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(a) and( b)
i) The audit assistant has used a flow chart to document his understanding of the accounting and internal control system over the company‘s procedure. This is an important step in the audit because it assists in building the auditor‘s understanding of the system. The test of controls are carried out where the auditor wishes to rely on some of the controls to reduce the level of substantive testing to be carried out on the payroll expenses. The results of the test of controls are therefore important to support the level of substantive testing that the audit assistant has planned to carry out and ultimately to support his conclusion on whether there is any misstatement in the payroll expenses. This evidence is reliable because it has been prepared by the auditor and is in writing.
(ii) The statement provides evidence as to the appropriateness of the depreciation policy adopted by management. This would be necessary to inquire further the reasons behind the choice of ten years as the expected useful life and where possible to get this in writing. Further evidence could be obtained by considering the useful lives of similar items of plant in the past or consulting trade journals, which may detail the relevant information. If the depreciation policy adopted is considered reasonable then the auditor should re-compute the depreciation charge for the year as a test for completeness and accuracy of what the client has provided for. To make the oral representation from management more reliable the auditor should seek to obtain other information to corroborate what the directors have indicated
(iii) The letter provides evidence that the company will be able to access credit facilities in the next foreseeable future and therefore mitigate any factors that could be raising questions as to the going concern of the company. As the evidence is from a source external to the company, it is reliable but would be more so if the letter had been sent direct to the auditors.
(iv) Attendance at a clients stock-take and performance of test counts provide evidence as to the existence of stock and whether the stock take was properly conducted and the whether the results can be relied upon. As the evidence was documentary, prepared by a member of the audit firm, and is based on physical inspection, it is very reliable. The items counted should be agreed to the final stock valuation by the client to confirm the completeness and accuracy of the stock valuation.
(v) Direct confirmation from a debtor provides reliable evidence as to the existence and accuracy of the debtors figures included in the balance sheet as the evidence is documentary, and from a source external to the company. To further support the evidence, the receipt of cash from the debtor, after the year end could be checked.
Wilfykil answered the question on February 21, 2019 at 11:43
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