Unformatted text preview: ACCT30004
Auditing and Assurance Services
Suggested Solutions and Advice Week 10
Students should continue to develop good answering techniques. Module 3 relates to the
execution phase of the audit, in particular we consider the audit procedures used to obtain
audit evidence. This tutorial concentrates on tests of controls.
Again you may find it helpful to keep referring to the Audit Risk Model and the preliminary
evaluation of Control Risk (ie. How the audit strategy is determined), as a basis for
determining what audit procedures are to be used. If the auditor believes that the preliminary
assessment of CR is LOW, then significant tests of controls will be required to confirm this
assessment and enable the auditor to place reliance on the effectiveness of the controls.
Again, I think it is very important to remember that the opinion which the auditor expresses
comes from the sum of the evidence which they have gathered. The gathering of evidence is
done via the audit procedures.
You should continue developing a quality approach to answering questions.
I encourage you to take a step-by-step process, such as:
§ What is happening in the information provided § How that information may impact on the financial statements § Which assertion(s) may be at risk of misstatement due to the situation § How the auditor may test the likelihood or presence of misstatement in the assertion Tute Solution -‐ Week 10_2-‐2015.Docx Updated – 15 October 2015 1 Suggested Solutions
12.24 Plush and Plastic Required Identify the audit risks for the audit of Plush and Plastic for the year ended 30 June 2015. Online system: unrecorded liabilities or overvalued receivables -‐ it is possible that refunds will be due to customers for incorrect delivery and these may not be recorded, also receivables may include debts that are not correct because invoices have been raised although goods were not despatched. Staff redundancies: if these redundancies have not been made before the year end there is a risk that the provision for redundancies is not correctly recorded. The overhaul of machinery: there is a risk that the expenditure is incorrectly treated -‐ is this an enhancement to the machinery and is therefore capital expenditure or is this merely maintaining existing capacity and therefore revenue expenditure. Recoverability of receivables: some customers are having difficulties paying so there is the risk that receivables are overstated due to an inadequate provision for doubtful debts. Going Concern: there has been significant investment in an online ordering system and machinery overhaul, there is also possible further costs required to correct the problems with the online system. The costs of making people redundant may be significant and savings from the new system are not yet being seen. Some customers are unable to pay and this has caused cash flow difficulties (paying suppliers after 60 days when previously paid after 30 days). The new machinery is a significant investment and funding is not yet secured. These do not indicate that the company is in trouble now but indicates a heightened risk of going concern problems. 12.29 Westinghome Ltd Required (a) Discuss how your audit plan and audit approach would be affected as a result of each item. (b) Where possible, relate the effects noted in (a) to specific financial statement assertions. 1. This is a related party issue and the primary financial statement assertions to consider relate to presentation and disclosure. In this case the auditor is aware of the related party, so the main audit work is in ensuring that it is disclosed correctly in accordance with AASB 124, so the key assertions are classification and understandability, and accuracy and valuation. Specific procedures are outlined in ASA 550 that include reviewing information provided by management identifying related party transactions and being alert for other material related party transactions. Tute Solution -‐ Week 10_2-‐2015.Docx Updated – 15 October 2015 2 In this case the auditor would want to gain some assurance as to the probity of the tender process and ensure that the contract details are fully and properly disclosed in the related parties note to the accounts. 2. The new system looks like it is a good system and will improve the control environment. The auditor may therefore perform testing of the system to increase the reliance on controls. The auditor may also make use of some of the specialised reports or request other types of specialised reports in the audit. The main concern here is over the ending inventory balance. The assertions of existence, valuation and allocation, and completeness would be all relevant in this scenario. It is quite acceptable for the client to use cyclical counts when a good perpetual system is in place and the auditor would be expected to attend some of these counts per ASA 501. However, given that the system has only been running for six months it is quite likely that the auditor would want the client to perform a full stock count for the 30 June 2015 audit. This will give the auditor more comfort that the balance of stock is fairly stated and will also provide further evidence of how effective the controls are within the new system. 3. This is primarily an issue relating to the assertions about the completeness and the accuracy and valuation of presentation and disclosure. The auditor should perform a detailed calculation of the effect of the change in these policies on the current year’s financial statements (or get the client to perform the calculation). The effects of the changes should then be disclosed in the notes to the 30 June 2015 accounts. 4. This scenario raises the questions of whether warranty has been properly valued (valuation and allocation) and also whether there is any litigation against the company, and if so, is it properly disclosed (completeness and accuracy and valuation of presentation of disclosure). The reports on the faults to the kettles and the fact that some are still covered by warranty should be followed up further. As warranty is an accounting estimate, the auditor should: • Review and test the processes used by management to develop the estimate. In doing this, the auditor should ascertain whether the problems in the ‘budget buster’ kettles have been considered by management. • Use an independent estimate and compare. The auditor may make his or her own estimate of warranty based on the facts as known and compare it to managements’ estimate. • Review subsequent events. The auditor could review problems/claims relating to the kettles after the end of the financial year to see whether they are consistent with estimations made in calculating the provision. Litigation is an issue for the auditor to consider because it is noted that the defective kettles have given users small electric shocks. To evaluate whether there are any claims that should be disclosed the auditor should review board minutes and correspondence with the entity’s lawyers and examine legal expense accounts. If any evidence suggests that there may be a claim against the company the auditor should communicate with the entity’s lawyers (ASA 508). Tute Solution -‐ Week 10_2-‐2015.Docx Updated – 15 October 2015 3 ...
View Full Document
- One '13