PROBLEM III: Audit program for Substantive test (30%)

LO: student will be able to apply relevant auditing standards and applicable laws and regulations to an audit of financial statements

ISA 500 - Audit Evidence "The objective of the auditor is to design and perform audit procedures in such a way as to enable the auditor to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor's opinion"

ISA 505 - External Confirmation That ISA also includes the following generalizations applicable to audit evidence:

a. Audit evidence is more reliable when it is obtained from independent sources outside the entity.

b. Audit evidence obtained directly by the auditor is more reliable than audit evidence obtained indirectly or by inference.

c. Audit evidence is more reliable when it exists in documentary form, whether paper, electronic or other medium.

In the case of each non-response, the auditor shall perform alternative audit procedures to obtain relevant and reliable audit evidence

Case Study - PT Pest Pests Control (PHS) PT PHS produces pesticides that are very much needed by farmers.

PT PHS business process:

o Cluster: grouping rice fields in Indonesia according to the group of pests in that area

o Educate local residents to become Farmer Coaches, Farmer Coaches are not employees of PT PHS, but get paid from PT PHS. The payment is calculated based on x% of the sales target and Y% of the collection of accounts receivable

o Each group of coaches consists of 3-5 coaches, in each cluster o Each group must develop a sales plan and target in its cluster

o Each group based on an agreement with the assisted farmers in each cluster prepares an order plan for pest control

o PT PHS sends the exterminators directly to the Farmers Development Group, which then distributes them to the farmers

o Sales are only recognized by PT PHS when the goods have been handed over to the farmers, this information is obtained from each group of Farmers Development.

o Farmers, even though they are not illiterate, but rarely have a record of purchasing pesticides, farmers generally trust the Pembina Tani.

o PT PHS internal audit regularly visits each cluster to check the supervisor's records and interviews with farmers.

Payments from farmers on average can only be obtained when harvesting (almost all clusters in 1 year harvest 3 times, except for rice fields with R5 Ratun rice between 4-5 harvests per year). About 20% of farmers who take advantage of 5% discount when paying off within 30 days

Your task:

Read carefully the PT PHS case and risk analysis (remember to use the Risk Based approach), to obtain appropriate and adequate audit evidence on the PT PHS Accounts Receivable balance, you must choose one of the following substantive audit procedures:

a. Sending an invoice confirmation letter directly to the Farmer

b. Sending Receivables Confirmation Letter to Farmers Coaching Group

c. Alternative procedures.

After making your choice, you must explain whether the procedure you have chosen can provide "sufficient and appropriate evidence" to determine that the receivable balance is free from material misstatement.