Revision questions
Question: Risk identification and analytical procedures
You are the auditor on the Mica Limited (Mica) engagement. Mica is a manufacturer of
home wares and furnishings. During the planning of the audit, discussions with
management reveal that during the year, the company has launched a clothing line
based on the latest fashion fad in Romania. Mica has had no previous involvement in
the clothing and apparel industry.
Preliminary analytical procedures reveal the following:
Ratio
Current ratio
Inventory turnover
Return on sales
Industry Avg.
Mica
1.7
0.8
4.2 times
1.8 times
14%
8%
Required:
Identify 2 risk factors in relation to Mica and explain why they require further
investigation by the auditor.
Question: Risk identification and analytical procedures
(cont.)
Risk factor
Further investigation
Inventory turnover The auditor needs to investigate whether Mica
ratio below industry has obsolete or unsaleable inventory stock and
determine whether they have been written off or
average
written down to NRV as appropriate.
Entrance into new
industry with
overseas imports
Need to investigate whether demand for
inventory exists (potential for overestimating
demand or transferability of fashion trend
locally); Need to investigate appropriate
recording of foreign exchange transactions
Question: CAATs
You are the audit senior on the Miggle Limited (Miggle) engagement. During
the year, Miggle has implemented a major update of their payroll system. The
payroll master file includes the following fields:
• Employee number
• Commencement date of employment
• Employee tax file number
• Annual pay rate
The fortnightly payroll input file includes the following fields:
• Employee number
• Number of regular hours worked
• Number of overtime hours worked
• Regular hourly pay rate
• Overtime hourly pay rate
• Fortnightly gross pay
Question: CAATs (cont.)
Required:
(i) Provide 2 general controls you would expect to find in Miggle.
(ii) How would you test the controls provided in (i) above?
(iii) Provide 2 programmed application controls you would expect to find in
payroll application system.
(iv) What is the key assertion that each of the controls identified in (iii) above
would minimise potential risk of misstatement of?
(v) How would you test the controls provided in (iii) above?
(vi) Outline two exception reports that could be produced in auditing payroll
expense of Miggle.
(vii) Identify how the reports in (vi) above will be utilised in providing necessary
relevant evidence, and specify the key assertion that each of the reports in
(vi) will address.
(viii) How could you utilise GAS in auditing occurrence of payroll expense?
What further manual procedure would you need to undertake?
Question: CAATs (cont.)
(i) General control
(ii) Test of control
Restricted access to
computer terminals and
data files via user IDs
and passwords
Test effectiveness of user ID and password
access restrictions by ensuring that access
to terminals and data files may be obtained
only through entry of valid user IDsand
passwords (invalid user ID and/or
password should not allow access)
Controls over
modification of existing
programs (appropriate
management review
and authorisation
required and
modification only by
authorised personnel)
Review documentation of modifications to
existing programs for evidence of review
and authorisation before modification is
performed by authorised personnel only.
Question: CAATs (cont.)
(iii) Application control (iv) Assertion
(v) Test of control
Check digit (employee Occurrence
number)
Run test data payroll
transactions ensuring that only
entries with valid employee
numbers can be processed,
and entries with invalid
employee numbers are
rejected.
Limit check (number of Occurrence
overtime hours
worked)
Run test data payroll
transactions to ensure that the
system prompts for
authorisation by appropriate
personnel when number of
overtime hours worked exceed
pre-specified limit of 3 hours
per fortnight.
Question: CAATs (cont.)
(vi) Exception
report
(vii)
Assertion
(vii) Use of report
Number of
Occurrence
overtime hours
worked > 3 hours
To identify transactions for testing
whether overtime hours where actually
worked (or to test if authorisation was
received for these transactions)
Commencement
date of
employment >
30/06/2012
To identify all new employees for further
testing (ensure they are genuine new
hires)
(viii) Use of GAS
Occurrence
Further manual procedure
Use GAS to select a sample of Verify accuracy of transactions by inspecting
payroll transactions for further time sheets and ensuring appropriate hours
testing
and pay rates applied.
Use GAS to select a sample of Verify employees recorded are genuine by
employees for further testing
inspecting personnel commencement records
signed tax declaration forms
Question: Subsequent events
Bintu Chartered Accountants (Bintu) is the auditor for Mintie Limited (Mintie) for the financial year
ending 30 June 2014. Fieldwork for the AMRS engagement was completed on 17 August 2014 and the
audit report is signed on 21 August 2014.
The following situations following balance date have come to Bintu’s attention:
1)
2)
3)
4)
5)
6)
On 19 August 2014, Mintie receives a valid claim for $100,000 relating to faulty products sold on 24
October 2013. This amount is material.
On 21 July 2014, there was a fire in one of Mintie’s warehouses which destroyed inventory within the
warehouse. The inventory destroyed was material and was not covered by insurance.
On 20 August 2014, Mintie acquired an overseas subsidiary. The negotiations to acquire this company
commenced on 14 June 2014. The subsidiary is material.
On 7 July 2014, a large sale was made by Mintie to an overseas customer. The sale was made at a
substantial discount below the cost of the inventory at which it was recorded on balance date.
On 18 August 2014, the market price of one of Mintie’s biggest investments declined marginally. The
amount of the decline is not material.
On 17 August 2014, information that the federal government may be introducing legislation that may
prohibit the sale of one of Mintie’s inventory lines is reported in the media. There has been no
confirmation from the government and no further information is available on 21 August 2014. The
inventory line in question is not material.
For each of the events described above, what is (or was) the most appropriate action, if any, the
auditor likely to require management to undertake in relation to the financial statements?
Question: Subsequent events (cont.)
Situation
1
2
3
4
Action
Adjust the account balance in the financial
statements
Disclose by way of subsequent event note to the
financial statements
Disclose by way of subsequent event note to the
financial statements
Adjust the account balance in the financial
statements
5
No action
6
No action
Question: Audit reporting
Bintu Chartered Accountants (Bintu) is the auditor for Mintie Limited (Mintie) for the
financial year ending 30 June 20124 The audit of Mintie is currently in its finalisation
stage and Bintu is considering the following matters:
1. Management from Mintie refuses to separately disclose the change in its depreciation policy
on the basis that the effect of the change is quantitatively immaterial.
2. Bintu was unable to attend the stocktake at one of Mintie’s overseas branches due to civil
unrest. Alternative audit procedures in relation to inventory held at this overseas location
could not be undertaken as the relevant documentation was destroyed by an angry ex‐
employee. The inventory held by the overseas branch represents approximately 10% of
Mintie’s total assets.
3. Bintu has engaged an external property valuer to value Mintie’s property portfolio. The
results of the external valuation indicate that Mintie’s property is overstated by $321,000.
Overall materiality for Mintie has set at $500,000, and Bintu is satisfied in all other material
respects.
4. Bintu concludes that there is a material inconsistency in the sustainability report which is
included in the annual report containing the audited financial statements. Mintie’s
management refuses to change the information in the sustainability report as they consider
believe that it has different interested users from that of the financial statements.
For each of the matters described above in relation to Mintie considered individually,
what is the appropriate audit opinion that should be issued to by Bintu?
Question: Audit reporting (cont.)
Matter Audit opinion
1
Qualified
2
Qualified
3
Unmodified
4
Unmodified with Other Matter paragraph