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(i) Four examples of external confirmations are:
•• Accounts receivable letter
•• Solicitor letter
•• Bank report letter
•• Inventory held by third parties.
(ii)
Accounts receivable letter
•• This letter provides evidence of the existence of the receivable when a reply is returned
from that receivable direct to the auditor.
•• The letter provides evidence on cut-off because sales or cash receipts recorded in the
incorrect accounting period will have to be reconciled to the balance provided by the
receivable.
•• The letter does not provide evidence of completeness of the receivables balance
because receivables may not query balances which are understated.
•• The letter does not provide evidence of the valuation of the receivables balance because
the receivable cannot be expected to list all outstanding balances and confirmation of
the debt does not mean it will be paid.
Solicitor letter
A solicitor letter provides evidence as to the existence of claims at the period end as the
solicitor will confirm specific claims.
However, the letter does not necessarily confirm the valuation of claims due to uncertainty
about the future or the completeness of any legal claims as solicitors do not normally provide
a list of all claims but they prefer to comment only on claims they are actually asked about.
Bank report letter
A bank confirmation letter provides good evidence on the existence of the company’s bank
accounts as the bank has confirmed this information in writing.
A bank letter cannot necessarily be relied on to provide complete or accurate information.
Most banks place a disclaimer on the letter of ‘errors and omissions exempted’ indicating
that the auditor must review this evidence against other cash and bank evidence obtained.
Inventory held by third parties
A letter from the third party holding the inventory will provide evidence of the existence of
that inventory because the third party has confirmed this in writing.
However, the letter does not provide evidence regarding the valuation of the inventory;
confirming something exists does not necessarily mean it is in good condition.
Wilfykil answered the question on April 13, 2019 at 07:33
- IAS 2 ‘Inventories’ requires that inventories are measured at the lower of cost and net realizable value.(Solved)
IAS 2 ‘Inventories’ requires that inventories are measured at the lower of cost and net realizable value.
Required:
(a) Explain why the audit of inventory is important to auditors.
(b) Define ‘cost’ and ‘net realizable value’ according to IAS 2 ‘Inventories’.
(c) Describe the audit evidence that you would obtain for the cost and net realizable value
of finished inventory in a company that manufactures household furniture.
Date posted: April 13, 2019. Answers (1)
- You have been asked by the manager in charge of the audit of Timab agencies to consider and describe various aspects of carrying out a...(Solved)
You have been asked by the manager in charge of the audit of Timab agencies to consider
and describe various aspects of carrying out a debtor’s circularization at its year ending 31st
December 2006. The company sells its products on credit and the draft accounts show annual
turnover of twenty five million shillings. The accounts also show debtors of five million shillings.
Your compliance test on the sales system has shown that there is only satisfactory division of
duties in the sales system and only minor errors were found in compliance tests.
Required
a. Consider the reliability of a debtor’s circularization in providing audit evidence and in
verifying value of year end debtors.
b. Describe the work you will carry out in auditing the replies to debtors circularization
where debtor does not reply to circularization
Date posted: April 13, 2019. Answers (1)
- “Action must be specifically taken to prevent the occurrence of frauds involving the assets of the
company”, Finance Director of Food All Limited addressing accounting staff...(Solved)
“Action must be specifically taken to prevent the occurrence of frauds involving the assets of the
company”, Finance Director of Food All Limited addressing accounting staff of the company. Of
particular interest to the directors are:
•• The safety of unclaimed wages
•• The receipt of cash from customers.
•• The company’s cheque books
•• Issue of credit notes to debtors.
Required:
a. For each of the above, explain how a fraud can occur in the area.
b. What controls should be in place to prevent the occurrence of each of the frauds described in (a) above?
Date posted: April 13, 2019. Answers (1)
- Tasty ice cream employs thirty salesmen each with defined geographical area coverage(Solved)
Tasty ice cream employs thirty salesmen each with defined geographical area coverage. Each
salesperson is supplied with a car which is changed every three years. At end of each week,
each salesperson is submits claim on a preprinted form for expenses with supporting vouchers.
