Question
You were selected to lead the audit of Down Low Ltd for the year ended 30 September 2021. One of the assistants has been auditing
You were selected to lead the audit of Down Low Ltd for the year ended 30 September 2021. One of the assistants has been auditing the accounts receivable which has an ending balance of $3,800,000. This balance is made up of 2100 accounts receivable ledger account transactions.
It is noted in the working papers that 90 accounts were selected for checking. The basis of the sample selection was as follows:
The 20 largest accounts were selected
Haphazard sampling of the remainder
Any balance under $5,000 were regarded as too small to be chosen
The test performed on those items selected was to ask the customers to confirm in writing what they think the balance outstanding was at year-end (accounts receivable circularization).
The results of the test show the following:
| Number of items selected | Balance in sales ledger | Balance confirmed by debtor |
No errors found (includes the 20 largest accounts) | 65 | $405,000 | 405,000 |
No confirmation by accounts receivable | 7 | 16,000 | 16,000 |
Difference due to goods in transit to customers | 6 | 14,500 | 8,200 |
Errors in calculating invoice total | 2 | 21,000 | 12,000 |
Invoices posted to incorrect debtors ledger account | 6 | 11,300 | 9,800 |
Invoice disputes with customer | 9 | 12,000 | 7,500 |
Total | 95 | 479,800 | 458,500 |
REQUIRED
a. Discuss the method of sample selection (including possible sampling risks) and suggest how this could be improved in order to be able to detect other material misstatements. (8 marks)
b. For any two of the categories where errors have been identified, discuss the potential misstatement that could arise and any adjustments that should be made to the financial statement. (6 marks)
c. Describe any further procedure that you will need to carry out in order to provide reasonable assurance about the test results, taking into consideration the sampling method used to produce the above test results. (6 marks)
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