a)
The most common type of circularization is where auditor writes a letter to the debtor or clients
audited paper asking them to reply directly to the auditor whether he agrees, disagrees or
can not confirm the balance on client’s sales ledger. The client is asked to reply under all
circumstances i.e. Positive circularization.
With negative circularization, a similar procedure is carried out but the debtor is asked to
reply only if he disagrees with the balance.
Frequently with circularization of debtors, the percentage of debtors who reply is low. With
negative circularization, the percentage is even lower. However, negative circularization
leads to an invalid conclusion as many debtors never reply to any circularization and some
of them will disagree with the balances. Negative circularization provides weak evidence of
the reliability of debtors figure in the sales ledger as many debtors who do not agree with the
balance will not reply.
Where client and debtor are independent of each other, replies to circularization are quite
good evidence. However, there are some limitations in reliability
•• Some debtors reply agreeing balance for any circularization even when there is a
difference. In some cases they sign the reply that they agree with the balance without
checking the purchases ledger. If the reply is from junior members of debtor staff, it is
less reliable from senior’s e.g. chief accountant.
•• Sometimes the debtor will disagree with the balance on clients sales ledger is correct.
Usually this arises through cash and goods in transit. In most businesses, the ledger
is more reliable than the purchases ledger, as sales invoice is posted to sales ledger
at the same time as the goods are dispatched to customer and cash is posted to sales
ledger when it is received usually within a day. However with purchases ledger, there
will be a considerable delay between receiving the goods and posting the invoice to
the purchase ledger because there may be delay in receiving purchase invoice and
delays in checking invoice to goods received note and purchase order. This creates
inaccuracies in customers purchase ledger.
•• Some debtors reply saying that they cannot confirm the balance because of accounting
records they keep. In this case, only the existence of debtor is confirmed.
•• Agreement of balance by debtor does not confirm that it is recoverable e.g. the debtor
may confirm the balance but because of cash flow problems, he is unable to pay it
and becomes a bad debt. Also, debtors who are experiencing cash flow problems may
not reply to the circularization. Nevertheless, this is a serious weakness of debtor’s
circularization. Checking cash received at the year end is best way of verifying the
recoverability of a debt.
•• Although the great advantage over debtor’s circularization is to confirm existence of
debtor, it is time consuming to carry out and because of limitations above. It is a less
efficient way of verifying debtors than other techniques such as looking at aged debtors
at the year end and checking cash received after year end.
•• It is carried out only on a small sample of debtors which could be a very small percentage
of the total valuation of debtors. Therefore there is a problem of sampling risk.
b)
Where a debtor does not reply to circularization, a number of techniques are used to confirm
the existence of such a debtor.
•• Check sales invoices, dispatch notes and order confirmations generated by the company.
This evidence is weak in reliability because it is generated by the company.
•• The best evidence of the existence of the debtor which is available within the company
is correspondence from the debtor such as orders from the debtor which can be found
in sales department and in the credit control.
•• Cheques received are further evidence of existence of debtors. Only the most recent
cheques will be available for auditor to inspect but there should be remittance advices
from customers showing invoices each cheque pays.
•• Other evidence can be obtained from trade directories and telephone directories. This
confirms existence of the business on client’s sales ledger but does not confirm that the
business is a debtor of the client i.e. the debtor balance on the sales ledger could either
be made of fictitious sales invoices or invoices posted to wrong accounts.
•• A further letter could be sent to the debtor to confirm that he received goods from the
client but in the same way the debtor did not reply to the circularization, he could also
not reply to the letter.
•• The debtor could be telephoned and asked if he purchased goods from the client. In
using the telephone, one must be careful that the call is not intercepted by the client.
To check the recoverability of a debt at the year end, the auditor should check its aging. The
auditor should also check cash received between year end and the time of audit visit after
year end. Any year end invoices cleared by cash received since year end can be considered
good as it is unusual for a debtor to request repayment. If some paid since year end is
large, one should check that the cheque has cleared particularly for debtors who have been
outstanding for a long period. The auditor will discuss all old outstanding amounts because
there is likely to be a dispute between the debtor and the client over the amount.
Wilfykil answered the question on April 13, 2019 at 07:22
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Tasty ice cream employs thirty salesmen each with defined geographical area coverage
(Solved)
Tasty ice cream employs thirty salesmen each with defined geographical area coverage. Each
salesperson is supplied with a car which is changed every three years. At end of each week,
each salesperson is submits claim on a preprinted form for expenses with supporting vouchers.
Expenditure is on petrol, repairs and servicing the car, hotels, lunches and entertainment. Each
claim is scrutinized by Beatrice who is the deputy chief accountant. She verifies that the claims
are supported by the vouchers. She clears any inconsistencies with the salesperson concerned
and makes out cheques for signatures by two company directors. The total amount paid in year
ended 31/12/2006 was Kshs. 25,000,000. The company made a profit of Kshs. 125,000,000.
Required:
a. Discuss the short comings of this system and suggest ways of improving the system.
b. List and describe the tests of control the auditor would undertake in this system.
c. During the audit, the auditor discovered that a salesperson in one area was submitting
false claims for entertaining customers. What actions should the auditor take?