Expenditure is on petrol, repairs and servicing the car, hotels, lunches and entertainment. Each
claim is scrutinized by Beatrice who is the deputy chief accountant. She verifies that the claims
are supported by the vouchers. She clears any inconsistencies with the salesperson concerned
and makes out cheques for signatures by two company directors. The total amount paid in year
ended 31/12/2006 was Kshs. 25,000,000. The company made a profit of Kshs. 125,000,000.
Required:
a. Discuss the short comings of this system and suggest ways of improving the system.
b. List and describe the tests of control the auditor would undertake in this system.
c. During the audit, the auditor discovered that a salesperson in one area was submitting
false claims for entertaining customers. What actions should the auditor take?
Date posted: April 13, 2019. Answers (1)
- An extract from the draft audit report produced by an audit junior is given below:(Solved)
An extract from the draft audit report produced by an audit junior is given below:
Basis of Opinion
‘We conducted our audit in accordance with Auditing Standards. An audit includes examination,
on a test basis, of evidence relevant to the amounts and disclosures in the financial statements.
It also includes an assessment of all the estimates and judgments made by the directors in the
preparation of the financial statements, and of whether the accounting policies are appropriate to
the company’s circumstances, consistently applied and adequately disclosed.
‘We planned and performed our audit so as to obtain as much information and explanation as
possible given the time available for the audit. We confirm that the financial statements are free
from material misstatement, whether caused by fraud or other irregularity or error. The directors
however are wholly responsible for the accuracy of the financial statements and no liability for
errors can be accepted by the auditor. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the company’s annual report.’
Required:
Identify and explain the errors in the above extract.
Date posted: April 13, 2019. Answers (1)
- List the audit procedures that should be carried out to determine whether or not the going
concern basis is appropriate for Green Co.(Solved)
List the audit procedures that should be carried out to determine whether or not the going
concern basis is appropriate for Green Co.
Date posted: April 13, 2019. Answers (1)
- Explain the directors’ responsibilities and the auditors’ responsibilities regarding financial
statements prepared on the going concern principle.(Solved)
Explain the directors’ responsibilities and the auditors’ responsibilities regarding financial
statements prepared on the going concern principle.
Date posted: April 13, 2019. Answers (1)
- Going concern concept is a fundamental assumption underlying the preparation of the financial
statements. What are the procedures you would perform to ensure that the going...(Solved)
Going concern concept is a fundamental assumption underlying the preparation of the financial
statements. What are the procedures you would perform to ensure that the going concern is
appropriate for you audit client.
Date posted: April 13, 2019. Answers (1)
- Walsh Co sells motor vehicle fuel, accessories and spares to retail customers. The company
owns 25 shops.(Solved)
Walsh Co sells motor vehicle fuel, accessories and spares to retail customers. The company
owns 25 shops. The company has recently implemented a new computerized wages system.
Employees work a standard eight hour day. Hours are recorded using a magnetic card system;
when each employee arrives for work, they hold their card close to the card reader; the reader
recognizes the magnetic information on the card identifying the employee as being ‘at work’.
When the employee leaves work at the end of the day the process is reversed showing that the
employee has left work.
Hours worked are calculated each week by the computer system using the magnetic card
information. Overtime is calculated as any excess over the standard hours worked. Any overtime
over 10% of standard hours is sent on a computer generated report by e-mail to the financial
accountant. If necessary, the accountant overrides overtime payments if the hours worked are
incorrect.
Statutory deductions and net pay are also computer calculated with payments being made directly
into the employee’s bank account. The only other manual check is the financial accountant
authorizing the net pay from Walsh’s bank account, having reviewed the list of wages to be paid.
Required:
a. Using examples from Walsh Co, explain the benefits of using Computer-Assisted Audit
Techniques to help the auditor to obtain sufficient appropriate audit evidence to be able
to draw reasonable conclusions on which to base the audit opinion.
b. List SIX examples of audit tests on Walsh Co’s wages system using audit software.
c. Explain how using test data should help in the audit of Walsh Co’s wages system,
noting any problems with this audit technique.
