(a) Headings: accounts payable and accrued expenditure
Whilst there are a great number of possible headings for accounts payable and accrued expenditure, the seven headings below seem likely:
Food and beverages;
Payroll;
Cleaning;
Maintenance of properties;
Waste disposal;
Light, heat, water and other utilities;
Business and other local taxes.
(b) Audit tests and reasons: accounts payable and accrued expenditure
General
The firm would first obtain an understanding of the business, including reviewing management
and financial accounts, in order to enable the firm to make some predictions as to the
likely relationships between items of financial and non financial data. There are likely to be
direct relationships that do not vary such as gross margins, and income and expenditure.
These relationships may be applied to each restaurant and to the company as a whole.
Understanding the business is important because it is the firm’s first year as auditor and
because it enables the auditor to properly plan tests, and evaluate the results thereof.
Tests of controls would be performed on expenditure under each heading to enable the firm
to determine the level of substantive procedures required at the year-end.
Analytical procedures would be applied to each heading, both for the company as a whole,
for regions and for individual restaurants if necessary. This would establish the level of
expenditure, and the level of accounts payable and accruals in the prior year and for each
period within the current year for which figures were available. Any unusual items would be
investigated and explanations sought and substantiated. Analytical procedures are useful
in the planning of audit tests to establish areas to which greater audit resources need to be
devoted.
Food, payroll, cleaning, maintenance of properties
I n all cases, substantive procedures would involve tracing source documentation created by
the company (such as purchase orders for food, contracts with the cleaning and maintenance
agencies and clock cards or timesheets) through the system (via goods received notes, signed
documentation indicating that services had been performed, etc.) to daybooks, ledgers and
control accounts and finally to schedules supporting the financial statements. This type of
test helps provide audit comfort that accounts payable and accruals are complete, correctly
calculated, properly authorized and recorded in the correct accounting period.
Substantive procedures tracing entries in the financial statements back to supporting
schedules, entries in the ledgers, control accounts and daybooks through to source
documentation help provide audit comfort that accounts payable and accruals exist are
properly authorized and recorded in the correct accounting period.
Substantive procedures may also involve direct confirmation of accounts payable, although
if suppliers send regular statements this may not be necessary. Such confirmations and
statements provide the auditor with valuable third party, written evidence that is generated
outside the company, showing the existence, accuracy and proper recording of accounts
payable.
After-date payment of both accounts payable and accruals also provides evidence of the
existence and accuracy of accounts payable and accrued expenditure.
Cut-off tests (checking samples of invoices for food received just before and just after the
year-end to goods received notes, purchase invoices and records of inventory counts, for
example) help ensure that expenditure and the related accounts payable and accruals are
recorded in the correct accounting period.
For many such items, there may be accrued expenditure. Tests for accrued expenditure will
be similar to those noted under the following heading.
Waste disposal, light, heat, water and other utilities and business and other local taxes
These items are less likely to have source documentation created by the company than
those noted above. They are also more likely to be billed or invoiced less frequently than
those noted above and there are likely to be more accruals for such items.
Accrued expenditure is an accounting estimate based on previous experience. Analytical
procedures such as those noted above form a large part of the checking of accrued
expenditure.
The firm should establish the basis on which accrued expenditure is calculated to ensure
that it appears reasonable and consistent with prior periods, and check the actual calculation
of the expenditure (possibly on a sample basis).
Checking accrued expenditure to invoices or bills received after the year-end and to payments
after the year-end provides evidence as to the correct calculation of accruals.
Wilfykil answered the question on April 12, 2019 at 10:29
- Explain the difficulties faced by auditors, and the decisions that auditors have to make, in conducting direct confirmations of accounts payable.(Solved)
Explain the difficulties faced by auditors, and the decisions that auditors have to make, in conducting direct confirmations of accounts payable.
Date posted: April 12, 2019. Answers (1)
- The external audit process for the audit of large entities generally involves two or more recognizable
stages. One stage involves understanding the business and risk assessment,...(Solved)
The external audit process for the audit of large entities generally involves two or more recognizable
stages. One stage involves understanding the business and risk assessment, determining the
response to assessed risk, testing of controls and a limited amount of substantive procedures.
This stage is sometimes known as the interim audit. Another stage involves further tests of
controls and substantive procedures and audit finalization procedures. This stage is sometimes
known as the final audit.
