UNIVERSITY: COURSE:
TUMAINI UNIVERSITY DAR ES SALAAM COLLEGE ACCT313/PRINCIPLES OF AUDITING II
COURSE ITEM:
TT1 - TERM/SEMESTER TEST 1 SUGGESTED SOLUTION & MARKING SCHEME 4th DECEMBER !"13
DATE:
#UESTION ONE $% M'%()(* +, th' t'. )('(t+0 )('(t+0 %22+)(* t+ IAS ! %( h+ %56' +, )('(t+0 )('(t+0 2%( 7' '8t).%t' %22+)(* t+ th)8 8t%(%: Meaning and valuation of inventory as per IAS 2: Assets held for sale in the ordinary course of business [finished goods], Assets in the production process for sale in the ordinary course of business [work
in process, and Materials and supplies that are consued in production [raw aterials][IAS 2!"] #alue of inventory shall be easured at the lower of cost and net reali$able value! %et reali$able value is the estiated selling price in the ordinary course of business less the estiated costs of copletion and the estiated costs necessary to ake the sale!
&he cost of inventories shall coprise all costs of purchase, costs of conversion and other other costs costs incurre incurred d
in
bringing the inventories to their present location and
condition!
&he cost of inventories shall be assigned by using the 'irst(In, 'irst()ut *'I')+ or weighted average
cost
forula!
$7 9h0 %6)t +, )('(t+0 )8 ).+t%(t ,+ .%(6,%2t6)(* .%(6,%2t6)(* ,). 2+.%' 2+.%' t+ 8')2' 2+.%(0 %( th' '%8+(8 ,+ th)8 t+ 7' 2+.5'; ), %6)t+ )8 (+t '55 '%': Audit of inventory for anufacturing fir copared to Service opany is
critically iportant considering the nature of activities of anufacturing firs deanding holding large aount of inventory to support production produces - a differ different ent situat situation ion with with servic servicee copani copanies es - the latter latter usuall usually y do not hold hold significant aount of inventory as in anufacturing firs! .enerally it is within anufacturing firs where auditors should e/pect to see all three types of inventory naely finished goods, work in progress as well as raw aterials in support of production process! 0ith large aount of inventory there is high possibility of inventories being held in different locations due to shortage of re1uired space within a single location! &his eans planning for and attendance by auditors to actual stocktaking e/ercise has to take into account this possibility - it adds the logistical and physical oveents deands for auditor and his tea in ters of attending and actual e/aination of actual stocktaking by staff of client copany as re1uired by ISA 34! 5ecall this standard deands that 6if inventory is aterial to the financial stateents the auditor shall obtain sufficient appropriate audit evidence regarding 1
the e/istence and condition of inventory by, in addition to other procedures, attendance at physical inventory counting unless ipracticable78 Audit of inventory is also iportant and critical because it is closely linked to different business operations9cycles as well as touching different accounts and financial stateents! Inventory is aong the easiest assets to anipulate and isstateent affect reported profit: isstateent of inventory balances has a direct effect on reported profit! Inventories identification: soe inventories can be very difficult for an auditor to identify - e/aple includes stock of gas reserve! &his kind of situation needs an e/pert to estiate the 1uantity( ISA "238 using the work of an e/pert! Inventories difficult to establish: the 1uantities of inventory held at a specific given oent ay be difficult to establish! It ay not be possible to cease inventory oveents during the inventory count and 26t +,, ay be hard to establish with precision! #aluation: difficult for certain a product e!g! anti1ues(no active arkets, hospital which is working 292 hours! Inventory losses: fro pilferage, wastage, obsolescence, daage, dorant stock! Inventories ay be intangible: soe very significant work in progress balances ay be intangible in nature! &here are different r ) 8<8 %88+2)%t' )th )('(t+0 5)<' ) nade1uate or inappropriate inventory held: to eet the deands of sales and production e!g! stock out, high inventory levels resulting in poo r cash flow and financial loss! )ther risks include inaccurate or incoplete record of inventory oveents resulting in lack of awareness of the actual inventory position and difficulties in eeting custoer needs! )thers include lack of security over inventory resulting in loss, theft or isappropriation as well as obsolete inventory held or incorrectly supplied to custoers, resulting in financial loss and daage to reputation!