Date posted:
April 13, 2019
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Answers (1)
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An extract from the draft audit report produced by an audit junior is given below:
(Solved)
An extract from the draft audit report produced by an audit junior is given below:
Basis of Opinion
‘We conducted our audit in accordance with Auditing Standards. An audit includes examination,
on a test basis, of evidence relevant to the amounts and disclosures in the financial statements.
It also includes an assessment of all the estimates and judgments made by the directors in the
preparation of the financial statements, and of whether the accounting policies are appropriate to
the company’s circumstances, consistently applied and adequately disclosed.
‘We planned and performed our audit so as to obtain as much information and explanation as
possible given the time available for the audit. We confirm that the financial statements are free
from material misstatement, whether caused by fraud or other irregularity or error. The directors
however are wholly responsible for the accuracy of the financial statements and no liability for
errors can be accepted by the auditor. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the company’s annual report.’
Required:
Identify and explain the errors in the above extract.
Date posted:
April 13, 2019
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Answers (1)
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List the audit procedures that should be carried out to determine whether or not the going
concern basis is appropriate for Green Co.
(Solved)
List the audit procedures that should be carried out to determine whether or not the going
concern basis is appropriate for Green Co.
Date posted:
April 13, 2019
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Answers (1)
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Explain the directors’ responsibilities and the auditors’ responsibilities regarding financial
statements prepared on the going concern principle.
(Solved)
Explain the directors’ responsibilities and the auditors’ responsibilities regarding financial
statements prepared on the going concern principle.
Date posted:
April 13, 2019
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Answers (1)
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Walsh Co sells motor vehicle fuel, accessories and spares to retail customers. The company
owns 25 shops.
(Solved)
Walsh Co sells motor vehicle fuel, accessories and spares to retail customers. The company
owns 25 shops. The company has recently implemented a new computerized wages system.
Employees work a standard eight hour day. Hours are recorded using a magnetic card system;
when each employee arrives for work, they hold their card close to the card reader; the reader
recognizes the magnetic information on the card identifying the employee as being ‘at work’.
When the employee leaves work at the end of the day the process is reversed showing that the
employee has left work.
Hours worked are calculated each week by the computer system using the magnetic card
information. Overtime is calculated as any excess over the standard hours worked. Any overtime
over 10% of standard hours is sent on a computer generated report by e-mail to the financial
accountant. If necessary, the accountant overrides overtime payments if the hours worked are
incorrect.
Statutory deductions and net pay are also computer calculated with payments being made directly
into the employee’s bank account. The only other manual check is the financial accountant
authorizing the net pay from Walsh’s bank account, having reviewed the list of wages to be paid.
Required:
a. Using examples from Walsh Co, explain the benefits of using Computer-Assisted Audit
Techniques to help the auditor to obtain sufficient appropriate audit evidence to be able
to draw reasonable conclusions on which to base the audit opinion.
b. List SIX examples of audit tests on Walsh Co’s wages system using audit software.
c. Explain how using test data should help in the audit of Walsh Co’s wages system,
noting any problems with this audit technique.
Date posted:
April 13, 2019
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Answers (1)
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List and briefly explain some of the difficulties of using audit software.
(Solved)
List and briefly explain some of the difficulties of using audit software.
Date posted:
April 13, 2019
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Answers (1)
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Computer-Assisted Audit Techniques (CAATs) are used to assist an auditor in the collection
of audit evidence from computerized systems.
(Solved)
Computer-Assisted Audit Techniques (CAATs) are used to assist an auditor in the collection
of audit evidence from computerized systems.
Required:
List and briefly explain four advantages of CAATs.
Date posted:
April 13, 2019
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Answers (1)
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There are a number of different methods of obtaining audit evidence. Methods include:
(Solved)
There are a number of different methods of obtaining audit evidence. Methods include:
•• Analytical procedures.
•• Audit sampling
•• Tests of controls.
•• Detailed testing of transactions and balances.
•• Computer assisted audit techniques (CAATs)
These methods overlap and may be used for different purposes during an audit of financial statements.
Required:
Describe the relationship between the five methods of evidence gathering described above.
Date posted:
April 12, 2019
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Answers (1)
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(Solved)
Curdco is a company that runs a chain of fast food restaurants. The company has a centralized
operating style and managers of individual restaurants have very limited decision-making powers
on day-to-day operational matters. The company’s centralized administration is responsible for
the buying of food, the payment of staff, the maintenance and cleaning of restaurants by staff
employed by a national agency, and all other matters relating to the running of the business. The
company has good internal controls over purchasing. Inventory counts are conducted at each
restaurant at the year-end. Your firm has recently been appointed as auditor to Curdco.
Required:
a. List the account headings you would expect to find in Curdco’s schedule of accounts payable and accrued expenditure.
b. Describe and give reasons for the audit tests you would carry out to obtain audit evidence for Curdco’s accounts payable and accrued expenditure.
Date posted:
April 12, 2019
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Answers (1)
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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.
