Advanced Auditing
CLO 3: Apply the audit procedure on selected items of financial statements
CLO 4: Analyze auditor's report on financial statements
Case 1:
Your audit firm (Dubai Co) has been approached by SAMA Co, a national chain of electronics, to tender for their statutory audit for the year ending 31 December 20X7.
You are an audit manager working at Dubai Co and will be managing the audit of SAMA if Dubai Co is appointed. Dubai Co is a large audit firm with branches around the country and in Europe. The firm has over 800 clients in many different industries.
You have carried out some research on SAMA by reviewing their website, brochures, and by reading articles from the national press, and have identified the following key points:
SAMA was established 10 years ago and is owned and run by two entrepreneurs who have extensive experience in the electronic industry. SAMA is an electrician with 45 high street stores throughout United Arab Emiratis.
They buy high value electronics from California and sell them in their high street shops, on-line or to other electrician retailers on a wholesale basis. The on-line business is relatively new and has been operating for just over one year.
An article in the national newspaper in September 20X7 indicated that the price of electronics was likely to fall dramatically during the following months due to an upturn in the world economy with major investors moving their funds out of electronics and into other investment areas.
You have a meeting scheduled with the Chief Executive Officer (CEO) and Finance Director (FD) of SAMA to discuss the contract in more detail. Points from meeting:
The FD informs you that SAMA has had another successful year and has opened another three stores at the start of 20X7.
The directors have asked your firm to commence the audit immediately because audited accounts are needed by the bank by 5th February 20X8.
SAMA would also like your firm to prepare their tax computations for the year in addition to the audit work.
When asked why the previous auditors left, the CEO indicated that there had been a disagreement with the previous auditors about certain disclosures in the financial statements in the previous year.
Points from meeting with the Dubai Co audit partner:
Rashid Ali (partner of Dubai Co) would like to know more about the disagreement from the previous auditors.
You conclude that the audit firm will have the skills to carry out the audit as it already audits another high street chain of electronics.
In addition, Rashid's brother-in-law is a director at SAMA and should be able to assist with any difficulties the auditors have.
Required:
Describe the matters to be considered and the procedures that must be undertaken before accepting the appointment as auditor to SAMA.
Case 2:
SAMA Co Draft Statement of Financial Position as of 31 December 20X7:
SAMA Co Draft Statement of Financial Position as of 31 December 20X7:
SAMA Co Draft Income Statement for the year ended 31 December 20X7:
Required:
As part of your risk assessment procedures for SAMA, identify and explain possible audit risks using:
A. Your knowledge of the business; and
B. Analytical procedures.
Case 3:
Required:
You are in charge of auditing SAMA's non-current assets.
A. What initial procedures would you perform on the non-current asset note?
B. Which of the financial statement assertions are most relevant to the testing of motor vehicles?
C. How would you test each of the assertions you have identified in (B)?
Case 4
The draft financial statements as of 31 December 20X7 show a positive cash balance of $ 48,000 and a bank overdraft of $ 680,000. There is also a long-term loan of $ 3,300,000.
Question 4
A. What 3 documents would you obtain to prove, with reasonable certainty, that SAMA had a bank overdraft of $ 680,000 as of 31 December 20X7? Get Professional Assignment Help Service Now!
B. Rank these three documents in order of reliability.
C. What would you do with these three documents to prove, with reasonable certainty, that SAMA had a bank overdraft of $ 680,000 as of 31 December 20X7?
D. How could you prove the amount of cash (notes & coins) that SAMA held in its tills and safes as of 31 December 20X7?
Case 5
Aged receivables analysis as of 31 December 20X7 ($ thousands)
Required:
A. State and briefly explain three assertions associated with the audit of trade receivables.
B. Select four balances that should be included in your trade receivables direct confirmation audit testing. Explain why you have included each of the balances.
C. Apart from direct confirmation, state and explain six substantive procedures the auditor should perform on the year-end trade receivables of SAMA.
Case 6
You attended the physical inventory count at SAMA year end as of 31 December 20X7. The company does not maintain book inventory records, and previous years' audits have revealed problems with purchases cut-off.
Your audit tests on purchases cut-off, which started with the goods received note (GRN), have revealed the following results:
Required:
Assume that goods received before the year end are in inventory at the year end, and goods received after the year end are not in inventory at the year end. From the results of your purchases cut-off test described in the question:
A. Identify the cut-off errors and produce a schedule of the adjustments which should be made to the reported purchases and payables in the draft financial statements to correct the errors.
