5.

24

Key facts:
Speciality retail store
Inventory is material
Items range in value $1 to $500
Prepayments: Orders 6 months in advance from
overseas suppliers, require large deposits

5.24
Assertion

Description

Existence

Auditors search for evidence to verify the asset,

liability and equity items included in the balances
in the financial report actually exist
Important = risk of overstatement

Rights &
Obligation
s

Auditors search for evidence to verify that

recorded assets are owned by the entity and that
recorded liabilities represent commitments to the
entity
Important = risk of recorded assets/liabilities are
not owned by the entity

5.24

Assertion

Description

Completen
ess

Auditors search for evidence that all assets,

liabilities and equity interests that should have
been recorded, have been recorded
Important = risk of understatement

Valuation & Auditor searches for evidence that assets,

Allocation
liabilities and equity items have been recorded
at appropriate amounts and allocated to the
correct general ledger accounts
Important = risk of over or undervaluation

5.24

Inventory

Existence

Inventory can change every season

Opportunity for theft and missing material inventory

Needs physical evidence trace from documents to clients

records to confirm classification, accuracy and completeness

Valuation & allocation

They can incur a risk of overstatement if inventory wasnt

appropriately recorded at the lower price/cost

Needs computational evidence check the accuracy of the

valuations within the financial report

5.24

Prepayments

Existence

Make up prepayment to over-value assets that dont even

exist to over-value assets

Needs physical evidence - to inspect the inventory to see if

it has been sold and delivered

Rights & obligations

Recorded as an asset but is not owned by the company/entity

Needs documentary evidence - supplier invoice to show

the transfer of assets and owned by the entity

5.34

Key facts:
Susan was talking to client staff and had a tour
around the various construction sites and offices
She is Working on spread sheet of the clients
previous FR and unaudited interim data

5.34 a

Susan has been gathering the following types

of evidence:

Verbal evidence

Responses of key client personnel to auditor enquires

throughout the course of the audit

Computational evidence

Evidence gathered by an auditor checking the

mathematical accuracy of the numbers that appear in
the financial report

5.34 a

Physical evidence

inspection of a clients tangible assets to assess

condition and to reconcile to clients records

Documentary Evidence

Evidence is information that provides proof about

details recorded in a clients list of transaction

5.34 b

Could indicate problem areas for further investigation,

and to calculate trends and ratios, including common
size statements, to quantify the fluctuations.

Susan will use the results of the analytical procedures to

justify increased or decreased focus on specific areas,
and the nature, timing and extent of further procedures.

She will analyse the specific movement of physical

materials used in construction and whether this is
consistent with the financial data

5.34 c

Susan is gathering evidence through inspection of her

client's tangible assets.

She vouches recorded amounts to assets to gain evidence that the

asset exists

She does this to show that the assets physically exists.

New = newly purchased and the client needs to have

supporting records of this transaction

Older = can mean that her client are having difficulty on

selling the goods

Unused = equipment may be obsolete and cannot be sold

5.35

Key facts:

KFP Partners auditors for Securimax

Securimax has a small internal audit department

that is headed by an ex-partner of KFP Rydell
Rydell, who left KFP six years ago

5.35

ASA 600 requires a group engagement partner to

consider the work of component auditors.

A component auditor means an auditor who, at the

request of the group engagement team, performs work
on financial information related to a component for the
group audit.

must meet the independent requirements that are relevant

to the group audit.

The engagement partner retains responsibility for the

audit and signs the audit report.

meet the same independence requirements as the

engagement auditor

5.35

No mention in the case of a group of companies

But, ASA 600 also applies where an auditor involves

other auditors in the audit of financial reports that
are not group financial reports

Rydell Creek heads the internal audit department

at Securimax

Could not meet the independence requirements for

the external auditor

ASA 600 would not allow their work to be treated as

though it is done by a component auditor

5.36

Key facts:

You have been asked to circulate the receivables

confirmations

Shady Oaks AR arise from the use of hospital facilities (inc.

provision of nurses, anaesthetists, operating theatres and
supplies) by medical in private practice

TR considered material

Payment date is 14 days from invoice

60% invoice outstanding from 5 different medical practitioners

40% numerous smaller amounts, most outstanding for more than

60 days

Any allowance for doubtful debts is taken directly against AR

and not shown separately.

5.36
Strengths

Weaknesses

Proves existence and

ownership (rights &
obligations), as debtors
confirm they owe the client
Externally generated
evidence sent directly to
the auditor are considered
the most reliable and best
quality
Independent of the client
as they dont have the
opportunity to alter it
Most persuasive when the
source is reliable and

Very little information

regarding valuation &
allocation as debtors are
asked to confirm amounts
outstanding at year end
Debtors only confirm
amount owing, not the
intention to pay