Question

Your firm is the external auditor of Southwood Trading Ltd and you are auditing the financial statements for the year ended 30^th June 2016. Southwood Trading has a turnover of $25 million and trade debtors at 30^th June 2009 were $5.2million.

The engagement partner has asked you to consider the relative reliability of evidence from third parties and certain matters relating to a debtor’s circularization.

In relation to requirement b)(ii) below , the partners has explained that judgment would be used to select debtors that appear doubtful and those that would not be selected using the dollar unit sampling technique described in requirements b) (i).

Required;

a)      Consider the relative reliability of the following types of evidence from third parties;

i)       Replies to a debtor’s circularization to confirm trade debtors.

ii)      Supplier’s statements to confirm purchases ledger balances.

b) In relations to selecting debtors for circularization;

i)      Explain the use of monetary unit sampling in selecting debtors to circularize.

ii)     Consider the criteria you would use to select individual debtors for circularization using judgment.

iii)     Describe the additional audit procedures you believe should be formed to ensure that payroll is fairly stated.

Answer 1

Relative reliability of following third-party evidence:

Replies to a debtor’s circularization to confirm trade debtors:

It is a general rule that the reliability of evidence is increased when it is obtained outside of the firm and that too without any indirect connection of the client in between. Therefore, it can be said that replies to confirm trade debtors are relatively reliable.

Statements from suppliers to confirm purchase balances

The above rule also applies here, as the statements are obtained from external sources. However, if the statements are not completely independent in that case, their reliability is unsure for external auditor.

Monetary unit sampling

This is quite common sense that high monetary transaction with any third party whether it is a supplier or a customer is always prone to risk. Also, while choosing a sample, it is important to balance the selection with a proper monetary unit so that the sample selected properly presents the population of data

Criteria for selecting the debtors for circulation

• Amount of transactions
• Frequency of transactions
• Year-end transactions
• High Value but infrequent transactions
• Long credit is given
• Unpaid more than 90 days