ACCT6006 Contemporary Issues in Accounting Theory

The auditor’s objective in testing a client’s bank reconciliations is to substantiate that the balance confirmed with the bank agrees with the client’s cash accounting records. Differences are caused by deposits in transit, outstanding cheques and other reconciling items. The auditor’s objective is to obtain reasonable assurance that reconciling items are authentic, complete and treated accurately. Therefore, the substantiation of the client’s bank reconciliations is aimed at the audit objectives related to existence and completeness of cash at bank.

Adequate provision for doubtful debts means that accounts receivable in the balance sheet is valued at the correct amount, the amount that is expected to be received. The following audit procedures may be performed to determine the adequacy of the provision for doubtful debts.

1. Review of aged trial balance to identify overdue debts.
2. Discuss with the credit manager the follow-up procedures undertaken by the audit client.
3. Review of subsequent receipts for evidence as to whether debts have been subsequently paid.
4. Review of correspondence between the audit client and debtors.

In order to substantiate additions to property, plant and equipment, an auditor mainly uses a combination of vouching (inspecting supporting documentation, such as invoices), physical examination (touring the plant and sighting assets) and substantive analytical procedures.

The following sets out the key audit assertions, followed by a procedure that could be used to address each assertion.

Accounts payable and purchases Completeness:

• Examine any unmatched receiving reports and ensure appropriate accruals have been made.
• Examine cash payments after balance date and unpaid invoice files to ensure there are no unrecorded liabilities in relation to accounts payable. Accuracy, valuation and allocation/accuracy:
• Examine reconciliation of accounts payable statements, ensuring any reconciling items are appropriately accounted for. Ensure any claims for credit as a result of the returns are appropriately supported and that all such claims have been included.
• Select a sample of accounts receivable and trace amounts to subsequent receipts. Any amounts not paid should be traced to invoices and delivery dockets.

Chapter 1-1.22:

After evaluating the current audit process, it is unreasonable for Daisy to expect the assurance from an audit. This unreliability is generated from inherent limitation of the audit process, which has been used by the professionals, while determining the nature, scope and time of the test. In addition, sampling procedures are used for collecting the audit evidence, while the evaluation of the conclusive nature of available evidence is evaluated. However, audit procedure allows the organisation to detect reasonable level of assurance in the auditors, report regarding the no material misstatement, which is found in the financial report.

Moreover, the financial report is mainly calculated on the assumption that the organisation is a going concern, which increases the need for auditor test. With the auditors test relevant reasonableness of the assumption is conducted, while it is unreasonable to undertake the guarantee that the entity will continue the existence. However, bankruptcy of an organisation can occur unexpectedly after the publishing of the auditor’s report under unforeseen circumstances.

After representing the audit evidence there is a possible and reasonable expectation that the organisation does not have any kind of material misstatement in their annual report, as there is no presence of fraud or error. However, it is unreasonable to expect that no frauds or errors are being conducted within the organisation. Nevertheless, due to the limitation of aud

Chapter 8-8.17:

(a) The conclusion of the audit is considered incorrect for the following reasons:

• The relevant measure is considered, as the errors are detected from the control breaches, which amount to immaterial, while the main issue is that the breaches have occurred.
• The overall fact regarding the amendments that has been conducted by the client regarding the information provided by the audit staff is mainly considered irrelevant, as the main issue is regarding the breach which occurred.
• The deviation rate or the tolerable rate is mainly at the levels of 5%, which can be ignored during the test evaluation. However, the actual deviation rate is mainly at the levels of 8.3%, which is higher than the tolerable rate and depicts that the controls are not operating effectively.

(b) On the other hand, audit assistance mainly concluded that there is no enough evidence of audit for relying on controls over payroll of the organisation.

Chapter 8-8.18:

Chapter 8-8.19:

The test of controls for Movies Galore are mainly affeered as follows.

• The use of CAATs allows the organisation to check any automated controls, when there is lack of hard-copy documentation of sales.
• The auditors can use the last year’s evidence for test of controls only if they can confirm that no changes in controls have been taken place. Moreover, the controls are mainly tested each year, where it needs to cover the current period of 12 months
• The extent of the test is relatively high, while related controls are to be performed more than 3000 times per year. However, the extent of the test needs to be reduced, when there are no changes in controls detected. Hence, the extent of the test will be relatively low, as no changes has been conducted on controls.

Chapter 9-9.20:

1. a) High risk assertions

• Rights and Obligations: the transfer arrangements have some relevant concern, where the ownership of the funds within the bank account of Reliable Communication and its subsidiaries.
• Existence: The transfer arrangements for cash is complex in nature, which may be accounted for twice.
• Cut-off: The funds has mainly moved around year end, which increases the likelihood of cut-off.

