Question

Question 1 (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

Sufficient and Appropriate Audit Evidence

The word “Sufficient” refer to enough evidence to support the conclusion given by auditor. By the end of the day what is enough depends on auditor own judgement.

The words “Appropriateness” of evidence breaks down into two important concepts

• Reliability of audit evidence.
• Relevance of Audit Evidence.

B) Case 1

As defined in AS 2315,

As per Para 39, Sample items should be selected in such a way that the sample can be expected to be representative of the population. Therefore, all items in the population should have an opportunity to be selected. Random-based selection of items represents one means of obtaining such samples. Ideally, the auditor should use a selection method that has the potential for selecting items from the entire period under audit.

If the total projected misstatement is close to the tolerable misstatement, the auditor may conclude that there is an unacceptably high risk that the actual misstatements in the population exceed the tolerable misstatement.

Conclusion: First of all, sampling chooses by Raymond is almost 60% that cover majority of the sample part. On the other hand, Actual misstatement is less than tolerable once so we can conclude it immaterial.

Case 2

The auditor may attend the stock-taking. The auditor should also satisfy himself that the discrepancies found during physical verification are appropriately dealt with and timely action is taken to prevent such occurrences in the future.

Conclusion: In this case, Auditor discovered 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. These error should be adjusted in current year inventory.