Question

(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

1) Sufficient appropriate audit evidence -

Any evidence in order to qualify as audit evidence shall have two key attributes. First one is "sufficiency" and second one is "appropriateness".

Sufficiency is all about quantity of evidence (is the evidence enough to reach a conclusion)

Let us take an example of "bank balance" . Say we have bank statement as evidence with us. Now is the statement sufficient - no. Because although bank statement is a good starting point there is a chance of misstating the balance due to various reasons and the same may not match with the balance at hand in books. So the auditor will perform "bank reconciliation" to ensure that he covered all the transactions and ensured that the evidence is sufficient.

Appropriateness - is all about the quality of the evidence ( is the evidence relaible enough to reach a conclusion)

Now continuing with the same example we have taken above - Bank balance. Can an auditor look at the books and conclude that cash balance in books is reliable. The answer is "No". Because the internal accounts can always be fabricated at will hence it is not reliable. So the next step is to get an evidence from a reliable third party - so that third party here can be a bank. So using a bank statement is a much better and realible evidence.

2) Investment in listed stock - note that in the absence of any information about materiality percentage and tolerable level of misstatement it is assumed that overall misstaement level(185,000) is below the tolerance level.

So in this case the auditor tested 60% of the population which is sufficient interms of quantity. Further he used an external and reliable information from australian stock exchenge site. hence the evidence is appropriate as well. Further since the level of misstatement is below the tolerance level and is immaterial the evidence is considered

"Sufficent and appropriate"

3) Inventory - Since the auditor performed the count both the ways - from floor to sheet and sheet to floor it can be it is a reliable way of computing stock. Further since the auditor only found minor discrepencies - the overall stock can be assumed to be correct. Hence the evidence is "Sufficent and appropriate"