Question

Question 1

You have reviewed the work performed by your assistant, Raymond Snow, on the audit of Tin Ltd for the year ended 30 June 20X8 and you have noted the following two independent matters: (i) In testing investments in listed securities, Raymond selected all shareholdings with a market value above $200,000 and checked them to the closing market value reported by the Australian Stock Exchange (ASX) to determine the net realisable value of each shareholding. The items tested totaled $5,500,000 or 60% of the total balance. Of the items tested, only one error of $110,000 was discovered. Raymond concluded that the error was not itself material, as it was only 2% of the balance tested. He extrapolated this error to the total population and estimated that the error for the total population would be $185,000, which was also immaterial. Therefore, he concluded that the investments in listed securities were fairly stated at the lower of cost or net realisable value.

(ii) Tin Ltd has 1,000 stock lines that are maintained on a perpetual inventory system. Stock is counted on a cyclical basis so that all lines are covered at least once per year. Raymond attended the March stocktake to observe the counting procedures and conducted 20 test counts from the floor to the client’s count sheets and 20 from the client’s count sheets to the floor. He uncovered two minor discrepancies of one item each, which he considered to be immaterial. The client also uncovered five minor discrepancies between the perpetual records and the actual quantity on hand. None of these discrepancies were adjusted on the perpetual records, as the amounts involved only totaled $50,000 and were considered to be immaterial. Raymond concluded that no further work was considered necessary on stock quantities at year end.

Required: (a) In your own words, explain what is meant by sufficient appropriate audit evidence. (b) Explain whether sufficient appropriate audit evidence has been obtained for each of the above situations. Give reasons for your answer. (Word Limit: Minimum of 250 words. Maximum of 300 words)

PLS GIVE UR UNIQUE ANSWER NOT THE SAME ONE AS HERE

Answer 1

a)sufficient and appropriate audit evidence : Before making a conclusion and express an audit opinion on the financial statements, the auditor needs to assess whether the audit evidence that they obtain are sufficient and appropriate for them to make a decision or not.

Sufficient audit evidence here mainly refers to the number of audit evidence. And the appropriate here refers to the quality of evidence.

Sufficient here can refer to the number of sampling they select, the procedures they use, as well as documents that they obtain.

The auditor needs to perform assessment whether that evidence is sufficient and they now get comfort on the evidence that the conclusion will make corrections.

If the quantity of evidence that they obtain seems to be enough, the auditor need also to assess the quality of that evidence is reliable or not. This is what the appropriate is all about.

The reliability of audit evidence depends on the nature of evidence whether they obtain from thirds parties, prepared by the auditor, prepare by clients, written, or original.

Appropriateness of audit evidence is very important for the auditor to make a correct conclusion.

The audit risks of express incorrect audit opinions are significantly related to sufficient and appropriate audit evidence.

b)no the sufficient and approppriate audit evidence was not obtained in both of the above cases.the audit evidence has to be obtained in the following manner.

Assertions about account balances at the period end (usually balance sheet assertions):

Financial statement assertion	Audit objective
Existence	To form an opinion as to whether assets, liabilities, and equity interests exist.
Rights and obligations (Ownership)	To form an opinion as to whether the entity holds or controls the rights to assets, and liabilities are the obligations of the entity.
Completeness	To form an opinion as to whether all assets, liabilities and equity interests that should have been recorded have been recorded.
Valuation and allocation	To form an opinion as to whether assets, liabilities, and equity interests are included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded.

Assertions about presentation and disclosure (covering both the profit and loss account and balance sheet):

Financial statement assertion	Audit objective
Occurrence and rights and obligations	To form an opinion as to whether disclosed events, transactions, and other matters have occurred and pertain to the entity.
Completeness	To form an opinion as to whether all disclosures that should have been included in the financial statements have been included.
Classification and understandability	To form an opinion as to whether financial information is appropriately presented and described, and disclosures are clearly expressed.
Accuracy and valuation	To form an opinion as to whether financial and other information are disclosed fairly and at appropriate amounts.

When designing and performing audit procedures to verify specific financial statements assertions, the auditor needs to consider whether the procedures are suitable to meet the audit objective and should select those that either in isolation or combination can provide sufficient appropriate evidence.

Inventory

The main assertions in the financial statements relating to inventory are existence, ownership, completeness and valuation and audit procedures should be designed and performed with the objectives of verifying such assertions.

ISA (UK and Ireland) 501, Audit Evidence – Specific Considerations for Selected Items, deals with inventory and specifically requires that, if inventory is material to the financial statements, the auditor shall obtain sufficient appropriate audit evidence regarding the existence and condition of inventory by, in addition to other procedures, attendance at physical inventory counting unless impracticable.

ISA 501 therefore focuses on the existence assertion, ie testing for overstatement of inventory, and on the condition of inventory, which is relevant to its valuation by identifying obsolete, damaged and slow moving items, both of which should invariably be verified by attending and performing audit procedures at the inventory counting (stocktake).

Attendance at the inventory counting is in any case also relevant in providing evidence in respect of the completeness and valuation of inventory and in respect of the cut-off for recording inventory inwards and outwards movements, and the connected impact on revenues and costs.   

The directors of a company, ie those charged with its governance, have the responsibility of preparing financial statements that are free from material misstatement and of ensuring that the amount at which inventory is recorded in the financial statements represents inventory physically in existence and includes all inventories of the entity. To achieve this, entities may maintain detailed records of inventory and check these by regular test counts, a perpetual inventory system. In some entities where the accounting records are less detailed, the amount of inventory may be determined by way of a full physical count at a date close to the entity’s financial year end.

Where an entity maintains a perpetual inventory system, checked by regular test counts, the auditor should perform procedures to confirm whether adequate records of inventory are maintained and kept up to date, procedures for inventory recording and test-counting are satisfactory and all material differences between the book records of inventory and the physical counts are investigated and corrected. The auditor attending a physical inventory counting for such an entity will need to consider whether the checking of stocks as a whole is effective in confirming that accurate records of inventory are maintained.

For entities that do not maintain detailed records of inventory and rely on a full physical count around the financial year end, the auditor’s attendance at the inventory counting is more important for the purpose of obtaining audit evidence in respect of inventories.