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You are the audit senior on the audit of Harmony Pty Ltd, a large manufacturing company, for the year ended 30 June 2017
You are the audit senior on the audit of Harmony Pty Ltd, a large manufacturing company, for the year ended 30 June 2017. It is now 25 August, 2017 and you are reviewing the audit working papers prepared by your audit assistant, Susan Jones, and notice the following matters:
(a) Susan attended the stocktake on 30 June and observed that the client followed the stocktake instructions. She selected numerous items for test inventory from the client's inventory sheets and all were found to be correct. Cut-off details were noted and subsequently checked and found to be correctly treated. Susan concluded that inventory was fairly stated.
(b) Susan selected 20 invoices to test the control that the sales clerk checks that prices agree with the authorised price list. She found 3 instances where the sales clerk had not signed the "prices checked" box in the invoice. The sales manager explained that the sales clerk always checks the prices but sometimes forgets to sign the box. As the prices on all the invoices agreed with the authorised price list, Susan concluded that the control was operating satisfactorily.
(c) As part of her work on subsequent events, Susan noted that there were a large number of returns in July of Product 75L. However, as this product was first sold in June and represented only 1% of sales for the year, Susan concluded that the amount was immaterial and no further work was necessary.
(d) Advertising expenses are material, although the expenses this year are only half (50%) of last year's balance for advertising expenses. Susan selected a large sample of entries and agreed them to supporting documents. No errors were found. Susan concluded that advertising expenses was reasonable.
(e) As part of the verification work on accounts payable, Susan carried out a search for unrecorded liabilities. She tested a random sample of 20 payments made after 30 June, 2017 and found 3 instances of payments that related to services provided in June, which had not been accrued. However, as the total of the 3 payments was immaterial, she concluded that no adjustment was required for unrecorded liabilities.
Required: For each of the five scenarios presented above, indicate whether you believe that sufficient appropriate audit evidence has been obtained to support the conclusions reached. Give reasons for your decision. Please note, the scenarios are related.
Expert Solution
Answer :- (a&b)
Here are my suggested answers:
a. Yes, sufficient audit evidence was obtained.
b. No, sufficient audit evidence was not obtained.
Detailed Explanation:
a.
1. The audit associate was present and witnessed the inventory count. This procedure ascertained the existence of the inventory.
2. She selected numerous items as samples and all were correct. The more samples you test, the closer you are to the total population; therefore, lesser untested items. Your conclusion based on the samples then (numerous samples) is more accurate than with lesser samples. Also, since all samples were correct after testing numerous samples, we can assume that the inventory is correct.
3. Cut-off details were tested. Cut off assertion is important in inventory. This step involves making sure all transactions have been reported in the proper financial period. Cut off testing is used especially if the Company has fast moving inventory and inventory in transit.
Based on the procedures performed, we can assume that the Inventory account is fairly stated.
b.
1. The associate selected only 20 invoices. Since the Company is a Large manufacturing company, more samples should be selected to represent the totality of the population.
2. There was 3 deviations found out of 20 invoices, that is 15% of the total samples tested. The auditor must note the deviations found. Since the associate captured deviations in the samples, we may assume that there are more deviations in the untested part of the population. Further testing is needed.
3. Based on the inquiry, the sales clerk "forgets" to sign the box. The signature is the evidence that the prices agree with the authorized price list. Since a signature is needed, we cannot use the answer of the manager to substantiate the effectiveness of the controls. The fact that the sales clerk "forgets" to sign, it may be a sign that the internal controls are weak.
Based on the procedures performed, we cannot conclude that the controls are operating satisfactorily. Further testing is needed to substantiate the conclusion of the associate.
Answer:- (c&d)
(c) The auditor has not obtained sufficient audit evidence for the returns of product 75L, because;
The auditor concluded that the amount was immaterial and no further work was necessary without analyzing and performing any initial audit procedure.
The returns were huge in number that means there must be some problem with the product and hence, it should have been analyzed and examined by the auditor.
The returns were a subsequent event and these events need to be verified and analyzed by applying appropriate audit procedures because these events may invalidate the information of financial statements.
The auditor regarded the subsequent event as not necessary and concluded it to be immaterial for the reason that the sales of the product returned were only 1% of sales. But the returns were huge in number and the auditor should have analyzed and examined the subsequent event in order to validate the information present in the summary of financial statements.
(d) Sufficient audit evidence is obtained for the advertising expenses, because;
The auditor carefully analyzed the materiality of the advertising expenses for applying further audit procedures.
The journal entries related to the advertising expenses were agreed to the supporting documents to adequately verify the accounts.
When no errors were found by the audit procedures of verification then the auditor concluded the reasonability of the advertising expenses.
The auditor obtained sufficient audit evidence by tracking and verifying the entries with the supporting documents and basing the conclusion on this verification and examination.
Explanation:-
Audit evidence is the evidence that is obtained and gathered by the auditor while performing an audit process. The evidence should be adequately and sufficiently obtained and should be relevant to the audit process because this evidence helps in forming a conclusion for the audit process.
The auditor records the relevant evidence in the audit working papers. Audit evidence can be achieved by many methods, such as inquiries, confirmations, documentation, physical examinations, analytical and other procedures. The evidence received must be correctly interpreted and analyzed to form a correct decision for the financials of the audit client.
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