AUE3702/202/3/2021

Tutorial Letter 202/3/2021

Substantive Procedures and Finalising

an Audit

AUE3702

Semester 1 and 2

Department of Auditing

IMPORTANT INFORMATION
This tutorial letter contains the suggested solution and comments on
Assignment 02

BARCODE
SUGGESTED SOLUTION AND COMMENTS ON ASSIGNMENT 02/2021

QUESTION

1. Substantive procedures for auditing credit sales MARKS

Reference: Auditing Notes 10/53–10/55 33 Marks

Occurrence
1. Select a sample of transaction entries recorded in the sales journal/general
ledger and trace the transaction to (occurrence) ^ ^
1.1 a customer order from an approved customer ^
^
1.2 a picking slip (yellow copy) ^
^
1.3 a signed delivery note (blue copy) dated within the current financial year ^
^
1.4 an invoice (white copy) ^
1.5 the invoice details – goods sold by the client ^ ^

2. Trace the sale of goods to the cash receipts journal/bank statement or ^

debtors’ controls account in the debtor’s ledger ^ ^

Completeness

3. Sequence test the invoices in the sales journal to ensure completeness of ^

sales OR select a sample of invoices and follow it through to the sales journal
^. Follow-up any discrepancies with management ^. ^

4. Perform analytical review procedures for trends and fluctuations follow up

any variances with management (completeness) ^ ^

4.1 gross profit analysis^ ^

4.2 sales prior periods^ ^

^
4.3 sales trends on a month-to-month basis compared to prior periods etc^
^
4.4 credit sales balance of comparative entities in the same sector^
Classification

5.1 Agree the transfer amounts from the monthly sales journals to the sales and
VAT control accounts in the general ledger ^. ^
5.2 Scrutinise the sales account for the inclusion of amounts recorded as
revenue but that do not constitute sales e.g. interest ^.
^
5.3 Inspect the sales account in the general ledger for any large or unusual
transactions and follow up with management ^.
5.4 Agree the general ledger total to that of the trial balance ^. ^

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5.5 Agree the total of the trial balance to the revenue disclosed on the face of the
statement of comprehensive income/annual financial statements ^. ^
^

Presentation

6 Inspect the annual financial statements to ensure that the revenue is

classified as goods sold and that accurate and accounting policies are ^
clearly expressed ^.
7 Compare the accounting policies applied in the current year to those of
^
the previous year to ensure that they have been consistently applied ^.
8 Obtain a written representation letter on sales from management in
regard to the completeness, occurrence and classification of sales^. ^

Available 33
Maximum 31
Communication skills: appropriate style 2

2.1 Factors to consider before relying on the work of the internal auditor MARKS
Reference: ISA 610 (revised).15 and A5-A11 and learning unit 1.4 and
12 Marks
Auditing Notes 4/46 – 4/48
1. Objectivity
1.1 The status of the internal audit function within the entity and the effect such
status has on the ability of the internal auditors to be objective^. ^
1.2 Whether the internal audit function reports to those charged with
governance or an officer with appropriate authority, and whether the internal
^
auditors have direct access to those charged with governance^.
1.3 Whether the internal auditors are free of any conflicting responsibilities ^. ^
1.4 Whether those charged with governance oversee employment decisions
related to the internal audit function^. ^
1.5 Whether there are any constraints or restrictions placed on the internal audit
function by management or those charged with governance^. ^
1.6 Whether, and to what extent, management acts on the recommendations of
the internal audit function, and how such action is evidenced^. ^
1.7 Whether the internal auditors are members of relevant professional bodies
and their membership obligates compliance to professional standards^. ^

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 2.1 Factors to consider before relying on the work of the internal auditor MARKS
Reference: ISA 610 (revised).15 and A5-A11 and learning unit 1.4 and
12 Marks
Auditing Notes 4/46 – 4/48
2. Technical competence
2.1 Whether the internal auditors have adequate technical training and
^
proficiency as internal auditors^.
2.2 Whether the internal audit function is adequately and appropriately
resourced^. ^
2.3 Whether the internal auditors have the required knowledge and skills
related to the industry specific knowledge and ability to perform work related
^
to the entity’s financial statements^.
2.4 Whether there are established policies for hiring and training internal
^
auditors^.

