long term. These are the main details that should be distinguished.


Tests of controls and substantive audit tests serve different purposes. The test of controls is aimed at evaluating how accurately and consistently internal controls are used by the company. These activities can identify malpractices that can result in mistakes (Green, 2005). Nevertheless, they are not supposed to identify any errors made by an organization. In contrast, substantive audit tests should validate or invalidate the financial statements made by an organization. In this way, auditors can pinpoint various inaccuracies or misstatements.

One should note GAAS (Generally Accepted Auditing Standards) are primarily designed for private companies that are not publicly traded. These standards can be regarded as the minimum requirements. In this case, auditors do not have to be supervised by independent agencies. Furthermore, they do not always need to disclose potential malpractices. In contrast, the norms set by the Public Company Accounting Oversight Board (PCAOB) are much more rigid because auditors may need to make their reports public, if a company does not eliminate possible deficiencies. Additionally, it is necessary to enforce certain internal control standards. So, according PCAOB standards, auditors must assume greater responsibilities. This is one of the distinctions should be taken into account.

In order to carry out a substantive audit test for the existence of cash, one should take several steps. At first, it is important to study the income statements made by the organization. Secondly, auditors should focus on such issues as contingent liabilities or letters of credit. Thirdly, one should check the bank accounts of a company. This information is needed to assess the accuracy of financial statements made by an organization. These are the main tasks that should be performed.

Governmental and Non-profit Auditing

The adoption of the Sarbanes-Oxley Act has profound implications for various organizations, including governmental and non-profit agencies. According to this act, the audit committees can assume greater responsibilities; moreover, these institutions should meet higher standards. For instance, at least, one of the committee members should have a professional background in finance (Green, 2005, p. 58). Thus, this individual can better determine if the performance of the company is sound. Additionally, these people can rely on the assistance of independent counselors (Green, 2005). Thus, they can better evaluate the functioning of the enterprise. Overall, these practices are important for identifying possible malpractices. This information can be important for individuals and organizations that support not-for-profit agencies. It should be noted that the requirements are not obligatory, but some governmental institutions voluntarily accept these norms in order to improve their effectiveness.

Furthermore, much attention should be paid to internal controls. In particular, these agencies are required to protect the rights of whistleblowers or people who disclose information about possible malpractices within the organization. This protection can increase the transparency of governmental institutions. Additionally, the duties of auditors should be segregated. This segregation is important for the impartiality of internal auditors. Moreover, this step is important for avoiding the conflict of interests. This is one of the benefits that should be singled out.

Overall, these best practices can greatly benefit both governmental and not-for-profit agencies. These institutions can better use the resources that are provided to them by various sponsors. Moreover, this transparency can be of great use to taxpayers who want to make the government more accountable. Thus, the provisions of the Sarbanes-Oxley Act can benefit various stakeholders.

Individual Income Tax

Overall, the main rationale for the deduction of home mortgage interest is to provide additional motivation for home ownership. This policy was supposed to help middle-income families. This is the main goal that had to be achieved. In addition to that, this incentive could contribute to the growth of construction industry and various businesses that are affiliated with this sector of economy. This task could be critical for policy-makers.

One can say that in the short term, this policy contributed to the increased home ownership, because more people found housing more affordable. Nevertheless, in the long term, the price of housing increased due to the greater demand (Hoagland, 2010). Therefore, this policy benefited the construction companies, rather than owners. Additionally, the findings of researchers indicate that countries, in which this policy is not implemented, do not have the lower rates of homeownership (Hoagland, 2010). This is one of the issues that should be considered. Furthermore, this policy contributes the increased budget deficit. These are some of the limitations that should be taken into account.

Despite various limitations of this policy, it should not be abolished. In particular, this step can create significant challenges for millions of people who have to repay mortgage loans. They may not afford additional expenses. Additionally, if the prices of housing decline significantly, many people will find it more difficult to raise money by mortgaging their houses. These are some of the difficulties should be considered. Admittedly, this policy can make real estate more affordable because the value of real estate may decrease significantly. Nevertheless, this abolition can harm many other stakeholders, especially millions of homeowners. This is one of the risks that should not be overlooked.

Advanced Accounting

The strengthening or weakening of the U.S. dollar relative to other currencies can occur due to various factors. For instance, one can speak about the changes in the balance of trade, growing public debt, the development of the national economy, the degree of political stability within a country, and so forth. Businesses operating at the international level should consider the impact of these fluctuations. If some of company’s receivables are denominated in a foreign currency, the investors and financial managers may find it difficult to estimate the values of these assets. Therefore, businesses must record transactions in U.S. dollars; moreover, they should use the spot rates which were valid at the time of the transaction. The key challenges can occur provided that the price of a foreign currency diminishes considerably relative to the U.S. dollar. As a result, the financial performance of this organization can be adversely affected. This argument is particular relevant for those businesses that have invested significant capital into the foreign economy.

Additionally, the inclusion of receivables denominated in a foreign currency can create difficulties for regulators because it will be difficult to estimate the cash flows. These challenges can become particularly high, if the company earns a part of its revenues in highly volatile currencies.

Overall, these fluctuations can be described as the exchange gains or losses. They should be reflected in the income statement. In particular, accountants should demonstrate how exchange rates have changed over a certain period (Hamlen, Huefner, & Largay, 2014). These data is of great importance to governmental regulations as well as stockholders. Moreover, companies need to take precautions against the losses. In this way, they can make their financial performance more sustainable.

Reference List

Garrison, R., Noreen, E., & Brewer, P. (2013). Managerial Accounting. New York, NY: McGraw-Hill Irvin.

Green, S. (2005). Sarbanes-Oxley and the Board of Directors: Techniques and Best Practices for Corporate Governance. New York, NY: John Wiley & Sons.

Hamlen, S., Huefner, R., & Largay, J. (2014). Advanced Accounting. Cambridge Business Publishers.

Hoagland, K. (2010). The Fair Tax Solution: Financial Justice for All Americans. New York, NY: Penguin.

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