(Solved)
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,
reliability and sufficiency as required by the auditor’s operational standards regarding:
• Written confirmation...
(Solved)
Explain whether the following types of audit evidence meets the standards of relevancy,
reliability and sufficiency as required by the auditor’s operational standards regarding:
• Written confirmation of a trade debtor circularized at year end
• Work-in-progress stocks identified during the annual physical stock count
• Solicitor’s letter confirming pending legal action
Date posted:
April 12, 2019
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Answers (1)
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Compare the responsibilities of the directors and auditors regarding the published financial statements
(Solved)
Compare the responsibilities of the directors and auditors regarding the published financial statements
Date posted:
April 12, 2019
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Answers (1)
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The responsibilities of internal and external auditors in relation to the risk of fraud and error differ.
(Solved)
The responsibilities of internal and external auditors in relation to the risk of fraud and error differ.
Explain the responsibilities of external auditors in respect of the risk of fraud and error in an audit
of financial statements
Date posted:
April 12, 2019
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Answers (1)
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Stone Holidays is an independent travel agency. It does not operate holidays itself. It takes commission on holidays sold to customers through its chain of...
(Solved)
Stone Holidays is an independent travel agency. It does not operate holidays itself. It takes commission on holidays sold to customers through its chain of high street shops. Staff are partly paid on a commission basis. Well-established tour operators run the holidays that Stone Holidays sells. The networked reservations system through which holidays are booked and the computerised accounting system are both well-established systems used by many independent travel agencies. Payments by customers, including deposits, are accepted in cash and by debit and credit card. Stone Holidays is legally required to pay an amount of money (based on its total sales for the year) into a central fund maintained to compensate customers if the agency should cease operations.
Describe the nature of the risks to which Stone Holidays is subject arising from fraud and error.
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
with risks to the entity.
(Solved)
Fraud and error present risks to an entity. Both internal and external auditors are required to deal
with risks to the entity.
Required:
Explain how the internal audit function helps an entity deal with the risk of fraud and error.
Date posted:
April 12, 2019
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Answers (1)
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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...
(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
new audit client. You are commencing the planning of the audit for the year-ended 31 May 2005.
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
goods sold through the Internet division to include toys, garden furniture and fashion clothes. The
directors believe that when one product has been sold on the Internet, then any other product
can be as well.
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
signed prior to this time.
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
projects seek to educate children and support teachers in certain countries
(Solved)
Ajio is a charity whose constitution requires that it raises funds for educational projects. These
projects seek to educate children and support teachers in certain countries. Charities in the
country from which Ajio operates have recently become subject to new audit and accounting
regulations. Charity income consists of cash collections at fund raising events, telephone
appeals, and bequests (money left to the charity by deceased persons). The charity is small
and the trustees do not consider that the charity can afford to employ a qualified accountant.
The charity employs a part-time bookkeeper and relies on volunteers for fund raising. Your firm
has been appointed as accountants and auditors to this charity because of the new regulations.
Accounts have been prepared (but not audited) in the past by a volunteer who is a recently
retired Chartered Certified Accountant.
Required:
Describe the risks associated with the audit of Ajio under the headings inherent risk, control risk and detection risk and explain the implications of these risks for overall audit risk
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)
List and explain the audit tests to be performed on income and expenditure from fund raising events.
Date posted:
April 12, 2019
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Answers (1)
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Rhapsody Co supplies a wide range of garden and agricultural products to trade and domestic
customers. The company has 11 divisions, with each division specializing in...
(Solved)
Rhapsody Co supplies a wide range of garden and agricultural products to trade and domestic
customers. The company has 11 divisions, with each division specializing in the sale of specific
products, for example, seeds, garden furniture, and agricultural fertilizers. The company has an
internal audit department which provides audit reports to the audit committee on each division
on a rotational basis.
Products in the seed division are offered for sale to domestic customers via an Internet site.
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.
Order quantities are normally between one and three packets for each type of seed. Order details
are transferred manually onto the company’s internal inventory control and sales system, and
a two part packing list is printed in the seed warehouse. Each order and packing list is given a
random alphabetical code based on the name of the employee inputting the order, the date, and
the products being ordered.
In the seed warehouse, the packets of seeds for each order are taken from specific bins and
dispatched to the customer with one copy of the packing list. The second copy of the packing list
is sent to the accounts department where the inventory and sales computer is updated to show
that the order has been dispatched. The customer’s credit card is then charged by the inventory
control and sales computer. Bad debts in Rhapsody are currently 3% of total sales.
Finally, the computer system checks that for each charge made to a customer’s credit card
account, the order details are on file to prove that the charge was made correctly. The order file
is marked as completed confirming that the order has been dispatched and payment obtained.
Required:
a) In respect of sales in the seeds division of Rhapsody Co, prepare a report to be sent to the
audit committee of Rhapsody Co which:
i. Identifies and explains four weaknesses in that sales system.
ii. Explains the possible effect of each weakness.
iii. Provides a recommendation to alleviate each weakness.
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
(Solved)
List down internal control procedures for raw material purchasing system of a large manufacturing firm
Date posted:
April 12, 2019
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Answers (1)