Case Study Auditing and Assurance †Free Sample Solution

Questions: Case Study 1: As a result of work undertaken during the planning stage and audit evidence collected for the tests of controls stages of the audit, Robert Smith has determined that there is a low risk of material misstatement (low inherent and control risk) for the following account balances: Wages and salaries Electricity Repairs and maintenance Due to the expected reliability of these controls, Robert has undertaken extensive testing of the controls regarding these account balances, and has concluded that the controls are reliable. Required: Identify one substantive audit procedure for each of the account balances above that will provide sufficient appropriate audit evidence regarding the accuracy of that account balance. Case Study 2: You are reviewing your audit assistants work for Orange Pty Ltd for the year ended 30 June 2015, and note the following matters: Your audit assistant undertook a test of controls for 50 sales transactions. This test resulted in three errors. When planning the test, a tolerable error of 5 per cent had been established. The audit assistants working papers noted that none of the errors found were materials, either individually or in aggregate, and she therefore concluded that the controls were reliable. Your audit assistants working papers on the accounts payable testing contain the following notes and conclusion: In order to test accounts payable, I selected all balances over $100,000 and vouched these to supporting invoices. The sample selected comprised $2,565,650 of total accounts payable of $5,168,000. One invoice for $102,500 had been incorrectly recorded on the accounts payable listing, as the goods were not actually received until after year end. Given the error relates to only 4% of accounts payable tested, which would be a total error of $206,702 of the overall accounts payable balance, it is not material as this is less than the materiality level set for this audit and, therefore, no further work has been performed. I am satisfied that the accounts payable balance of Orange is fairly stated. Required: Comment on the appropriateness of your audit assistants conclusions in each of the above situations. Answers: Case Study 1 Substantive audit procedures for wages and salaries Robert had undertaken accrued wages as well as salary account at the end of accounting period. Most of the audit works on wage system performs at the time of interim period for substantive audit procedures (Whittington 2011). It confirms payroll costs as well as wages accruals as a final part of audits. Interim audit work on wages depends upon normal stages of recording, testing internal controls as well as evaluating for the same. It is advisable in using computer as an audit tool for testing data as well as audit software. It employs at interim period as well as final audit of wages. Testing data consists of data submission by an auditor for application controls like data validation checks. It uses valid as well as invalid transactions for checking operational control at the same time. It tests for ensuring accuracy levels as well as completeness of balances in respect with wages costs and payroll deductions. It enables observing clocking procedures as well as supervision levels in selected payroll agreed hours (Reding 2011). Wages and salaries needs to be audited as per the given rules as well as substantive audit procedures as far as possible. Auditors require proper evaluation in implementation of audit software for conducting audit report at the end of the financial year. Substantive audit procedures for electricity Robert needs to evaluate business in accordance with auditing procedures for assisting financial health of organization. Electricity is one of the expenses that are borne by companies and industries. Companies have different types of internal controls in case of expenses like electricity (Pflugarth 2011). Some invoices include certain signature levels as well as written contract requirements. It requires reasonableness check on ordinary variable expenses like electricity. Having bill from two electric companies taken from one location and causes in case of audit flag. It should have one electricity supplier for the same. Electricity should be received and paid on timely manner. Auditors require selection of random invoices for electricity bill. It needs proper original documentation in against paid amount as well as finding mistakes at the same time (Louwers 2011). Substantive audit procedures for repairs and maintenance Robert needs classify asset because it will; help in recording of fixed assets in correct form. It classifies as capital assets. It ensures capitalization of recording of major part of fixed assets. For instance, repair and maintenance costs treated as expenses as well as significant amount spent for asset improvement at the same time (Leung 2011). It ensures capitalization of additional asset values in an overall manner. Auditors requires in examining selected repair and maintenance work for supporting essential transactions for determination of capitalization of repair costs. Audit procedures for repairs and maintenance include presentation as well as disclosure in the financial statements. It requires testing details in account balances uses by auditor professional in the near future. Professional judgment determines in scrutinizing balanced accounts in case of repairs as well as maintenance in the most appropriate way. Variation as well as allocation ensures examining invoices fo r future analysis purpose (Hooks 2011). Case Study 2 (1). On reviewing Orange Pty Ltd, it is noticed that occurs three potential sampling errors on 50 sales transactions. On planning test, it got around 5 percent tolerable errors that need consideration as far as possible. Audit risk includes uncertainties for sampling attributes for factors at the end of financial year (Hall and Hall 2011). It includes aspects from audit risk like sampling risk as well as non-sampling risk. It provides reliable information from the internal control of audit transaction in Orange Pty Limited. It accepts uncertainty caused from cost and time requirements for future analysis purpose. It examines data as well as adverse consequences in possible erroneous conclusion from data sampling techniques. Sample evaluation relates with likelihood from existing monetary misstatements as well as deviations in and from prescribed controls on proportionate terms. It selects non-statistical analysis for statistical sampling that affects auditors decision-making process (Aren s 2011). (2). Part A After evaluating Orange Pty Ltd annual report, it tests for account payable options as selection of balances $100000 and vouched for supporting invoices. Sampling requires testing accounts payable for current liabilities for Orange Pty Limited. It ensures acquisition of goods for resale by the manufacturer (Whittington 2011). Accounts payable refers as obligations for credit transactions at the same time. It reports gross method as well as net method in purchase assertions in case of cost of goods sold. It requires reconciliation of accounts payable ledger in accordance with control account for future analysis purpose. It ensures purchase cut offs in determination of purchased goods for analytical procedures. It involves cash disbursements in recording payables in the most appropriate way. In case of audit report, auditors need to calculate receivable reports at the same time. Sampling selected consists of $2565650 that totals amounting to accounts payable as $5168000. Invoices compr ises for $102500 as it is incorrectly recorded. It ensures accounts payable in listing of goods in way of account payable options as mentioned in the balance sheet of Orange Pty Ltd. Auditors need to review at the trend lines of sales as well as accounts payable as unusual trends. It helps in measuring accounts payable collection period at the same time (Hall and Hall 2011). Part B In this particular question, errors records only 4% of accounts payable tests for total error of $206702. It sets for materiality set in audit process in final audit process in the most appropriate way. On critical analysis, it is stated that Orange Pty Ltd is fairly stated in the financial statements in the near future. Auditors requires in reviewing selected credit memos as per audit report analysis. It assess entries related to provision for bad as well as doubtful debts as per the business environment (Whittington 2011). Auditors need to evaluate in the account payable attributes as per the test errors for future analysis purpose. It records auditing errors for setting solutions for the material misstatement in the financial statement analysis of Orange Pty Limited. Reference List Arens, A. (2011).Auditing, assurance services ethics in Australia. Frenchs Forest, N.S.W.: Pearson Australia. Hall, J. and Hall, J. (2011).Information technology auditing and assurance. Mason, Ohio: Thomson/South-Western. Hooks, K. (2011).Auditing and assurance services. Hoboken, NJ: Wiley. Leung, P. (2011).Modern auditing assurance services. Milton, Qld.: John Wiley. Louwers, T. (2011).Auditing assurance services. New York: McGraw-Hill Irwin. Pflugarth, G. (2011).Auditing, assurance and ethics handbook 2011. [Frenchs Forest, N. S. W.]: Pearson Australia. Reding, K. (2011).Internal auditing. Altomonte Springs, Fla. Whittington, O. (2011).Principles of auditing other assurance services. [Place of publication not identified]: Irwin Mcgraw-Hill.