Audit and Assurance (AA)
Prof. CA VIDYA S
Audit and Assurance (AA)
UNIT 3-Audit evidence
Unit 3 – Practical Problems
Chapter 11 & 7 (Kaplan)
CA VIDYA S HOSUR
AA
Audit Evidence & Review procedures
Which of the following matters should the auditor
consider prior to placing reliance on the work of the
expert?
1 The availability of alternative sources of audit
evidence 2 The technical expertise required to perform
the valuation
3 The availability of audit staff to complete the
evaluation of the expert on a timely basis
4 The extent to which the use of the expert can be
referred to in the auditor’s report
A 1 and 2
B 2 and 3
C 1 and 4
D 2 and 4
Solution: The correct answer is A.
The requirements of ISA 500 Audit Evidence are applicable in
determining whether reliance can be placed on the expert. ISA
500 states that in order to determine reliance, the auditor
should consider whether there are other sources of evidence
available as if so the level of reliance will be reduced, and to
consider the technical expertise that the expert should
possess in order to carry out the work. It is not appropriate for
the auditor to consider at this stage whether staff can be
allocated to perform the work as the availability of staff and
the ability to perform the work should have been considered
at the acceptance stage. While the auditor in certain
circumstances may need to refer to the fact that an expert has
been used, the responsibility to gather sufficient and
appropriate evidence on which to base the audit opinion
remains solely with the auditor. Therefore considering the
extent to which reference can be made to the expert is not an
appropriate matter on which to base reliance.
AA
Audit Evidence & Review procedures
Which of the following procedures is a substantive
procedure in relation to non-current assets?
A Review board minutes for evidence of approval of
capital expenditure
B Inspect a sample of assets included in the noncurrent asset register to
ensure each asset has a unique serial number or
barcode
C Review the internal audit team’s working papers
confirming the noncurrent asset register has been
reconciled to the physical assets on a
regular basis
D Inspect the purchase invoices for a sample of assets
to confirm they are
in the name of the client
Solution: The correct answer is D.
A good way to approach this style of question is to think
about the objective of a test, does it confirm a control is in
place or does it test a financial statement assertion.
Tests A, B and C would all test a control in relation to noncurrent assets such as approval, reconciliation between the
records and assets to ensure the records are up to date, and
serial numbers to enable the company to identify the assets.
Test D tests the assertion of rights and obligations. If the
client did not purchase the asset, it should not be included
in the financial statements.
AA
Audit Evidence & Review procedures
The following audit evidence has been gathered relating to
the accuracy of the depreciation charge for Scafell Co:
1 Proof in total calculation performed by an audit team
member
2 Written representation from the directors of Scafell Co
confirming the accuracy of the depreciation charge
3 Verbal confirmation from the finance director of Scafell
Co confirming the accuracy of the depreciation charge
4 Recalculation of the depreciation charge by an internal
audit team member of Scafell Co
What is the order of reliability of the audit evidence
starting with the MOST RELIABLE first?
A 1, 2, 3, 4
B 1, 4, 2, 3
C 4, 1, 2, 3
D 4, 1, 3, 2
Solution: The correct answer is B.
The most reliable evidence will be the work performed
by the audit team member as auditor generated
evidence is the most reliable.
Verbal confirmation is the least reliable form of evidence
as it can be disputed or retracted.
Written confirmation is the next least reliable form of
evidence as it is client generated.
AA
Audit Evidence & Review procedures
It is 1 July 20X5. You are the audit manager responsible
for the audit of Yarra Co which has a year ended 31
March 20X5. On 6 April 20X5 it was discovered that
inventory with a value of $100,000 which was
manufactured in March was defective. The defective
goods have no resale value and must be scrapped. The
financial statements have not been amended in respect
of this issue. The draft financial statements show total
assets of $1 million.
Required: Discuss whether the financial statements
require amendment in order to avoid a modified audit
opinion.
