Assertions All problems compiled PDF

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Financial statement Reason the assertion may be at Audit procedures assertion(s) risk (2.5 Marks for the audit procedures to gather sufficient appropriate (.5 Mark for the evidence about the assertions) (2 Marks for the reason for the assertions for each assertions to be at risk for each company) company) You are the auditor for Office Supplies Pty Ltd, a retailer office equipment and supplies. While testing controls over payments of creditors you noted that many payments were made 180 days after the due date indicating that the client may have cash-flow problems. You are now testing the creditors balance in order to form an opinion on that balance for the year-end audit report. Office supplies Pty Ltd

Completeness

With cash flow problems the client may be tempted to hide creditors.

Search for unrecorded creditors e.g. comparison with last year, identify significant creditors during the year(Looking at suppliers invoice) and see if they are included in the final list of creditors. Confirm with suppliers

You are the auditor for Fine Fittings Pty Ltd, a furniture manufacturer. When you attended the stock take at year end you took note of the last sales invoice numbers tor the year and checked that the inventory items on these invoices were not included in the stock at year end. As part of your year-end analytical review of sales you determined that there are sales invoice numbers after the numbers that you noted at the stock take. Fine fittings Pty Ltd Cut off The company may be attempting to Enquire about the discrepancy between your cut-off invoice numbers and the year-end recorded invoice numbers. Existence increase the value of sales at year end by including sales for the next period in the current period. As part of the year-end audit of Beige Ltd you are reviewing the company's aged debtors balance. As a result of that review you note that 15% of debtors were due over 180 days ago. The company has a policy of maintaining a provision for doubtful debt's at 2% of debtors. Debtors are a material item in the financial statements. Check accuracy of the aged trail balance. Discuss with management the ability Beige Ltd Valuation and allocation The company may be reluctant to of the debtors to pay and the appropriateness of the provision. increase the doubtful debts Check subsequent payments of these outstanding debts. provision as this would reduce profits Audit procedures Client Financial statement Assertions The auditors of Highlow Ltd have identified through interim testing that the costing system does not always identify the full cost of the goods that are being made and as a result the value of finished goods inventory may be understated. (5 Marks) Highlow Ltd Valuation and allocation Audit sampling to verify cost of inventory by vouching cost price back to suppliers and cost accounting records. Problems identified need to be raised with the client and an explanation sought. Reasonableness of the explanation needs to be evaluated. if the problem is found to be systematic then an evaluation of the impact of this on the value of inventory and profit needs to be completed and evaluated for materiality. Kent Kwenches Pty Ltd is a family business that manufactures soft drink. The majority of purchases are fruit, sugar and some colouring agents. There are no formal goods received documentation though when goods are received the supplier's invoice is checked against the goods by whoever is in the factory when the goods arrive. When the checked invoice is sent to the office for payment it is checked against the order before payment is made. (5 Marks) Kent Kwenches Completeness and Possible that not all invoices for goods received are sent to the office. Review supplier statements for unmatched

accuracy, Existence

invoices/Confirm with suppliers. Undertake substantive analytical procedures. Attend stocktake and sample count and price inventory to invoices. Cheese Mouse Ltd is a manufacturer of a range of cheeses sold throughout Australia. While the auditor was finalising the risk assessment she noticed that the company appeared to have a debt-recovery problem with the majority of accounts receivable outstanding for more than 60 days. Cheese Mouse's current provision for doubtful debts is 1% of sales. Cheese Mouse has only been operating for two years. Last year Cheese Mouse wrote off $75,000 of accounts receivable arid credit sales were $1,005,000. (5 Marks) Cheese Mouse Ltd Valuation and allocation, Test the aged trail balance for accuracy. Positive debtors' confirmation. Review subsequent receipts. Discuss the Existence debtors’ ability to pay with the client. You are the audit senior at Brown & Associates and have been assigned to the audit of Location Ltd (Location) for the year ended 30 June 2015. Location manufactures GPS navigation systems for motor vehicles and exports these to car manufacturers in South Korea and Japan. The South Korean market has grown rapidly over the past two years and has become the company’s most significant customer base, representing 75 per cent of Location’s revenue. All contracts are payable in US dollars. In the past three months, the volume of orders from Location’s South Korean customers has fallen 20 per cent, and two major customers have requested extended payment terms. Location is also under pressure from Chinese competitors who have undercut Location’s prices by 25 per cent. Required (a) Identify two significant statement of financial position accounts at risk of material misstatement and provide a brief explanation of why each is at risk. (b) Identify the key assertion that is affected for each account identified in (a). (c) For each of the accounts and the associated key assertions you identified above, recommend a specific substantive test of detail that would be most responsive to the risk identified. LO 9.4