Describe and explain the main audit procedures and processes that take place during the interim
and final audit of a large entity.
Date posted: April 12, 2019. Answers (1)
- Explain whether the following types of audit evidence meets the standards of relevancy,
reliability and sufficiency as required by the auditor’s operational standards regarding:
• Written confirmation...(Solved)
Explain whether the following types of audit evidence meets the standards of relevancy,
reliability and sufficiency as required by the auditor’s operational standards regarding:
• Written confirmation of a trade debtor circularized at year end
• Work-in-progress stocks identified during the annual physical stock count
• Solicitor’s letter confirming pending legal action
Date posted: April 12, 2019. Answers (1)
- Explain the meaning of the following terms;
• Relevant audit evidence
• Reliable audit evidence(Solved)
Explain the meaning of the following terms;
• Relevant audit evidence
• Reliable audit evidence
Date posted: April 12, 2019. Answers (1)
- Compare the responsibilities of the directors and auditors regarding the published financial statements(Solved)
Compare the responsibilities of the directors and auditors regarding the published financial statements
Date posted: April 12, 2019. Answers (1)
- The responsibilities of internal and external auditors in relation to the risk of fraud and error differ.(Solved)
The responsibilities of internal and external auditors in relation to the risk of fraud and error differ.
Explain the responsibilities of external auditors in respect of the risk of fraud and error in an audit
of financial statements
Date posted: April 12, 2019. Answers (1)
- Stone Holidays is an independent travel agency. It does not operate holidays itself. It takes commission on holidays sold to customers through its chain of...(Solved)
Stone Holidays is an independent travel agency. It does not operate holidays itself. It takes commission on holidays sold to customers through its chain of high street shops. Staff are partly paid on a commission basis. Well-established tour operators run the holidays that Stone Holidays sells. The networked reservations system through which holidays are booked and the computerised accounting system are both well-established systems used by many independent travel agencies. Payments by customers, including deposits, are accepted in cash and by debit and credit card. Stone Holidays is legally required to pay an amount of money (based on its total sales for the year) into a central fund maintained to compensate customers if the agency should cease operations.
Describe the nature of the risks to which Stone Holidays is subject arising from fraud and error.
Date posted: April 12, 2019. Answers (1)
- Fraud and error present risks to an entity. Both internal and external auditors are required to deal
with risks to the entity.(Solved)
Fraud and error present risks to an entity. Both internal and external auditors are required to deal
with risks to the entity.
Required:
Explain how the internal audit function helps an entity deal with the risk of fraud and error.
Date posted: April 12, 2019. Answers (1)
- You are the audit manager for Parker, a limited liability company which sells books, CDs, DVDs
and similar items via two divisions: mail order and on-line...(Solved)
You are the audit manager for Parker, a limited liability company which sells books, CDs, DVDs
and similar items via two divisions: mail order and on-line ordering on the Internet. Parker is a
new audit client. You are commencing the planning of the audit for the year-ended 31 May 2005.
An initial meeting with the directors has provided the information below.
The company’s turnover is in excess of Kshs85 million with net profits of Kshs4 million. All profits
are currently earned in the mail order division, although the Internet division is expected to return
a small net profit next year. Turnover is growing at the rate of 20% p.a. Net profit has remained
almost the same for the last four years. In the next year, the directors plan to expand the range of
goods sold through the Internet division to include toys, garden furniture and fashion clothes. The
directors believe that when one product has been sold on the Internet, then any other product
can be as well.
The accounting system to record sales by the mail order division is relatively old. It relies on
extensive manual input to transfer orders received in the post onto Parker’s computer systems.
Recently errors have been known to occur, in the input of orders, and in the invoicing of goods
following dispatch. The directors maintain that the accounting system produces materially
correct figures and they cannot waste time in identifying relatively minor errors. The company
accountant, who is not qualified and was appointed because he is a personal friend of the
directors, agrees with this view, The directors estimate that their expansion plans will require a
bank loan of approximately Kshs30 million, partly to finance the enhanced web site but also to
provide working capital to increase inventory levels. A meeting with the bank has been scheduled
for three months after the year end. The directors expect an unmodified auditor’s report to be
signed prior to this time.
