Question

Q7 Consider each of the following independent situations. Situation 1: As part of your audit of Case Ltd, a manufacturer of outdoor furniture, you attended their stock take. At the stocktake, you made a note of the final sales invoice numbers and checked to ensure that inventory sold (as per the invoice) was not included in the final year balance. Subsequently, when you performed your yearend review of sales you found sales invoice numbers after the numbers you noted for the stocktake. Situation 2: During your audit of Plug Ltd you were reviewing accounts payable. You noted that many cash payments for creditors were being made as many as 5 months after the due date. You are now testing the payables balance in order to form an opinion on the balance for the year-end. Situation 3: Bryer Ltd is a manufacturer of a range of soft drinks sold throughout Australia. While the auditor was finalizing their assessment of the value of accounts payable, she noticed that there were no outstanding invoices from one of the major sugar suppliers to Bryer Ltd. At the end of the previous year, the amount owed to this supplier constituted the bulk of the accounts payable balance. Required: For each of the above three (3) ‘Situations’: Identify and justify the financial statement assertions that are at risk; AND outline the audit procedures that can be used to gather sufficient and appropriate evidence about these assertions. In the answer below, please write the letter followed by your answer. Eg. (situation 1) Your answer (situation 2) Your answer

Answer 1

Situation 1

Stock Audit refers to physical verification of entity's inventory. While conducting the stock audit, an auditor is required to perform adequate audit procedures in order to obtain sufficient appropriate audit evidence regarding the sales and purchases made by the entity during the year. For this, auditor needs to vouch and verify invoices raised by the entiy to the other parties. He can also obtain external confirmations from the outer parties indulged in the transations with the entity.

It came to the notice of the auditor that inventory sold (as per the invoice) was not included in the final year balance. This results in decrease in profits of the company. Company is required to include all the invoices in the books in order to reflect correct figures of sales and profits during the year.

Subsequently, additional number of invoices of the same financial year appeared before the auditor is also required to be adjusted in the books. Non-adjustment of the same would lead to incorrect representation of inventory. Invetory will be decreased and sales will be increased. Further if management refuse to make such adjustments then auditor should qualify the audit report.

Situation 2

Payments to the creditors after the due date may cast a significant doubt on the enity's cash flow positions. It means company may have negative cash flow position which may also cast doubt on the going concern assumption of the company. Auditor must evaluate the quantum of delayed amount of account payable in order to ascertain its impact in the financial statements as a whole.

Audit procedures: Third party confirmation is required in order to verify the closing balaces and the transactions made during the year between the party and the entity. In respect of cash payments, auditor shall evaluate the authenticity of the transactions by vouching the vouchers made and signed by the due authority..

Situation 3

No outstanding invoices from one of the major sugar suppliers to Bryer Ltd can be due to several reasons. Auditor should ask the reasons for the same from the management. She should obtain written representations from the management in order to satisfy herself and to form an opinion based on those evidences. Confirmations from the suppliers is also required. Auditor can find from which party now the materials are obtained Bryer Ltd.