Question

estion 1 (This question is from the Week 3 Tutorial)

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

Answer 1

The Overall objective of the auditor is to obtain sufficient and appropriate audit evidence to reduces its audit risk an acceptably low level and sufficient and appropriate evidence reduces risk of material misstatement in overall level.