Question

During your review of the audit field work completed by a new junior employee of the audit firm, John Smith, you have noted many areas which require additional review notes. John, who has just completed the interim audit of Taxon Ltd for the year ended 30 June 2019, has just performed testing of controls. When testing controls over payments made to related parties, there should be evidence of approval and sign-off by the chief financial officer (CFO). John selected a sample of payments made to related parties and vouched them back to the electronic funds transfer (EFT) forms to sight the CFO’s signature of approval. Based on a sample of ten payments, six had been approved by the CFO in writing. However, the remaining four EFT forms (for immaterial amounts) did not have the CFO’s signature, but John noted that the CFO had given verbal approval. John concluded that because all internal controls were working, the audit team could use analytical procedures alone to audit payments made to related parties. Required: Based on the results of the testing of controls outlined above, determine whether John has arrived at the appropriate conclusion? (1 mark) Justify your answer by addressing the following areas: the risks associated with related party transactions, and the reliability of controls at Taxon Ltd.

hi the answer already provided here is alright but not reliable enough. i am hoping more correct and reliable answer that answers the question particularly.

Answer 1

John had performed sample testing of related party payments for process controls and selected a sample of 10 transactions for validation. Based on the sample audit, he identified that six out of ten transactions comply with the testing critierias and have acquired all appropriate approvals from the authorized signatory, i.e. CFO of the company before online remittance which is supported by online Electronic Fund Transfer (EFT).

However, four transactions had only secured verbal approvals and were missing documented approvals from the CFO. Hence, it implies a 40% failure rate which is too high for an audit sample. Although the four transactions were for immaterial amounts, it’s quite possible that the same approvals might be missing for some material transactions leading to cash fraud.

It is therefore suggested to extend the sample size for let’s say another 20 transactions of all material transactions to validate whether they’re secured with documented approvals from the CFO before concluding that all process controls are in place.