Question

AUDITING

(a). Discuss the first stage of the audit sampling process, namely ' designing the sample'.

(b) Discuss the audit procedures to follow to audit capital expenditures.

(c) Discuss the analytical review procedures for wages paid.

(d) Discuss the essential elements to a good physical control over stock

(e) Discuss the audit enquiry and tests for:

 Raw materials;

 Production; and

 finished goods.

Answer 1

(a) The first stage in the Audit Sampling Process is the 'Designing the Sample''-When Designing the audit sample,the auditor  shall consider the purpose of the audit procedure and the characteristics of the population from which the sample will be drawn.If the population is uneven stratification kind of techniques will be required for random selection.Sample should be design in such a way that all sampling units have a chance of selection in order to provide the auditor with a reasonable basis on which to draw conclusions about the entire population.

(B) Audit Procedure for Audit of Capital Expenditure:
1. The procedure should start with the verification of opening balance of Capital Asset on which Capital Expenditure is incurred by the audited statement of previous year,If in previous year it exists.
2.The auditor should physical verify the asset on which capital expenditure is incurred, if it is an tangible asset.

3.Auditor should check the ownership of capital asset through various supporting documents i.e,Invoice,Fixed Asset Register, agreement of lease(if taken on lease),whether the asset is on charge or not by inspecting register of charges,

4. Verify the details of expenditure capitalized upto a period when asset is ready to put to use.

(C) Analytical Review Procedure for Wages paid.
1. Auditor should check the HR policy of the organisation regarding the payment of wages and it calculation.
2. Few items of deductions such as provident fund, insurance, advance, etc. should be checked as to whether they have been properly adjusted and recorded in the books.
3. Wages for the current month should be compared with the wages of previous months. In case of any increase in wages, he should enquire into the reason for such increase.
4.Total wages sheets should be checked with cash book and ensure that the cashier had withdrawn the exact amount that is required to pay net wages and deposit the amount payable to the provident fund, employees state insurance department, etc. to the relevant accounts.
5.The signatures of the workers of two or three periods should be compared to examine their genuineness. Normally, test checking is adopted for this purpose.

(D) Element for physical control over stock
1. Minimum stock level - you identify a minimum stock level, and re-order when stock reaches that level. This is known as the Re-order Level.

2.Stock review - you have regular reviews of stock. At every review you place an order to return stocks to a predetermined level.

3.Just In Time (JIT) purchase -It aims to reduce costs by cutting stock to a minimum.Items are delivered when they are needed and used immediately.This will reduce the inventory holding cost.

4. Re-order lead time - allows for the time between placing an order and receiving it.

5. Economic Order Quantity (EOQ) - a standard formula used to arrive at a balance between holding too much or too little stock. This is the minimum level of stock to be ordered for keeping ordering and inventory holding cost to its minimum.

6. Batch control - managing the production of goods in batches. It is to make sure that entity have the right number of components to cover the needs until the next batch.

7. First in, first out - a system to ensure that perishable stock is used efficiently so that it doesn't deteriorate. Stock is identified by date received and moves on through each stage of production in strict order.