Question

You are the audit senior at East & West and are conducting the audit of Relaxing Pool Ltd for the year ended 30 June 2018. Relaxing Pool retails spa pools and has stores across Australia.

The audit assistant, John Cummins, has carried out tests of controls over payroll. An extract from his audit working papers is as follows:

• The tolerable rate of deviation for this test, as per the audit plan, is 5 per cent.
• Twenty-four employee’s pays were selected from the weekly payroll reports (two per month) and tests performed as per the audit plan.
• Two immaterial errors were found.
• These errors were discussed with the client, who corrected them based on information provided by audit staff.

As the errors were immaterial (less than $30 each) and subsequently corrected, payroll controls are working satisfactorily and there is sufficient appropriate audit evidence to rely upon them.

Required

• Identify three reasons why the audit assistant’s conclusion is incorrect
• State the correct conclusion the audit assistant should have reached

Answer 1

Levels of materiality for the audit plan:

1. Materiality is defined at 3 levels at Planning Level, Performing Level & at Conclusion Level.
2. During Planning, we set “Performance Materiality” Level to ensure “Tolerable Error”
3. During Performance Level, If there are misstatements above “Performance Materiality” then, the auditor will extent Nature, Timings & Extent of Audit Procedures to ensure whether the misstatements are upto “Tolerable Error” or upto “Actual Materiality Level”.
4. At the time of Conclusion, "Overall Materiality" is ensured considering the impact of Misstatement.
5. “Actual Materiality Level” is assessed after the assessment of Internal Control considering Nature of Business & Volume of Transactions.

In a given problem, a test of controls over payroll & carried out based on which Performance Materiality Level is ensured at 5%.

During the performance of the audit, when 2 Errors found out of 24 Samples i.e 5%.

But,

• No Performance Materiality Level was revised,
• the auditor had not extended his Nature, Timings & Extent of Audit Procedures
• Auditor has not ensured whether the misstatements are upto “Tolerable Error” or upto “Actual Materiality Level”
• No attempt was made to enquire the reason for the failure of Payroll Controls.
• "Test of Details" not performed to obtain audit evidence.
• Checking for Effectiveness & Efficiency of Internal Controls to be done considering the misstatement.

Hence, auditors should collect sufficient & appropriate audit evidence to controls are working satisfactorily. So, he should conclude that controls are not effective enough to highlight the misstatement.