Audit Evidence, Financial Ratios, Internal Controls, Related Party Transactions, Revenue Audit, and

What is meant by sufficient appropriate audit evidence?

 (a) In your own words, explain what is meant by sufficient appropriate audit evidence. 

 (b) Explain whether sufficient appropriate audit evidence has been obtained for each of the above situations. Give reasons for your answer.

The following financial ratios have been calculated for Nova Ltd for the year ended 30 June 2008:

Ratio             Actual results        Budgeted results     Previous year     Industry Average 

 Current ratio          1.97                      1.92                           1.87                     1.92 

Quick asset ratio      1.06                   1.06                         1.06                     1.11 

Inventory turnover   4.21                  4.91                        4.86                     4.76

 Net profit ratio         0.05                  0.03                        0.03                      0.03

 Gross margin            0.65                  0.59                            0.61                0.61 

Required: Provide four (4) possible explanations for the results of the various ratios for Nova Ltd and explain their implications for the audit.

Everyday Supplies Pty Ltd is a single-store retailer that sells a variety of tools, garden supplies, timber, small appliances, and electrical fixtures to the public, although about half of Everyday Supplies’ sales are to construction contractors on account. Retail customers pay for merchandise by cash or credit card at cash registers when merchandise is purchased. A contractor may purchase merchandise on account, if approved by the credit manager based only on the manager’s familiarity with the contractor’s reputation. After credit is approved, the sales associate files a prenumbered charge form with the accounts receivable supervisor to set up the receivable. The accounts receivable supervisor independently verifies the pricing and other details on the charge form by reference to a management - authorised price list, corrects any errors, prepares the invoice, and supervises a part-time employee who mails the invoice to the contractor. The accounts receivable supervisor electronically posts the details of the invoice in the accounts receivable subsidiary ledger; simultaneously, the transaction’s details are transmitted to the bookkeeper. The accounts receivable supervisor also prepares a monthly computer-generated accounts receivable subsidiary ledger without a reconciliation with the accounts receivable control account and a monthly report of overdue accounts.

Possible explanations for the results of the various ratios for Nova Ltd and their implications for the audit

The cash receipts functions are performed by the cashier, who also supervises the cash register clerks. The cashier opens the mail, compares each cheque with the enclosed remittance advice, stamps each cheque “for deposit only”, and lists cheques for deposit. The cashier then gives the remittance advices to the bookkeeper for recording. The cashier deposits the cheques daily, separate from the daily deposit of cash register receipts. The cashier retains the verified deposit slips to assist in reconciling the monthly bank statements, but forwards to the bookkeeper a copy of the daily cash register summary. The cashier does not have access to the journals or ledgers.

The bookkeeper receives the details of transactions from the accounts receivable supervisor and the cashier for journalising and positing to the general ledger. After recording the remittance advices received from the cashier, the bookkeeper electronically transmits the remittance information to the accounts receivable supervisor for subsidiary ledger updating. The bookkeeper sends monthly statements to contractors with unpaid balances upon receipt of the monthly report of overdue balances from the accounts receivable supervisor. The bookkeeper authorises the accounts receivable supervisor to write off accounts as uncollectible when six months have passed since the initial overdue notice was sent. At this time, the credit manager is notified by the bookkeeper not to grant additional credit to that contractor. 

Required: Describe five (5) internal control weaknesses in Everyday Supplies’ internal control for the cash receipts and billing functions and explain why they are weaknesses for two (2) that you have identified.

During your review of the audit field work completed by a new junior employee of the audit firm, John Smith, you have noted many areas which require additional review notes. John, who has just completed the interim audit of Taxon Ltd for the year ended 30 June 2019, has just performed testing of controls. When testing controls over payments made to related parties, there should be evidence of approval and sign-off by the chief financial officer (CFO). John selected a sample of payments made to related parties and vouched them back to the electronic funds transfer (EFT) forms to sight the CFO’s signature of approval. Based on a sample of ten payments, six had been approved by the CFO in writing. However, the remaining four EFT forms (for immaterial amounts) did not have the CFO’s signature, but John noted that the CFO had given verbal approval. John concluded that because all internal controls were working, the audit team could use analytical procedures alone to audit payments made to related parties. 

Internal control weaknesses in Everyday Supplies’ internal control for the cash receipts and billing functions and why they are weaknesses

1)Based on the results of the testing of controls outlined above, determine whether John has arrived at the appropriate conclusion? 

2)Justify your answer by addressing the following areas: the risks associated with related party transactions, and the reliability of controls at Taxon Ltd. 

 Magi Chen is the managing director of Sun Construction Pty Ltd, a family owned business that provides construction services. As Magi is interested in purchasing some new construction equipment’s for her business, she has approached her local bank for finance. The bank has asked that Magi provide an audited financial statement to assist them in considering her loan application. Magi has approached your audit firm for this service and you have been allocated the task of auditing Sun Construction for the year ended 30 June 2019. You have undertaken a preliminary review of the business and determined that a substantive testing approach would be suitable and appropriate. You are currently preparing an audit program for the revenue cycle. The following information has been obtained from your review: 

• Magi usually works 120 hours a fortnight. Part of this time is spent travelling between different clients and is not charged to the clients. The remaining time is charged at $60 per hour, regardless of the task undertaken.

 • Customers typically pay Magi in cash for the work undertaken, except for a small number of regular small-business customers. Magi allows these customers to pay on account by bank transfer on a monthly basis.

 • Magi supplies each cash customer with a written receipt, prepared manually from a receipt book purchased at the local news-agency. The book contains pre-numbered blank receipts, which are completed in duplicate. 

Required: For each of the assertions of occurrence, completeness and accuracy, identify a procedure(s) you could use to audit Sun Construction's revenue.

Several firms have internal audit function to govern their business operations. The head of internal audit department of one of your clients has invited you to give a talk to the members of his department during their annual training week. He would like your views on the different roles of external and internal auditors, the type of work that each carry out and their reporting responsibilities. 

Required: Draft notes that you will use when giving your talk, paying particular attention to the differences and similarities of the following features of internal and external auditors: 

(i)independence;  

ii)the work carried out on systems of internal control and operations;  

(iii) reporting responsibilities.