Audit and Assurance – Page 8

AA – L2 – Q50 – Audit Evidence

Explain procedures for obtaining a bank report and substantive procedures for Zenith Healthcare Ltd's bank report. List substantive procedures for auditing bank balances in Zenith Healthcare Ltd's financial statements.

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

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Tags: ank Balances, Audit Evidence, Cash Transactions, Financial Statements, Substantive Procedures
Level: Level 2

Topic: Audit Evidence

AA – L2 – Q49 – Analytical Procedures

Explain reasons for changes in current ratio, gross profit margin, and inventory holding period at audit planning. Explain automated tools and techniques and their use at the audit planning stage.

Question

Analytical procedures are an important and powerful tool for auditors explaining the performance of a business. ISAs 315 and 320 require the auditors to apply analytical procedures at the planning and overall review stages of the audit.

Required
(a) Explain the possible reasons for the following changes in accounting ratios found at the planning stage of the audit:
(i) an increase in the current ratio;
(ii) a decrease in the gross profit margin; and
(iii) an increase in the inventory holding period.

(b) Explain what automated tools and techniques are and describe how they can be used at the planning stage of the audit.

Answer

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Tags: Accounting Ratios, Analytical Procedures, Audit Planning, Risk Assessment
Level: Level 2

Topic: Audit Evidence

AA – L2 – Q48 – Audit Sampling

List factors for selecting a sample of receivables for confirmation and apply them to Henley Co.'s receivables. Set out procedures for planning, performing, and following up receivables confirmation for Henley Co.

Question

The revenue of Henley Co. for the year ended 30 June 20X8 was C7.5 million, its draft profit before tax was C200,000 and its net assets C1.8 million. At that date the receivables ledger contained 140 live accounts totalling trade receivables of C1.6 million. The accounts can be broken down as follows:

Value range	Number of balances
C000	2
100-150	6
50-100	40
10-50	60
1-10	29
0-1	3
Credit balances (all less than C1,000)	140

The auditor is to use direct confirmation to confirm receivables balances.

Required
(a) List the factors which should be considered when selecting a sample of receivables for confirmation and how those factors should be applied to Henley Co.’s receivables.

(b) Set out the procedures to be performed:

(i) when planning and performing the confirmation

(ii) when following up the results.

Answer

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Tags: Audit Procedures, Audit Sampling, Follow-up Procedures, Receivables Confirmation, Trade Receivables
Level: Level 2

Topic: Audit Sampling and Other Selective Testing Procedures

AA – L2 – Q47 – Audit Evidence

Identify strengths and weaknesses of year-end inventory count instructions at a manufacturer.

Question

The following is a set of instructions for the year end physical inventory count at a manufacturer. Production is to continue on the day of the year end count.
Counting is to be carried out by staff from the warehouse and the accounts department. Counters are to report at 8am on 30 June to the warehouse manager.
The warehouse manager will issue sequentially numbered inventory sheets which will include pre-printed descriptions of the inventory lines and the quantities supplied by the inventory controller.
The count area is to be divided into sections and each will be allocated a section by the warehouse manager. Items are to be marked once counted.
The production manager will estimate the materials required for use in production on the day and ensure that they are taken out of the warehouse and moved to the production department.
Goods to be despatched on the day are to be taken out of the warehouse before counting commences and labelled accordingly. Any items not despatched at the end of the day will be included in inventory. The number of the last despatch note will be recorded by the warehouse manager.
Any emergency requisitions of raw materials are to be reported to the warehouse manager.
Damaged inventory is to be noted as such on the inventory sheets.
Any discrepancies between physical and book inventory will be referred to the warehouse manager.
All inventory sheets are to be signed by the counter and returned to the warehouse manager at the end of the count. The warehouse manager will check the numerical sequence of the inventory sheets.

Required
Identify the strengths and the weaknesses of the above instructions, explaining clearly their significance.

Answer

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Tags: Audit Procedures, Cut-off, Internal controls, Inventory Count, Physical Inventory
Level: Level 2

Topic: Audit Evidence

AA – L2 – Q46 – Audit Evidence

Describe how audit software can assist in auditing revenue and receivables at Brighton Components. Discuss external auditor reliance on internal audit’s use of embedded software at Brighton Components.

Question

The audit manager of Brighton Components has decided that audit software can be used effectively in the audit of revenue and trade receivables. He has discussed this with the firm’s computer audit department and with the finance director of Brighton Components and this approach has been agreed as a feasible one. Furthermore, the finance director has asked his internal audit function to investigate the possibility of installing embedded software to help the external auditors in their work.

Required:
(a) Describe, giving examples, how audit software in general could assist the audit firm in their audit of revenue and receivables.

(b) Discuss the extent to which the external auditor could rely on the results of the internal auditor’s use of embedded software.

Answer

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Tags: Audit Evidence, Auditor Reliance, Embedded Software, Internal Audit
Level: Level 2

Topic: Audit Evidence

AA – L2 – Q45 – Audit Evidence

List and explain audit procedures for inventory count evidence at Pearl & Stone's diamond jewellery shops. Explain factors to consider when using Crystal Experts' work for Pearl & Stone's inventory audit. Describe audit procedures to ensure correct valuation of Pearl & Stone's jewellery inventory.

