During your audit of Bactor Ltd, the following evidential matter had been included in your working papers:
i. Flowcharts of the company's payroll routine prepared by your audit assistant backed up by compliance tests.
ii. An oral statement by the production director that the expected working life of plant acquired in January 1988 is 10 years.
iii. A newspaper report to the effect that the new technology is expected to have adverse effect on the sales of products representing 20% of the company's turnover.
iv. A letter to the managing director from the company's bank manager indicating that the bank intends to extend overdraft facilities for a period of one year.
v. A list of items of stock counted by a member of your firm of Certified Public Accountants during observation of the company's stock count.
vi. A letter from a debtor to your firm in reply to a confirmation request indicating agreement with the balance as recorded in the books of Bactor Ltd.
In respect of each of the above evidential matters:
(a) Explain its relevance to the overall audit objective of forming an opinion and reporting on the financial statements
(b) State, giving reasons, how reliable you judge the evidence to be
(c) Describe one additional item of audit evidence you would seek to support the matter described.
You are about to commence the final audit of Gigglane Sportswear Limited, a distributorofsports equipment and clothing. The internal auditor informs you that he has carried out a positive debtor's circularisation without your prior knowledge, utilising the following procedures:
i. Obtained a list of outstanding debtors balances (total Kshs. 376,000) at 31 October 2004.
ii. Selected every third debtor for circularisation resulting in a sample of 30 debtors totalling Kshs. 50,000.
iii. Prepared and signed the circularisation letter himself. The letter requested the debtor to write the balance due to Gigglance Limited on the reply slip and to return the reply to the chief accountant.
iv. Prepared a summary list of all replies received for submission to the external auditor.
Only eight replies (value Kshs10,500) had been received to date. The internal auditor is a little disturbed at the fact that you intend to re-circularise debtors as he feels that it is a duplication of effort and that the replies received are reliable audit evidence.
You are required to
(a) Describe the work which you perform before you can make use of any of the work undertaken by the internal auditor.
(b) Explain to the internal auditor the reasons why you wish to re-circularise debtors, commenting upon the procedure adopted by the internal auditor.
(c) Describe the techniques which you could adopt to increase the response rate of the second debtors circulation made by you.
(d) Explain the possible limitations of positive debtors circulation.
It has been your practice for some years to obtain letters of representation from the management of audit client companies. The newly appointed managing director of a client company has, however, expressed reluctance to sign a letter of representation, a suggested draft of which you sent him, and he makes the following observations in his reply to your request for such a letter.
i. The company employs several qualified accountants who are responsible for preparing accurate accounts which comply with the Companies Acts and statements of standard accounting practice. It is his understanding that it is the responsibility of the auditors (who receive a substantial fee for their services) and not his responsibility to vouch for the accuracy of the accounts and the auditors have access to all accounting records, directors' minutes, correspondence and internal audit department reports, etc and even authority to approach third parties to enable them to draw their own conclusions.
ii. He is not an accountant or lawyer and is not qualified to comment on some matters contained in the letter.
iii. He and a fellow director will be signing the balance sheet before the report is signed.
Draft your reply to the managing director
Your firm has been appointed auditors of Compa Ring Ltd in succession to another firm of Certified Public Accountants. The first financial statements on which you are required to express an opinion are for the year ended 30th September 2003
You are required to detail
(a) Your responsibilities in respect of prior period financial information, including comparatives, and
(b) The procedures you would adopt in order to discharge your responsibilities.
The modern approach to `risk-based auditing' is a most welcome development.
(a) Explain what you understand by risk-based auditing.
(b) List four factors which could indicate potential high risk areas on a particular audit. You should give reasons in your answer.
(c) Explain why there has been an increased use of a risk-based auditing approach in recent years and what advantages arise for the auditor from the adopting of such an approach.
(d) Risk-based auditing is often associated with the use of statistical sampling techniques in auditing. Explain why the two are associated, giving an illustration of the circumstances when statistical sampling techniques are, and when they are not, appropriate in this context.
(e) State what you understand by `confidence level' in relation to statistical sampling.