Emily, an experienced auditor, is assigned to conduct the audit of a continuing client, EarthWear Clothier Ltd. To comply with the auditing standard ‘ASA500 Audit Evidence’, Emily is planning the following specific audit procedures:
| Audit procedures | |
| 1) | Examining large sales invoices for a period of two days before and after year-end to determine if sales are recorded in the proper period. |
| 2) | Comparing the current-year gross profit percentage with the gross profit percentage for the last four years. |
| 3) | Examining a new plastic extrusion machine to ensure that this major acquisition was received. |
| 4) | Watching the entity’s warehouse personnel count the raw materials inventory. |
| 5) | Obtaining a letter from the entity’s attorney indicating that there were no lawsuits in progress against the entity. |
Required: In the LMS space provided
Part A
For each audit procedure listed in the table above, indicate the type of audit procedure it represents. (2.5 mark)
Part B
For each audit procedure listed in the table, indicate one account balance that is at risk and a key assertion for the account balance that is likely to be affected with brief explanation. (7.5 marks)
Examining large sales invoices for a period of two days before and after year-end to determine if sales are recorded in the proper period.
Explanation: This procedure involves examining individual sales invoices to verify the timing of revenue recognition, ensuring that sales are recorded in the correct accounting period. It is a substantive procedure because it directly tests the existence and occurrence of sales transactions.
Comparing the current-year gross profit percentage with the gross profit percentage for the last four years.
Explanation: This is an analytical procedure that involves comparing the gross profit percentage of the current year with that of the previous four years. It aims to identify significant changes or anomalies in the gross profit margin, which can indicate potential risks or errors in the financial statements.
Examining a new plastic extrusion machine to ensure that this major acquisition was received.
Explanation: This procedure involves physically inspecting a specific tangible asset, the plastic extrusion machine, to verify its existence and proper recognition in the financial statements. It falls under the category of inspection of tangible assets as it focuses on the physical presence and condition of the asset.
Watching the entity’s warehouse personnel count the raw materials inventory.
Explanation: This is an observation procedure where the auditor actively watches and confirms the counting process of raw materials inventory by the entity’s warehouse personnel. It is used to verify the existence and completeness of inventory.
Obtaining a letter from the entity’s attorney indicating that there were no lawsuits in progress against the entity.
Explanation: This procedure involves making inquiries to the entity’s attorney to obtain information about any pending or potential lawsuits against the company. It is an inquiry procedure as it relies on obtaining information from a third party to assess the likelihood of legal claims affecting the financial statements.
Part B: Account Balances and Key Assertions
Audit Procedure: Examining large sales invoices for proper period recording.
Key Assertion: Existence and Occurrence
Explanation: The audit procedure is aimed at verifying whether sales transactions have been recorded in the correct period. The key assertion at risk here is the existence of revenue (i.e., whether recorded sales actually occurred) and the occurrence of revenue (i.e., whether sales were recorded in the correct accounting period).
Account Balance at Risk: Gross Profit
Key Assertion: Accuracy
Explanation: By comparing gross profit percentages, the auditor assesses the accuracy of gross profit figures in the financial statements. Any significant deviation may indicate a risk to the accuracy of the reported gross profit.
Audit Procedure: Examining a new plastic extrusion machine.
Account Balance at Risk: Property, Plant, and Equipment
Explanation: The audit procedure aims to confirm the existence of a specific asset (the plastic extrusion machine) within the property, plant, and equipment category. The key assertion being tested is the existence of the asset in the financial statements.
Audit Procedure: Observing raw materials inventory count.
Account Balance at Risk: Inventory (Raw Materials)
Explanation: By observing the inventory count, the auditor is primarily concerned with ensuring that all raw materials inventory owned by the company is being counted. The key assertion in this case is the completeness of raw materials inventory.
Audit Procedure: Obtaining a letter from the entity’s attorney regarding lawsuits.
Key Assertion: Completeness
Explanation: The procedure involves inquiring about potential legal liabilities from the entity’s attorney. The key assertion being addressed is the completeness of contingent liabilities, ensuring that all material legal claims are properly disclosed in the financial statements.
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