Chapter 13

Question 1

What must the auditor decide when designing substantive procedures?

Answer 1

consider which financial statement assertions the test needs to address

Question 2

What is the audit procedures for existence assertion? How is it done? (non-current assets)

Answer 2

physical verification of assets selected from the non-current asset register
- take sample already counted by client and agree number of items in warehouse

Question 3

What is the audit procedures for the rights and obligations assertion? (non-current assets)

Answer 3

i.e. inspection of:
- title deeds for property
- vehicle registration documents
- share certificates
- purchase invoices

Question 4

What is the audit procedures for the completeness assertion? How is it done? (non-current assets)

Answer 4

• trace a sample of assets seen in use to the non-current assets register
• review repairs and maintenance account
  How= take a sample in warehouse and count them

Question 5

What is the audit procedures for the valuation assertion? (non-current assets)

Answer 5

• check purchase invoice
• check surveyor’s report for revaluations
• for self constructed assets:
  1. labour costs
  2. subcontractor invoices
• consider appropriateness of depreciation policy

Question 6

In what types of business will inventory be a key audit area?

Answer 6

manufacturing and retail

Question 7

Why is inventory a key audit area?

Answer 7

• inventory can be highly material
• valuation is subjection
• affects statement of profit or loss and statement of financial position

Question 8

How do you calculate inventory?

Answer 8

quantity X value

Question 9

Why is it important the auditor has attendance at the inventory count?

Answer 9

• provides evidence about quantity
• provides evidence over valuation- ( some items maybe damaged so have a lower value)

Question 10

What does the audit on receivables focus on?

Answer 10

whether the customer agrees with the recorded balance, and whether the debt if likely to be paid

Question 11

are auditors about to use external confirmations as a form of audit evidence?

Answer 11

yes- these can be done in a positive or negative way

Question 12

What does a positive confirmation do?

Answer 12

encourages definite replies from those being contacted

Question 13

What does negative confirmation do?

Answer 13

• sent when a reply is only needed if the balance is disputed

Question 14

When should negative confirmations be used?

Answer 14

-risk of misstatement is low
- controls are operating effectively
- large number of small balances are involved
- there is no reason to believe that customers will disregard the request

Question 15

how can auditors check cash?

Answer 15

• bank confirmations directly from the bank
• the bank will only disclose once with written confirmation from the client

Question 16

What confirmation might the auditor request from the bank/

Answer 16

confirmation of:
- year end balances
- loans and overdraft facilities and terms
- contingent liabilities e.g. guarantees given
- securitise belonging to the client

Question 17

what matters should be referred to a senior member of staff?

Answer 17

• conclusions
• exceptional items
• unusual accounting entries
• indications of possible money laundering
  -issues requiring further discussions with the client