Question 3 (38 marks) You are the audit senior at Tam and Lam, CPAs, and you have two clients in your portfolio. You are now planning the audit engagements and plan to assign the tasks of performing tests of controls for the sales process and the test of details of balances for accounts receivable to your audit assistants. You would like to form an expectation of the time required for this work. The two clients are described below: Client 1 A&B operates a chain of supermarkets in Hong Kong and is a public company listed on the Hong Kong Stock Exchange. A&B has been a client of Tam and Lam for 20 years and has implemented sophisticated internal controls for its sales process, including an automated point of sale system at the cashier 10 years ago. The majority of its sales are made by either cash or credit card. There have been very few audit adjustments required in prior years' audits. Its sales have grown at a reasonable rate throughout the past few years and its performance is not materially affected by the economic slowdown as A&B sells basic necessity items. Client 2 C&D is a medium-sized retailer selling handbags and accessory items. C&D is owned and managed by the Fu Family and is a new client to Tam and Lam. Based on the preliminary understanding of the internal controls of C&D, it is noted that there has not been much segregation of duties within the company due to limited manpower. However, you are quite happy with the day-to-day close supervision of the operations by the members of Fu's extended family. Required: Briefly distinguish among the following audit procedures: tests of controls, substantive tests of transactions, analytical procedures and test of details of balances. Provide one specific example of each in your answer. (12 marks) b For each of the above two clients, design an evidence mix for the audit of the both sales and accounts receivables with respect to tests of controls, substantive tests of transactions, analytical procedures and tests of details of balances. Justify whether an extensive amount (E), medium amount (M), small amount of testing (S) or no testing (N) is expected. Assuming that both clients are about the same size, which client do you expect would require the more audit hours? (26 marks) Question 3 (38 marks) You are the audit senior at Tam and Lam, CPAs, and you have two clients in your portfolio. You are now planning the audit engagements and plan to assign the tasks of performing tests of controls for the sales process and the test of details of balances for accounts receivable to your audit assistants. You would like to form an expectation of the time required for this work. The two clients are described below: Client 1 A&B operates a chain of supermarkets in Hong Kong and is a public company listed on the Hong Kong Stock Exchange. A&B has been a client of Tam and Lam for 20 years and has implemented sophisticated internal controls for its sales process, including an automated point of sale system at the cashier 10 years ago. The majority of its sales are made by either cash or credit card. There have been very few audit adjustments required in prior years' audits. Its sales have grown at a reasonable rate throughout the past few years and its performance is not materially affected by the economic slowdown as A&B sells basic necessity items. Client 2 C&D is a medium-sized retailer selling handbags and accessory items. C&D is owned and managed by the Fu Family and is a new client to Tam and Lam. Based on the preliminary understanding of the internal controls of C&D, it is noted that there has not been much segregation of duties within the company due to limited manpower. However, you are quite happy with the day-to-day close supervision of the operations by the members of Fu's extended family. Required: Briefly distinguish among the following audit procedures: tests of controls, substantive tests of transactions, analytical procedures and test of details of balances. Provide one specific example of each in your answer. (12 marks) b For each of the above two clients, design an evidence mix for the audit of the both sales and accounts receivables with respect to tests of controls, substantive tests of transactions, analytical procedures and tests of details of balances. Justify whether an extensive amount (E), medium amount (M), small amount of testing (S) or no testing (N) is expected. Assuming that both clients are about the same size, which client do you expect would require the more audit hours? (26 marks)

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