Final exam topics: topics post mid-trimester test
Exam Weight: 50%
20 Multiple Choice Questions - 2 marks each total 40 marks covering topics from weeks 7 - 11.
Four case studies require you to enter answers in text in the space provided in the box on Moodle.
1) Substantive testing: Balance sheet item - 10 marks
2)Substantive testing: Balance sheet item - 10 marks
3) Substantive testing: Income statement item - 20 marks
4) Subsequent events and Audit opinions - 20 marks
Revise all lecture notes, tutorial materials, textbook, and Revision Practice Exercise.
10.24 Bank confirmations The following is a copy of the auditor’s working paper for auditing cash at bank balances for the client New Millennium Ecoproducts. It shows the details of the bank confirmation requests. Required (a) Find the list of banks from which the auditor has sought bank confirmations. How many banks are listed? (b) What information would be sought in a bank confirmation? Explain what assertion(s) are relevant to this test, and how the test provides evidence about the assertion(s). (c) Have any errors or misstatements been revealed by the bank confirmations in this example? (a) Four banks: Bendigo & Adelaide Bank, Westpac, National Australia Bank, AMP Banking (column ‘bank name’). (b) As per Para 29 of GS 016 Bank confirmation requests, the following are the information to be confirmed during bank confirmation request: • Normal banking activities, such as account balances, interest rates, terms of liabilities, items held as security for the client’s liabilities, any accounts opened or closed by the client during the period, and unused limits and facilities; • Client’s treasury operations, such as forward rate agreements, foreign currency contracts, interest rate swaps, options and treasury futures contracts; and • Other contractual arrangements. The example in this question relates to normal banking activities. The assertions addressed by this test are: • Existence (of bank accounts and loans), • Completeness (by asking the bank if there are any other deposits or loans than the ones listed), • Accuracy, valuation and allocation (by asking the bank to confirm the account balance and seeking information about interest rates), • Rights and ownership (by asking the bank if there are any charges against deposits, and to confirm the name the accounts are held in). • Cut-off, as the bank accounts are confirmed via two requests, either side of the balance date. (c) There are no errors or misstatements in the example. All items are agreed to bank accounts maintained by client (see ticks in ‘TM/Ref’ column), and absence of any comments. 10.31 Inventory Just Start Tools runs a network of small hardware retail outlets across the state. All sales are made for cash or on credit card and processed through electronic tills. A wide range of goods are stocked by the stores, meaning that the business deals with a large number of suppliers. All goods are purchased on credit with varying terms, depending on the supplier. Invoices are paid by cheque after a package of documents is collated and approved for payment. Ordering of goods and subsequent payments are processed by the central office with delivery direct from supplier to the stores — no central warehouse is used. Just Start Tools uses a perpetual stock system and conducts test counts at regular periods throughout the year. Required (a) What controls should exist for inventory movements at the local store level and the central office? (b) Explain how the stocktake for Just Start Tools should be audited. What details are most important? (a) Controls at the local store level include: • Locked doors to store and to any warehouse area. • Receiving documents when goods are received from the supplier. • Any discrepancies in deliveries are reported to the central office for backorder. • Electronic tills record stock items and update store stock records. • Cyclical stocktakes reconciled to store stock records. • Obsolete, damaged, impaired stock is identified promptly. Controls at the central office include: • Purchase orders are placed with approved suppliers. • Invoices from suppliers are not paid until local store receiving reports are reconciled with purchase order and supplier invoice – quantities and prices for each unit, and overall accuracy of invoice is verified (quantities and prices total correctly) – vouchers are prepared before payment. • Invoice payment is authorised by a senior staff member who does not participate in placing purchase orders. • Stock records are reconciled to the store level stock records. (b) Just Start Tools conducts cyclical stocktakes during the year at each store location. Therefore, the auditor would substantiate a sample of these stocktakes. The auditor would observe the stocktake to establish that: • the client’s personnel are complying with the instructions for taking the counts • items belong to the client, and those the client is responsible for, are accurately counted and recorded • items to be excluded from the inventory count (such as those with no value or belonging to others) are either subject to satisfactory control and excluded • count tags, sheets, or cards are properly controlled. The auditor would also perform test counts of the client’s counts (from tags to items, and from items to tags), and trace the tags to the inventory records (including treatment of unused, voided etc. tags). The auditor would inspect documents for receiving and any transfer between stores, to establish the numbers of the last documents used and other information required for cut-off of inventory movements in accounting records. The auditor would also perform procedures to verify inventory valuation. This would include identification of obsolete, slow-moving, damaged items. Inventory records would be inspected for evidence of correct pricing and record of cost of goods sold. Analytical procedures would compare physical item numbers and pricing, compared with previous periods, comparisons across stores (by month, product line). 