- 20 Marks
Question
Radcliffe Co.
ISA 500 Audit Evidence states that the objective of the auditor is to “design and perform audit procedures in such a way as to enable the auditor to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor’s opinion.”
Required:
a. List and explain the factors which will influence the auditors’ judgment concerning the sufficiency of audit evidence obtained. (4 Marks)
b. You are the audit senior in charge of the audit of Radcliffe Co, a company that has been trading for over 50 years. Radcliffe Co manufactures and sells tables and chairs directly to the public. The company’s year-end is 31 December. Current liabilities are shown on Radcliffe Co’s statement of financial position as follows:
| Description | 2013 | 2012 |
|---|---|---|
| Trade payables | 884,824 | 816,817 |
| Accruals | 56,903 | 51,551 |
| Provision for legal action | 60,000 | – |
| Total | 1,001,727 | 868,368 |
The provision for legal action relates to a claim from a customer who suffered an injury while assembling a chair supplied by Radcliffe Co. The directors of Radcliffe Co dispute the claim, although they are recommending an out-of-court settlement to avoid damaging publicity.
List the substantive audit procedures that you should undertake in the audit of the current liabilities of Radcliffe Co for the year ended 31 December 2013. For each procedure, explain the purpose.
Marks are allocated as follows:
- Trade payables (9 Marks)
- Accruals (3 Marks)
- The provision for legal action (4 Marks)
Answer
a. Factors Influencing Sufficiency of Audit Evidence:
- Inherent Risk: Higher inherent risk in an area demands more evidence to reduce detection risk.
- Materiality of Item: Increased materiality necessitates more evidence to ensure no material misstatement.
- Control Systems: Weak control systems require more evidence due to limited reliance on controls.
- Previous Audit Experience: Positive past audit experiences can reduce evidence requirements.
- Audit Procedure Results: Consistent audit results require less evidence, whereas conflicting evidence demands more.
- Information Quality: Reliable information sources reduce evidence needs; less reliable sources require more evidence.
b. Substantive Procedures for Current Liabilities Audit:
Trade Payables (9 Marks)
- Agree Trade Payable Listings to Control Account – Confirms completeness and accuracy of payables.
- Supplier Statement Reconciliations – Verifies outstanding amounts with supplier records.
- Review Subsequent Payments – Ensures liabilities stated are cleared after year-end, confirming existence.
- Search for Unrecorded Liabilities – Identifies missing payables by reviewing after year-end payments.
- Examine Large or Unusual Balances – Validates unusual or large payable items.
Accruals (3 Marks)
- Review Accruals Schedule – Ensures completeness by matching accruals to related expenses.
- Agree Accruals to Supporting Documentation – Validates accruals by verifying supporting invoices or contracts.
- Review Subsequent Payments – Confirms that accruals stated as of year-end are cleared post-year-end.
Provision for Legal Action (4 Marks)
- Obtain Correspondence with Legal Advisors – Determines validity and potential liability of the legal claim.
- Review Directors’ Minutes – Identifies discussions or decisions about the legal provision.
- Inspect Payment Offers or Settlements – Assesses if out-of-court settlements align with provision amounts.
- Management Representation Letter – Confirms directors’ assertions on provision adequacy.
- Tags: Audit evidence, Audit Judgment, Current Liabilities, ISA 500, Substantive Procedures
- Level: Level 2
- Topic: Audit evidence
- Uploader: Kofi