• Solution: The discovery of the defects after the
year end is an adjusting event as the inventory was
manufactured before the year end and therefore
the defects are a condition in existence at the year
end.
• The financial statements should be adjusted as the
inventory needs to be written off as it has no resale
value.
• The value of the inventory requiring write-down is
$100,000 which represents 10% of total assets
which is material.
• If the inventory is not written off, the financial
statements will be materially misstated and a
modified opinion will be required.
• The financial statements require amendment to
avoid a modified opinion.
AA
Audit Evidence & Review procedures
It is 1 July 20X5. You are the audit manager responsible
for the audit of Spree Co which has a year ended 31
March 20X5. On 6 April 20X5 it was discovered that a
customer owing a balance of $1,000 at 31 March 20X5
had been declared bankrupt. The financial statements
have not been amended in respect of this issue. The draft
financial statements show total assets of $1 million.
Required: Discuss whether the financial statements
require amendment in order to avoid a modified audit
opinion.
Solution The bankruptcy of a customer so close to the
year end is an adjusting event as the condition causing
the financial difficulties would have been in existence
at the year end and therefore the receivable is an
irrecoverable debt.
• The financial statements should be adjusted as the
irrecoverable debt needs to be written off.
• The value of the irrecoverable debt is $1,000 which
represents 0.1% of total assets which is not
material. If the debt is not written off, the financial
statements will not be materially misstated and an
unmodified opinion will be required.
•
The financial statements do not require
amendment to avoid a modified opinion.
AA
Audit Evidence & Review procedures
You have been assigned the going concern section of the
audit of Zambezi Co. The company has had a difficult
year with the loss of two major customers due to
bankruptcy, resulting in a decline of revenue of 40%. This
has impacted cash flow and the company has had to
request an increase in its loan facility with the bank.
Required: Describe the audit procedures the auditor
should perform in assessing whether or not Zambezi Co
is a going concern.
Solution :
➢ Discuss with management whether any new business
has been signed to replace the fall in revenue caused
by the loss of the two major customers and if so,
review the signed contracts.
➢ Review correspondence with the bank for indication
that the loan facility will be extended.
➢ Review correspondence with customers for evidence
of any issues that might impact recoverability of other
debts and affect future revenue.
➢ Analyse cash flow forecasts and discuss the
reasonableness of the assumptions used to prepare
the forecasts with management.
➢ Read board meeting minutes for discussion of
management’s plans to address the cash flow issues.
➢ Obtain written representation from management
regarding its plans for the future and how it plans to
address the going concern issues..
AA
Audit Evidence & Review procedures
It is 1 July 20X5. You are an audit supervisor of Mara & Co
and have been assigned responsibility for completing the
detailed going concern testing for Tsavo Co for the year
ended 30 April 20X5. Tsavo Co’s audit should be finalised
and the financial statements signed by 30 September
20X5. Management’s assessment of Tsavo Co’s ability to
continue as a going concern covers the period to 30
November 20X5.
Which of the following actions should Mara & Co take in
relation to Tsavo Co’s going concern assessment?
A Request that management extends the assessment
period to 30 September 20X6
B Request that management extends the assessment
period to 30 April 20X6
C Perform additional audit procedures to confirm Tsavo
Co’s going concern status
D Review management’s assessment to 30 November
20X5 and only request that it is extended if it raises
doubt that Tsavo Co is a going concern
Solution The correct answer is B.
ISA 570 requires that in evaluating the entity’s ability to
continue as a going concern the auditor must cover the
same period as that used by management to make its
assessment.
If management’s assessment covers a period of less than
twelve months from the date of the financial statements
the auditor is required to request management to extend
its assessment period.
In this case the auditor must request that management
extend the assessment period to 30 April 20X6.
Performing additional audit procedures would not
resolve the fact that the assessment period is not as
required by ISA 570, therefore option C is not an
appropriate response in this instance.
THANK YOU
Prof. CA VIDYA S
Department of Management
vidyas@pes.edu