Question

The directors of Synergy Pty Ltd (Synergy) have provided its external audit firm with an oral representation confirming that the bank overdraft balances included within current liabilities are complete.

REQUIRED

1. Describe the relevance and reliability of this oral representation as a source of evidence to confirm the completeness of the bank overdraft balances.

1. Explain why the auditor is concerned particularly with completeness of bank overdraft.                                                                        

Design an additional audit procedure for bank overdrafts. Explain how this procedure will address the concern identified in b) (i).

Answer 1

Answer:

a) Describe the relevance and reliability of this oral representation as a source of evidence to confirm the completeness of the bank overdraft balances.

Audit work requires certain specific evidences to keep it reliable and accurate. If evidences for transactions are in documentary form, they are considered to be more reliable than oral form. Auditing Standard 15 deals with Audit evidence and is very clear about evidences that are considered reliable. This standard explains  what constitutes audit evidence and establishes requirements regarding designing and performing audit procedures to obtain sufficient appropriate audit evidence. Inquiries may range from written to oral and formal to informal. However, there are certain transactions which needs written or documentary evidences only.

In the given case, the Directors of Synergy Pty Ltd. have given oral evidence for Bank Overdraft which is not at all reliable for any auditor. Such transactions may not be considered as 'complete' also cannot be called as 'reliable'.

b) (i) Explain why the auditor is concerned particularly with completeness of bank overdraft.   

Auditor requires documentary evidence for the audit procedure. Auditor has to state whether the accounting statements are depicting 'true and fair' view of economical business position. If 'true' evidences are not available, the auditor may stay in conflict and is doubtful about the 'trueness' of accounting statements.

Bank overdraft cannot be an oral evidence. This is because, bank statements (passbook) will also show the transaction if it ever occurred. This will give a clear picture to the auditor if the Directors are stating the true evidence.

c) Design an additional audit procedure for bank overdrafts. Explain how this procedure will address the concern identified in b) (i).

Audit Procedure will go as follows:

Basic

1. Test of Controls
2. Statement Verification

Risk Assessment:

1. Inquiry with the management, Directors
2. Inquiry with the accountant and other staff
3. Observations and Inspection

Further Procedure:

1. Substantiative Procedure
2. Tests of details
3. Verification with the secondary sources like bank and creditors etc.

Comment if more explanation is needed.

Thumbs-up for this answer.

All the best !!