Question

3. You are a financial auditor who works in one of the public accountant firm. You are assigned by your partner to audit a client. This client listed in stock market which uses IFRS as the accounting standard. This client is a distribution company which product is home appliances. Clients sell goods to retail stores, both modern and traditional home appliances. The following are the things that you encounter when auditing that client:

a)The client has 10 (ten) operational vehicles purchased five years ago, amounting to IDR 200 million, the client uses the straight-line method and estimates of economic life for 5 years and at the time when you audit the book value the client has reported at 0. The client sells all 10 (ten) vehicle for operations are valued at IDR 80 million each and recognize total sales of IDR 800 million as gain on sale of long-lived assets. You have confirmed to the buyer and checked the sales documents such as receipts and so on, where everything is appropriate.

b)You do an inventory audit. Total physical inventory and company records are appropriate. However, there is an outdated inventory, a product that has not been sold for a long time, so that its physical appearance has faded and is not like new anymore. The client does not make adjustments to the decline in the value of obsolete inventory. The client said that they would make a bazaar by selling the obsolete goods directly to the end user, then adjusting when the goods were sold.

c)The client has an investment in the form of securities in a material amount. At the end of the period, the value of shares owned by clients has decreased. Decreased to below the purchase price of the stock. The client does not include the impairment in the comprehensive loss section, when an inquiry is made, the client says that due to the impairment due to a pandemic outbreak, and after the pandemic outbreak ends, it is assumed that the value of the stock will rise again.

d)You do a sampling to confirm the client's accounts receivable to its customers, which are both modern and traditional retail home appliance stores. You do not confirm to all customers, but only do sampling. The sample is chosen using the monetary unit sampling method, where you choose based on customers who have a material amount. After the whole sample is confirmed, you find that there are some customers whose confirmed amounts are different, but the amount is immaterial. After use audit software to detect the unrecorded transaction, it found that it because there are unrecorded sales returns in small amount. The client acknowledged this and makes adjustments.

Questions:

a.For each point number a) – d), identify each point as “fair” or “finding”. Provide your reason underline that answer! (20%)

For each point number a) – d), identify each point, type of audit objective and type of audit procedures. Provide your reason regarding audit objective and audit procedures you have chosen! (20%)

Answer 1

a) The point is fair. SInce, all the proceeds from sale of long lived assets are shown as gain on sale of long lived assets instead of showing it as revenue from operations. The book value of all the assets sold are shown as zero, which pertains to correct accounting treatment.

The audit objective in case of sale of assets is to obtain assurance as to the sale.i.e., verify whether the sale had actually took place and whether the sale is made at arms length's price. The audit procedures to be followed are to confirm the sale with the buyer and verify whether the proceeds are actually received by cash and whether those assets have been removed from the books of accounts.

Since, all the things regarding the transaction are found appropriate, the transaction is concluded to be fair.

b) This point comes under a finding. The Inventory has to be valued at Net realised value (NRV) or cost whichever is lower at the end of each year. Sine, the inventory is found to be obsolete, its NRV will be lower than cost. Hence, the company has to value the obsolete inventory at NRV but not at cost. The difference between cost and NRV should be written off.

Audit objective is to ensure that the valuation of inventory is appropriate and it matches with the quantity and value of the physical inventory present. Audit procedure is to compare the NRV and cost of all types of inventory at the year end and perform physical verification to ensure that the books of accounts show true and fair picture of the inventory by the year end.

SInce, reduction in the value of obsolete inventory has not been accounted , it pertains to a finding and management's reply of adjusting the value of inventory when it is sold is incorrect.

c) This point appears to be fair. Since, all the investments have to be measured at cost at the year end, irrespective of the reason because of which the value of investments has fallen down. IFRS prohibits measurement of investment at fair value. Only for the disclosure purpose fair value of investments shall be used.

Audit objective is to ensure that the assertions made by the management are correct and the value of investments is true and fair. Audit procedures include verification of documents of investments and its valuation.

d)The point appears to be fair. The main check regarding assurance that the trade receivables are appropriate is obtaining external confirmation from the debtors. External confirmation has to be obtained from almost all the customers where the amount either singly, or when aggreagated with others is material to the entity. Here, Auditor found that some of the debtor balances didnot match with debtor confirmations. Since, the management accepted the errors and chnages the amounts and recorded the unrecorded transactions, the problem is resolved and the books of accounts are kept appropriate. If, the auditor considers the matter is material for the understanding of true and fair view of  entity's position by the stakeholders, it can disclose the same in emphasis of matter paragraph in the audit report.

Audit objective is to ensure all the sales had been accounted for and had been recorded at appropriate value. Audit procedures are to obtain external confirmations and to verify subsequent receipts from the debtors.