Oriental Produce Ltd (Oriental Produce) has been operating for a number of years as a producer of canned vegetables. Oriental Produce imports most of its vegetables from Asia. All overseas shipments to Oriental Produce are invoiced and require settlement in US dollars. Furthermore, Oriental Produce is required to pay for freight and insurance costs. The insurance covers the period from the day the goods are loaded onto the ship (i.e. Oriental Produce assumes ownership of the goods on the day the goods are

loaded onto ships in the various Asian ports from where the produce is shipped) until the day they arrive in Oriental Produce’s warehouses in Australia. All shipments arrive in Australia within a 21-day period after loading onto a ship. All overseas suppliers are settled 30 days after the date of shipment. Overseas suppliers now represent 65 per cent of accounts payable. Local and overseas suppliers are maintained in separate subsidiary ledgers within the accounting system. The audit partner has identified that accounts payable is at risk of material misstatement. Required (a) Outline two key reasons why accounts payable is at risk of material misstatement. (b) For each key reason outlined in (a), identify and explain the assertion most at risk. (c) For each assertion at risk outlined in (b), describe one substantive test of detail that is specifically responsive to the risk of material misstatement.

You are a senior auditor with Tran & Associates and have been assigned to the audit of Beautiful Hair Ltd (Beautiful Hair). In early 2015, Beautiful Hair acquired a small manufacturer of high-quality organic hair-styling products, Shimmer Pty Ltd (Shimmer). Beautiful Hair’s management had identified that Shimmer’s line of products would fit extremely well with the Beautiful Hair business, and organised funding for the acquisition from Regional Bank. Shimmer uses special formulas to create its products. Only the owner of Shimmer knows the secret ingredients for the formulas. These secret ingredients are apparently documented and held by Shimmer’s solicitors. Beautiful Hair’s management has been advised that the intellectual property related to the formulas has the potential to be both a material and valuable asset and has been recognised as an intangible asset arising from the acquisition in accordance with accounting standard AASB 3.

Required (a) Identify and explain the two key assertions most at risk in relation to the intellectual property intangible asset. (b) Describe a substantive audit procedure to address the risks you outlined in (a).

You are a junior auditor working for the local arm of Checkers & Smith Pty Ltd (C&S), an international chartered accounting firm. You graduated last year and have been working in audit at C&S since graduation. Lion Pty Ltd (Lion) is an Australian independent publisher. Lion has a specialist line of education titles for the Education Department of the Government of the Brastan Islands, which are printed in the native language of the islands. Sales to the Brastan Islands are Lion’s only export sales. The Brastan Island’s Education Department pays for shipments of books which are delivered twice per year, so that new textbooks are available at the start of the school year and just before the start of the second semester (a significant proportion of students in the Brastan Islands only attend scholl in the second half of the year). Lion is

responsible for the insurance and shipping costs, and title passes when the books come into the Education Department’s possession. The first order of textbooks was received by Lion on 7 January 2012. The order was processed, the revenue booked and the textbooks shipped on 8 January 2012. The second order of the textbooks was received by Lion on 25 June 2012. The order was processed, the revenue was booked and textbooks shipped on 26 June 2012. The first order arrived in the Brastan Islands on 21 January 2012. The second order arrived on 8 July 2012. Payment for all books is in Australian dollars. Assume that the value of the books is material. You are the audit senior on the Lion audit. You have been presented with the audit plan which identifies that the shipment of books to the Education Dpt of Brastan represent and audit risk. The audit plan identifies the following account balances and key assertions at risk: Item

Account Balance 1 Sales 2 Inventory 3 Trade debtors Required: (a) (b) (c) (d)

Key Assertion Cut-off Rights and Obligations Cut-off

For each account balance listed in the table above, identify whether the listed key assertion is correct (Yes / No). For each incorrect assertion identified in (a) above, explain why it is not correct. For each incorrect key assertion identified in (a) above, identify the correct assertion. Justify your answers to (c) above.

