Question

Listed below are several misstatements of inventory, accounts payable, and accrued liabilities accounts. Design a substantive audit procedure that provides reasonable assurance of detecting each misstatement.

1. A bonus earned by the president of the company has not been recorded.

2. Several accounts payable to vendors that the company has never purchased from before are omitted from the accounts payable listing.

3. When client employees counted the physical inventory, they included a number of items that were consigned to, but do not belong to, the company.

4. There is no disclosure in the financial statements that a large accounts payable is due to a related party.

5. Accrued payroll is understated.

6. One-third of the inventory of diamond jewelry is actually cubic zircona or white sapphires.

7. The client paid the same vendor invoice twice, although it is still shown as an account payable.

8. Client personnel informed the auditors that underground petroleum tanks contained an inventory of high-octane gasoline when they actually contained water.

9. The client failed to record warranty expenses incurred after year-end applicable to sales made before year-end.

10. Inventory in one corner of the warehouse is overlooked and not counted during the client’s physical inventory count.

Answer 1

1.A bonus earned by the president of the company has not been recorded.

Ans:It must the check the Bonus Policy first of all And analyse and Check through the bank account statement whether it is not came according to the bank statement and go further details to analyse the eligibility to get the bonus and what are reasonable cases where it is improper to record the entries in books of accounts, Where the mistake happened for treating and recognising the payments. And we need to apply various assertions while reviewing and conduct the audit

Problem must be checked through bank and cash balances

Rights: check whether he is really eligible to pay bonus under the provisions of bonus act

Completeness :Ensure all the banks accounts are properly working

Valuation :Ensure while valuing the date check whether it is came across the bonus of President

Presentation and Disclosure:Ensure it is recorded in board meeting or any of the notes regarding the issue of bonus’s

2.Several accounts payable to vendors that the company has never purchased from before are omitted from the accounts payable listing.

Ans:Must obtain the details of inventories and whom it is purchased from and cross check the data between inventories purchased and accounts payables ledgers and sure we get one non entered bill

3.When client employees counted the physical inventory, they included a number of items that were consigned to, but do not belong to, the company.

Ans:They must obtain the list of Physical Inventory first of all and need to go through the list and should not check or include the others inventory in their audit list and take appropriate steps to not to include in the list of client.

4.There is no disclosure in the financial statements that a large accounts payable is due to a related party.

Ans: The steps must taken in order to disclose such related party transaction ,A related party transaction is must required to disclose fails which qualify the Audit report and Mention what is happening with management regarding qualification of audit report and Notes their replies.

5.Accrued payroll is understated.

Ans:Must the obtain list of employees and their timings worked and cross reference with the payroll ,They must get the unadjusted or non accounted accrued wages or salaries and take step to include in the relevant Financial Statements

6.One-third of the inventory of diamond jewelry is actually cubic zircona or white sapphires.

Ans: It must check the existence of Such Inventory shown in the books along with physical presence ,Verify the values if shown any and cross reference with fair value and ensure it is shown correctly in the financial statements and Check whether the proper insurance is taken or not because it is relevant to precise or very valuable one ,Which must require the insurance in order to safeguard the asset,If it is not found then inform to the management regarding the comply with the issue and Explain the problems of non insurance and Note the replies and if not complied qualify the report by stating the fact

7.The client paid the same vendor invoice twice, although it is still shown as an account payable.

Ans:We first obtain the vendor balances and Cross check the bank statement with accounts payables and If found any unadjusted entry eventhough the payment are made must be cross checked and take the appropriate action and Must try to include the balances in the relevant periods.

8.Client personnel informed the auditors that underground petroleum tanks contained an inventory of high-octane gasoline when they actually contained water.

Ans: Check whether the management taken any insurance policy on such stock and whether it is regular practice to take the insurance If not report to management on consequence of non compliance of insurance policy as safeguard measure and Check inventory by physical counting and measuring, ensure they are shown good quantity with exact(cost)amount which is required to mention as per the applicable financial reporting framework. Ensure they are tallied and not shown any spoiled quantity and such quantity have been transferred to Income statement as other than special ordinary activity

9.The client failed to record warranty expenses incurred after year-end applicable to sales made before year-end.

Ans: Obtain the list of warranties paid and cross check with the list and Bank statement ,We should find the unrecorded warranty details and ensure recording the warranty expenses in the relevant financial statements.If the amount is incurred in next year ,we should not include in the previous year in which the sales belongs to, Must assess the materiality and take appropriate action.

10.Inventory in one corner of the warehouse is overlooked and not counted during the client’s physical inventory count.

Ans: Take the steps to recountthe inventory or count the overlooked area and check whether the inventory is tallied with client books andPhysical inventorywith us and ensure accurate inventory is shown in the financial statements.