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Busi 3343 Assignment Four Due October 7th Question One (8 marks) Below are four situations that involve the audit risk model as it is used for planning audit evidence requirements in the audit of inventory. For each situation, calculate planned detection risk. SITUATION 1 Audit risk 1% Inherent risk 100% Control risk 100% Detection risk ________ 2 10% 100% 100% ________ 3 10% 50% 40% ________ 4 5% 20% 30% ________ Question Two (10 marks) Following are extracts from the annual financial statements: 2012 2011 2010 Cash Accounts receivable Fixed assets (net) $99,000 $320,000 $15,000 $110,000 $220,000 $20,000 $124,000 $150,000 $25,000 Accounts payable Bank indebtedness $270,000 $100,000 $180,000 $25,000 $150,000 $0 Share capital $200,000 $200,000 $200,000 Revenue Cost of sales $625,310 $406,452 $538,120 $333,634 $507,380 $304,428 Administration expenses Sales expenses Amortization $89,000 $31,266 $5,000 $57,000 $21,525 $5,000 $58,000 $20,295 $5,000 Calculate preliminary materiality. Justify your decision of materiality base and choice of materiality. Question Three (12 marks) Below are 12 audit procedures. Classify each procedure according to the following types of audit evidence: (1) inspection, (2) external confirmation, (3) recalculation, (4) observation, (5) inquiry of the client, (6) reperformance, and (7) analytical procedure. Type of Evidence Audit Procedures 1. Watch client employees count inventory to determine whether company procedures are being followed. 2. Count inventory items and record the amount in the audit working papers. 3. Stand by the payroll time clock to determine whether any employee "punches in" more than one time. 4. Calculate the ratio of cost of goods sold to sales as a test of overall reasonableness of gross margin relative to the preceding year. 5. Obtain information about the client's internal controls by asking questions of client personnel. 6. Trace totals from the cash disbursements journal to the general ledger. 7. Examine a piece of equipment to make sure a recent purchase of equipment was actually received and is in operation. 8. Review the total of repairs and maintenance for each month to determine whether any month's total was unusually large. 9. The auditor computes the debt covenant based on the financial information to ensure that the client's calculation was performed correctly. 10. Re-foot entries in the sales journal to determine whether they were correctly totalled by the client. 11. Make a surprise count of petty cash to verify that the amount of the petty cash fund is intact. 12. Obtain a written statement from the client's bank stating the client's year-end balance on deposit. Total assignment 30 marks