(a) Headings: accounts payable and accrued expenditure
Whilst there are a great number of possible headings for accounts payable and accrued expenditure, the seven headings below seem likely:
Food and beverages;
Payroll;
Cleaning;
Maintenance of properties;
Waste disposal;
Light, heat, water and other utilities;
Business and other local taxes.
(b) Audit tests and reasons: accounts payable and accrued expenditure
General
The firm would first obtain an understanding of the business, including reviewing management
and financial accounts, in order to enable the firm to make some predictions as to the
likely relationships between items of financial and non financial data. There are likely to be
direct relationships that do not vary such as gross margins, and income and expenditure.
These relationships may be applied to each restaurant and to the company as a whole.
Understanding the business is important because it is the firm’s first year as auditor and
because it enables the auditor to properly plan tests, and evaluate the results thereof.
Tests of controls would be performed on expenditure under each heading to enable the firm
to determine the level of substantive procedures required at the year-end.
Analytical procedures would be applied to each heading, both for the company as a whole,
for regions and for individual restaurants if necessary. This would establish the level of
expenditure, and the level of accounts payable and accruals in the prior year and for each
period within the current year for which figures were available. Any unusual items would be
investigated and explanations sought and substantiated. Analytical procedures are useful
in the planning of audit tests to establish areas to which greater audit resources need to be
devoted.
Food, payroll, cleaning, maintenance of properties
I n all cases, substantive procedures would involve tracing source documentation created by
the company (such as purchase orders for food, contracts with the cleaning and maintenance
agencies and clock cards or timesheets) through the system (via goods received notes, signed
documentation indicating that services had been performed, etc.) to daybooks, ledgers and
control accounts and finally to schedules supporting the financial statements. This type of
test helps provide audit comfort that accounts payable and accruals are complete, correctly
calculated, properly authorized and recorded in the correct accounting period.
Substantive procedures tracing entries in the financial statements back to supporting
schedules, entries in the ledgers, control accounts and daybooks through to source
documentation help provide audit comfort that accounts payable and accruals exist are
properly authorized and recorded in the correct accounting period.
Substantive procedures may also involve direct confirmation of accounts payable, although
if suppliers send regular statements this may not be necessary. Such confirmations and
statements provide the auditor with valuable third party, written evidence that is generated
outside the company, showing the existence, accuracy and proper recording of accounts
payable.
After-date payment of both accounts payable and accruals also provides evidence of the
existence and accuracy of accounts payable and accrued expenditure.
Cut-off tests (checking samples of invoices for food received just before and just after the
year-end to goods received notes, purchase invoices and records of inventory counts, for
example) help ensure that expenditure and the related accounts payable and accruals are
recorded in the correct accounting period.
For many such items, there may be accrued expenditure. Tests for accrued expenditure will
be similar to those noted under the following heading.
Waste disposal, light, heat, water and other utilities and business and other local taxes
These items are less likely to have source documentation created by the company than
those noted above. They are also more likely to be billed or invoiced less frequently than
those noted above and there are likely to be more accruals for such items.
Accrued expenditure is an accounting estimate based on previous experience. Analytical
procedures such as those noted above form a large part of the checking of accrued
expenditure.
The firm should establish the basis on which accrued expenditure is calculated to ensure
that it appears reasonable and consistent with prior periods, and check the actual calculation
of the expenditure (possibly on a sample basis).
Checking accrued expenditure to invoices or bills received after the year-end and to payments
after the year-end provides evidence as to the correct calculation of accruals.
Wilfykil answered the question on April 12, 2019 at 10:29
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Explain the difficulties faced by auditors, and the decisions that auditors have to make, in conducting direct confirmations of accounts payable.
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Explain the difficulties faced by auditors, and the decisions that auditors have to make, in conducting direct confirmations of accounts payable.
Date posted:
April 12, 2019
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Answers (1)
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Explain whether the following types of audit evidence meets the standards of relevancy,
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April 12, 2019
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April 12, 2019
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Date posted:
April 12, 2019
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Date posted:
April 12, 2019
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Answers (1)
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Fraud and error present risks to an entity. Both internal and external auditors are required to deal
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Fraud and error present risks to an entity. Both internal and external auditors are required to deal
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Date posted:
April 12, 2019
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You are the audit manager for Parker, a limited liability company which sells books, CDs, DVDs
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(Solved)
You are the audit manager for Parker, a limited liability company which sells books, CDs, DVDs
and similar items via two divisions: mail order and on-line ordering on the Internet. Parker is a
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An initial meeting with the directors has provided the information below.
The company’s turnover is in excess of Kshs85 million with net profits of Kshs4 million. All profits
are currently earned in the mail order division, although the Internet division is expected to return
a small net profit next year. Turnover is growing at the rate of 20% p.a. Net profit has remained
almost the same for the last four years. In the next year, the directors plan to expand the range of
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The accounting system to record sales by the mail order division is relatively old. It relies on
extensive manual input to transfer orders received in the post onto Parker’s computer systems.
Recently errors have been known to occur, in the input of orders, and in the invoicing of goods
following dispatch. The directors maintain that the accounting system produces materially
correct figures and they cannot waste time in identifying relatively minor errors. The company
accountant, who is not qualified and was appointed because he is a personal friend of the
directors, agrees with this view, The directors estimate that their expansion plans will require a
bank loan of approximately Kshs30 million, partly to finance the enhanced web site but also to
provide working capital to increase inventory levels. A meeting with the bank has been scheduled
for three months after the year end. The directors expect an unmodified auditor’s report to be
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Required:
Identify and describe the matters that give rise to audit risks associated with Parker .
Date posted:
April 12, 2019
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Answers (1)
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Ajio is a charity whose constitution requires that it raises funds for educational projects. These
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Date posted:
April 12, 2019
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Answers (1)
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List and explain the audit tests to be performed on income and expenditure from fund raising events.
(Solved)
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Date posted:
April 12, 2019
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Answers (1)
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on a rotational basis.
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Customers review the product list on the Internet and place orders for packets of seeds using
specific product codes, along with their credit card details, onto Rhapsody Co’s secure server.
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random alphabetical code based on the name of the employee inputting the order, the date, and
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a) In respect of sales in the seeds division of Rhapsody Co, prepare a report to be sent to the
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Date posted:
April 12, 2019
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Answers (1)
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List down internal control procedures for raw material purchasing system of a large manufacturing firm
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Date posted:
April 12, 2019
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You are an audit senior responsible for understanding the entity and its environment and assessing
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Date posted:
April 12, 2019
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Date posted:
April 12, 2019
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(Solved)
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Date posted:
April 12, 2019
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Answers (1)
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You are an audit manager in McKay & Co, a firm of Chartered Certified Accountants. You are preparing the engagement letter for the audit of...
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Date posted:
April 12, 2019
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Answers (1)
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Date posted:
April 12, 2019
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Answers (1)
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a) Describe the matters to consider within your firm and the other procedures that must be
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(Solved)
a) Describe the matters to consider within your firm and the other procedures that must be
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Date posted:
April 12, 2019
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Answers (1)
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The objectivity of the external auditor may be threatened or appear to be threatened where:
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Date posted:
April 12, 2019
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Answers (1)
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Date posted:
April 12, 2019
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Answers (1)
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Date posted:
April 12, 2019
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Answers (1)