Edinburgh Napier University School of Accounting, Economics & Statistics Auditing (ACC09919) April/May 2009/10 Section A 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

D B B A B D A C A D

Section B 11. a. b.

Salaries are paid only to genuine employees (no dummy) Salaries are paid only for work done, hours worked or other agreed criteria Salaries are paid at authorized rates of pay Payments correctly calculated Deductions correctly calculated All payments made on a timely basis All transactions correctly and promptly recorded Segregation of duties: updating separate from processing or payment read: access should be available to responsible officials who need to access data amend access restricted to senior officials only Authorization procedures for addition of starters and deletion of leavers and amendment of pay rate Procedures for adding starters immediately on commencement and deleting leavers immediately after leaving Computer log which registers date and time of access; such log to be reviewed regularly by senior officials.
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Weakness 1 Weakness: Production manager sole authority for recruitment Implication: Dummy employees? Recommendation: Recruitment by production manager and personnel Weakness 2 Weakness: Payroll clerks have amend access to payroll master file Implication: May manipulate so that their associates may benefit Recommendation: Amend access should be given to payroll manager; payroll clerks can read access Weakness 3 Weakness: Payroll master file is updated prior to commencement of employment Implication: Unauthorized salaries may be paid prior to commencement Recommendation: New employee details should be entered after commencement Weakness 4 Weakness: Production manager issues swipe card to new employees Implication: Dummy employees? Recommendation: Issue of swipe cards should be controlled by officials independent of payroll and production functions Weakness 5 Weakness: Production manager can amend employee details Implication: Fraudulent salary payments? Recommendation: Amendment should be made only by official independent of payroll and production Weakness 6 Weakness: Entry / exit terminals of time-recording system not monitored Implications: Attendance records may be falsified Recommendation: Should be monitored Weakness 7 Weakness: Payroll program does not produce exemption reports Implication: Unauthorized payments may not be picked up Recommendation: Monthly exception reports should be produced and reviewed by payroll manager and accountant

Weakness 8 Weakness: Payroll summary not checked by independent official prior to sending credit transfer instructions to bank; all summaries are filed by payroll manager without any further checking Implication: Unauthorized payment? Recommendation: All monthly summaries should be checked and signed by accountant prior to filing d. Inherent risk high due to potential for misappropriation of funds Discuss with management as to why recommendations are not adopted Access potential impact on FS and consider materiality levels Consider issuing except for audit opinion

12. a. Potential sources of knowledge Previous experience Other auditors, legal advisors Volunteers, previous accountant Related publications Relevant legislation & regulations Last years accounts Guidance for audit of charities Overall audit strategy Financial reporting requirements e.g. mandatory reporting to regulators? Number of locations to be visited Use of IT? Any test data available? CCAT? Trustees to answer audit queries? Timetable for reporting FS Need to update trustees with status of audit work, arrange meetings to discuss nature, extent and timing of work Need to communicate with third parties High inherent risk as managed by non-professionals and more susceptible to fraud Funds raised from public or private donors; how funds are to be applied? Any violations of constitutions? Other charities and regulatory bodies may object Accounts prepared by retired accountant, will this lower inherent risk? High control risk as usually no formal internal controls; donations susceptible to misappropriation as rely on honesty of volunteers Detection risks: auditor may draw wrong conclusions, misinterpret audit results since being new auditor and unfamiliar with clients business

b.

c.

13. a. Sufficient appropriate audit evidence Sufficient quantity Appropriate quality & reliability Different sources needed as persuasive not conclusive Sample must be sufficient and appropriate to reach an opinion Difference between tests of controls and substantive audit procedures Tests of control: test that internal control procedures are being applied as prescribed Substantive audit procedures: tests of transactions and balances as to the completeness, accuracy and validity of info in accounting records and FS Materiality Materiality: relative significance of a particular matter in FS An item is material if its omission or misstatement would reasonably influence the decisions of an addressee of the auditors report Part of audit testing: help to choose sample sizes and conclude on results of audit tests. Refer to Tutorial 4 Question 2

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14. a. b. Revenues Expected to increase by 5.3 % Per accounts, increased by 26%, why? Explanation needed for large increase Given inventory increased by 37.5%, does it mean a better sales position? Explanation required Gross Profit Increased by 4 % Given there was an increase of 26% in sales, this is low return Any error? Plant and machinery Increased by 20% - lower than anticipated Since expect some P&M will be replaced, so expect to have larger increase in P&M; explanation needed Total non-current asset expected to be 8M, but total per accounts is 10.84M; any error in recording? Inventory Expected to increase by 200,000 but per accounts, increased by 600,000, why? Any problems with sales leading to higher than expected closing inventory? Receivables Expected to increase by not more than 10%, but per accounts, increased by 50%; why? Debt management policy not successful causing liquidity problems Payables Expected to increase in line with inventory, i.e. by 12.5% Per accounts, increased by 75%; why? Any problems paying bills? Potential liquidity problems Bank balances From +320,000 to bank OD 900,000
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For risk assessment, understanding of entity and environment and for overall review at end of audit Performed at planning stage, during audit testing and at review stage Results help direct audit effort and identify areas for further testing

Need to identify OD limit and banks attitude toward this Dividend payable Increased by 27% High increase given increase in net profit was only 12% Why pay so much dividend when there is liquidity problem, any pressure from shareholders? Tax payable Increased by 50% Higher than expected given net profit increased by 12% only Explanation required

15. a. Potential problems / issues for auditors Lack of practical computer audit experience Audit team lacks expertise in computer audit Client able to supply limited info to answer auditors queries as lacks expertise Client lacks computer documentation Have to tackle both computerized and manual systems Auditors testing on a live basis likely to disrupt clients operations Auditing through the computer Follows the audit trail through the computer operations Verify processing controls are functioning properly Tests computer controls Verifies accuracy of computer-based processing of input data Auditing around the computer The internal software of the computer system is not audited Calculate expected results from transactions input into computer, compare these calculations to the output results If they agree, assume system of controls is effective General controls Software acquisition; change and maintenance; access security; backup procedures; segregation of duties etc Application controls Arithmetic checks, range checks, validation checks, data reasonableness tests etc Functions of audit software See handout

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