ACC621 : Auditing - Audit Planning - Sample Selection - Assessment Answer

Auditing Assignment

Assignment Task

Your task:

• Select 1 of the revenue accounts that you identified in Part A,
• Access the General Ledger detail for that account from the file: GL extract for Part B.doc (Go to Blackboard: Assessment: Assignment),
• Use one of the following sample selection techniques: random, systematic or haphazard, to select 5 transactions from the ledger account for further audit testing,
• Explain/demonstrate how your chosen sampling technique resulted in the selection of these 5 transactions, and
• Provide an explanation of the benefits of your selected technique (including the limitations of the 2 alternative techniques).

Part B: Sample Selection

You are now further into the audit process. You have finished your audit planning, including gaining an understanding of the entity’s internal control structure. You have decided to adopt a predominantly substantive approach for the revenue accounts and are now in the substantive testing stage of the audit.

Your task:

• Select 1 of the revenue accounts that you identified in Part A,
• Access the General Ledger detail for that account from the file: GL extract for Part B.doc (Go to Blackboard: Assessment: Assignment),
• Use one of the following sample selection techniques: random, systematic or haphazard, to select 5 transactions from the ledger account for further audit testing,
• Explain/demonstrate how your chosen sampling technique resulted in the selection of these 5 transactions, and
• Provide an explanation of the benefits of your selected technique (including the limitations of the 2 alternative techniques).

Part C: Considerations in Substantive Testing and Collecting Audit Evidence

Please provide an answer to the following questions:

1 . What might be your reason for adopting a predominantlysubstantive approach in Part B?

2. Which of the following assertions are you likely to be moreChapters 9 through 13 will assist you in answering these questions. These topics are covered in lectures in weeks 4, 6, 7 and 8.concerned about for the account used in Part B: occurrence or completeness? Why?

3. Which of the following audit procedures would be more appropriate: tracing orvouching? Why?

4. Please list 1 other assertion that might be relevant for this account.

5. What evidence could you seek for the assertion you identified in question 4? You should list at least 1 example of corroboratory evidence and/or a specific audit procedure.

6. Assume your further testing revealed an error with one of the transactions youselected in Part B, specifically a misstatement of $20,000.

a .Is this likely to be considered acceptable? Why/why not?

b. Would the magnitude of the misstatement be relevant if you were doing testsof control rather than substantive testing? Why/why not?

c. What other information would you need to know before projecting your resultsto the entire account balance? 7. Under which circumstances might it be considered acceptable to use a part-year trialbalance, such as the one presented in Part A, for substantive testing?

Part A

1.1 Preliminary judgement of materiality

Every organization prepares financial statements so that it can analyze the results achieved through its operations and the areas it needs to work on for improvement. Apart from analyzing results, there is another purpose for which an organization prepares financial statements is for the stakeholders, who are associated with the company and uses the financial statements for making decisions (Pickett 2006). In normal course of business the management is responsible for preparation of accounts and it certain cases the company employs a third party for doing this on behalf of the company. As a result of this the accounts thus prepared are not independent in nature therefore there arises the necessity of auditing the accounts independently.

1.2 Analytical review

Wills and Adams defines that decision regarding the level of materiality of a company depends on several factors such as assets, revenue, expenses and other factors. As per the model of Wills and Adams, a total omission or misstatement exceeding 1% of the company’s Gross Revenue is considered as material (Millichamp 2002). This makes the total level of materiality as $2015 (201515 X 1/100). As per this model the permissible level of misstatement is about 75% of the total materiality level. An analysis of the various accounts in trail balance indicate that the level of assets of the organization have remained the same or in certain cases have decreased. According to the income statement of the organization (refer appendices), the profit of the organization has decreased inspite of the increase in the primary revenue.

1.3 Five accounts selected and rationales

After undergoing a thorough observation and analysis of the trial balance of the company, the five accounts mentioned below can be extracted for further testing:

• Sales
• Accounts Receivable
• Cost of Sales
• Cash at bank
• Other Income

On analyzing the trial balance some interesting facts arises such as increase in sales of the company when the cost of sales have gone down of the company. The other observation includes fall in value of other income from $25000 to $1000 of the company. This is definitely something exceeding the planning materiality factor of $2015 (Carey, Knechel and Tanewski 2013). By analyzing a trial balance one can detect any misstatement with respect to accounts receivable of the company. Cash forms one of the most sensitive elements in an organization. Cash being liquid in nature is very susceptible to misuse and therefore reconciliation forms an important activity to be conducted (Carey, Knechel and Tanewski 2013). The reason for taking cost of sales under consideration is that the same has gone down where the sales of the company has increased. This area seems to be a very unlike factor as inventory level has also increased.

It is seen that the sales of the company has gone up by around 20%, on the other hand cash at bank has decreased by 2% and accounts receivable has risen by 10%. It is found that the equity if the company has gone up with decrease in cost of sales and increase in sales and again fall in wages doesn’t seem to be at par with decrease in cash at bank of the company (Carey, Knechel and Tanewski 2013).

The accounts which can be selected irrespective of the factor of materiality is consultancy fees account since its nature is very unclear and therefore a test needs to be carried on upon this during the course of audit of the company.

Part B

2.1 Explanation/demonstration of sampling technique

One of the methods listed below will be employed for carrying out a test of the accounts listed above for the purpose of ensuring that the auditing method and sample which has been chosen is error free and avoids any sort of issues to crop up:

• Stratification:

Under the technique of stratification a group of transactions are classified or sub-categorized in a group which is homogeneous in nature and selection of a certain number of transactions is done from the given group for further testing procedure (Blewett and O’Keeffe 2011).

• Random Sampling:

Apart from Stratified sampling method, the Random sampling method is also used in this. The technique of Random sampling has several methods including random number tables and random number generators although the method of systematic selection has been employed in this case (Blewett and O’Keeffe 2011). There are cases where in few accounts, even transactions are selected and cases where odd transactions are selected.

• Non-statistical sampling:

This technique of non-statistical sampling involves more of judgement rather than involvement of any sort of specific technique. Under such technique the understanding of the auditor plays an important role.

Under this, every fourth transaction of the consultancy fees account has been selected from the top for the purpose of testing further (Blewett and O’Keeffe 2011). This forms an example of the method of systematic selection since it contains a specific system for making selection and the same is not messed up.