Question

Consider each of the following situations:

1. One of the mitigating controls that you wish to rely on is that any increases in credit limits are authorised by the financial controller. The audit assistant checks the company’s policy manual and notes that this control procedure is required. He concludes that the control is operating effectively and can be relied on.

2. A test of controls of 48 sales transactions was undertaken which resulted in four errors. The working papers noted that none of the errors found was material and the conclusion from conducting the test was that: ‘the system is operating satisfactorily’.

3. Trade payables is a material balance sheet account comprising 20 large and 200 small creditors. Your client presented the audit assistant with a list of creditors making up the balance shown in the trade payables control account in the general ledger. In your absence the audit assistant decided to utilise a judgemental sampling technique to test these creditors. The only procedure the audit assistant used was to randomly select 30 creditors from listing. These were traced to reconciled creditors’ statements.

4. SJO Pty Limited (SJO) is currently in dispute with the taxation authorities. This year an assessment was issued by the taxation authorities requiring the company to pay an additional $150,000 in taxes. SJO believes that the basis for the assessment was incorrect and inappropriate. Notwithstanding this, it paid the $150,000 to the taxation authorities under protest and lodged a formal objection against the assessment. SJO is carrying forward the $150,000 paid as an ‘other receivable’ in its year-end financial report. The audit assistant has verified this other receivable by agreeing it to the cash payments books and the bank statement.

Required:

You are the audit senior and have been presented with the above information by the audit assistant (a new graduate). In each of the above situations, explain why the audit assistant has not obtained sufficient appropriate audit evidence or has concluded incorrectly.              

Answer 1

Audit Programme fro conducting Audit

Audit strategy focuses on test of control to obtain substansive audit evidence. Substansive test verify whether the information provided by the client is correct or not. auditor need to prepare overall audit stategy for conducting audit.

Audit strategy and audit plan need to documented , if any change it should be update on the audit documented

Misstatement may be find the only if three event happened.

Error in first stage, the risk is happened is known as inherent risk

the client intrnal control cannot be prevented and detect and control is know as control risk

The auditor cannot be detect and correct . is know as detection risk

therfore the auditor must , assessed the effectiveness of internal control system this means investigate its design and operation, and evidence obtaining by using substansive test during the audit.

the Audit assistance doest not apply the substansive test as well the internal control testing technique, the audit assistance does not check the following area.

scope of materiality not set the level of material misstatement

not set the credit reference of new customer, not set the credit limit to customer, not check the age of trade receiveables , and not update the relised amount from debtors to time to time.therefore he is fails to obtain the audit evidence.

Test of control grouped on the following area

Enquiry and Inspection

Confirmation from the party

observation techniques

Recalculation and restatement

by using the analytical Procedure and audit test

Applying the requirment of as 315 identifying and assessing the risk of material misstatement through understanding entity and its envrionmrnt

using sa 330 and sa 550 and 505 to details checking the books of accounts and also take help of accounting standard