Tute Solution - Week 11_2-2015

Tute Solution - Week 11_2-2015 - ACCT30004 Auditing and...

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Unformatted text preview: ACCT30004 Auditing and Assurance Services Suggested Solutions and Advice Week 11 Advice We have noted in the past that student exam submissions often show a lack of understanding of the information in the question well enough to enable quality answers to the question. It is important to take the time to understand the situation given, and not just automatically look for ‘the answers’. 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. In the Coppero Engineering question, while the CR is low, circumstances such as the rise in $AUD, slowing economy, and Asian Financial Crisis mean that additional IR is created. Therefore, the auditor will need to develop an increased level of evidence from Substantive Procedures. One way of approaching such a question is to use a table: Transaction or Balance (Detail) Accounts Receivable Assertion Existence and Valuation Valuation etc…. Tute Solution -­‐ Week 11_2-­‐2015.Docx Updated – 15 October 2015 Audit Procedure (Nature / Timing / Extent) Send confirmation letters to a sample of Acct Rec that are recorded as at balance date. • Will occur after balance date, will need to allow time for responses • Consider stratification of the population into two subpopulations o Based on inside/outside Aust o Based on value of balance outstanding • Consider different materiality levels depending on balance outstanding Review management’s reasoning and calculations regarding Allow for DD. Consider reasonableness in relation to: • Aged listing of debtors • Historical information on failure to collect • Incorporate consideration of the increasing AUD and the financial crisis in the expectations regarding customers in Asia Note – do not use words like ‘check’ or ‘ensure’, be clear about what the test actually is. 1 Suggested Solutions 14.31 Coppero Engineering Ltd Required You are asked to prepare an audit program to test Coppero Engineering’s year-­‐end accounts receivable. You are required to include in your program specific audit objectives you can test using the audit firm’s new generalised audit software package. Your manager is particularly worried about the possible negative effects on the collectability of accounts receivable because of the Asian financial crisis, the rising dollar and the slowing Australian economy. The audit program to test Coppero Engineering’s year-­‐end accounts receivable would include the following: • Perform analytical procedures such as comparing current and previous year’s balances and seeking expert advice and credit analyses on what impact (if any) the Asian financial crisis and the rising Australian dollar are likely to have on major customers in Asia. • Confirm accounts receivable balances by mail, with concentration on the 30% of customers with 70% of the dollar value balances. • Where necessary, undertake alternative follow-­‐up procedures, to ensure payment has subsequently been received. • In relation to the adequacy of doubtful debts, examine evidence of collectability of accounts receivable, by reference to evidence such as the ageing of the accounts receivable, correspondence with customers, credit checks and discussions with the client’s credit manager. • Specific audit objectives that can be tested using the audit firm’s generalised audit software include: − ensuring the totals on the accounts receivable master file agree with the accounts receivable control account in the general ledger − extracting a complete listing of accounts receivable balances at year end − ensuring the master file is made up of complete and accurate customer records through identifying and printing out listings of customer; records where information in the record is invalid or absent − determining whether the ageing of the customer’s debt has been correctly entered onto the master file, which would require cross adding the file to ensure the individual aged amounts agree with the total amount owing − determining whether the internal control procedure in relation to credit control has been correctly followed by identifying those customers who have exceeded their credit rating limits − determining whether the client’s allowance for doubtful debts is adequate by identifying those records with long outstanding balances. Tute Solution -­‐ Week 11_2-­‐2015.Docx Updated – 15 October 2015 2 15.23 Grosse Ltd Required o Outline any queries you would raise with the audit assistant. (a) Why did the balance in accounts payable decrease by $184 000 from 2014 to 2015? (b) The accounts payable balance may be immaterial compared to the overall materiality, but it is probably not immaterial compared to the materiality allocated to accounts payable. (c) Potential errors in relation to accounts payable may be material. This is because the main risk associated with accounts payable is understatement. (d) The sample selected is not appropriate. It would be preferable for the auditor to use statistical techniques to select the sample size. Selection of the three largest balances is also inappropriate because the main risk associated with payables is understatement not overstatement. (e) The balances of the creditors selected for testing should be reconciled to the original supplier’s statement. (f) What audit work has been performed to ensure that there are no unrecorded liabilities? b. Describe the additional audit procedures you believe should be performed to ensure that the accounts payable balance is fairly stated. • The auditor should obtain adequate explanations for such a substantial drop in payables from 2014 to 2015. • The errors in accounts payable may not be immaterial. The auditor should perform work searching for unrecorded liabilities through review of subsequent period’s purchase and payment transactions. • A random sample (using statistical sampling techniques) should be selected from the whole population of payables to reconcile to original suppliers’ statements. The auditor should ensure that accounts payable that have decreased significantly from 2010 are included in the sample. • More audit work should be done on cut-­‐off of purchases and payables. Tute Solution -­‐ Week 11_2-­‐2015.Docx Updated – 15 October 2015 3 ...
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