$2 FIVE ,6(2t)+(8 ,+ %6)t +, )('(t+0: )= B',+' 8t+2
year;s
working
papers,
failiari$e
theselves with the nature volue and location of inventories, and consider the controlling and recording procedures over inventory and the tiing of the count!
syste of internal control and decide whether reliance can be placed on internal auditors! 5isk and ateriality: assess inherent, control and detection risks and establish ateriality! ( Inventory held by third parties: arrange third party confiration of inventories held by third parties( depending on ateriality, the auditors should also consider the integrity and independence of the third party and whether it is necessary to arrange for other auditors to observe the count or whether it is sufficient to obtain another auditor;s report on the ade1uacy of the 2
third party;s systes or erely to inspect relevant docuentation held at client place! =/pert assistance : if the nature of the inventories is speciali$ed then the auditor
will need to arrange e/pert help! ounting i n s t r u c t i o n s :
e/aine
the
c l i e n t ;s
counting
i n s t r u c t i o n s : if f o u n d t o b e inade1uate, the atter should be discussed with the client with a view to iproving the prior to the inventory count!
))= D6)(* 8t+2
)))= A,t' 8t+2
the count or easureents, including apparent instances of obsolete or deteriorating stocks, are followed up! 'or e/aple, details of the last serial nubers of goods inwards and outwards records and of oveents during the stocktake ay be used in order to
check cut(off! In addition, copies of [or e/tracts fro] the stocktake records obtained by the auditor during the stocktake and details of test counts, and of the se1uence of stocktake records ay be used to check that the results of the count have been properly reflected in the
accounting records of the entity! &he auditor reviews whether continuous records of stocks have been ad>usted to the
aounts physically counted or easured and that differences have been investigated! 0here appropriate, the auditor considers whether anageent has instituted procedures to ensure that all oveents of stocks between the observed stocktake and the period end have been ad>usted in the accounting records, and the auditor tests these procedures to the e/tent considered necessary to address the assessed risk of aterial isstateent! 3
In addition, the auditor follows up 1ueries and notifies anageent and those charged
with governance of significant difficulties encountered during the stocktake! In conclusion, the auditor considers whether attendance at the stocktake has provided sufficient appropriate audit evidence in relation to relevant assertions - principally e/istence and, if not, the other procedures to be perfored!
#UESTION T9O $% A 2+.'h'(8)' ',)()t)+( +, (+(-26'(t %88't8 %22+)(* t+ IAS 1> IAS 4", which deals with accounting for the tangible %on(current Assets uses special
ter for this as
rental to others or for adinistrative purposes and are =/pected to be used during ore than one accounting period thus the cost of the %on(
current Assets is systeatically allocated over its useful life through depreciation! ?nder this definition the useful life of a fi/ed asset should be understood as: &he period of tie over which an asset is e/pected to be used by the enterprise or the nuber of production units or siilar units e/pected to be obtained fro the asset by the enterprise!
$7 FOUR )(t'(%5 2+(t+5 +2'6'8 t+ 7' +78'' 70 %6)t+ h)5' %6)t)(* (+(26'(t %88't8 &he high value of <<= in any copanies akes it necessary to ake separation of the authori$ation, custody and record keeping functions especially iportant!
destruction, safe custody of ovable assets e!g! otor cars, furniture, electronic e1uipent, etc as well as physical security over the docuents such as title records! M%(%*')%5 S6')8)+( - there should be a suitable capitali$ation policy and this should be used to onitor capital e/penditure! Siilarly there are should be budgetary control useful for onitor capital e/penditure as well as periodical verification process to confir the e/istence of <<= as shown in the records!
$2 S678t%(t)' %6)t t'8t8 )th '8'2t t+ %6)t +, (+(-26'(t %88't8 + +th' )t'.8 %5+(* ,+6 .%@+ %88't)+(8 2%( 7' '8'(t' )( t%765% ,+.%t %8 ,+55+8: -
S'2),)2 8678t%(t)' +2'6'8 ,+ T%(*)75' N+(-26'(t A88't8
A88't)+( E;)8t'(2'
I886' Is the PPE balance in the financial statements overstated?
Are all ac1uisitions during the accounting period genuineB
Cave all assets which were sold during the year been reoved fro the <<= registerB &here is a risk that ites which have been scrapped ay not have been accounted for!
C+.5't'('88
E;%.5' A6)t T'8t8
Are there any e/pense ites which have been capitali$ed in errorB
Select a saple of additions fro the <<= register and agree to supporting docuentation such as title deeds! Select a saple of assets fro the <<= register and physically verify their e/istence! 5eview board [of directors] inutes for details of disposals and trace the disposals to the <<= register! 5eview the description of additions in the <<= register to ensure they are all genuine capital ites!
Is the PPE balance in the financial statements understated?
Cave all additions been included in the <<= registerB
&he auditor could check the board inutes for approval of capital e/penditure and ensure the related ite appears in the <<= register! A saple of physical assets could be agreed to the <<= register to ensure they have been included!