Required:
Identify and describe the matters that give rise to audit risks associated with Parker .
Date posted: April 12, 2019. Answers (1)
- Ajio is a charity whose constitution requires that it raises funds for educational projects. These
projects seek to educate children and support teachers in certain countries(Solved)
Ajio is a charity whose constitution requires that it raises funds for educational projects. These
projects seek to educate children and support teachers in certain countries. Charities in the
country from which Ajio operates have recently become subject to new audit and accounting
regulations. Charity income consists of cash collections at fund raising events, telephone
appeals, and bequests (money left to the charity by deceased persons). The charity is small
and the trustees do not consider that the charity can afford to employ a qualified accountant.
The charity employs a part-time bookkeeper and relies on volunteers for fund raising. Your firm
has been appointed as accountants and auditors to this charity because of the new regulations.
Accounts have been prepared (but not audited) in the past by a volunteer who is a recently
retired Chartered Certified Accountant.
Required:
Describe the risks associated with the audit of Ajio under the headings inherent risk, control risk and detection risk and explain the implications of these risks for overall audit risk
Date posted: April 12, 2019. Answers (1)
- List and explain the audit tests to be performed on income and expenditure from fund raising events.(Solved)
List and explain the audit tests to be performed on income and expenditure from fund raising events.
Date posted: April 12, 2019. Answers (1)
- ISA 400 (Risk Assessments and Internal Control) deals with internal control objectives and
internal controls. ISA 500 (Audit Evidence) deals with audit objectives and audit procedures....(Solved)
ISA 400 (Risk Assessments and Internal Control) deals with internal control objectives and
internal controls. ISA 500 (Audit Evidence) deals with audit objectives and audit procedures. A
proper understanding of internal controls is essential to auditors in order that they understand the
business and are able to effectively plan and execute tests of controls and an appropriate level
of substantive procedures.
You are the auditor of a small manufacturing company, Dinko, that pays its staff in cash and by
bank transfer and maintains its payroll on a small stand-alone computer.
Required:
(a) For the payroll department at Dinko, describe the:
i. Internal control objectives that should be in place.
ii. Internal control environment and internal control procedures that should be in place to achieve the internal control objectives.
(b) For the payroll charges and payroll balances (including cash) in the financial statements of Dinko:
i. Describe the external auditor audit objectives.
ii. List the tests of control and substantive procedures that will be applied in order to achieve the audit objectives identified in (b) (i) above.
Date posted: April 12, 2019. Answers (1)
- Rhapsody Co supplies a wide range of garden and agricultural products to trade and domestic
customers. The company has 11 divisions, with each division specializing in...(Solved)
Rhapsody Co supplies a wide range of garden and agricultural products to trade and domestic
customers. The company has 11 divisions, with each division specializing in the sale of specific
products, for example, seeds, garden furniture, and agricultural fertilizers. The company has an
internal audit department which provides audit reports to the audit committee on each division
on a rotational basis.
Products in the seed division are offered for sale to domestic customers via an Internet site.
Customers review the product list on the Internet and place orders for packets of seeds using
specific product codes, along with their credit card details, onto Rhapsody Co’s secure server.
Order quantities are normally between one and three packets for each type of seed. Order details
are transferred manually onto the company’s internal inventory control and sales system, and
a two part packing list is printed in the seed warehouse. Each order and packing list is given a
random alphabetical code based on the name of the employee inputting the order, the date, and
the products being ordered.
In the seed warehouse, the packets of seeds for each order are taken from specific bins and
dispatched to the customer with one copy of the packing list. The second copy of the packing list
is sent to the accounts department where the inventory and sales computer is updated to show
that the order has been dispatched. The customer’s credit card is then charged by the inventory
control and sales computer. Bad debts in Rhapsody are currently 3% of total sales.
Finally, the computer system checks that for each charge made to a customer’s credit card
account, the order details are on file to prove that the charge was made correctly. The order file
is marked as completed confirming that the order has been dispatched and payment obtained.
Required:
a) In respect of sales in the seeds division of Rhapsody Co, prepare a report to be sent to the
audit committee of Rhapsody Co which:
i. Identifies and explains four weaknesses in that sales system.
ii. Explains the possible effect of each weakness.
iii. Provides a recommendation to alleviate each weakness.
