Long answered questions Flashcards
explain 3 information processing controls that should be adopted by bravo PLC to ensure the completeness and accuracy of the input of purchase invoices
Document counts - the number of invoices to be input are counted, invoices are then entered one by one, at the end of the number of invoices input is checked against the document count.
Control totals - here the total of all invoices such as gross value, is manually calculated. the invoices are input, the system aggregates the total input gross value and is compared to control total
One for One checking - the invoices entered into the system are manually agreed back one by one to the original purchase invoices.
Review of output to expected value - an independent assessment is made of the value of purchase invoices to be input, this is the expected value.
explain the additional factors that your firm should consider during the audit in relation to williams PLC use of the payroll service organisation
during the year Williams PLC outsourced its payroll processing to an external service organisation.
the audit team will need to verify controls at the 3rd party. A detection risk arises as to whether sufficient sufficient and appropriate evidence is available at Williams PLC to confirm the completeness of and accuracy of controls over payroll.
if not another auditor may be required to undertake testing at the service organisation.
- the team may wish to visit David payrolls and undertake test of controls to confirm the operating effectiveness of controls
-Kevin & co is responsible for obtaining sufficient and appropriate evidence therefore, no reference may be made in the auditors report regarding the use of information David payroll co auditors.
describe the step auditor should perform in understanding a positive receivable circularisation for bashing. co
-obtain consent from the finance director of Bashing Co in advance of undertaking the circularisation
- obtain a list of trade receivables at yr end, cast this and agree it to the receivable ledger control account total
-select sample from the Receivables list ensuring that a number of nil, old, credit and large balances are selected
-contact customers and suppliers
-where no response is received, follow up with another letter or phone call and where necessary alternative procedures
- when replies are received, they should be reconciled to Bashing co. receivables records, any differences should be investigated further
Describe substantive procedures the auditor should perform to obtain sufficient and appropriate audit evidence in relation to receivables.
-review after date cash receipts
-inspect aged receivables
-review bank confirmations and loan agreements for evidence of receivables
-select sample of goods despatched notes from before yr end
discuss the issue and describe the impact on the auditors report, if any, should this issue remain unresolved.
- company has included a redundancy provision of $110k in the draft of FS, but, audit fieldwork has confirmed that the provision should have been $305k. the provision is understated and profit before tax overstated if the finance director does not amend the FS.
- needs an adjustment of $195k required, represents 7.5% of profit before tax, or 1.1% of total assets, hence the material matter
define audit risk and the components of audit risk
audit risk is that the auditor expresses an inappropriate audit opinion when the FS are materially misstated. audit risk to an acceptable low level will not detect a misstatement which exists and which could be material, either individually or when aggregated with other misstatements.
what is inherent risk
is the susceptibility of an assertion about a class of transaction, account balance or disclosure to a misstatement which could be material, either individually or when aggregated with other misstatements, before consideration of any related goods
what is control risk
the risk that a misstatement which could occur on an assertion about a class of transaction, account balance or disclosure and which could be material , either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected on a timely basis by the entities controls
what is a detection risk
the risk that the procedures performed by the auditor to reduce audit risk to an acceptably low level will not detect a misstatement which exists and which could be material, either individually or when aggregated with other misstatements
what are the components of audit risk
inherent risk
control risk
detection risk
what is audit risk
is the risk that the auditor expresses an inappropriate audit opinion when the FS are materially misstated
what are the three information processing controls
document controls
control totals
one for one checking
6 audit risks in relation to planning audit for william plc
1) undertakes continuous production and work in progress balance at yr end likely to be material
2) production will not cease so exact cut off will need to be assessed, if cut-off is not correctly calculated, inventory valuation may be overstated
3) inventory machinery ordered 270k 2/3rds may not be received by yr end, only assets which physically exist should be valued, otherwise PPE will be overt-stated
4)patent has been purchased for 1.3m, if management have not correctly accounted for it, intangible assets and profits could be over stated
5) company borrowed 1.2m, this loan needs to be correctly split between current and non-current liabilities
6) as level of debt has increased, should be additional costs,. there is a risk of this being omitted from statement of P&L. F costs could be understated
7 deficiencies in the system
-director authorising payments
-purchase ledger clerk doesn’t apply controls
-reconciliation of savings account every two months
-delayed payments to suppliers leads to risk of going concern and suggest financial issues
- orders not numbered can lead to orders being lost, under/over stated assets
-process of selecting suppliers is weak due to only going with the one who can despatch fastest