3. Application of a systemic and disciplined approach

3.1 Whether activities of the internal audit function are properly planned,
^
supervised, reviewed and documented^.
3.2 The existence and adequacy of audit manuals or other similar documents,
^
work programmes and internal audit documentation^.
3.3 Whether the internal audit function has appropriate quality control policies
^
and procedures^.

Available 21
Maximum 12

2.2 Relying on the work of internal audit MARKS

Reference:
8 Marks
ISA 610 & Auditing Notes 4/46–4/48 & learning unit 1.4
1. It is concerning that the internal audit function reports to the CEO – your ^
audit manager would need to consider whether this reporting line results in an
objective organisational status ^.
2. There is no mention of the work performed/policies of internal audit, and
^
whether they apply a systematic and disciplined approach, including quality
control ^.
3. Idle employees, unsure of what areas to audit, are an indication of the lack ^
of a systematic and disciplined approach/staff may perform work outside
the scope of internal audit ^.

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4. It appears that the head of internal audit has no formal qualification or ^

experience in auditing (she has a hairdressing qualification) and therefore the
function may lack competence ^.
5. Furthermore, the head of internal audit it not associated to any professional
^
affiliations, i.e. the IIA, thus the internal audit department may not have the
required technical competence ^.
6. The qualifications and experience of the internal audit clerks are not ^
specified, and this can further affect the competence of the internal audit
function ^.
^
7. The external auditor can therefore not place reliance on the internal audit
function without addressing these concerns ^.
Available 10.5
Maximum 7
Communication skills: layout 1

3 Property, plant and equipment – Existence and valuation of balance MARKS

Auditing Notes 14/25-14/26 & learning unit 3.5
22 Marks

Existence
1. Select a sample of items of property plant and equipment from the fixed ^
asset register ^.
2. Physically inspect the assets by agreeing the asset numbers/car registration ^
numbers and descriptions of the property, plant and equipment as obtained
from the fixed asset register ^.
^
3. Select a sample of items from the FAR and inspect the short-term insurance
schedule for inclusion of these items ^.
4. Select a sample of the PPE on the FAR and inspect the registration
^
documentation or licence renewal or lease agreements or invoices of
these PPE ^.
Accuracy, valuation and allocation
5. Compare the opening balances for the cost and the accumulated ^
depreciation in the general ledger and the financial statements of this year to
the closing balances of the prior year/prior year work paper ^.

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 3 Property, plant and equipment – Existence and valuation of balance MARKS
Auditing Notes 14/25-14/26 & learning unit 3.5
22 Marks
6. Reperform all casts and extensions in the fixed asset register OR ^
recalculate the FAR and compare the recalculated balances with the current
closing balances in the fixed asset register ^.
^
7. Compare the fixed asset register balance (cost and accumulated depreciation)
with the balance in the general ledger, trial balance and financial
statements ^.
8. Select a sample of property, plant and equipment from the FAR and compare ^
the item values with the property, plant and equipment listed in the insurance
policy to confirm that item values are in line with the replacement costs ^.
9. Select a sample of property, plant and equipment from the FAR and
^
physically inspect the condition of the property, plant and equipment to
assess whether there is any indication that the property, plant and equipment
might be impaired ^.
10. Reperform the depreciation calculations and compare the recalculated
^
amounts with the amounts in the fixed asset register ^.
11. Enquire from the production manager/staff, etc. regarding any item of
^
property plant and equipment that is not in good working order or that needs
to be replaced in order to determine if any assets should be impaired ^.
Existence/accuracy, valuation and allocation
12. Scrutinize the fixed asset register of PM for any unusual/abnormal entries ^
^.
13. and discuss these cases with management, for example ^: ^
14. No current year depreciation where the item value is greater than nil
^
(valuation) ^.
15. Where there is no asset but a depreciation value appears, for example for
^
assets that were disposed of in the prior year, there should not be any
depreciation (valuation) ^.
16. Where the current depreciation exceeds the accumulated depreciation ^
(valuation) ^.
17. Addition amounts capitalised that should have been expensed (e.g. repairs ^
and maintenance) (valuation) ^.
18. Duplicate asset numbers (existence) ^. ^