1. b) Procedures to test and detect the risks resulting from material misstatement

• Rights and Obligations: Reviewing the transfer arrangements for understanding and determining the point, where the fund is owned by transferee/transferor.
• Existence: Reviewing the bank reconciliation statement for detecting whether all the relevant outstanding deposits are received after the year end.
• Cut-off: Reviewing the transfer schedules, bank reconciliation statement, and bank statement for detecting the transfer conducted between bank accounts, while understanding whether the accounts is accounted for transferee or transferor.

Chapter 11-11.16:

From the evaluation relevant audit procedures is used for indenturing subsequent events, which also includes the following measures.

• The procedure relevantly reads about the board minutes and investigate regarding matters to be discussed in the meeting.
• The procedure reads the current available interim financial report, cash flows, budget, and other management reports.
• The procedure enquires about the legal matters.
• The procedures also evaluate the relationship between build-up receivables, level of cash received from receivables, where doubtful debts are identified.
• Evaluation of build-up inventory, sale volumes, and sales price of the merchandise is detected with subsequent balance date to identify the inventory obsolescence.
• Identifying the journals regarding the development of high technology equipment’s that is being sold.
• Reviewing of the data regarding the expansion of overseas operations, forecasts, economic review, and article regarding the overseas economies are conducted in the procedure.
• Adequate review is conducted that management needs to display the material after balance date events and detecting whether events have occurred, which might affect financial report of the organisation.

Chapter 11-1.17:

Chapter 12-12.22:

1. i) The issue is considered material, while the report issued by the chairman will be considered materially incorrect. However, the financial report itself will be considered correct, as it holds the relevant information provided by both auditor and chairman in other information section. The occurrence of both information will result in the occurrence of unmodified opinion on the financial report, which will be enlisted in the Other Matter paragraph in the auditor’s report.
2. ii) The issue is considered material, whereas the organisation failed to reflect the purchase, which was conducted before the year end. Hence, this ignorance will directly increase the material misstatement in he annual report of the organisation, due to the omission of purchase addition in the financial report. Therefore, adequate auditor opinion needs to be addressed by the organisation for understanding the material misstatement. Therefore, without the inclusion of purchases both inventory and liability section of the annual report will not be included.

iii) The issue is considered material, as the organisation failed to adjust the pay increase in their annual report, which increases the material misstatement condition in the financial report. Hence, the organisation needs to take opinion from qualified auditor regarding the changes in both expense and liability section of the financial report, as payroll accrual has not changed.

1. iv) The client has not disclosed the information adequality, which makes the issue material. Hence, opinion of qualified auditor needs to considered by the client to disclose the material information.

Chapter 12-12.23:

1. i) The auditors qualified opinion is mainly needed under the situation, where no enough audit evidence is detected, while preparing the audit report. The value of material involved is not considered pervasive, which initiates an opinion of a qualified auditor rather than the disclaimer of the opinion issued.
2. ii) The issue of qualified auditor is mainly conducted when there is a difference in opinion with those charged for the valuation the accounts receivable of the organisation. In addition, the use of opinion of qualified auditors is only needed, when the amount involved is material not pervasive. Hence, when the situation arises the organisation needs to portray a qualified opinion rather than adverse opinion in their annual report regarding the issue.

iii) The situation indicates that the unmodified auditor’s opinion can be issued for the organisation, which is due to the presence of expert and adequate reliance on the information can be conducted by the auditor. The situation further indicates that the organisation enough evidence regarding the audit report has been depicted in the financial statement, which initiates the unmodified auditor’s opinion within the organisation. This mainly indicates that organisation has enough data for increasing the efficiency level of the financial report.

1. iv) The situation directly indicates that an unmodified auditors report will be issued by the organisation, while a certain paragraph needs to be mentioned under Material uncertainty related to going concern. The paragraph will mainly address the situation of inherent uncertainty relate to the going concern, which needs to be disclosed adequately in the financial report. The adequate adjustments in the financial report is mainly conducted, when assumption regarding the going concern of the company is not appropriate.
2. v) The situation indicates that adequate qualified auditors report needs to be issued by the organisation, as there is disagreement between the personas in-charged of governance. This relevantly lacks the disclosure regarding the accounting policies, which has been adopted by the organisation. In addition, the amount involved in the case is considered material but not pervasive. Hence, qualified opinion needs to be issued by the organisation rather than the adverse opinion.

Question 5: