Audit Evidence, Assertions, and Sampling - 20 marks

a) Describe the difference between tolerable rate of deviation and tolerable misstatement. Explain the effects of a decrease in the tolerable rate of deviation. (4 marks)

b) You have just finished the testing of sales invoices at BeachHouse Resorts, and the results are as follows. The three strata correspond to different services and the overall tolerable error is set at $20 000. Calculate the total projected error. Is the projected error material? What action, if any, would you take? (4 marks)

c) Youre auditing the clients contingent liabilities. Your client has returned to you the representation letter that they sent to their lawyer. The letter contains the following statement from the clients lawyer:

the directors seem to underestimate the likelihood of losing the case, and the potential financial settlement amount. We believe that there is little chance of successfully defending the matter, and expect that there will be amounts payable in the vicinity of $3 million, not $1 million. We do however remind you that the matter is only in preliminary stages and could still go either way.

i) Has the auditor collected this evidence in an appropriate way? Explain. (4 marks)

ii) Suggest and explain ONE extra type of audit evidence or procedure that the auditor can collect in order to form their opinion on the above event. (4 marks)

iii) Given the above, the auditor suggests that accuracy is the key assertion at risk for the accounts payable. Is this suggestion appropriate? Explain your answer. Suggest ONE audit procedure that can test accuracy in this case. (4 marks)