Q22 Hutton

22.1 Analytical procedures (AP)

AP is used to identify patterns and trends and any outliers or anomalies indicates potential risk of
material misstatements within the FS. In accordance with ISA, AP must be used at both the planning
and overall review stage of the audit and it may be used to gather evidence.

Benefits

The benefits of using AP at the planning stage are:

 Identify areas which are of higher risk of material misstatements

 Allows the audit team to design appropriate audit steps
 Determine the nature extent and timing of the engagement
 Allocate appropriate team members to the respective sections of the engagement
 Obtain an understanding of the business

Limitations

Conversely, the limitations are:

 Consistent mis-recording of transactions will conceal errors and fraudulent entries

 The results must be interpreted by an individual who is familiar with the business and this
may not be the case in the first year of audit
 The information is based on internal documents and this may challenge its reliability
 Unavailability of comparable information
 If the information is available, they are not comparable especially when the company is
experiencing rapid expansion or the company is in a specialist part of the industry

22.2 Volume based supplier rebates

Justification

Volume based supplier rebates have increased by 74.5% and the effective rate has increased from
7.1% to 12.9% is within the 1% to 15% range but is moving towards to the upper range of the
spectrum may be unlikely in view of the difficult trading conditions as cost of sales have declined by
3.6% and revenue similarly has decreased by 16.3%. The amount is material to the FS as it
represents 7.9% of revenue. This potential overstatement could be due to:

 There are 350 suppliers and there is an increased chance of allocating incorrect rates to the
different suppliers;
 The records are maintained on a spreadsheet which is easily accessible and corrupted;
 Based on proof in total, the expected rebate would amount to $101.8m (1,434 x 7.1%) but
was recorded in the ledger at $185m;
 The rebates are based on estimates by the purchasing director and estimates are subjective
and judgemental;
 Potential cut off errors as the rebates are only paid at the end of the contract which spans
over 1 to 3 years

Procedures

 Read the contract with the suppliers to establish the rebate rates and terms from them
 Agree the rates in the contract to the spreadsheet
  Cast the spreadsheet for accuracy
 Request for the forecast purchases and for the expired period, agree the quantity purchased
to the forecasted quantity
 Discuss and evaluate the reasonableness of the assumptions used in the forecast
 Agree the rebates to post year-end receipts from suppliers whose contract ended during the
financial year
 Enquire with management if they are using suppliers with higher rebates during the year
 Obtain written representation from management that the basis used is to their best
knowledge and they have disclosed all information and explanations to us
 Evaluate and test the controls over the recording of rebates

Inventory

Justification

Inventory has increased by 39% and is inconsistent with the 3.7% decrease in cost of sales. Inventory
days have increased from 54 days to 77.9 days and is out of line as the company is closing down 50%
of its retail stores suggest an overstatement of inventory and this may be caused by:

 Handphones are desirable items and hence it vulnerable to pilferage and this may not have
been recorded into the inventory ledger;
 Inappropriate translation rates used for the overseas purchases;
 Inclusion of slow-moving / obsolete inventories as these items are fast changing;
 If differences between the actual and ledger are not adjusted, this would cast doubt on the
reliability of the perpetual inventory system;
 Hutton is a new client and this increases detection risks due to lack of cumulative prior
knowledge and any misstatements in the opening balances may go undetected as we were
not the previous auditor

Procedures

 Attend the inventory count on 19th June to be conducted and perform 2-way tests:
o Register to floor;
o Floor to register
 Assess the conditions of the inventories
 Confirm that the count was carried out in accordance with the instruction lists
 Compare the inventory count sheet to the quantity recorded in the perpetual inventory
system and investigate material differences
 Request for the internal audit report to identify any deficiencies were noted during the
count prior to our appointment
 Evaluate if we can rely on the internal audit work by considering their qualification and
scope of work together with the organisational structure of Hutton
 Request for the ageing inventory report to identify slow-moving / obsolete inventories
 Enquire with management on the basis used in identifying slow moving goods and assess its
reasonableness based on our understanding of the business
 Recalculate provision for accuracy
 Review post year-end selling price to ascertain NRV
 Agree the costs recorded to suppliers’ invoices
 Evaluate and test the controls over inventory recording
 Agree the rebate adjustment to the spreadsheet calculation
  Retranslate the overseas purchases by using an independent rate
 Obtain previous year’s audited FS and ensure the balances were accurately brought forward

Intangible assets – website development costs

Justification

IA has increased by 181.8% and it represents 1.3% of revenue is material to the FS. There is an
increased chance of material overstatement due to:

 Incorrect capitalization of expenses; Time spent by the employees are estimated by the IT
director and estimates are subjective and judgemental in nature;
 Unreliable estimate of its UEL of 10 years as software changes rapidly and it is expected to
have a shorter UEL; this would in turn result in incorrect amortisation charged;
 In view of the technical issue encountered, previously capitalized expenses should be written
off in view of the changes made to the system;
 Fail to perform an impairment review would be in breach of IAS 38;

Procedures

 Obtain the detailed breakdown of capitalized expenses and ensure they meet the
capitalization requirements
 Vouch the costs incurred to Sweepweb to its invoices
 Agree the time spent to payroll records and timesheets
 Ascertain the basis used by the IT director in estimating the time spent by its employees and
consider its reasonableness
 Discuss with management on the estimation of UEL and consider its appropriateness by
comparing to industry norms
 Recalculate amortisation and trace to SOPL
 Ensure the amortisation commences from the date the IA is ready for use
 Enquire with management if an impairment review was conducted and read the report for
reasonableness
 Ensure that the previously capitalized expenses in respect of the technical issue is now
written off into the SOPL
 Discuss the functionality of the new software with its employees