Question

Magi Chen is the managing director of Sun Construction Pty Ltd, a family owned business that provides construction services. As Magi is interested in purchasing some new construction equipment’s for her business, she has approached her local bank for finance. The bank has asked that Magi provide an audited financial statement to assist them in considering her loan application. Magi has approached your audit firm for this service and you have been allocated the task of auditing Sun Construction for the year ended 30 June 2019. You have undertaken a preliminary review of the business and determined that a substantive testing approach would be suitable and appropriate. You are currently preparing an audit program for the revenue cycle. The following information has been obtained from your review:

• Magi usually works 120 hours a fortnight. Part of this time is spent travelling between different clients and is not charged to the clients. The remaining time is charged at $60 per hour, regardless of the task undertaken.

• Customers typically pay Magi in cash for the work undertaken, except for a small number of regular small-business customers. Magi allows these customers to pay on account by bank transfer on a monthly basis.

• Magi supplies each cash customer with a written receipt, prepared manually from a receipt book purchased at the local news-agency. The book contains pre-numbered blank receipts, which are completed in duplicate.

Required: For each of the assertions of occurrence, completeness and accuracy, identify a procedure(s) you could use to audit Sun Construction's revenue.

Answer 1

* time spent travelling between different clients and is not charged to the clients is applicable only as per the policy, if eligible to charge on clients. Similarly if Magi charges $ 60 per hour without specifying task undertaken should not be entertained. Still if company's policy allows, it can be entertained.

* Normally cash receipt over and above a particular limit as per statutory requirement should not be entertained. It should be directed through bank transfer/cheque.

* If the receipt book contains name of the company and Magi is signing on behalf of the company, then it is Ok. Else it is not acceptable.