- 10 Marks
AA – L2 – Q50 – Audit Evidence
Question
Elisa Medical Co
Elisa Medical Co has a significant number of cash transactions and recent non-current asset purchases have been financed by a bank loan. This loan is repayable in equal annual instalments for the next five years.
Required:
(a) Explain the procedures to obtain a bank report for audit purposes from Elisa Medical Co’s bank and the substantive procedures that should be carried out on that report.
(5 marks)
(b) List the further substantive procedures that should be carried out on the bank balances in Elisa Medical Co’s financial statements.
Answer
(a) Procedure for obtaining a bank letter
The auditor should consider if a bank letter is required. For the audit of Zenith Healthcare Ltd the letter is required as the company has significant cash transactions and a loan from the bank.
The auditor will produce an external confirmation letter in accordance with local audit regulations and practices.
The letter will be sent to the client to sign and authorise disclosure and then it will be forwarded on to Zenith Healthcare Ltd’s bank.
Alternatively, the client may already have provided a standard authority for the bank to respond to a bank letter each year. In this case separate authority would not be required.
Ideally the letter should be sent before the end of the accounting period to enable the bank to complete it on a timely basis e.g. at the year-end.
The bank will complete the letter and send it back directly to the auditor.
Audit procedures on the bank letter include:
Agree the balances for each bank account to the relevant bank reconciliation and the year-end balance in the financial statements.
Agree total interest charges on the letter to the interest expense account in the general ledger.
For any details of loans, ensure repayment terms are correctly disclosed in the financial statements between current and non-current liabilities.
(b) Substantive procedures for the audit of bank balances
(1) Obtain a copy of the year-end trial balance.
Agree the bank balance on the trial balance to
- the year-end bank balance on the computer system, and
- the balance on the financial statements.
(2) Obtain a copy of Zenith Healthcare Ltd’s bank reconciliation. - Cast the reconciliation
- Agree the bank balance to the trial balance.
- Agree the bank statement balance to the year-end bank statement.
- Agree any unpresented lodgements to the bank statement after the end of the year
- Agree any unpresented cheques or similar expenses to the cash book before the end of the year and the bank statements after the end of the year.
- Topic: Audit Evidence
- Uploader: Samuel Duah