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 AUE3702/202/1/2021

3 Property, plant and equipment – Existence and valuation of balance MARKS

Auditing Notes 14/25-14/26 & learning unit 3.5
22 Marks
19. Blank fields (e.g.no description or cost price) (existence/valuation ^). ^
20. Negative balances (none should exist) (valuation) ^.
^
21. Obtain a written representation letter from management dealing with the
^
existence and valuation of property plant and equipment ^.
Available 31 ½
Maximum 21
Communication- appropriate style 1

4. Substantive procedures to audit the value of finished goods with the

assistance of computer assisted auditing techniques (CAATs) MARKS

Reference:
25 Marks
Auditing notes 12/22–12/28 & learning unit 3.3
1. Use CAATs to calculate the opening balance of this year by using the ^
applicable fields in this year’s master file and comparing this balance with the
closing balance of the prior year either by recalculating the closing balance
using the same fields in the prior year’s master fi e or with the closing balance
in the financial statements. Follow up on differences.
2. Use CAATs to compare the quantity of inventory per the final inventory
^
count sheets to the amount recorded in the inventory masterfile to confirm
that all inventory quantity adjustments processed are processed after the stock
count and follow up on any discrepancies noted ^ .
^
3. Use CAATs to recalculate the total inventory at year-end by multiplying the
inventory items by the cost( or selling price if it is lower) ^ and compare it to
the value of closing inventory in the financial statements/trial
balance/general ledger to confirm that it has been recorded at the correct ^
value ^.

4. Use CAATs to scan the inventory masterfile for ‘’error conditions’’ ^, for ^
example:

- Negative quantities of stock on hand ^. ^

- Missing fields ^. ^

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 4. Substantive procedures to audit the value of finished goods with the
assistance of computer assisted auditing techniques (CAATs) MARKS

Reference:
25 Marks
Auditing notes 12/22–12/28 & learning unit 3.3
- Amounts in the total fields but no amount in the quantity field ^. ^

- Negative costs ^. ^

And follow up with management on the discrepancies ^. ^
5. Use CAATs to perform analytical review procedures ^ (inventory turnover; ^
gross profit percentages, inventory closing balances etc). Compare with
corresponding figures of prior years. Obtain acceptable explanations for
^
deviations identified ^.

Valuation – Purchase of raw materials (local and foreign)

6. Use CAATs to extract a sample of inventory item numbers both local and ^

foreign purchases considering IAS 2 where all costs directly attributable to

the acquisition of inventory should be considered (purchase price, import
duties, insurance on imports, transport, handling costs, etc).

7. Agree costs to the relevant supplier invoices/shipping contract and

^
costing schedule ^.
8. Use CAATs to reperform the cost of inventory (quantity x unit cost) and
^
compare to the value field for each item ^ and;
9. Confirm that the correct amount has been used to value the raw materials ^. ^
10. Confirm the correct cost formulae has been used ^.
^
11. Confirm all relevant items have been included in the cost (per IAS 2) ^. ^

For foreign inventory;

12. Use CAATs to confirm the correct exchange rate has been used (rate at date ^

of transaction) ^.
13. Use CAATs to confirm the appropriate import and customs duties and ^

shipping charges were included ^.

14. Use CAATs to confirm the allocation of the above costs are reasonable ^. ^

Available 33
Maximum 23
Communication- appropriate style 2