Question

In: Accounting

Assume that you are a newly appointed junior auditor in Ernst & Young, an auditing firm....

Assume that you are a newly appointed junior auditor in Ernst & Young, an auditing firm. After a 3month rigorous training on the job, you have been awarded the certificate of completion and is now ready to embark on your very first assignment. Today, your first job was to evaluate the audit evidence gathered by your team from Shinas Trading and see if they are reliable or not based on ISA 500. The following are the evidences gathered in various forms: a) You have been analyzing the cash balance of Shinas Trading and comparing it with the bank balance. To properly analyze the difference, you asked for the bank reconciliation prepared by the bookkeeper. She immediately gave it to you properly signed by the staff. b) Your colleague, the auditor in-charge of observing the physical count of inventory, gave to you their team’s report on their observation. You immediately filed it in the audit evidence file. c) During interview with the managing director of the company, she gave verbal confirmation that Shinas Trading has a long-term loan from Bank Muscat and payments are updated. d) Shinas Trading has a computerized system in its purchasing process. This is an indication of a good internal control system. Part of the audit evidences filed are electronic copies of the purchase order forms of the company. e) Also filed in the audit evidence folder are a complete set of photocopies of payroll sheets (salary sheets). Employee signatures contained in the sheets are also photocopies of the original. Required: Evaluate the reliability of each of the documents above and identify the one that is considered the most reliable and least reliable. (2 marks each)

Solutions

Expert Solution

Ans)

a) Verification of cash balance is to be done with physical cash count and also with cash book maintained by management.

Bank reconcilaiation will provide the difference between bank balance as per books and bank statement. Therefor it is not reliable for verifiying cash balance.

b) W.r.t physical count of inventory, cut off documents as on the date of physical count of inventory should be taken from management.

C) W.r.t long term loans, auditor has to verify loan sanction letter, repayment schedule, schedule of assets mortgaged for taking loan, proper accounting of loan obtained, repament of amount  & interest in books of accounts

d) soft copies of purchase orders are most reliable source while verifiying purchases. Whether the purchase made from the parties have relevant orders, invoice to purchase order tracing etc can be made.

e) Complete set of payroll sheets is a reliable source of evidence. With which we can verify no of employees with statutory payments returns.

DC


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