The following scenario relates to questions 1–5
You are an audit senior of Viola & Co and are currently conducting the audit of Poppy Co for the year ended 30 June 20X6. Materiality has been set at $50,000, and you are carrying out the detailed substantive testing on the year-end payables balance. The audit manager has emphasised that understatement of the trade payables balance is a significant audit risk. Below is an extract from the list of supplier statements as at 30 June 20X6 held by the company and corresponding payables ledger balances at the same date along with some commentary on the noted differences:
The audit manager has asked you to review the full list of trade payables and select balances on which supplier statement reconciliations will be performed.
Which of the following items should you select for testing?
(1) Suppliers with material balances at the year end
(2) Suppliers which have a high volume of business with Poppy Co
(3) Major suppliers with nil balances at the year end
(4) Major suppliers where the statement agrees to the ledger
Where completeness is the key assertion, the sample should be selected to verify where the balance may be understated and therefore should include suppliers with material balances, suppliers with a high volume of business with Poppy Co and major suppliers with no outstanding balance at the year end.
Which of the following audit procedures should be performed in relation to the balance with Lily Co to determine if the payables balance is understated?
In order to determine if the balance with Lily Co is understated, the auditor should determine if the goods should be included in payables at the year end by inspecting the goods received note.
Which of the following audit procedures should be carried out to confirm the balance owing to Carnation Co?
(1) Review post year-end credit notes for evidence of acceptance of return
(2) Inspect pre year-end goods returned note in respect of the items sent back to the supplier
(3) Inspect post year-end cash book for evidence that the amount has been settled
To confirm the balance with Carnation Co, the auditor must determine if the liability exists for the disputed items at the year end by reviewing pre year-end goods returned notes and post year-end credit notes to verify that the goods have been returned and the order cancelled by the supplier.
The audit manager has asked you to review the results of some statistical sampling testing, which resulted in 20% of the payables balance being tested.
The testing results indicate that there is a $45,000 error in the sample: $20,000 which is due to invoices not being recorded in the correct period as a result of weak controls and additionally there is a one-off error of $25,000 which was made by a temporary clerk.
What would be an appropriate course of action on the basis of these results?
Although the error is immaterial, the auditor must reach a conclusion on the sample selected and in order to do so the effect of the error must be considered in relation to the whole population.
To help improve audit efficiency, Viola & Co is considering introducing the use of computer assisted audit techniques (CAATs) for some audits. You have been asked to consider how CAATs could be used during the audit of Poppy Co.
Which of the following is an example of using test data for trade payables testing?
Test data involves inputting fake transactions into the client’s system to test how the transactions are processed. The other options are examples of audit software.