Question

You are the audit manager in the firm of Amoah & Partners, an audit firm with ten national offices. One of your clients, Pearl & Stone, purchases diamond jewellery from national manufacturers. The jewellery is then sold from Pearl & Stone’s four shops. This is the only client your firm has in the diamond industry.

You are planning to attend the physical inventory count for Pearl & Stone. Inventory is the largest account on the statement of financial position with each of the four shops holding material amounts. Due to the high value of the inventory, all shops will be visited and test counts performed.

With the permission of the directors of Pearl & Stone, you have employed Crystal Experts, a firm of specialist diamond valuers who will also be in attendance. Crystal Experts will verify that the jewellery is, in fact, made from diamonds and that the jewellery is saleable with respect to current trends in fashion. Crystal Experts will also suggest, on a sample basis, the value of specific items of jewellery. Counting will be carried out by shop staff in teams of two using pre-numbered count sheets.

Required:
(a) List and explain the reason for the audit procedures used in obtaining evidence in relation to the inventory count of inventory held in the shops.

(b) Explain the factors you should consider when using the work of Crystal Experts.

(c) Describe the audit procedures you should perform to ensure that jewellery inventory is valued correctly.

Answer

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Tags: Audit Procedures, Diamond Industry, Inventory Valuation, Net Realisable Value, Substantive Procedures
Level: Level 2

Topic: Audit Evidence

AA – L2 – Q44 – Audit Evidence

List and explain audit tests to verify completeness and accuracy of revenue in Tandem Logistics' financial statements. List and describe audit work to verify the statement of financial position figure for vehicles in Tandem Logistics' financial statements.

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

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Tags: Audit Procedures, Completeness, Depreciation, Existence, Financial Statements, Non-current Assets, Substantive Procedures, Transport Industry, Valuation, Vehicles
Level: Level 2

Topic: Audit Evidence

AA – L2 – Q43 – Audit Sampling

Describe use of statistical and judgmental sampling in auditing revenue system of a manufacturing company. Describe use of statistical and judgmental sampling in direct confirmation of trade receivables. Describe use of statistical and judgmental sampling in verifying year-end trade receivables. Discuss advantages and disadvantages of statistical vs. judgmental sampling in audit. Explain why auditing accounting estimates is difficult for auditors.

Question

You are planning the audit of the revenue system and year-end trade receivables of Porter Manufacturing.
The company has revenue of approximately $15 million and all of its sales are made on credit. The year-end value of trade receivables is approximately $3 million, and there are about 1,000 customers on the sales ledger.
You have been asked by the partner in charge of the audit to consider whether it would be appropriate to use statistical or judgmental sampling in your audit work.

Required:
(a) Describe and illustrate, by the use of suitable examples, the way in which statistics and judgement can be used in audit sampling, in relation to:
(i) the audit of the revenue system

(ii) writing directly to trade receivables, asking them to confirm the balance owed

(iii) the verification of year-end trade receivables

(b) Based on your answer to (a), above, discuss the advantages and disadvantages of the use of statistical or judgmental sampling.

(c) Explain why the audit of accounting estimates is a difficult area for the auditor.

(d) List the audit evidence you would seek in respect of a provision for damages in respect of an action brought by a customer for breach of contract.

Answer

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Tags: Audit Procedures, Audit Sampling, Judgmental Sampling, Revenue System, Statistical Sampling
Level: Level 2

Topic: Audit Sampling and Other Selective Testing Procedures

AA – L2 – Q42 – Audit Evidence

List and explain factors influencing the auditor's judgment on sufficiency of audit evidence. List substantive audit procedures for trade payables, accruals, and provision for legal action at Regent Co.

Question

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 auditor’s judgment concerning the sufficiency of audit evidence obtained.

You are the audit senior in charge of the audit of Regent Co, a company that has been trading for over 50 years. Regent Co manufactures and sells tables and chairs directly to the public. The company’s year-end is 31 March.
Current liabilities are shown on Regent Co’s statement of financial position as follows:

	20X8	20X7
	C	C
Trade payables	884,824	816,817
Accruals	56,903	51,551
Provision for legal action	60,000	–
	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 Regent Co. The directors of Regent Co dispute the claim, although they are recommending an out of court settlement to avoid damaging publicity against Regent Co.

Required:
(b) List the substantive audit procedures that you should undertake in the audit of current liabilities of Regent Co for the year ended 31 March 20X8. For each procedure, explain the purpose of that procedure.
marks are allocated as follows:
(i) Trade payables (9 marks)
(ii) Accruals (3 marks)
(iii) The provision for legal action (4 marks)

Answer

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Tags: Audit Evidence, Auditor Judgment, Risk Assessment, Sufficiency of Evidence
Level: Level 2

Topic: Audit Evidence

AA – L2 – Q41 – Audit Evidence

List four examples of external confirmations and explain one supported and one unsupported audit assertion for each.

