Audit and assurance
Question 4
Under ISA 500 “Audit Evidence” auditors must design and perform audit procedures to obtain sufficient appropriate audit evidence to enable the auditor to form an audit opinion.
Required:
(a) Explain your understanding of ‘sufficient appropriate evidence’.
(2 marks)
(b) Audit evidence can be obtained from a variety of different sources. Identify the main sources of audit evidence and their degree of reliability, giving a suitable and relevant example of each.
(4 marks)
(c) Identify and describe using suitable and relevant examples TWO procedures that the auditor would use to obtain audit evidence.
Procedure will include – inspection examining records
Documents or assets/ observation – of tasks of IC’s
(2 marks)
Question 4 continued overleaf …..
Question 4 continued …..
You are the audit senior working on the audit of Tong See Carriage Ltd which is a company that provides international courier services for corporate and private clients. During the course of the audit, you come across the following items which may have relevance. These items are:
1. A local newspaper report stating that if the expansion to the local airport is approved, it will mean that part of the freehold properties belonging to Tong See Ltd will be demolished.
2. A letter from Tong See’s bank indicating the agreed overdraft facilities for the next year.
3. A comment by the Procurement Director over lunch that the air conditioning and heating controls in the warehouse were in a bad state of repair and were in need of upgrading.
4. The sample of items that were physically counted by the audit junior when he attended Tong See Ltd.’s year- end inventory count.
Required:
(d) In respect of each of the above items:
i. State their relevance to the overall audit objective of forming an opinion on the financial statements. (1 mark for each point made). (4 marks)
ii. State, with reasons, the degree of reliability. (1 mark for each point made). (4 marks)
iii. State ONE additional item of supporting evidence that you could obtain as corroboration. (1 mark for each point made). (4 marks)
Total:20marks
Question 6
Described below are three situations which have arisen at three unrelated external audit clients of your firm which the audit partner has asked you to review.
1. Silvan Ltd (‘Silvan’)
The financial statements of Silvan show the purchase of a motor vehicle from Endeavour Ltd (Endeavour), for £16,500, which has been appropriately included in non-current assets. While reviewing Silvan’s board minutes you discovered that Endeavour is owned and managed by the husband of Silvan’s managing director. The directors of Silvan refuse to disclose the transaction in the notes to the financial statements as they claim that the amount is too small to warrant disclosure. The draft financial statements of Silvan show total assets of £7.5 million.
Question continued overleaf ………..
Question 6 continued ………..
2.Plantoquip Plc (‘Plantoquip’)
Plantoquip’s audit documentation in relation to ‘plant and equipment’ notes an error in the calculation of depreciation on some items in the sample tested. The audit junior who performed the test extrapolated the error across the population of plant and equipment. This resulted in an overall expected error of £56,555. Materiality for the audit was set at £85,000. The audit junior concluded the error was not material.
3.May Plc (‘May’)
Your firm attended the inventory count at May’s warehouse on 30 June 2020, but was unaware that May also owned inventory held at a third party’s premises on this date. May has not retained any count records in respect of the inventory held by the third party and there are no other records from which the amount of inventory can be substantiated. The directors wish to include the inventory held at the third party’s premises in the year-end financial statements at £105,000.
The total assets of May at 30 June 2020 are £4.2 million and the profit before tax for the year ended 30 June 2020 is £950,000.
Required:
(a) Write a memo to the engagement partner in relation to each situation described above, explain your decisions as an auditor in light of materiality and the appropriate accounting principles. (You can develop the scenarios further as appropriate to illustrate the points made) (12 marks)
(b) Explain using suitable and relevant examples TWO reasons why performance materiality is set by auditors. (4 marks)
(c) Describe the relationship between materiality and audit risk within the external audit process. (4 marks)
Total: 20 marks
