Case Study Orange Pty Ltd

Questions: Case Study 1: As a result of work undertaken during the planning stage and audit evidence collected for the tests of controls stages of the audit, Robert Smith has determined that there is a low risk of material misstatement (low inherent and control risk) for the following account balances: Wages and salaries Electricity Repairs and maintenance Due to the expected reliability of these controls, Robert has undertaken extensive testing of the controls regarding these account balances, and has concluded that the controls are reliable. Required: Identify one substantive audit procedure for each of the account balances above that will provide sufficient appropriate audit evidence regarding the accuracy of that account balance. Case Study 2: You are reviewing your audit assistants work for Orange Pty Ltd for the year ended 30 June 2015, and note the following matters: 1. Your audit assistant undertook a test of controls for 50 sales transactions. This test resulted in three errors. When planning the test, a tolerable error of 5 per cent had been established. The audit assistants working papers noted that none of the errors found were materials, either individually or in aggregate, and she therefore concluded that the controls were reliable. 2. Your audit assistants working papers on the accounts payable testing contain the following notes and conclusion: a. In order to test accounts payable, I selected all balances over $100,000 and vouched these to supporting invoices. The sample selected comprised $2,565,650 of total accounts payable of $5,168,000. One invoice for $102,500 had been incorrectly recorded on the accounts payable listing, as the goods were not actually received until after year end. b. Given the error relates to only 4% of accounts payable tested, which would be a total error of $206,702 of the overall accounts payable balance, it is not material as this is less than the materiality level set for this audit and, therefore, no further work has been performed. I am satisfied that the accounts payable balance of Orange is fairly stated. Required: Comment on the appropriateness of your audit assistants conclusions in each of the above situations. Answers: Case Study 1: Introduction Audit evidence tends to the collection of all information that will be used by an auditor in the arrival of a conclusion which according to the auditors opinion is based and contains data in the accounting records found in the financial statements (Riding, 2013). Therefore, as an auditor, you are not expected to test all the information that is available. Hence, auditors evidence which tends to be cumulative in natures contains audit evidence found in auditing procedures that are done during the audit. Thus, it includes evidence that is obtained from other different resources. The different resources may include previous audit conducted and the firms quality control procedures to test the clients acceptance and continuity (Riding, 2013). There may also be the use of minutes from previous meetings, control manuals of information obtained from past audit procedures and the inspection of the developed auditory information so as to come up with a valid conclusion. In the first case study, we will be developing substantive procedures for the three account balances so as to test the accuracy of the test balances. Wages and Salaries The substantive procedure that we can use to test this account balance is through the reasonable test procedure. Therefore, this procedure of audit accounting tends to focus on the changes in accounts across periods. Thus, it involves the development of a model that forms an expectation base in financial data, nonfinancial data or it may occur under both circumstances (Binnie, 2012). Therefore, the use of this procedure in our case will be based on the application of simple premises, thus, as an auditor one can gather more information on the accuracy of the account. Hence, what becomes certain is that the it becomes easy to examine the relationship between the accounts because of the existence of some underlying economic factors. Therefore, in our case, the wages and salaries accounts can be estimated through average wages from all firms business premises and the total amount of salaries paid. Therefore, through this the auditor can identify the potential problems that may arise in this accounts, this is possible by comparing wages per square foot to the salaries being paid. Hence, this procedure tends to be significant also because one can get the unusual amounts that may have been indicated in the wages and salaries accounts. Electricity In this instance of electricity accounts balance, the confirmation procedure of auditing may play a significant role in accuracy. Confirmation tends to be a unique type of inquiry process that is used in obtaining a certain representation of information or the obtaining process that involves a particular condition that is direct to the third party (American Inst. Of Accountants, 2015). For instance, as an auditor, the application of this substantive procedure means that confirmation is made from the receivables through communication with the debtors. Confirmation procedure is regularly used for the existing account balances and their components, but the restriction is required on these items. Therefore, the development of a communication procedure works in a manner that allows the existence of a modification of the agreements, and if so there is the existence of relevant information is carries. For instance, an auditor may request