B. Comment on the results of your test, and state what further action you will take.
D. Present to the Audit Committee the main cut-off issues Identified while considering the following:
- Be concise in narrative, focusing on the financial impact on the balance sheet and income statement.
- Use key visual elements (e.g., graphs or tables) to illustrate the nature of the cut-off errors and the adjustments required.
- Provide actionable recommendations to prevent future cut-off errors. Highlight the importance of internal controls and propose practical solutions.
- Craft a final slide with a call to action. Focus on how the board can support management in implementing changes and ensure robust controls for inventory management.
Case 7 (10 Marks).
You are now auditing the company's trade payables balance of $ 400,000 as of 31 December 20X7. The total balance has already been agreed to the purchase ledger which shows that trade payables consist of 5 suppliers.
A junior member of the audit team has been checking these 5 balances by reconciling suppliers' statements to the balances on the purchase ledger. He is unable to reconcile a material balance, relating to Hamad Co, who supply electronics to SAMA. He has asked for your assistance, and your suggestions regarding the audit work which should be carried out on the differences.
The balance of Hamad Co on SAMA purchase ledger is shown below:
Purchase ledger Supplier: Hamad Co
On SAMA's purchase ledger, under 'Status' the cash and discount marked 'Alloc 1' paid invoices marked 'Paid 1' (similarly for 'Alloc 2' and 'Paid 2').
Hamad Co's terms of trade with SAMA allow a 2% cash discount on invoices where Hamad Co receives a cheque from the customer by the end of the month following the date of the invoice (i.e. a 2% discount will be given on November invoices paid and received by 31 December).
Hamad Co have sent the following supplier statement:
SAMA's goods received department checks the goods when they arrive and issues a goods received note (GRN). A copy of the GRN and the supplier's advice note is sent to the purchases accounting department.
Required:
A. Prepare a statement reconciling the balance on SAMA's purchase ledger to the balance on Hamad Co's supplier's statement.
B. Describe the audit work you will carry out on each of the reconciling items you have determined in your answer to part (A) above, in order to determine the balance which should be included in the financial statements.
Analyze auditor's report on financial statements
Long Case:
Background
TechInnovate Inc. is a publicly traded technology company specializing in cloud computing solutions. The company has been in operation for 10 years and has shown steady growth. However, recent market volatility and increased competition have put pressure on the company's financial performance.
As an independent auditor, you have been engaged to conduct the annual audit of TechInnovate Inc. for the fiscal year ending December 31, 2023. The board of directors is particularly interested in your findings and opinion, as they are considering a major strategic decision based on the company's financial health.
Financial Information
TechInnovate Inc. has provided the following summarized financial statements:
Income Statement (in millions)
Revenue: $500
Cost of Goods Sold: $300
Gross Profit: $200
Operating Expenses: $150
Net Income: $50
Balance Sheet (in millions)
Total Assets: $800
Total Liabilities: $500
Total Equity: $300
Audit Findings
During your audit, you have uncovered the following issues:
Revenue Recognition: The company has been recognizing revenue for multi-year contracts upfront, instead of over the contract period as required by accounting standards.
Capitalization of Expenses: R&D costs totaling $20 million have been capitalized as assets, rather than expensed as incurred.
Related Party Transactions: Undisclosed related party transactions worth $15 million were identified with a company owned by the CEO's sibling.
Inventory Valuation: The company's inventory valuation method doesn't account for technological obsolescence, potentially overstating inventory by $10 million.
Contingent Liability: A pending lawsuit against the company for patent infringement, with a potential liability of $25 million, has not been disclosed in the financial statements.
Task
As the lead auditor, you are required to:
Assess the materiality of each issue identified.
Determine the potential impact on the financial statements.
Evaluate the overall fair presentation of the financial statements.
Prepare an audit report, including your opinion on the financial statements.
Develop a presentation for the board of directors, highlighting key findings and your audit opinion.
Considerations
The materiality threshold for this audit has been set at $5 million.
Consider the cumulative effect of the misstatements on the financial statements.
Evaluate management's willingness to adjust the financial statements for identified misstatements.
Assess the implications of your findings on the company's internal control over financial reporting.
Attachment:- Advanced Auditing.rar