Question

ISA 500 Audit Evidence identifies seven main testing procedures. One of these is external confirmation.
Required:
(a) List FOUR examples of external confirmations.
(2 marks)
(b) For EACH of the examples in (a) above explain:

ONE audit assertion that the external confirmation supports, and
ONE audit assertion that the external confirmation does NOT support.
(8 marks)
(Total: 10 marks)

Answer

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Tags: Audit Evidence, Audit Procedures, External Confirmations, Financial Statement Assertions
Level: Level 2

Topic: Audit Evidence

Subject (SQ): Audit and Assurance

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AA – L2 – Q50 – Audit Evidence

Explain procedures for obtaining a bank report and substantive procedures for Zenith Healthcare Ltd's bank report. List substantive procedures for auditing bank balances in Zenith Healthcare Ltd's financial statements.

AA – L2 – Q49 – Analytical Procedures

Explain reasons for changes in current ratio, gross profit margin, and inventory holding period at audit planning. Explain automated tools and techniques and their use at the audit planning stage.

AA – L2 – Q48 – Audit Sampling

List factors for selecting a sample of receivables for confirmation and apply them to Henley Co.'s receivables. Set out procedures for planning, performing, and following up receivables confirmation for Henley Co.

AA – L2 – Q47 – Audit Evidence

Identify strengths and weaknesses of year-end inventory count instructions at a manufacturer.

AA – L2 – Q46 – Audit Evidence

Describe how audit software can assist in auditing revenue and receivables at Brighton Components. Discuss external auditor reliance on internal audit’s use of embedded software at Brighton Components.

AA – L2 – Q45 – Audit Evidence

List and explain audit procedures for inventory count evidence at Pearl & Stone's diamond jewellery shops. Explain factors to consider when using Crystal Experts' work for Pearl & Stone's inventory audit. Describe audit procedures to ensure correct valuation of Pearl & Stone's jewellery inventory.

AA – L2 – Q44 – Audit Evidence

List and explain audit tests to verify completeness and accuracy of revenue in Tandem Logistics' financial statements. List and describe audit work to verify the statement of financial position figure for vehicles in Tandem Logistics' financial statements.

AA – L2 – Q43 – Audit Sampling

AA – L2 – Q42 – Audit Evidence

List and explain factors influencing the auditor's judgment on sufficiency of audit evidence. List substantive audit procedures for trade payables, accruals, and provision for legal action at Regent Co.

AA – L2 – Q41 – Audit Evidence

List four examples of external confirmations and explain one supported and one unsupported audit assertion for each.

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AA – L2 – Q50 – Audit Evidence

Explain procedures for obtaining a bank report and substantive procedures for Zenith Healthcare Ltd's bank report. List substantive procedures for auditing bank balances in Zenith Healthcare Ltd's financial statements.

You're reporting an error for "AA – L2 – Q50 – Audit Evidence"

AA – L2 – Q49 – Analytical Procedures

Explain reasons for changes in current ratio, gross profit margin, and inventory holding period at audit planning. Explain automated tools and techniques and their use at the audit planning stage.

You're reporting an error for "AA – L2 – Q49 – Analytical Procedures"

AA – L2 – Q48 – Audit Sampling

List factors for selecting a sample of receivables for confirmation and apply them to Henley Co.'s receivables. Set out procedures for planning, performing, and following up receivables confirmation for Henley Co.

You're reporting an error for "AA – L2 – Q48 – Audit Sampling"

AA – L2 – Q47 – Audit Evidence

Identify strengths and weaknesses of year-end inventory count instructions at a manufacturer.

You're reporting an error for "AA – L2 – Q47 – Audit Evidence"

AA – L2 – Q46 – Audit Evidence

Describe how audit software can assist in auditing revenue and receivables at Brighton Components. Discuss external auditor reliance on internal audit’s use of embedded software at Brighton Components.

You're reporting an error for "AA – L2 – Q46 – Audit Evidence"

AA – L2 – Q45 – Audit Evidence

List and explain audit procedures for inventory count evidence at Pearl & Stone's diamond jewellery shops. Explain factors to consider when using Crystal Experts' work for Pearl & Stone's inventory audit. Describe audit procedures to ensure correct valuation of Pearl & Stone's jewellery inventory.

You're reporting an error for "AA – L2 – Q45 – Audit Evidence"

AA – L2 – Q44 – Audit Evidence

List and explain audit tests to verify completeness and accuracy of revenue in Tandem Logistics' financial statements. List and describe audit work to verify the statement of financial position figure for vehicles in Tandem Logistics' financial statements.

You're reporting an error for "AA – L2 – Q44 – Audit Evidence"

AA – L2 – Q43 – Audit Sampling

You're reporting an error for "AA – L2 – Q43 – Audit Sampling"

AA – L2 – Q42 – Audit Evidence

List and explain factors influencing the auditor's judgment on sufficiency of audit evidence. List substantive audit procedures for trade payables, accruals, and provision for legal action at Regent Co.

You're reporting an error for "AA – L2 – Q42 – Audit Evidence"

AA – L2 – Q41 – Audit Evidence

List four examples of external confirmations and explain one supported and one unsupported audit assertion for each.

You're reporting an error for "AA – L2 – Q41 – Audit Evidence"

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