Question

Question 1

Consider each of the following situations:

1. One of the mitigating controls that you wish to rely on is that any increases in credit limits are authorised by the financial controller. The audit assistant checks the company’s policy manual and notes that this control procedure is required. He concludes that the control is operating effectively and can be relied on.

2. A test of controls of 48 sales transactions was undertaken which resulted in four errors. The working papers noted that none of the errors found was material and the conclusion from conducting the test was that: ‘the system is operating satisfactorily’.

3. Trade payables is a material balance sheet account comprising 20 large and 200 small creditors. Your client presented the audit assistant with a list of creditors making up the balance shown in the trade payables control account in the general ledger. In your absence the audit assistant decided to utilise a judgemental sampling technique to test these creditors. The only procedure the audit assistant used was to randomly select 30 creditors from listing. These were traced to reconciled creditors’ statements.

4. SJO Pty Limited (SJO) is currently in dispute with the taxation authorities. This year an assessment was issued by the taxation authorities requiring the company to pay an additional $150,000 in taxes. SJO believes that the basis for the assessment was incorrect and inappropriate. Notwithstanding this, it paid the $150,000 to the taxation authorities under protest and lodged a formal objection against the assessment. SJO is carrying forward the $150,000 paid as an ‘other receivable’ in its year-end financial report. The audit assistant has verified this other receivable by agreeing it to the cash payments books and the bank statement.

Required:

You are the audit senior and have been presented with the above information by the audit assistant (a new graduate). In each of the above situations, explain why the audit assistant has not obtained sufficient appropriate audit evidence or has concluded incorrectly.              

                                                                                                                                    (4 situations*2= 8 marks)

Answer 1

Situation 1

Any increase in credit limit should be authorised by Financial Controller. Here the audit assistant has not concluded the situation correctly by only walking through the company's policy since he requires to check whether any increase in credit limit involves any misrepresentation of facts or involves any other fraud by other party which might benefits to certain section of people in the company or vice a versa. he is required to check whether the increase in limit is genuine or not by randomly walking through the procedure such as

• companies contract with other party
• total supplies made during the year
• whether the previous dues are cleared on time or not etc.

and thus should conclude that the control is operating effectively by obtaining sufficient appropriate audit evidences.

Situation 2

A test of controls which resulted in certain errors can only be avoided if it involves

• Data Entry error
• Lack of documentation procedure
• reconciliation errors etc

thus, the audit assistant was required to obtain sufficient appropriate audit evidences to support the errors detected during test of control. Any discrepencies should be reported, need to be discussed and should be corrected on timely basis before coming to any conclusion.

Situation 3

The methodology requires for samplimg depands on the type of analysis to be performed which includes random sampling or systematic sampling. Here, the group of 20 large creditors should be checked seperately taking into consideration the materiality point of view by obtaining the balance confirmation from all parties and then confirming the same from ledgers of the company and reconcilations.

Thus the audit assistant should have done systematic sampling for large creditors and random sampling for 200 small creditors for giving a true and a fair view of the representation of facts.

Situation 4

Contingent Asset not knowing whether these gain will materialize or not able to determine the correct economic value cannot be recorded on the balancesheet. Thus they are required to be reported in the acccompanying notes to account in the financial statement. It become a realised asset when the realization of cash flows become certain.

Since here in the above situation it has still not become as realised asset it cannot be recorded in other recievable of the balancesheet and should be recorded as contigent asset and should be reported in the notes to account accompanying financial statement thus audit assistant has failed to conclude it significantly.