QUESTION 1

CLO4:AUDITING COMPLEX EDP

MDP Courier Company Ltd is a Limited company that offers courier services to its local online shoppers. The company has decided to diversify its portfolio by purchasing items from local farmers and manufacturers and exporting them to Jamaicans abroad. The company's only shareholders, directors and employees are brothers Michael, David and Peter. The company does not have an established accounting Department; however, they keep a necessary accounting record, including a sales day book, a cash book and trade receivables and general ledgers. Peter, who has a degree in accounting, has the responsibility to maintain the books of prime entry but not the trade receivables and general ledgers. The company has outsourced this function to a small auditing firm.

The Minister of Finance has increased the online duty-free shopping form U.S. $50 to US$100; this has resulted in a significant increase in its revenue.

The buying and selling part of the business was off to a slow start. During the resulting period, only 48 sale invoices were issued. A limited amount of customers paid for their goods and the remaining customers are offered credit sales and products are priced from a catalogue that the directors authorise. The control procedures employed over sales include the use of pre-numbered multi-part dispatch notes and sales invoice stationery.

The audit partner has just informed you that the following are key areas that the audit team need to focus on:-

Attend the year-end inventory count to observe the process and carry out verification.

Direct verification (vouching) approach to the audit will be adopted, instead of a systems-based approach.

Required:

(a)Explain why a system-based approached to audit would be used.

Your answer should refer to the stages of such an approach. (5 marks)

(b)State why a direct verification (vouching) approach is often more appropriate when auditing the financial statements of a small limited liability company.(8 marks)

c) (i) Computer-assisted audit techniques (CAATs) can be used to audit inventory.

Describe FOUR (4) audit procedures on which this technique can be used.

(4 marks)

(ii) Explain the potential advantages of using CAATs; and (4 marks)

(iii) Explain the potential disadvantages of using CAATs.(4 marks)