Question

You are a senior on the audit for the year ended 30 June 2018 of Office Supplies Ltd, A Perth-based manufacturer of customised office furniture. You are carrying out audit checks on cut-off at year end. Office Supplies maintains details of stock quantities on its computer and conducts a ‘wall-to-wall’ count of inventory when all operations cease at 30 June, and all inventory is counted in a single stocktake. The bulk of inventory is held in two adjoining warehouses owned by Office Supplies. However, a material amount of special desk fittings is held in a separate warehouse in a difference suburb by a third party:

          During the planning stage of the audit, you have discovered that the following potential misstatements may occur or exist:

• Obsolete and damaged furniture fittings may be overlooked in the warehouse
• Some empty containers may have been included in the inventory count due to poor labelling procedures
• The lower of cost or net realisable value method may have been incorrectly applied

Based on your audit procedures completed during the planning stage, you have concluded that there are no relevant control activities that could prevent these potential misstatements from occurring

Required

(a) Outline the substantive test of detail that will substantiate each of the potential misstatement

(b)   For each substantive test of detail that you outlined in (a), indicate the assertion at risk

Potential misstatement	(a) Substantive test of detail	(b) Assertion at risk

Answer 1

• Audit assertions - what the auditor gathers evidence to support.

assertions are as follows:

• Accuracy. All of the information contained within the financial statements has been accurately recorded.

• Completeness. All of the information that should be disclosed has been included within the financial statements and accompanying footnotes so that readers have a complete picture of the results and financial position of the entity.

• Cut-off. Transactions have been compiled into the correct reporting period.

• Existence. The information recorded in the financial statements actually occurred during the year; fraudulent transactions are most likely to violate this assertion.

• Rights and obligations. The entity is entitled to the assets it is reporting, and is reporting all of its obligations as liabilities.

• Understandability. The information contained within the financial statements has been clearly presented, with no intent to obfuscate the results or financial position of the entity.

• Valuation. The transactions that are summarized in the financial statements were properly valued; this is a particular concern when transactions must be either initially or subsequently recorded at their market value.

• Audit procedures - how the auditor gathers the evidence.

Substantive Procedures: If the internal control system is poor, the auditor will have to perform much more work as the audit is the only defence left against a material misstatement in Financial Statement. It mainly involves

1. Analytical Procedures
2. Test of details

Test of Details would include:

• Confirmation like asking for Balance Confirmation from customers
• Inspection & observation, which is vouching and tracing of Bill's and Invoices to ensure that they are posted to the right Vendor/Customers account.
• Recalculation like performing the activity of reconciliation of Bank Statements with Bank Book again.

Potential misstatement (a) Substantive test of detail (b) Assertion at risk Valuation Obsolete and damaged furniture fittings Enquiry and confirmation may be overlooked in the warehouse Some empty containers may have been included in the inventory count due to poor Inspection labelling procedures The lower of cost or net realisable value Recalculation and method may have been incorrectly applied Reperformance Existence or occurrence Accuracy

Please like the answer.....................for doubts comment..................thank you

Answer 2

• Audit assertions - what the auditor gathers evidence to support.

assertions are as follows:

• Accuracy. All of the information contained within the financial statements has been accurately recorded.

• Completeness. All of the information that should be disclosed has been included within the financial statements and accompanying footnotes so that readers have a complete picture of the results and financial position of the entity.

• Cut-off. Transactions have been compiled into the correct reporting period.

• Existence. The information recorded in the financial statements actually occurred during the year; fraudulent transactions are most likely to violate this assertion.

• Rights and obligations. The entity is entitled to the assets it is reporting, and is reporting all of its obligations as liabilities.

• Understandability. The information contained within the financial statements has been clearly presented, with no intent to obfuscate the results or financial position of the entity.

• Valuation. The transactions that are summarized in the financial statements were properly valued; this is a particular concern when transactions must be either initially or subsequently recorded at their market value.

• Audit procedures - how the auditor gathers the evidence.

Substantive Procedures: If the internal control system is poor, the auditor will have to perform much more work as the audit is the only defence left against a material misstatement in Financial Statement. It mainly involves

1. Analytical Procedures
2. Test of details

Test of Details would include:

• Confirmation like asking for Balance Confirmation from customers
• Inspection & observation, which is vouching and tracing of Bill's and Invoices to ensure that they are posted to the right Vendor/Customers account.
• Recalculation like performing the activity of reconciliation of Bank Statements with Bank Book again.

Potential misstatement (a) Substantive test of detail (b) Assertion at risk Valuation Obsolete and damaged furniture fittings Enquiry and confirmation may be overlooked in the warehouse Some empty containers may have been included in the inventory count due to poor Inspection labelling procedures The lower of cost or net realisable value Recalculation and method may have been incorrectly applied Reperformance Existence or occurrence Accuracy

Please like the answer.....................for doubts comment..................thank you