Question

You are reviewing your audit assistant’s work for Al hukkaire Pty Ltd for the year ended 30 June 2019, and note the following matters:

• Your audit assistant undertook a test of controls for 50 sales transactions. This test resulted in three errors. When planning the test, a tolerable error of 5 per cent had been established. The audit assistant’s working papers noted that none of the errors found were materials, either individually or in aggregate, and she therefore concluded that the controls were reliable.
• Your audit assistant’s working papers on the accounts payable testing contain the following notes and conclusion:

1. In order to test accounts payable, I selected all balances over $100,000 and vouched these to supporting invoices. The sample selected comprised $2,565,650 of total accounts payable of $5,168,000. One invoice for $102,500 had been incorrectly recorded on the accounts payable listing, as the goods were not actually received until after year end.
2. Given the error relates to only 4% of accounts payable tested, which would be a total error of $206,702 of the overall accounts payable balance, it is not material as this is less than the materiality level set for this audit and, therefore, no further work has been performed. I am satisfied that the accounts payable balance of Alhukaire is fairly stated.

Required:

Comment on the appropriateness of your audit assistant’s conclusions in each of the above situations.

Answer 1

The Audit Assistant undertook analytical test for fifty sales transaction and she found three error. She concluded that none of such error was material and hence concluded that the internal controls were trustable. Since the auditor found three errors out of 50 transaction which means error was 6% i.e. (3*100/50). The tolerable error was 5% and thus the error occurred was 1% higher than the tolerable error. Still, the auditor concluded such controls are trustable which lead to a fault or error in the audit conducted. Since the error was higher than tolerable error, the auditor should perform this procedure on other sample to ensure that the error was immaterial and then she should conclude that the control was reliable. It causes high detection risk and for reducing such risk, auditor should perform more test.

Thus, in my opinion, the auditor doesn’t test the observations correctly. She has also not performed any test to check internal controls but only perform control test. She should perform both analytical and substantive test to ensure that the risk remain low at all times during audit.