Question 3 (12 marks)

Consider each of the following independent situations:

1. You are reviewing the results of accounts receivable confirmation carried out on 40 debtors of your client, XYZ Limited (XYZ). One of the accounts receivable selected, KMO Pty Limited (KMO), has responded to your request for confirmation stating that no debt is owing by KMO to XYZ. The audit assistant concluded as follows:

One discrepancy only was found between the clients records and the confirmations received; therefore, trade receivables are fairly stated.

2. You are the senior responsible for the audit of KKK Limited which has a 30 June balance date. The companys inventory consists of approximately 20,000 music cassettes and compact discs, details of which are maintained on a perpetual IT inventory system. Inventory is counted on a cyclical basis throughout the year with all items being counted at least once during the year. The stocktakes are attended by an audit assistant where a sample of 20 items is counted from the floor and checked to stocktake sheets and perpetual records, and a further sample of 20 is selected from the perpetual records for checking to the floor.

The most recent stocktake took place in March. The clients inventory system was not subsequently updated for several errors identified at the time of the stocktake. The audit assistant has concluded that, as these errors occurred in the March inventory counts, no further work is considered necessary.

3. Property, plant and equipment is depreciated at the flat rate of 15% p.a. on cost. As such, it was considered appropriate to test the accuracy of the depreciation expense using substantive analytical procedures.

The work paper supporting this audit procedure contained the following information:

Property, plant and equipment

= Opening cost value + Closing cost value X 15%

2

= 46,209,576 + 51,674,973 X 15_

2 100

= $7,341,341 is the calculated depreciation expense

The balance of depreciation expense per the client records is $6,076,555.

The audit assistant has concluded that the balance of the depreciation expense for the year is reasonable.

4. As part of your review of the cash section, you note that:

• year-end balances have been agreed back to copies of the monthly bank statements;
• copies of the statements have been put on file as audit evidence; and
• confirmation requests have been returned to you via the client so as to enable you to achieve the audit clearance deadline.

The audit assistant has concluded that cash balances are fairly stated.

Required:

You are the audit senior and have been presented with the above information by the audit assistant. Comment on whether or not you agree with the audit assistants conclusions, giving reasons and the appropriate additional actionyou would take. (4*3= 12 marks)

You may wish to present your answer in the form of a table as follows:

Situation	Do you agree or not agree? (4 situations*1= 4 marks)	Reason (4 situations*1 = 4 marks)	Appropriate additional action (4 situations*1= 4 marks)
(A)
(B)
(C)
(D)