Part A: Substantive Procedures and the Financial Statement Listed below are seve
ID: 2571971 • Letter: P
Question
Part A: Substantive Procedures and the Financial Statement
Listed below are several misstatements of inventory, accounts payable, and accrued liabilities accounts. For each of the following misstatements, design a substantive audit procedure that provides reasonable assurance of detecting the misstatement.
1. Bonuses awarded to senior management have not been recorded.
2. Several suppliers that the company had not purchased from prior to this year were omitted from the accounts payable listing.
3. When employees counted the physical inventory, included were a number of items that were consigned to the company by a client company.
4. There was no disclosure in the nancial statements of a material account payable to a related party.
5. The year-end payroll accrual was understated.
6. One-third of the dollar amount of diamond jewelry inventory is actually cubic zirconia or white sapphires.
7. The accounts payable prepared checks to pay a vendor’s invoice twice. The invoice is still shown as an outstanding account payable.
8. Company personnel, conducting an inventory, informed the auditors that underground petroleum tanks contained high-octane gasoline when they actually contained water.
9. The accounting department of the client failed to record warranty expenses incurred after year-end applicable to prior year sales.
10. Inventory in one remote area of the warehouse was overlooked and thus not included in the client’s physical inventory count.
Explanation / Answer
1. We will analyse the Bonus policy and total amount calculated for Bonus. We will make a reconciliation statement to check that for how many employees bonus is given. How many employees were present employees at the time of deciding the record and cutoff date of bonus. If at that date suppose 100 employees were there but as per bonus calculation bonus was given to only 90 employees then it is indication of misstatement then we will ask for management and if they are unable to give reasons. We will record it as misstatement.
2. We will ask for backup of total amount of trade payables appearing in the financial statements. Then we will make movement between balances appearing as opening balance and closing balance. At the time we would be able to identify any omitted name of trade payable.
3. We will arrange an independent inventory count by audit team only. Audit team will ask for inventory listing from client and then will check physical existence of that inventory. For more evidence they may ask for purchase order, invoice etc. to ensure that it is pertaining to client only.
4. There is a normal practice that we ask for 100% Related party balance confirmation. If client has disclosed all the related parties then our risk is covered by external confirmation. But we will have to maintain professional skeptism to identify any other party which may include in related party.
5. Client will provide payroll master in which they will provide number of employees and pay given to each employee along with segregation of salary component wise. Then we will perform expected accrued salary and will compare with amount as disclosed by client. Then we may identify any understatement and overstatement. Further we can check subsequent payment made to employees.
6. This type of inventory misstatement can only be identify by physical count. We perform physical count on major items only. If this inventory does not have so much amount to be considered then we may ignore this.
7. We can ask for confirmation for this specific party it will help us to identify any difference. Further by checking bank statement balance as on last date of financial statement we can identify this type of misstatement.
8. This may be a major misstatement for inventory balance. We may perform physical count for that area specifically. We will have to discuss with management that how can be check those tanks to check actual inventory.
9. Warranty expenses incurred after year end would not be included in current period financial statement provided that it has significant amount which may impact on financial statement. If amount is not so high, we can ignore it.
10. At the time of audit we can identify about areas where stock is kept by the client. We will make reconciliation of physical count sheet with inventory data provided by client of which amount should matched with amount as disclosed in financial statement. If there is any discrepancy then we can identify any misstatement.