DEC 2015
a. Importance of obtaining independent confirmation from banks:
- Evidence in the form of confirmation from banks is obtained from independent
third parties. So, the evidence is free from bias and is highly reliable.
- Confirmation of bank balances would enable the auditor to determine accuracy
of the bank account balances of the client.
- Confirmation of bank balances would enable the auditor to determine existence
of the bank accounts and whether the client has a right over the bank balances.
b. The procedures done by the junior auditor were considered as incomplete mainly
because only the audit procedures relating to audit of the bank reconciliation
statements were performed. The other audit procedures in verifying the closing cash
and bank balances were obviously omitted by the junior auditor. For instance, the
junior auditor did not perform physical examination of cash balances held by the client
as at the year-end. The cash records such as the cash book were not evidently verified
by the junior auditor. In auditing the bank reconciliation statement, the junior auditor
did not examine the status of unpresented and uncredited cheques.
It is suggested that a more comprehensive audit procedures be performed by the junior
auditor. For example, he should examine the cash receipts and the cash payments a few
days before and a few days after the year-end in order to ensure that cash and bank
balances are included in the proper accounting period. In auditing the bank
reconciliation, he should trace the unpresented cheques and uncredited cheques to the
subsequent month bank statements in order to determine whether the cheques have
cleared or not.
c. Audit procedures to test the completeness assertion: Perform test of kiting (test of
interbank money transfers) to determine whether money deposited were properly
recorded.
Audit procedures to test the valuation assertion: Obtain confirmation of bank balances
as at the financial year-end from the client’s bank.
Audit procedures to test the allocation assertion: Examine cash receipts and payments
in the bank accounts a few days before and after the year-end.
d. Audit procedures for petty cash:
Perform physical examination of the pretty cash balances held by the client as at the
year-end.
Trace/verify/examine the supporting documents (such as the official receipts) for
payments made by using the petty cash balance.
Verify the evidence of approval for the payment of expenses made by using the petty
cash such as by examining the signature of the responsible officer on the payment
voucher.
JUNE 2016 Q4
A.
a. The purpose of AP is to assist in planning the audit by identifying UNREASONABLE
account balances and potential ERRORS as well as to identify areas that require detailed
CHECKING and substantive tests.
b.
i. Compare the gross profit margin of the company in the current year with the prior
years.
Compare the profit turnover ratio of the company in the current year with the prior
years.
ii. Compare the current ratio of the company in the current year with the prior years.
Compare the quick (acid-test) ratio of the company in the current year with the prior
years.
B.
Type of assertion Specific audit objectives Substantive procedures
Existence To ensure that the accounts Compare the total balance of
receivable balances stated in AR stated in the SOFP against
the SOFP really exist. the total amount of AR
balances stated in the listing
of AR.
Obtain confirmation of
balances of AR as at the year-
end from the debtors.
Completeness To ensure that all account Trace the total amount of AR
receivable balances are from the listing of AR to the
included in the SOFP. amount stated in the SOFP.
Right n obligation To ensure that the company Obtain confirmation of
has a right over the AR stated balances of AR as at the year-
in the listing of AR. end from the debtors.
Valuation To ensure that the AR are Evaluate the amount of AFDD
properly valued. as at the financial year-end.
DEC 2016 Q4
a. Existence: The management claims that the inventory stated in the SOFP really
exists.
Completeness: All the inventory items have been included in the SOFP without
omission.
Rights & obligation: The entity has a right over the reported inventory items.
Valuation: The inventory items have been properly valued based on the lower of
cost and net realizable value.
b. Verify/examine/Trace/Vouch the supporting documents such as official receipts for the
expenses recorded in the journals.
Examine the evidence of approval by responsible officer on the payment voucher.
Check the recorded motor vehicle expenses against the supporting documents to
determine whether they are properly classified or not.
Check whether the depreciation method and rates used are reasonable and reflect the
carrying amount of the asset.
Recalculate the amount of depreciation charges for the year for each category of PPE
items.
c. Physical examination of inventory is more time-consuming compared to a building
because there are many inventory items held by an entity.
Inventory items might be located in various geographical locations. Therefore, it would
be costly to perform the inventory count.
Some inventory items might be held by the consignee. Thus, physical examination
cannot be performed on these items. (We need to use confirmation letter).
Valuation of inventory is always subjective and requires professional judgement. The
inventory might easily be misstated by the client.
Some of the inventory items might become obsolete. This might cause overvaluation of
inventory balance as well as the net profit and current assets.