Date posted: April 13, 2019. Answers (1)
- List and briefly explain some of the difficulties of using audit software.(Solved)
List and briefly explain some of the difficulties of using audit software.
Date posted: April 13, 2019. Answers (1)
- Nagaya a limited liability company is a reseller of sports equipment, specializing in racquet
sports such as tennis, squash and badminton. (Solved)
Nagaya a limited liability company is a reseller of sports equipment, specializing in racquet
sports such as tennis, squash and badminton. The company purchases equipment from a
variety of different suppliers and then resells this using the Internet as the only selling media.
The company has over 150 different types of racquets available in inventory, each identified
via a unique product code.
Customers place their orders directly on the Internet site. Most orders are for one or two
racquets only. The ordering/sales software automatically verifies the order details, customer
address and credit card information prior to orders being verified and goods being dispatched.
The integrity of the ordering system is checked regularly by Archer Web, an independent
Internet service company.
You are the audit manager working for the external auditors of Nagaya, and you have just
started planning the audit of the sales system of the company. You have decided to use test
data to check the input of details into the sales system. This will involve entering dummy
orders into the Nagaya’s system from an online terminal.
Required:
List the test data you will use in your audit of the financial statements of Nagaya to confirm the
completeness and accuracy of input into the sales system, clearly explaining the reason for each
item of data.
Date posted: April 13, 2019. Answers (1)
- Computer-Assisted Audit Techniques (CAATs) are used to assist an auditor in the collection
of audit evidence from computerized systems.(Solved)
Computer-Assisted Audit Techniques (CAATs) are used to assist an auditor in the collection
of audit evidence from computerized systems.
Required:
List and briefly explain four advantages of CAATs.
Date posted: April 13, 2019. Answers (1)
- Computer security is of vital importance not only to the accountant in industry but also to the
accountant in practice who may be advising his client...(Solved)
Computer security is of vital importance not only to the accountant in industry but also to the
accountant in practice who may be advising his client as to suitable security controls or who
may be auditing a computer system. Security is the means by which losses are controlled and
therefore involves the identification of risks and the institution of measures to either prevent such
risks entirely or to reduce their impact.
a. State four areas of risk which may arise in relation to a computer system and in each
case explain one factor which could lead to the system being exposed to such risk.
b. Describe the different forms of control which should be instituted to safeguard against
computer security risks.
Date posted: April 13, 2019. Answers (1)
- A medium size firm which has been your client for several years has changed from manual
accounting system to a computerized one. State and explain the...(Solved)
A medium size firm which has been your client for several years has changed from manual
accounting system to a computerized one. State and explain the factors which you will take into
account when planning the first audit under the new system.
Date posted: April 13, 2019. Answers (1)
- There are a number of different methods of obtaining audit evidence. Methods include:(Solved)
There are a number of different methods of obtaining audit evidence. Methods include:
•• Analytical procedures.
•• Audit sampling
•• Tests of controls.
•• Detailed testing of transactions and balances.
•• Computer assisted audit techniques (CAATs)
These methods overlap and may be used for different purposes during an audit of financial statements.
Required:
Describe the relationship between the five methods of evidence gathering described above.
Date posted: April 12, 2019. Answers (1)
- (Solved)
Curdco is a company that runs a chain of fast food restaurants. The company has a centralized
operating style and managers of individual restaurants have very limited decision-making powers
on day-to-day operational matters. The company’s centralized administration is responsible for
the buying of food, the payment of staff, the maintenance and cleaning of restaurants by staff
employed by a national agency, and all other matters relating to the running of the business. The
company has good internal controls over purchasing. Inventory counts are conducted at each
restaurant at the year-end. Your firm has recently been appointed as auditor to Curdco.
Required:
a. List the account headings you would expect to find in Curdco’s schedule of accounts payable and accrued expenditure.
b. Describe and give reasons for the audit tests you would carry out to obtain audit evidence for Curdco’s accounts payable and accrued expenditure.
Date posted: April 12, 2019. Answers (1)
- 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)