Are there any capital ites which have been e/pensed in errorB
0ere all Ddisposals; genuineB
&he auditor could review the breakdown of e/pense accounts such as the repairs E aintenance account to ensure no ites have been e/pensed in error! &race a saple of disposals fro the <<= register to supporting docuentation such as invoices or receipts in the bank stateents!
5
A88't)+( R)*ht8/ O75)*%t)+(8
I886' Does the company own or control all assets included in the Non-current Asset register?
V%56%t)+( %( %55+2%t)+(
E;%.5' A6)t T'8t8
A copany does not own assets under hire purchase9 finance leases but is still peritted to capitali$e these assets!
Are the PPE held valued in accordance with the applicable accounting standards?
Cave disposals been correctly accounted for, including any gain9lossB
Are all <<= depreciationB
valued
&he auditor can check supporting docuentation such as purchase invoices9title deeds9 loan docuentation to ensure the copany does have title to assets! @oard inutes could also be reviewed to ensure that title of the asset is assigned! <<= should be held at %@#! All assets, e/cept land, should be depreciated! 5evaluation is peritted, but only for an entire class of assets!
&he auditor should review a saple of disposals and ensure they have been treated correctly!
at cost9value less Select a saple of assets in the <<= register and ensure that each asset has been depreciated!
Cave depreciation rates been properly calculated to write off assets over their estiated useful lives i!e! are the depreciation rates used ade1uate but not e/cessiveB
&he auditor should critically review the <<= accounting policy and assess whether the depreciation rates used are reasonable! &he auditor should also check that the stated rates are being used in the <<= register!
If depreciation rates are e/cessive, there ay be a large nuber of fully written down assets in the <<= register which are still in use! If depreciation rates are too low, there ay be assets approaching end of useful life but still 4 Cave any revaluations been accounted for with a large carrying aount ! correctlyB &he auditor should review the accounting for any revaluations ade!
#UESTION THREE $% L)8t %( 7)', '82)t)+( +, 2+..+( '5'.'(t8 +, 8t%(% %6)t '+t &here are at least eight eleents of audit report - listed and described as follows: -
1 Also too high disposal gain/loss 6
T)t5' - the title of the report should be clearly stated while differentiating audit report
with other types of reports usually prepared by anageent of lient opany! Siple words like 6independent auditor8 or 6auditor ;s report8 are usually used! A'88'' - focuses on who the audit report is priarily intended to - norally those
who in the first place are seen as eploying or in need of auditing and assurance services! &hese are none but the owners or shareholders of a particular copany - thus the report will identify the as Dshareholders; or 6board of directors8 or 6supervisory board8! O'()(* + )(t+62t+0 %%*%h two issues are of particular iportant naely
the identification of the financial stateents audited as well as a stateent of the responsibility of the entity;s anageent and the responsibility of the auditor on these stateents! Fey stateents usually show clearly that it is the anageent of the copany that is responsible for preparing the audited 'Ss while the auditor;s duty is liited to conducting the relevant audit work! S2+' %%*%h - this usually describes the nature of an audit engageent including
what actually auditor did in the audit engageent before arriving at giving relevant audit opinion and ust ake reference to the ISAs or relevant national standards or practices! O)()+( %%*%h this contains e/pression of opinion on the financial stateents -
generally key ters used to e/press the auditor;s opinion are financial stateents 6give a true and fair view8 or 6present fairly, in all aterial respects,8 7 and ention the fraework used to arrive at that opinion - in the conte/t of &an$ania according to ISAs! D%t' +, th' '+t - the report ust be dated and this date usually
coincides9corresponds with the date for which the audit work was copleted ( usually the last date of field work ! Auditor should not date the report earlier than the date on which the financial stateents are signed or approved by anageent! A6)t+8 %'88 - this is none but a specific location, usually the city in which the auditor
aintains an office that serves the client audited - where relevant it ay ean a city and country in which the audit report has been issued! A6)t+8 8)*(%t6' - this refers to the nae of the audit fir, or the personal nae of the
auditor, or both, as appropriate! &he auditor;s report is ordinarily signed in the nae of the fir because the fir assues responsibility for the audit!
7
$7 M'%()(* +, .+),)2%t)+( +, %6)t+8 '+t 2+(t%)()(* 6(6%5),)' +)()+( An auditor;s un1ualified report is soeties odified to e/plain atters that do
not affect the auditor;s opinion, but should be ephasi$ed to the financ ial
stateent user! =phasis of Matter, under ISA G33, in certain circustances an auditor;s report ay be odified by adding a fourth, ephasis of atter paragraph, to highlight a aterial atter regarding a going concern proble and when there is significant uncertainties, the resolution of which is dependent upon future events which ay affect the financial stateents!
8
