Question

Part I

Explain the purpose of an audit firm undertaking an audit of the design and effectiveness of internal control procedures.

Part II

An auditor may perform the following three types of substantive procedures: (a) tests of details of transactions; (b) tests of details of balances; and (c) analytical procedures

Explain the purpose of an audit firm undertaking an audit of the design and effectiveness of internal control procedures.

Below are specific audit procedures that fall within one of these categories:

1. Reconcile supplier statements at the year-end with balances in the purchase ledger.

2. Agree a sample of sales invoices to goods despatch records held in the inventory system.

3. Review post year-end receipts from customers to establish the extent of unpaid debts.

4. Calculate gross profit ratios for each branch of a chain of supermarkets and compare month by month and prior year.

5. Obtain schedule of asset disposals in the period and agree to supporting sale documents.

6. Attend the factory on the final day of the year to review work in progress.

7. Agree payment to equipment hire company to a copy of the lease.

8. Calculate expected payroll costs from last year's amount adjusted for staff changes and pay rise in the year.

Required:

For each procedure, classify which of the three types it belongs to.

Part III

Below are some audit tasks performed by an audit assistant:

1. An audit assistant opened the file of purchase invoices and selected 20 orders as part of tests of controls over occurrence.

2. An audit assistant selected all material receivables balances for receivables circularisation tests.

3. An audit assistant selected every hundredth sales invoice and checked to goods despatched note.

Required:

Discuss whether the above individual audit task is considered as audit sampling techniques or acceptable audit procedures? Explain your answer.

Answer 1

Part I

Below points can explain, purpose of an auditor for an audit of the design and effectiveness of internal control procedures,

• The Auditor should test the design effectiveness of the controls selected for testing by detemining company`s controls, if they are operated as prescribed y persons possessing the necessary authority and competence to perform the control effectively, satisfy the company`s control objectives and can effectively prevent or detect error or fraud that could result in material misstatements in the financial st atements.
• The Auditor should test the operating effectiveness of a control selected for testing by determining whether the control is operating as designed and whether the person performing the control possesses the necessary authority and competence to perform control effectively.

Part II

1. Tests of details of transactions:
   • ​​​​​​​2. Agree a sample of sales invoices to goods despatch records held in the inventory system.
   • 5. Obtain schedule of asset disposals in the period and agree to supporting sale documents.
   • 7. Agree payment to equipment hire company to a copy of the lease.
2. Tests of details of balances:

   • 1. Reconcile supplier statements at the year-end with balances in the purchase ledger.

   • 3. Review post year-end receipts from customers to establish the extent of unpaid debts.
   • 6. Attend the factory on the final day of the year to review work in progress.
3. Analytical procedures:
   • 4. Calculate gross profit ratios for each branch of a chain of supermarkets and compare month by month and prior year.​​​​​​​
   • 8. Calculate expected payroll costs from last year's amount adjusted for staff changes and pay rise in the year.

Part III

• ​​​​​​​Audit Sampling techniques
  • ​​​​​​​1. An audit assistant opened the file of purchase invoices and selected 20 orders as part of tests of controls over occurrence.
  • 3. An audit assistant selected every hundredth sales invoice and checked to goods despatched note.
• Accepted Audit Procedures
  • ​​​​​​​2. An audit assistant selected all material receivables balances for receivables circularisation tests.

Brief Explanation of Audit Sampling techniques and Accepted Audit Procedures:

• There are Five Principal methods of audit sampling which are random selection, systematic selection, monetary unit selection, haphazard selection, block selection. In selection of samples,auditor must ensure that selected sample should be representative of the population.
• Audit Sampling techniques could have sampling risk,which may be lead to errorneous conclusion of audit.
• Audit procedures are the process, methods that auditors perform to obtain audit evidence which enables them to make a conclusion on the set of audit objective and express their opinion. Auditors design audit procedures to detect all kinds of risks that identified and ensuring that the required audit evidence is obtained sufficiently and appropriately.