the confirmation of transactions of an entity by invo lving third parties. Confirmation is also significant since it provides relevant information about the absence of certain data or conditions. For instance, the absence of undisclosed agreement may influence the results of revenue recognition. In our case, the application of this substantiate procedure in determining the accuracy of the electricity account balance will be possible through obtaining of specific types of inquiry. For example, as an auditor, you may obtain vital or critical information about this account by communicating with the electricity providers. Hence, the confirmation request could be designed in a manner that allows you to create an agreement with the parties involved in providing electricity. Hence, it means that as an auditor you obtain the total amount of electric bills that the company paid. Thus, you will be able to produce sufficient audit evidence that is built on the accuracy of the electricity account balance. Repairs and Maintenance The substantive process that may be applied in this instance is by inquiry. Inquiry tends to be information seeking processes that increase the knowledge base process of a particular entity or entry in any financial account balance. Hence, the process is often used in the contemporary performance of the accuracy audit procedure. Therefore, it tends to range from the formal inquiries to the informal inquiries (Sherwood Culey, 2014). Later, one evaluates whether the inquiry response is integral with the results obtained in the process. Hence, the inquiry procedure involves consideration of the knowledge, asking of concise and relevant questions, application of open or closed questions, listening effectively, considering the reactions developed, and evaluating the available response. Hence, in our case, the inquiry process may be significant in determining our accuracy because we may inquire from the people who were responsible for conducting the repair and maintenance the total expense. Therefore, this means that the response attained might offer information that is similar or may differ from the information gathered in this case. Thus, this process shows that we can easily resolve any significance inconsistencies that may be obtained in the process. Hence, the application of the inquiry procedure in the repair and maintenance account balance means that we can be able to keep track of the accurate value of the repair and maintenance accounts. Case Study 2: Part 1 To show the appropriateness of my audit assistance in this case perhaps it would be helpful if I could outline some facts in this case. From what can be gathered is that my assistant undertook test controls from 50 different sales transactions. The planning test took a tolerable error of 5% and the errors identified were not from the materials, they were either individual or in aggregate. Hence, to support my assistance appropriateness Firstly, I would like to state that my assistance work as an auditor is built on opinion 50 different transactions that are obtained and evaluated as audit evidence. Hence, it means my assistant audit process evidence has been inspected, observed, confirmed, recalculated; reperformed and analytical procedures have been done through combination and inquiry (Sherwood Culey, 2014). Though inquiry may offer some significant audit evidence and may produce a misstatement. The use of other methods by my assistant apart from inquiry alone enables me to suppor t the appropriateness of my assistance because of the availability of high assertion levels and high operation effectiveness of the controls. Therefore, the reasonable assurance of by my assistant through sufficient audit evidence lowers the audit risk. Part 2 In this instance, to support the appropriateness of my assistant, what I observe is that in the assessment of the risk that is on material misstatement and financial statement, my assistant provides a clear understanding of the audit control environment (Riding, 2013). In an effective control environment, the auditor is confident in the internal control and reliability of his audit evidence generated within the provided entities. To support this, my assistant understands that the 4% of accounts payable tested has a less material level. Hence, he drew a conclusion that he is satisfied with the accounts payable. Also, his ability to identify the goods that were not received until the end of year shows that he has a clear understanding of his auditing control environment. Hence, the consideration of all relevant audit evidence by my assistant support appropriate audit evidence as the assistant auditor draw qualified opinion or disclaiming of opinions in the financial statements. References European Court Of Auditors. (2010),Audit of the clearance of accounts procedure: (pursuant to Article 287(4), second subparagraph, TFEU). Luxembourg, Publications Office of the European Union. Riding, K. (2013),Establishment of a building audit procedure and analysis for the Kansas Department of Transportation phase 2A buildings. Topeka, Kan, Kansas Department of Transportation. United States. (2013),Energy in municipal waste water treatment: an energy audit procedure and supporting data base: appendix a. American Institute Of Certified Public Accountants. (2015),Case studies in auditing procedure. New York, N.Y., American Institute of Certified Public Accountants. Sherwood, J. F., Culey, R. T. (2014),Auditing: theory and procedure. Madison, US Armed Forces Inst. Binnie, A. (2012),Audit programmes and procedure. London, Gee.