Topics: Depreciation, Auditing, Financial audit Pages: 5 (1374 words) Published: September 11, 2013
5.30 (Medium) Sufficient appropriate audit evidence has not been obtained to support the conclusions.| | Procedures| General point| Quality (appropriate evidence)| Quantity (sufficient)| (a)| Observation of stock take - went according to instructionsInventory test counts and cut-off prove satisfactory.| To conclude that the ACCOUNT balance is fairly stated (i.e. in $$ terms), all material assertions must be verified.| Existence assertion (an overstatement test) has been tested from the stock sheet to the floor (one direction).Test counts should also have been selected from the factory floor and checked to the client’s inventory sheets to test for the assertion of completeness (an understatement test in the other direction). Quantities must be tested BOTH ways.| No work has been carried out on the valuation and allocation assertion. Auditor cannot come to the conclusion that the Inventory is fairly stated without * an understatement test of quantities and * then work on the valuation e.g. Q x P = Value i.e. cost of products using accounting policy, and then * testing the provision for obsolescence| (b)| Tests of control (sales prices to selling price list) revealed 3 / 20 were not checked by sales clerk, despite the prices being matched without error.| The test of control is checking for existence and effectiveness of the control.| Failing to complete the ‘prices checked’ box means that there were 3 deviations out of 20 for the test of existence of the control. The fact that the prices were correct is not relevant when checking the existence of the control.| * It could be concluded that there is already enough evidence to say that the control is not working. * A lot depends on the definition of a 'deviation=error'. * If the error had to include an incorrect price a bigger sample would have be drawn before a conclusion could be reached.| (c)| Post-balance sheet sales returns of Product 75l were noted as large in number. Adjustments may have to apply for 30 June| Sales returns = Dr Sales returns Cr Accts Receivable Dr InventoryCr Cost of SalesGOODS are faulty but we don't know how many| Monica has not considered the possible effect of the sales returns on other accounts.Quality of evidence appears superficial (not detailed enough to test understatement of Provision for warranty)| * Assertion - (Over or understated) Valuation and allocation of the inventory of Product 75L, * Assertion - (overstated) Collectability /valuation of accounts receivable in relation to sales of Product 75L and * Assertion - Completeness of Provision for warranty if the goods are faulty.| (d)| Advertising expenses vouched for overstatement. | Problem is prior amount is higher than current year.| Testing has been done only in one direction (for overstatement)| * However, the primary risk with the advertising expenses is understatement, considering the 50 per cent reduction from the previous year. * test for completeness from Advertising invoices/statements to GL or corroborate possible expenses which may be noted in director's minutes.| (e)| Search for unrecorded liabilities on random basis revealed 3 / 20 cheques for services not accrued at BD.| Sunstantive test may reveal a systemic internal control problem.| Auditors' assessment of controls identified that expenses for services were not correctly accrued. Other services may also suffer from incorrect cut-off.| * A larger sample needs to be made * A proper test of subsequent payments needs to be made.|

5.34 (Medium)
(a)This would substantially increase the level of audit risk (increased control risk), as there has been a breakdown in internal control—procedures designed to ensure that this internal control exists have not been properly applied. (b)The level of audit risk would decrease (decreased control risk), as management has demonstrated a proactive approach to internal control. There is an independent party now present...
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