QUESTION 1

This scenario relates to five requirements.

Airsoft Co is a listed company which manufactures stationery products. The company's profit before tax for the year ended 31 December 20X6 is $16.3m and total assets as at that date are $66.8m.

You are an audit supervisor of Biathlon & Co and you are currently finalising the audit programmes for the year-end audit of your existing client Airsoft Co. You attended a meeting with your audit manager where the following matters were discussed:

Trade payables and accruals

Airsoft Co purchases its raw materials from a large number of suppliers. The company's policy is to close the purchase ledger just after the year-end and the financial controller is responsible for identifying goods that were received pre-year-end but for which no invoice has yet been received.

An accrual is calculated for goods received but not yet invoiced (GRNI) and is included within trade payables and accruals.

The audit strategy has identified risk over the completeness of trade payables and accruals. The audit team will utilise computer assisted audit techniques (CAATs), in the form of audit software while auditing trade payables and accruals.

Bank overdraft and savings accounts

Airsoft Co's draft financial statements include a bank overdraft of $2.6m, which relates to the company's main current account. In addition, Airsoft Co maintains a number of savings accounts. The savings account balances are classified as cash and cash equivalents and are included in current assets. All accounts have been reconciled at the year-end.

Directors' remuneration

Airsoft Co's board is comprised of eight directors. Their overall remuneration consists of two elements: an annual salary, paid monthly; and a significant annual discretionary bonus, which is paid in a separate payment run on 20 December.

All remuneration paid to directors is included within wages and salaries. Local legislation requires disclosure of the overall total of directors' remuneration broken down by element and by director.

(a) Describe substantive procedures the auditor should perform to obtain sufficient and appropriate audit evidence in relation to the COMPLETENESS of Airsoft Co's trade payables and accruals.

Excluding procedures included in part (a):

(b) Describe audit software procedures which could be carried out during the audit of Airsoft Co's trade payables and accruals.

QUESTION 2

a. Baggio International Co (Baggio) is a manufacturer of electrical equipment. It has factories across the country and its customer base includes retailers as well as individuals, to whom direct sales are made through their website. The company's year-end is 30 September 20X5. You are an audit supervisor of Suarez & Co and are currently reviewing documentation of Baggio's internal control in preparation for the interim audit.

Baggio's website allows individuals to order goods directly, and full payment is taken in advance. Currently, the website is not integrated into the inventory system and inventory levels are not checked at the time when orders are placed. Inventory is valued at the lower of cost and net realisable value.

Goods are despatched via local couriers; however, they do not always record customer signatures as proof that the customer has received the goods. Over the past 12 months, there have been customer complaints about the delay between sales orders and receipt of goods. Baggio has investigated these and found that, in each case, the sales order had been entered into the sales system correctly but was not forwarded to the despatch department for fulfilling.

Baggio's retail customers undergo credit checks prior to being accepted and credit limits are set accordingly by sales ledger clerks. These customers place their orders through one of the sales team, who decides on sales discount levels.

Raw materials used in the manufacturing process are purchased from a wide range of suppliers. As a result of staff changes in the purchase ledger department, supplier statement reconciliations are no longer performed. Additionally, changes to supplier details in the purchase ledger master file can be undertaken by purchase ledger clerks as well as supervisors.

In the past six months, Baggio has changed part of its manufacturing process and as a result, some new equipment has been purchased, however, there are considerable levels of plant and equipment which are now surplus to requirement. Purchase requisitions for all new equipment have been authorised by production supervisors and little has been done to reduce the surplus of old equipment.

Required:

Describe substantive procedures Suarez & Co should perform at the year-end to confirm plant and equipment additions.

b. Dashing Co manufactures women's clothing and its year-end was 31 July 20X7. You are an audit supervisor of Jaunty & Co and the year-end audit for Dashing Co is due to commence shortly.

The draft financial statements recognise profit before tax of $26m and total assets of $18m. You have been given responsibility for auditing receivables, which is a material balance, and as part of the audit approach, a positive receivables circularisation is to be undertaken.

At the planning meeting, the finance director of Dashing Co informed the audit engagement partner that the company was closing one of its smaller production sites and as a result, a number of employees would be made redundant. A redundancy provision of $110,000 is included in the draft financial statements.

Required:

Describe substantive procedures the auditor should perform to confirm the redundancy provision at the year-end.

QUESTION 3

Delphic Co is a wholesaler of furniture (such as chairs, tables and cupboards). Delphic buys the furniture from six major manufacturers and sells them to over 600 different customers ranging from large retail chain stores to smaller owner-controlled businesses.

The receivables balance, therefore, includes customers owing up to $125,000 to smaller balances of about $5,000, all with many different due dates for payments and credit limits.

All information is stored on Delphic's computer systems although previous audits have tended to adopt an 'audit around the computer' approach.

You are the audit senior in charge of the audit of the receivables balance.

For the first time at this client, you have decided to use audit software to assist with the audit of the receivables balance.

Computer staff at Delphic are happy to help the auditor, although they cannot confirm completeness of systems documentation, and warn that the systems have very old operating systems in place, limiting file compatibility with more modern programs.

The change in audit approach has been taken mainly to fully understand Delphic's computer systems prior to new internet modules being added next year.

To limit the possibility of damage to Delphic's computer files, copy files will be provided by Delphic's computer staff for the auditor to use with their own audit software

Required:

a) Explain the audit procedures that should be carried out using audit software on the receivables balance at Delphic Co.

For each procedure, explain the reason for that procedure.

b) Explain the potential problems of using audit software at Delphic Co.

For each problem, explain how it can be resolved.

c) Explain the concept of 'auditing around the computer' and discuss why this increases audit risk for the auditor.