- 20 Marks
AA – L2 – Q44 – Audit Evidence
Question
You are the external auditor of Tandem Logistics, a public limited company (TL). The company’s year-end is 31 March. You have been the auditor since the company was formed 19 years ago to take advantage of the increase in goods being transported by road. Many companies needed to transport their products but did not always have sufficient vehicles to move them. TL therefore purchased ten vehicles and hired these to haulage companies for amounts of time ranging from three days to six months.
The business has grown in size and profitability and now has over 550 vehicles on hire to many different companies. At any one time, between five and 20 vehicles are located at the company premises where they are being repaired; the rest could be anywhere on the extensive road network of the country it operates in. Full details of all vehicles are maintained in a non-current asset register.
Bookings for hire of vehicles are received either over the telephone or via e-mail in TL’s offices. A booking clerk checks the customer’s credit status on the receivables ledger and then the availability of vehicles using the Transport Management System (TMS) software on TL’s computer network. E-mails are filed electronically by customer name in the e-mail program used by TL. If the customer’s credit rating is acceptable and a vehicle is available, the booking is entered into the TMS and confirmed to the customer using the telephone or e-mail. Booking information is then transferred within the network from the TMS to the receivables ledger programme, where a sales invoice is raised. Standard rental amounts are allocated to each booking depending on the amount of time the vehicle is being hired for. Hard copy invoices are sent in the post for telephone orders or via e-mail for e-mail orders.
The main class of asset on TL’s statement of financial position is the vehicles. The net book value of the vehicles is $6 million out of total shareholders’ funds of $15 million as at 30 June 20X8.
Required:
(a) List and explain the reason for the audit tests you should perform to check the completeness and accuracy of the revenue figure in Tandem Logistics’ financial statements.
(b) List and describe the audit work you should perform on the statement of financial position figure for vehicles in Tandem Logistics’ financial statements for the year ended 30 June 20X8.
Answer
(a)
| Audit test | Reason for test |
|---|---|
| Discuss with booking clerk how orders are recorded from the customer. | The main problem with the system in TL is the lack of evidence for the receipt of the telephone order. Checks are therefore required to ensure that orders have been correctly recorded for revenue recognition. |
| Review controls over e-mail orders. Select a sample of orders and agree details from the e-mail to the Transport Management System (TMS). | To confirm that orders are completely and accurately transferred to the TMS system, ensuring that revenue is not understated. |
| Select a sample of orders from the TMS and agree to the invoice raised on the receivables ledger. | To confirm that all orders entered into the TMS result in an invoice, ensuring completeness of revenue. |
| Review numerical sequence of invoices raised in the receivables ledger to ensure that all invoices have been recorded. | To confirm that no invoices have been omitted, ensuring completeness of revenue. |
| For a sample of invoices raised in the receivables ledger, agree the amount to the standard rental amount for that period of time. | To confirm that the revenue amount is accurate and that invoices have not been raised for incorrect amounts. |
| Select a sample of invoices just prior to and just after the year end and ensure that the invoice has been recorded in the correct accounting period. | To ensure that revenue has been recorded in the correct period, confirming accurate cut-off. |
| For a sample of orders in the TMS, ensure that a vehicle was available for that customer. | To confirm that revenue is only recognised for orders where a vehicle was actually provided, ensuring the occurrence of the revenue transaction. |
| Discuss with management the controls to ensure that all orders are eventually invoiced. | To confirm that there is no breakdown in the system between order and invoice, ensuring completeness of revenue. |
| For a sample of payments received from customers, agree details to the invoice and the TMS. | To confirm that payments relate to invoiced orders, ensuring accuracy and existence of revenue. |
| Cast the monthly revenue figures in the general ledger and agree to the financial statements. Investigate any discrepancies. | The final cast and checking ensures that the financial accounts figure is accurate. Casting tests can be carried out manually or using computer audit software. |
(b)
| Audit work | Reason |
|---|---|
| Obtain non-current asset register from client. Cast the cost, depreciation and net book value columns of the register and agree to the financial statements of TL. | To ensure that the vehicle figures are accurately recorded in the financial statements (Accuracy and completeness assertions). |
| For a sample of new additions in the non-current asset register: <br> a) Agree to board minute or similar documentation for evidence of authority to purchase vehicle. (Occurrence assertion) <br> b) Agree to the physical asset to confirm existence of the vehicle. Where the vehicle is on hire during the audit visit, obtain alternative evidence of existence such as payment from customer near year end for hire (Existence assertion) <br> c) Check the physical condition of the vehicle to ensure that repairs and renewal expenditure is not being understated. (Existence of repair expenditure) <br> d) Agree details to purchase invoice or similar document for evidence of ownership. (Rights and obligations assertion) | To confirm that additions are authorized, exist, are in good condition, and TL has rights to the vehicles. |
| Test the calculation of depreciation in the non-current asset register, ensuring that the rates used are those disclosed in the financial statements. (Accuracy, valuation and allocation assertion) | To confirm that depreciation is accurately calculated and consistent with disclosed policies. |
| Review profits and losses generated on sale of vehicles and ensure these are not excessive. If they are, check the accuracy of the depreciation rates used as this may indicate over or under charge of depreciation. (Accuracy assertion) | To ensure depreciation rates are appropriate and gains/losses on disposal are reasonable. |
| Compare revenue to sale of similar vehicles with similar mileage and ensure comparable. | To confirm that disposal values are reasonable (Valuation assertion). |
| For a sample of disposals during the year (for occurrence assertion): <br> a) Ensure asset has been removed from the non-current register <br> b) Check calculation of profit or loss on sale <br> c) Agree receipt on sale to the cash book | To confirm that disposals are properly recorded and removed from the register (Completeness and accuracy assertions). |
| For a sample of vehicles purchased during the year, agree details to purchase invoice and purchase day book (PDB) ensuring details recorded in the correct year. (Existence and cut-off assertions) | To confirm that purchases are recorded in the correct period. |
| For a sample of vehicle purchases in the PDB, agree details to the non-current asset register. (Completeness assertion) | To ensure all vehicle purchases are recorded in the register. |
| Agree totals in non-current asset register to the financial statements, ensuring vehicles are disclosed separately in the non-current asset note (material item). (Presentation assertion) | To confirm proper disclosure in the financial statements. |
| Ensure that the accounting policy for depreciation is clearly stated in the financial statements and is the same as last year. (Presentation assertion) | To confirm consistency in accounting policies. |
- Topic: Audit Evidence
- Uploader: Samuel Duah