11.34 Substantive procedures for cost of sales IdealProtect Limited (IdealProtect) has been an audit client of Celestia & Associates (C&A) for the past 15 years. IdealProtect is based in Toowoomba, where it manufactures high-tech armour-plated personnel carriers. IdealProtect often has to go through a competitive market tender process to win large government contracts. Its main product, the small but powerful Territory Grappler, is highly specialised and IdealProtect does business only with nations that have a recognised, democratically elected government. IdealProtect maintains a highly secure environment because of the sensitive and confidential nature of its vehicle designs and its clients. In September 2019, IdealProtect installed an off-the-shelf costing system to support the highly sophisticated and cost sensitive nature of its product designs. The new system replaced a system that had been developed in-house as the old system could no longer keep up with the complex and detailed manufacturing costing process that provides tender costings. The old system also had difficulty with the company’s broader reporting requirements. The manufacturing costing system uses all of the manufacturing unit inputs to calculate and produce a database of all product costs and recommended sales prices. It also integrates with the general ledger each time there are product inventory movements such as purchases, sales, wastage and damaged stock losses. IdealProtect’s end of financial year is 30 June. Substantive procedures for cost of sales (a) What are the principal audit objectives and assertions for IdealProtect’s cost of sales? Explain. (b) Identify the relevant substantive tests of details that would be appropriate to gather evidence about the assertions in (a) above. (a) Costs of sales are properly supported as charges against the entity in the period. Costs applicable to future periods are carried forward as inventories (occurrence). All cost of sales relating to the current period’s revenue are included in the income statement (completeness). Cost of sales are stated in income statement at the appropriate amounts and correct period (accuracy and cut-off). Cost of sales are properly classified, described, and disclosed in the financial report, including the notes, in conformity with IFRS (classification and understandability). The principal objectives relate to occurrence, accuracy and cut-off because there is a greater risk of understatement than overstatement of cost of sales (to increase gross profit). The complex costing for IdealProtect’s products suggest accuracy of costing of manufactured items will be at risk. (b) The nature, timing and extent of substantive testing of cost of sales are dependent on results of control assessment and testing. The new manufacturing costing system will be tested for its ability to provide accurate costing data for cost of sales and inventory balances. The manufacturing costing system must support costing of sophisticated product designs (including likely individual specification requests by the foreign governments) and integrate with the general ledger for all stock movements. All expenses that are included in the manufacturing process will need to be substantiated (including purchases of materials and supplies, transfer of materials and supplies into the production process, labour and allocation to individual products or batch processes, machinery costs) and estimates of percentage of completion of work in process on hand at the end of the period. In addition, movements of completed items from finished goods to cost of sales during the period will be substantiated. Substantive procedures include: • Trace and vouch purchases (supplier invoices etc. to entries in purchases/general ledger and entries in ledger to supporting documents). • Trace and vouch labour expense (list of employees and HR records to payroll expense and payroll expense to documents and timecards); compare relationship of direct labour costs to number of employees with prior period, investigate significant fluctuations. • Test mathematical accuracy of product costing. • Cut-off procedures for purchases, inventory transfers, payroll. • Review production data and compare relationship of overhead costs in cost of dales to direct labour, hours and/or dollars with prior years. • Review relationship with respect to flow of goods, such as gross profit analysis, comparison of standard and actual costs, and review reconciliation between cost of sales and shipments. • Compare actual and budgeted costs by month or quarter. Investigate reasons identified by client for important variations. Investigate unexpected variations (or their absence) not identified by the client. 12.23 Events after balance date Greg Brown is reviewing the results of the review of subsequent cash receipts. There are several receipts listed from customers that were considered doubtful at the end