Professional Academy Of Commerce

Suggested Solution
CAF-9 – Refferel Test#3 AA

Answer: 1
a. Substantive procedures for trade receivables(Maximum Marks 5, 0.75 mark for each)
i. Obtain the aged receivables listing and agree to the balance on the sales ledger control
account and trial balance.
ii. Review the aged trade receivables ledger to identify any slow moving or old balances,
discuss the status of these balances to assess whether they are likely to pay.
iii. Select a representative sample of trade receivables and review for any subsequent cash
receipts. Ensure that a sample of slow moving/old receivable balances is also selected.
iv. Select a sample of goods despatched notes (GDN) immediately before and after the year
end and follow through to the receivables ledger to ensure they are recorded in the
correct accounting period (Cut-off).
v. Select a sample of year-end receivables balances and agree back to valid supporting
documentation of sales invoices, GDNs and sales orders to ensure existence.
vi. Review customer correspondence to identify any balances which are in dispute or
unlikely to be paid and discuss with management.
vii. Review board minutes to identify whether there are any significant concerns in relation
to payments by customers.
viii. Calculate the average receivables collection period and compare this to the prior year
and investigate any significant differences.
ix. Inspect post year-end sales returns/credit notes and consider whether an additional
allowance against receivables is required.
x. Obtain a breakdown of the allowance for trade receivables, recalculate and compare to
any potentially irrecoverable balances to assess if the allowance is adequate.
b. Substantive procedures for bank balances(Maximum Marks 5, 0.75 mark for each)
i. Obtain a bank confirmation letter from AL’s bankers for all of its accounts.
ii. Agree all accounts listed on the bank confirmation letter to the company’s bank
reconciliations or the trial balance/generalledger to ensure completeness of bank
balances.
iii. For the current account, obtain AL’s bank reconciliation and cast to check the additions
to ensure arithmeticalaccuracy.
iv. Agree the balance per the bank reconciliation to an original year-end bank statement
and to the bank confirmation letter.
v. Agree the reconciliation’s balance per the cash book to the year-end cash book.
vi. Relate other information contained in the confirmation letter to other areas of the audit
(forexample, accrued bank charges must be provided for in the financial statements).
vii. Check items appearing in the bank reconciliation statement against any available
supporting evidence (for example, unpresented cheques in the bank reconciliation
statement should be shown as having been presented in a subsequent bank statement).
viii. Examine any old unpresented cheques to assess whether they need to be written back.
ix. Review the cash book and bank statements for any unusual items or large transfers
around the year end, as this could beevidence of window dressing.
x. Review the confirmation letter from the bank for any other information to be disclosed
inthe financial statements (for example, charges on assets and security for loans).
xi. For the savings bank accounts, review any reconciling items on the year-end bank
reconciliations and agree to supporting documentation.
 Professional Academy Of Commerce
Suggested Solution
CAF-9 – Refferel Test#3 AA

xii. Review the financial statements to ensure that the disclosure of bank balances is
complete and accurate and classifiedappropriately between current assets and current
liabilities.
Ans. 2
(a)
Additional audit procedures(Maximum Marks 4, 1 mark for each)
i. Inspect the contract with Pets to confirm credit terms are 60 days
ii. Inspect other contracts to confirm credit terms are 30 days
iii. Check date of contract with Pets
iv. Inspect records of goods despatched to Pets prior to year end
v. Ascertain if amount was paid after year end
vi. Direct confirmation of balance with Pets
vii. Reperform trade receivables days’ calculation excluding Pets and ascertain if:
- days are in line with 30-day credit policy for other customers
- days are in line with prior year

(b)

Following are substantive procedure(Maximum Marks 5, 1 mark for each)

i. Review and test the procedures in place for comparing NRV with cost for each item of
inventory.
ii. Follow up any information obtained from other audit work suggesting that for certain items
of inventory, NRV may be lower than cost. Information may be obtained from the physical
inventory count (where the auditor has observed evidence of deterioration of the inventory)
or from the amount of returns and allowances granted to customers.
iii. Review inventory records and order books for evidence of slow-moving items, whose selling
price might need to be reduced and whose NRV may therefore be less than cost.
iv. Review prices at which goods have been sold after the reporting period, for evidence that
NRV is higher than cost
v. In the case of work in progress, compare costs incurred to date with selling price minus costs
to complete (NRV). Estimated costs to complete may be assessed by the auditor from the
client’s management accounts.

Ans. 3(Maximum Marks 11, 1 mark for each)

Before the count

i. Review the prior year audit files to identify whether there were any particular warehouses
where significantinventory issues arose last year.
ii. Discuss with management whether any of the warehouses this year are new, or have
experienced significant controlissues.
iii. Decide which of the 12 warehouses the audit team members will attend, basing this on
materiality and risk of eachsite.
iv. Obtain a copy of the proposed inventory count instructions, review them to identify any
control deficiencies and ifany are noted, discuss them with management prior to the counts.

During the count

i. Observe the counting teams of Andromeda to confirm whether the inventory count
instructions are being followedcorrectly.
ii. Select a sample of inventory and perform test counts from inventory sheets to warehouse
aisle and from warehouseaisle to inventory sheets.
iii. Confirm the procedures for identifying and segregating damaged goods are operating
correctly, and assess inventoryfor evidence of any damaged or slow moving items.
iv. Observe the procedures for movements of inventory during the count, to confirm that all
movements have ceased.
v. Obtain a photocopy of the completed sequentially numbered inventory sheets for follow up
testing on the finalaudit.
vi. Identify and make a note of the last goods received notes and goods despatched notes for
31 December in orderto perform cut-off procedures.
vii. Discuss with the internal audit supervisor how any raw materials quantities have been
estimated. Where possible,reperform the procedures adopted by the supervisor