You are the auditor of CUTE Bunny, a limited liability company which manufactures and sells small cuddly toys by mail order. The company is managed by Mr Matsumoto and two assistants. Mr Matsumoto authorizes important transactions such as wages and large orders, one assistant maintains the payables ledger and orders inventory and pays suppliers, and the other assistant receives customer orders and dispatches cuddly toys. Due to other business commitments Mr Matsumoto only visits the office once per week. At any time, about 100 different types of cuddly toys are available for sale. All sales are made cash with order there are no receivables. Customers pay using credit cards and occasionally by sending cash. Turnover is over RM52 million.

You are planning the audit of CUTE Bunny and are considering using some of the procedures for gathering audit evidence recommended by AI500 as follows:

• Analytical Procedures
• Inquiry and Confirmation
• Inspection
• Observation
• Computation

Required:

(a) For EACH of the above procedures:

(i) Explain its use in gathering audit evidence (5 marks)

(ii) Describe one example for the audit of CUTE Bunny. (5 marks)

(b) Discuss the suitability of each procedure for CUTE Bunny, explaining the limitations of each. (10 marks)