Question

Magi Chen is the managing director of Sun Construction Pty Ltd, a family owned business that provides construction services. As Magi is interested in purchasing some new construction equipment’s for her business, she has approached her local bank for finance. The bank has asked that Magi provide an audited financial statement to assist them in considering her loan application. Magi has approached your audit firm for this service and you have been allocated the task of auditing Sun Construction for the year ended 30 June 2019. You have undertaken a preliminary review of the business and determined that a substantive testing approach would be suitable and appropriate. You are currently preparing an audit program for the revenue cycle. The following information has been obtained from your review: • Magi usually works 120 hours a fortnight. Part of this time is spent travelling between different clients and is not charged to the clients. The remaining time is charged at $60 per hour, regardless of the task undertaken. • Customers typically pay Magi in cash for the work undertaken, except for a small number of regular small-business customers. Magi allows these customers to pay on account by bank transfer on a monthly basis. • Magi supplies each cash customer with a written receipt, prepared manually from a receipt book purchased at the local news-agency. The book contains pre-numbered blank receipts, which are completed in duplicate. Required: For each of the assertions of occurrence, completeness and accuracy, identify a procedure(s) you could use to audit Sun Construction's revenue.

Answer 1

Audit here is for a construction company where existing internal control has been asserted to be weak and hence substantive procedure has been sought as audit procedure for the audit to be carried out.

Main source of revenue of the company is from its construction activities charged @$60 from its customers as per hours worked irrespective of task completed and travelling time is excluded from this .

Audit procedure for assertion of occurrence, completeness and accuracy are as follows:

1. Occurence for revenue recognition occurs on two different ways one being in cash and other bank transfer directly to bank account .

Completeness and accuracy for the bank collection is well and good as sufficient and appropriate audit evidence for the collection made can easily be known from bank statement and balance confirmation of the bank.There is a little chance of fraud or any material misstatements in this case.However , as a substantive procedure ,the basis for collection of revenue and all terms are appropriately used and the calculation made are correct or not has to be checked briefly using sample technique.

For the cash collection, a cross verification of the pre numbered bill book is required to know whether the reciept issued are in proper manner or not .Further, whether there is seggregation in duties for collection, management and deposit of cash in the company or not.If a same person carries all this task, substantive procedure has to be followed to check accuracy and check for manipulation of amount recieved and voucher isssued very carefully.Further , whether cash collected are deposited in Bank account periodically or not ,has to be checked properly.