Question

1. Refer to Harrisons’ Income Statement data which is located in Appendix B to the Partner’s Memo and record your answers to the following questions:
   1. Perform analytical procedures for the completeness assertion of advertising expense, security expense and bad debts expense and indicate whether you believe that there is a concern about material misstatements in each accoun
   2. Suggest an appropriate substantive procedure to test the completeness of security expense.
   3. 
      Monet & Associates Memo To: Dean Smith (Audit Senior) From: Vince Mater (Audit Partner) Date: 6th January 2020 Re: Harrisons Ltd Audit for 31 December 2019 I just wanted to fill you in briefly on our client, Harrisons Ltd, as you are just joining the audit team and it is your first year on the audit. I have been out to visit the client in order to get some information which will help us with planning this year's audit for their financial year ending 31 December 2019. I have conducted some initial audit procedures for the upcoming audit and have included these in the current audit file for the client. Harrisons Ltd is a publicly traded company that is listed on the ASX. This will be the second year that we have audited the company (and I was the engagement partner last year). In last year's audit we found no material misstatements. Harrisons Ltd is an Australian manufacturer of building materials and cement, founded in 1948 in NSW. Their operations include both manufacturing plants and wholesale distribution centers in 68 locations across Australia. They have developed a good reputation with their clients and employees and maintained strong relationships with their suppliers, who are all Australian owned and operated companies. However, there has been some recent lobbying activity by environmental groups who have expressed concerns regarding the pollution levels at their Coffs Harbour manufacturing plant. The CFO indicated to me that they do have some concerns about how this may affect their relationship with stakeholders in the community and their social licence to operate in the region. While revenues have grown year on year, and profit growth has been above 5% between 2016 and 2018, the CFO noted that inventory turnover had slowed in 2019, partly due to increased competition in the domestic market. 4 The company operates a results-oriented work environment that holds employees as well as managers accountable for success and utilizes systems that reward employee and group output. Notably, senior managers and sales staff were advised that they are to be rewarded with a bonus if the firm achieves profit growth of 5% in 2019.
      
   4. 

Answer 1

a) Analytical procedures for completness assertion of advertising expenses, security expenses and bad debt expenses :-

i) Check bills of Advertising expenses and security expenses incured.

ii) To cross check with Tax deducted at source for advertising expenses TDS rate is 10% if exceeds ₹30000 and for security providers it is 1% for individual and 2% for other than individuals. Also to check with GST - GSTR 2A with amount is matching and ITC has been claimed.

iii) To check whether amount paid through bank account and reconcile the same with bill avaiable in case of advertising and security expenses. And to check Whether it has been recorded in books of accounts as an when incurred in the same accounting period and classified as revenue expenses and debited to Profit and Loss Account.

iv) To check for unrecorded expense and to crosscheck the accounts payable account recorded in Balance Sheet Liability Side. To reconcile account payable summary to general ledger.

v) To check whether there is authorized person for approval of transaction and the annual budget for expenses should be checked.

vi) To check with the Provision made for Bad debts is accounted for properly in correct accounting period. And also to check the bills of transaction done with that party with should reconcile with bank statement received amount and remaining as account receivable. To check whether Bad Debts is settled with Provision made and if amount differs it should be charged to Profit and Loss Account.

vii) There is risk to material misstatement for which Cash Payment made should be properly reconciled and authorized person should be appointed for allowing such such transaction and Cash book and bank book BANK RECONCILIATION STATEMENT should be made.

b) Substantive Procedure to test the completeness of Security Expenses are :-

i) Check the nature of agreement i.e. Contract Agreement with Security Providers and obtain assurance as to the reasonableness of the amount charged.

ii) Verify whether TDS under section 194C of The Income Tax Act 1961 has been deducted on Amount Payable to Security Providers as Amount greater than ₹30000 if payment made to individual than TDS rate is 1% and other than individual it is 2% and if Amount is less than ₹30000, then to check on annual basis if Amount is less than or equal to ₹100000 than No TDS but if exceeds ₹100000 than TDS rate is for individual is 1% other than individual it is 2%. Also, auditor needs to verify than from bank statement that amount paid to Security provider is net of TDS. And also to check whether TDS payments are made to Government upto 7th of the next succeeding month and TDS Returns are filled Quarterly. TDS means TAX DEDUCTED AT SOURCE.

iii) To check billings of Security providers whether they are charging GST 18% on TAXABLE AMOUNT (Exclusive of TDS) i.e Service provided amount and to crosscheck whether Security Providers have Paid this GST amount to Government then only ITC can be claimed by the assessee. GST means GOODS AND SERVICES TAXES and ITC means INPUT TAX CREDIT.

iv) To check whether company is having documentary lists of authorized persons for sanctions of expenses and individual amount of sanctioning limit.

v) As security expenses is revenue expenses, to check whether it is properly accounted and charged to Profit and Loss Account. And also to check expenses are booked in correct accounting period, and the expense have been actually occurred and related to us only for services availed and the have been properly recorded under Administrative head of expense.