Date posted: April 12, 2019. Answers (1)
- List down internal control procedures for raw material purchasing system of a large manufacturing firm(Solved)
List down internal control procedures for raw material purchasing system of a large manufacturing firm
Date posted: April 12, 2019. Answers (1)
- The time is now towards the end of the audit, and you are reviewing working papers produced by the audit team. An example of a...(Solved)
The time is now towards the end of the audit, and you are reviewing working papers produced by the audit team. An example of a working paper you have just reviewed is shown below.
Client Name Specs4You Co
Working paper Payables transaction testing
Year end 30 April 2007
Prepared by ……………………..
Reviewed by ……………………
Audit assertion: To make sure that the purchases day book is correct.
Method: Select a sample of 15 purchase orders recorded in the purchase order system. Trace
details to the goods received note (GRN), purchase invoice (PI) and the purchase day book
(PDB) ensuring that the quantities and prices recorded on the purchase order match those on
the GRN, PI and PDB.
Test details: In accordance with audit risk, a sample of purchase orders were selected from
a numerically sequenced purchase order system and details traced as stated in the method.
Details of items tested can be found on another working paper.
Results: Details of purchase orders were normally correctly recorded through the system. Five
purchase orders did not have any associated GRN, PI and were not recorded in the PDB.
Further investigation showed that these orders had been cancelled due to a change in spectacle
specification. However, this does not appear to be a system weakness as the internal controls do
not allow for changes in specification.
Conclusion: Purchase orders are completely recorded in the purchase day book.
Required:
Explain why the working paper shown above does not meet the standards normally expected of
a working paper.
Date posted: April 12, 2019. Answers (1)
- You are an audit senior responsible for understanding the entity and its environment and assessing
the risk of material misstatements for the audit of Rock for...(Solved)
You are an audit senior responsible for understanding the entity and its environment and assessing
the risk of material misstatements for the audit of Rock for the year ending 31 December 2004.
Rock is a company listed on a stock exchange. Rock is engaged in the wholesale import,
manufacture and distribution of basic cosmetics and toiletries for sale to a wide range of stores,
under a variety of different brand names. You have worked on the audit of this client for several
years as an audit junior.
Required:
Describe the information you will seek, and procedures you will perform in order to understand the entity and its environment and assess risk for the audit of Rock for the year ending 31 December 2004.
Date posted: April 12, 2019. Answers (1)
- Discuss on features of audit working papers(Solved)
Discuss on features of audit working papers
Date posted: April 12, 2019. Answers (1)
- Explain the following controlling procedures in a well planned audit:
• Direction and supervision of work
• Review and co-coordination of work
• Quality controls(Solved)
Explain the following controlling procedures in a well planned audit:
• Direction and supervision of work
• Review and co-coordination of work
• Quality controls
Date posted: April 12, 2019. Answers (1)
- You are an audit manager in McKay & Co, a firm of Chartered Certified Accountants. You are preparing the engagement letter for the audit of...(Solved)
You are an audit manager in McKay & Co, a firm of Chartered Certified Accountants. You are preparing the engagement letter for the audit of Ancients; a public limited liability company, for the year ending 30 June 2006.Ancients has grown rapidly over the past few years, and is now one of your firm’s most important clients. Ancients has been an audit client for eight years and McKay & Co has provided audit, taxation and management consultancy advice during this time. The client has been satisfied with the services provided, although the taxation fee for the period to 31 December 2005 remains unpaid. Audit personnel available for this year’s audit are most of the staff from last year, including Mr. Grace, an audit partner and Mr. Jones, an audit senior. Mr. Grace has been the audit partner since Ancients became an audit client. You are aware that Allyson Grace, the daughter of Mr. Grace, has recently been appointed the financial director at Ancients. To celebrate her new appointment, Allyson has suggested taking all of the audit staff out to an expensive restaurant prior to the start of the audit work for this year.
Required:
Identify and explain the risks to independence arising in carrying out your audit of Ancients for the
year ending 30 June 2006, and suggest ways of mitigating each of the risks you identify.
Date posted: April 12, 2019. Answers (1)
- Explain the situations where an auditor may disclose confidential information about a client.(Solved)
Explain the situations where an auditor may disclose confidential information about a client.
Date posted: April 12, 2019. Answers (1)