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Audit procedures and sampling - tutorial solutions KH
Concepts In Biochemistry And Microbiology (SHGB6115 )
Universiti Malaya
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Audit procedures and sampling - solutions
Question 1
Under what circumstances can an auditor perform a controls based audit?
A control based audit approach will be adopted if the control environment is assessed to be strong. If this is the case, the controls will be tested. Only if the controls are deemed to be effective can a controls based approach be taken.
When taking a control based approach, do any substantive procedures need to be performed?
Yes, the auditor must always perform some substantive procedures, even when performing a control based audit. The substantive procedures performed may be either analytical procedures or tests of detail.
Question 2
What is meant by directional testing?
Refer lecture material.
Question 3
What considerations would you make before performing analytical procedures?
The suitability of the data The reliability of the data How precise the data and information available can be in formulating expectations The tolerable difference
Refer to lecture materials for detail
Question 4
You are the auditor for Faber and Daughter plc. They operate an oil rig just off the Norfolk coast.
They had an issue with a recent oil spill and estimate that the cost of cleaning up the damage and paying compensation to the local crab fisherman will amount to £2m. Management have assessed the likelihood of payment to be probable, and as such have recognised a provision for £2m in the financial statements.
Their financial year end is 31 December 2011; it is now the 1st of February 2012.
What audit procedures are appropriate to obtain evidence over the provision?
Firstly the auditor must consider whether the assessment of likelihood as ‘probable’ is reasonable. o Enquire how this has been determined o If possible, talk to in-house legal counsel o If Faber and Daughter have used an external legal advisor, review correspondence. o In both of the instances above, the auditor must establish whether the legal advisor (whether in house or external) is suitably competent (has relevant qualifications and experience). The auditor may ask to review any working papers, and if necessary, may wish to consult an independent legal expert.
Once satisfied that the provision does need to be created (probable event as discussed above, past event (oil spill has happened) and present obligation (to the crab fishermen)), then the reasonableness of the £2m provided must be investigated. o Consider the timing of the payment, and if required, determine whether the time value of money has been taken into account (i. if it is material the provision must be discounted back to present value). o If using a present value, consider the reasonableness of the discount factor used (compare to industry / re-calculate company’s cost of capital) o Review correspondence of legal claims.
The auditor must also consider the accuracy of prior period estimates based on actual results or adjustments to the estimates in current period (this will serve as proof of management’s ability to estimate, their inclination to bias and the risk of material misstatement).
The auditor will obtain written representation (in the management representation letter) that they believe the estimate to be accurate.
Consider events that have occurred after the 31 December year end (it is now February) – this may provide evidence about the amounts settled / the likelihood of any court cases if these have taken place.
Question 5
Required:
Perform analytical procedures in respect of the depreciation expense of Scissor Ltd in relation to their loans outstanding during the year end 31 December 2013.
Identify which balances require further investigation, assuming that the tolerable threshold has been set at £1,500.
Where you have identified balances that require further information, make sensible suggestions at what might have caused the difference to arise.
Analytical procedures
Gain an understanding of the business From the PPE note we can see there have been additions and disposals of PPE during the year. Ideally we would want to find out a bit more about when these occurred / how many items there were.
Develop an independent expectation
Land and buildings 퐸푥푝푒푐푡푒푑 푑푒푝푟푒푐푖푎푡푖표푛 =
£140,000 − £40, 000 (푙푎푛푑)
50 푦푒푎푟푠
= £ퟐ,ퟎퟎퟎ
Plant and machinery 퐸푥푝푒푐푡푒푑 푑푒푝푟푒푐푖푎푡푖표푛 표푛 푖푡푒푚푠 ℎ푒푙푑 푎푙푙 푦푒푎푟 =
£85, 000 − £35, 000 (푑푖푠푝표푠푎푙푠)
20 푦푒푎푟푠
= £ퟐ,ퟓퟎퟎ
Audit procedures and sampling - tutorial solutions KH
Course: Concepts In Biochemistry And Microbiology (SHGB6115 )
University: Universiti Malaya
