Question

HKSA 500 “Audit Evidence” requires the auditor to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the audit opinion. HKSA500 also identifies different types of audit procedures for obtaining audit evidence as well as offers guidance on how to assess the reliability of audit evidence.

Required:

1. For the four audit procedures which are Observation, Re-calculation, Inspection, Analytical procedures, describe an audit test using each of the procedure above to obtain evidence as to the balance of plant and equipment, including the related balances of accumulated depreciation and charges to income.

Answer 1

HKSA 500

Auditing in the general sense is the examination of the books of accounts of a business concern by an independent person called the auditor. The work of an auditor begins on completing the accounting process. Hence auditing is only a post-mortem analysis of the books of accounts.

“Auditing is the systematic examination of the books and records of a business or other organization, in order to ascertain or verify and report up on the facts regarding its financial operation and the result thereon”

In this case of HKSA500 the audit test procedure up on the valuation of plant equipment is going to explain:

Audit Procedure

Plant and equipment’s value or balances, the fixed assets balance which deals with the asset that can’t easily be converted into cash, is a common material account on entities financial statements. It is audited through procedures that confirm the existence and valuation of the reported account balance. So for ascertaining the audit evidences in respect of HKSA500 we have to follow the above mentioned procedures for plant and equipment’s valuation.

Prior to the four step procedure, the auditor should gather evidences regarding the plant and equipment’s which includes the detailed listing of fixed assets, or a depreciation schedule which include the depreciation of asset, the original cost , rate of depreciation, depreciable life and prior years deprecation expenses and the method of depreciation followed by HKSA500. And the auditor should check whether the figures in the depreciation schedule matching with the financial statements provided. If the initial procedure is ok the auditor should move on to the audit procedures systematically,

1)Analytical procedure: This step is actually the continuation of evidence gathering in this step the auditor should compare the current year financials of HKSA500 with previous year and determine whether the deviation is reasonable. For instance, he should move on to a ratio analysis such as ‘depreciation expense as a percentage of fixed asset,’ is also considered an analytic. He should track ratio for a period of four to five years and evaluate ratios that produce unexpected evidences.

2) Observation: In this stage the auditor should check whether HKSA500 correctly recorded the acquisition costs and disposition of equipment’s. To test existence of plant and equipment’s, the auditor select a sample of item from the group and matches the details with HKSA500’s depreciation schedule. While reviewing invoices or vouching the auditor should checks the date op acquisition, cost of acquisition and other expenses such as installation charges etc. and also review gain and loss accounts to determine if dispositions are correctly recorded.

3) Inspection: The thread stage is the physical checking of the equipment’s which means in this stage the auditor should verify whether the plant and equipment is physically observe. While observing an asset the auditor should determine that the asset exists and that the asset’s condition is comparable to the remaining life listed on the depreciation schedule.

4) Recalculation: In accordance with the qualified advice from audit partners the auditor should move on to the mathematical accuracy verification of documents and records. And he or she should check the accuracy through a sample verification as per his level of expertise.

The through follow-up of the audit procedure should help the auditor to make correct audit decision regarding the plant and equipment of HKSA500