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Published by Sudip Dip Konar

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Published by: Sudip Dip Konar on Jul 16, 2012
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Q. As a senior audit assistant of M/s. Asutosh Associates, you are in charge of internal audit team of M/s Rajesh Technologies involved in the manufacture of plastic tubes. From the information you obtained you find the company is facingliquidity problem for the last two years. You are required to prepare workingpaper indicating the internal audit problems you would expect to face and howyou plan to overcome them.Answer:As a senior audit assistant of M/s. Asutosh Associates, I need to prepare workingpaper indicating the internal audit problems are as follows:Summary of problem areaPlanning Points
(i) Company is facing liquidity problemdue to poor working capitalmanagement especially in inventorymanagement area.(i) Detailed study of inventorymanagement especially in the area of inventory recording, inventorymovement, inventory valuation method,internal control system of inventory etc.(ii) Meerut plant produces all spareparts, whereas Dehradun plan produceless.(ii) Both the plant i.e. Meerut as well asDehradun should be visited by auditteam. Internal control system should bereviewed by audit team.(iii) Level of inventory should be verifiedat both the plants.(iv) Various ratio analysis particularlyrelated to inventory should beconducted as compared on month tomonth basis.Some of the important ratios to beconsidered are inventory turnover ratio,inventory holding period, raw materialinventory turnover ratio, work inprogress (WIP) turnover ratio etc.(v) Whether the company is following ABC analysis technique to inventorycontrol. In ACB analysis, inventory iscategorized according to relativeimportance for the purpose omonitoring and control.(vi) Some of the general problem areasshould be specifically checked like:(a) The purchase department in order to benefit from the economics of scale,indulges in bulk buying, which maycause an overstocking of raw materials.(b) The production department’s focusis on output maximization through
improved operational efficiency fowhich un-interrupted production is pre-requisite. Therefore, the productiondepartment would always wantsufficient inventory of WIP so thatinterruption at some stage in theproduction line does not affect itsoutput i.e. finished goods.(c) The marketing department with itsobjectives to maximize sales, wouldfocus on maximizing investment in thefinished goods inventory, as it enablesthe firm to exploit any sudden increasein demand.These individual goals of differentdepartments should be analyzecarefully and problem areas should beidentified.(vii) After completion of internal auditarrange a discussion with managementregarding problem areas and suggeststhem suitable means.
Q. Explain the use of Sampling technique in Internal audit [SA500]Answer:Use of Sampling Techniques in Internal Audit
SA 500:
„Audit Evidence
issued by the Institutes of Chartered Accountant of Indiasays:“The audit evidence should, in total, enable the auditor to form an opinion on thefinancial information. In forming such an opinion, the auditor does not normally examineall the information that is available to him because he can reach a conclusion about anaccount balance, class of transactions or a control by way of judgmental or statisticalsampling procedures.”Statistical sampling technique is a well accepted audit techniques now-adays. Statisticalsampling in auditing means forming an opinion about a group of items on the basis of examination of a few of the items. Statistical sampling technique add scientific flavor toold, generally accepted by auditing professional, of „test checking
. Statistical samplingtechniques are based on the probability theory.
The Institute of Chartered Accountants of India has issued SA 530: “Audit sampling”which is mandatory in nature and applicable to all kinds of audit.” The following is thetext of SA 530 modified as per our requirement:
1. The purpose of this standard is to establish standards on the design and selection of an audit sample and the evaluation of the sample results.This standard applies to statistical and non-statistical sampling methods. Either method,when properly, applied can provide sufficient appropriate evidence.2. When using either statistical or non statistical sampling methods, the auditor shoulddesign and select an audit sample. Perform audit procedures thereon, and evaluatesample results so as to provide sufficient appropriate audit evidence.3. Auditing sampling means the application of audit procedure to less than 100% of anitem within an account balance or class of transactions to enable the auditor to obtainand evaluate audit evidence about some characteristics of the items selected in order toform or assist in forming a conclusion concerning the population.4. It is important to recognize that certain testing procedures do not come within thedefinition of sampling. Tests performed on 100% of the items within a population do notinvolve sampling, likewise, applying audit procedures to all items within a populationwhich have a particular characteristics (for example all items over a certain amount)does not qualify as audit sampling with respect to the portion of the populationexamined, nor with regard to the population as a whole, since the items were notselected from the total population on a basis that was expected to be representative.
Design of the sample
5. When designing an audit sample, the auditor should consider the specific auditobjectives, the population from which the auditor wishes to sample, and the samplesize.
 Audit objectives
6. The auditor would first consider the specific audit objectives to be achieved and theaudit procedures which are likely to best achieve those objectives. Consideration of thenature of the audit evidence sought and possible error conditions or other characteristics relating to that audit evidence will assist the auditor in defining whatconstitutes an error and what population to use for sampling. For example, whenperforming tests of control over an entity’s purchasing procedures, the auditor will beconcerned with matters such as whether an invoice was clerically checked and properlyapproved on the other hand, when performing substantive procedures on invoiceprocessed during the period, the auditor will be concerned with matters such as theproper reflection of the monetary amounts of such invoices in the financial statements.

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