You are the auditor of Custom Ltd, a manufacturer of cordless landline telephones. The following information was gathered by your audit senior. i)

Management of Custom recently decided to relax credit terms for debtors. This involved increasing the number of days to pay from 60 days to 90 days and increasing credit limits.

ii) Ratio analysis has indicated the inventory turnover has gone from 5.16 in 2013 to 3.89 in 2014. Inventory represented 15% of sales in 2013 and is now 22% of sales in 2014. iii) Creditors are recorded in a ledger that is produced monthly. Custom’s staff have been having problems with the ledger because it has reached the maximum number of creditor accounts. Management have approved an upgrade to a new system, but in the meantime Custom’s staff are relying on extensive manual records. Required: a) Identify three (3) account areas that at risk of material misstatement.

3 marks

b) For each of the three (3) account areas you have identified in part a), outline the key assertion at risk. Briefly explain why this assertion is the most important. 3 marks c) For each of your assertions in part b), list one (1) appropriate audit procedure. 4 marks

You have been assigned to the audit of Grain Crops Ltd (Grain Crops), a company that produces wheat, flour, yeast and other bakery products. As with many other businesses, Grain Crops has been finding it extremely difficult to recruit and retain skilled factory staff. As a result, Grain Crops decided that staff in the most difficult-to-retain award categories will be rewarded with annual bonuses. These are calculated using a relatively complex formula that takes into account the employee’s length of service, award rate, seniority and estimated contribution to profit. Required (a) Identify the key account at risk of misstatement and the two key audit assertions at risk. (b) Outline the audit procedures you would perform to gather sufficient appropriate audit evidence on each assertion.

You are currently part of the team that is conducting the audit of Reliable Security Ltd (Reliable Security) for the year ended 30 June 2015. Reliable Security is a manufacturer of security doors and security alarm systems. Your audit manager has asked you to carry out audit checks on cut-off at year end. Reliable Security maintains details of stock quantities on its computer. These stock quantities are updated from goods received notes and sales invoices. Reliable Security conducts a ‘wall-to-wall’ count of inventory, whereby all operations cease and they count all inventory in a single stocktake. You have noted that the following risks of potential misstatement. (i) Due to poor labelling procedures, some empty containers may be included in the inventory count. (ii) Obsolete and damaged security alarm components may have been overlooked in the warehouse. (iii) The lower of cost or net realisable value method may have been incorrectly applied. There are no relevant control activities that could prevent these potential misstatements from occurring. Required (a) For each of the potential misstatements listed above, indicate the financial report assertion to which it relates. (b) Describe one substantive test of detail that will substantiate each of the assertions listed in (a).

While assessing the risk of material misstatement and determining the appropriate response with regard to the inventory of Computing Solutions Ltd (Computing Solutions) for the 30 June 2015 audit, you become aware of the following information: (i) The best-selling computer presentation package has been experiencing a high level of returns owing to suspected software problems. (ii) Based on closing inventory, inventory turned over an average of 5.2 times in 2014 and 4.1 times in 2015. (iii) Computing Solutions moved its inventory from a central warehouse to six new regional warehouses in March 2015. (iv) Inventory on hand at end of year represented 20 per cent of sales in 2015 and 18 per cent of sales in 2014. (v) Computing Solutions has recently won a tender to supply a large government department with various products. In order to win the tender and prevent competitors from gaining a foothold in the public sector market, Computing Solutions agreed to supply the items at 10 per cent below their cost price. The first shipment is due to be delivered to the government department in the middle of July 2015. Required (a) Explain the two main assertions at risk in relation to inventory. (b) Identify two substantive audit procedures that you could perform in response to each risk identified above.

While auditing accounts payable of Flash Hardware Ltd, the audit assistant has: • selected a sample of accounts payable from the year-end accounts payable ledger and vouched each accounts payable balance to selected invoices and subsequent cash payments • agreed the total of the accounts payable ledger to the trial balance and general ledger. Required (a) Which audit assertion is each of the procedures performed by the audit assistant directed towards? (b) Identify the assertions that you believe the audit assistant should perform further testing on. Ignore disclosure issues. (c) In relation to the assertions identified in (b), what additional audit procedures would you advise the audit assistant to perform in order to gather sufficient appropriate audit evidence?

During the current year, RPL has expanded its earnings base by having titles available as searchable e-books that can be downloaded directly by readers, and by acquiring Medical Books Ltd (MBL) to access the copyright that MBL held over printing a large range of specialised medical textbooks. Required (a) Based on the background material contained in the Appendix to this book, identify the key assertion at risk for each of deferred e-book storage revenue and the medical book copyright. (b) Design an appropriate substantive test of details for deferred e-book storage revenue and the medical book copyright....