Addressing Lack of Professional Skepticism in Audit Procedures

Q1. Circumstances Where Audit Procedures May Not Achieve Planned Objective

Q1. You are the newly promoted audit manager of a mid-size audit practice in Singapore. The managing partner has tasked you to address the issue that the junior staff do not exercise sufficient professional skepticism when designing audit procedures addressing complex audit areas involving significant judgement and estimates.

Junior staff often adopt a “Same-As-Last-Year” mentality, i.e., uncritically applying the same audit procedures as in the prior year. In order to better understand the issue, you have performed a review of several audit files in the firm and identified the following audit procedures that are most commonly repeated in the audit files over the years: 

Audit procedure 1 - Valuation of warranty expense provision

Develop an independent point estimate of the provision for warranty based on the annual average of the past three years’ actual warranty claims and compare it to the management’s estimate of the total warranty expense provision. Based on that, the auditor concludes that the warranty provision is reasonably valued.

Audit procedure 2 – Occurrence of recorded trading sales

Select sample items from the general ledger and vouch to the sales journal, sales invoice and the relevant delivery orders acknowledged by the customers to ensure that the sales transactions have actually occurred.

Required:

(a) For each of the audit procedure above, identify and explain the possible circumstances where the audit procedure may not have achieved the planned audit objective.

(b) For each of the circumstances in part (a), identify an alternative or additional audit procedure, and explain how the proposed alternative or additional procedure would better achieve the planned audit objective and address the risks identified. Do not repeat the audit procedures 

Q2. Straits Constructions Pte Ltd (SC) is in the business of property development and trading of construction materials. Its key customers include the Housing Development Board (HDB) and major property owners. SC bills its project customers progressively based on the work certified by independent architects. It recognizes project revenue progressively over time using total costs as an input. SC subcontracts some of its piling, electrical and mechanical works to a pool of subcontractors.

SC is extremely successful with project and cost management. It purchases construction materials in bulk and allows most of its subcontractors ready access to construction materials that have been delivered to them onsite. At each month-end, SC’s quantity surveyors, together with the subcontractors, will perform a stock count and quantify the construction materials utilized onsite.

SC then raises invoices to the subcontractors at the end of each month for the construction materials used and recognizes them as trading revenue.