Mr. Maan is the owner of Al Oman Chips, established in 2015. He wishes to open another manufacturing unit in the Muscat Industrial area. He is in need of funds and is planning to approach the bank for financial assistance. Mr. Maan was asked to submit the audit report to the bank for processing his loan. He appointed Mr. Osama as an external auditor. Mr. Osama follows the audit procedure to collect all required pieces of evidence. Mr. Osama and his audit staff followed various audit techniques like inspection, observation, external confirmation, recalculation or re-computation, analytical procedure, re-performance, or independent execution.

Due to some issues in the financial statement of Al Oman chips, Mr. Osama and his staff used the following techniques as per the requirement of audit evidence. In the case of intangible assets like goodwill, copyright they used an inspection procedure. Under this technique, the audit team checked all the relevant documents which showed that the ownership of those intangible assets was with Mr. Maan.

For confirming the manufacturing performance and other required details Mr. Osama told his staff to observe the manufacturing process. But this technique carried a limitation as this evidence is limited due to the time of conducting the observation.

Mr. Darwish is the customer of Mr. Maan. Mr. Salim supplies material to Al Oman Chips. During the audit, work mismatches were noticed with regard to receipt from the customer and making payment to the supplier. External confirmation is a good technique to confirm the evidence. This includes direct communication with customers or suppliers as per requirements. Contracts made by the company with the customer or supplier proved to be a piece of good evidence.

Mathematical accuracy of Journals Ledgers Trial balance and Financial Statement were exercised by recalculation which could be done electronically or manually.

In a few cases, Mr. Osama confirms evidence by performing recording transactions again, which were originally performed by the internal controller. This technique is term as re-performance.

Mr. Osama guided his staff that in case of a need with regard to financial or nonfinancial information about the company, they can do inquiry. This inquiry can be with parties inside or outside the company. A formal inquiry should be in written or electronic form. Oral inquiries are treated as informal.

Analytical procedure technique is not used during the audit as financial information is properly recorded in the Income statement and Balance sheet.

With the above-mentioned audit, the procedure objective was achieved as all pieces of evidence were considered valid and incomplete pieces of evidence were rejected. The Bank manager appreciated the company as in the Balance sheet all assets and liabilities were perfectly valued. Finally, Mr. Osama made a declaration as to the nature of collected pieces of evidence which included both internal as well as external sources.

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To check mathematical accuracy, which technique is useful?

a.

Reconfirmation

b.

Recalculation

c.

Rechecking

d.

Reperformance

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Select the technique which Mr. Osama has not suggested to use as that technique is informal in nature?

a.

Oral Confirmation Technique

b.

Analytical Procedure

c.

Re calculation as it is not required

d.

Observation because it is time consuming procedure

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When nonfinancial information is needed, which of the following technique is useful? (Refer case 2)

a.

Re performance

b.

None of the options

c.

Inquiry with persons inside or outside

d.

Direct communication with customer

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Who is the responsible to maintain financial statement? (Refer case 2)

a.

Bank Manager

b.

Mr. Osama and his staff

c.

Mr. Osama

d.

Mr. Maan

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Question 50

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Find the best evidence technique used when there are major issues with financial statement: (Refer case 2)

a.

Observation

b.

Recalculation

c.

Inquiry

d.

Analytical Procedure