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367904 Advanced Auditing Tutorial Mini Audit

2013 SEMESTER 1
CONTENTS
MINI AUDIT VOSPA LTD

AUDIT PLANNING & RISK ASSESSMENTS


TQ6: Audit Planning and Risk Assessments
TQ7: Analytical Procedures & Materiality Assessments
INTERIM AUDIT
TQ8: Assessing General Control Risks
TQ9: Audit of Sales & Collection System
FINAL AUDIT
TQ13: Audit of
TQ15: Audit of
TQ20: Audit of
TQ22: Audit of

Accounts Receivables, Bad & Doubtful Debts


Cash and Bank
Provision for Contingent Liabilities
Audit Reporting

367904 Advanced Auditing Tutorial Mini Audit

THE AUDIT OF VOSPA LTD


For the year ended 31 December 20X3
TQ6: Audit Planning & Risk Assessments
Read ISA (NZ) 220: Quality control for an audit of financial
statements; ISA (NZ) 210: Agreeing the terms of audit
engagements; ISA (NZ) 300: Planning an audit of financial
statements; ISA (NZ) 315: Identifying and assessing the risks of
material misstatement through understanding the entity and its
environment and ISA (NZ) 330: The auditors responses to
assessed risks.
a. Acceptance of an Audit Client
Craddock Vaugh, the managing director (MD) of Vospa Ltd approached your audit
partner regarding the audit of the company for the year ended 31 December 20X3.
Vospa Ltd is a large public company. It manufactures and sells jewellery. Its
manufacturing factory is situated in Whangarei and its head office and ten retail
outlets in Auckland. The company also sells to other independent retailers in the
high-end jewellery market. Vospa Ltd was previously audited by Evan & Co., but at
the end of last years audit, there was a dispute between the managing director
Vaugh and the previous auditors over:
(a) the proper valuation of the work-in-progress
(b) the inclusion in sales of inventory that has not been paid for nor delivered
This dispute led to Vaughs decision to change the company auditors. As an audit
manager, you have been asked by your audit partner to assess whether this new
client should be accepted. You asked Vaugh, the MD for his permission to confer with
the previous auditors. He agreed although he mentioned that he could not see any
need for you to contact the previous auditors. He also indicated that he was glad to
change auditors because he had enough of their "nit-picking".
Question 1: Explain the steps to take in deciding whether to accept this new client?

b. Preliminary Risks Assessments


Your preliminary assessment of Vospa Ltd led to the acceptance of this audit client.
As manager, you are in charge of this audit client and you are now required to plan
the audit. During a visit to the clients head office in Auckland, you managed to
gather the following information from the MD and his staff:
1) The personnel in the centralised accounting department are competent but
seemed somewhat overworked and underpaid relative to the other employees.
2) The accounting system is computerised and the processing is centralised at head
office in Auckland. The computer equipment was upgraded last June. This should
potentially improve the record keeping
3) The company has an internal audit department.

367904 Advanced Auditing Tutorial Mini Audit


4) Stock-take will be held on balance date 31 December 20X3 at the different
locations.
5) Vaughn Craddock, the MD is also a shareholder of the company.
6) His niece Sheila Webb is the Financial Controller. She is responsible for all the
accounting and the administration of the company.
7) The MD is proud of his group of aggressive young sales executives. They receive
relatively low salaries. However, a high proportion of their income is a result of an
unusually generous profit-sharing plan.
8) You were told that one of the retail staff members was caught stealing jewellery
from the store where she worked. She confessed that she has been stealing
jewellery regularly over a period of 3 months. However, it was only in the last
month that she was caught in the act.
9) Even though the industry as a whole has suffered dramatic setbacks in recent
years, Vospa Ltd continues to prosper, as evidenced by its constantly increasing
earnings and growth. However, it is only in the last year that sales were declining
due to the recession.
10) At present the bankers are willing to continue the company loan. However, the
loan agreement is due for renewal at the end of the year. Providing the bank with
a copy of Vospas audited annual accounts is a condition of the loan agreement.
11) Vospa Ltd has 40% holding in one other private company, Telco Ltd. Telco markets
Vospas jewellery locally and overseas.
Question 2:
a) Identify the major audit risks concerns you should have for Vospa Ltd
b) Explain how the risk concerns would impact on financial reporting (by
way of misstatements, omissions, distortions and non-disclosures).
c) State the audit strategies for investigating the significance of each of the
items in (a)
d) Discuss the general planning approach for this audit client.
Present your answers as follows:
(a)Major concerns
identified

(b)Reasons for
your
concerns

(c) Audit
strategi
es

367904 Advanced Auditing Tutorial Mini Audit

THE AUDIT OF VOSPA LTD


For the year ended 31 December 20X3
TQ7: Analytical Procedures & Materiality Assessments
Read ISA (NZ) 520: Analytical Procedures and ISA (NZ) 320:
Materiality in Planning and Performing and Audit
Using the information in the unaudited financial statements for Vospa Ltd. for the
year ended 31 December 20X3 (refer to Excel File - TQ7 VOSPA LTD Financial
Statements), complete the following ratio calculations. Note that this is the stage
where the auditor uses his or her understanding of the business, the industry and
the results of the ratio calculations (analytical procedures) in audit planning to
anticipate any account balances and assertions that are likely to be misstated, and
also to plan the initial audit responses.
Required:
a. Calculate the following ratios for Vospa Ltd and compare them with the
comparative industry data (stated on the unaudited financial
statements) for the same periods.
Ratio

20X3
20X2

20X1

1.
2.
3.
4.
5.

Asset Turnover (sales/total assets)


Profit Margin (% profit before taxes/sales)
ROA (% profit before taxes/total assets)
Capital Structure Leverage (total assets/total equity)
Return on Equity (% profit before taxes/tangible net
worth)
6. Sales/Net Fixed Assets
7. AR Turnover in Days (AR/sales x 365)
8. Inventory Turnover in Days (Inv./CGS x 365)
9. Gross Operating Cycle
10.AP Turnover in Days (AP/CGS x 365)
11.Net Operating Cycle
12.Current Ratio
13.Quick Ratio
14.Free Cash Flow
15.Cash Flow from Operations to Current Debt + Dividends
16.Debt/Worth
b. Based on the information in (a) above, discuss the conclusions you
would arrived at for the company. For any areas where you have audit
concerns:
1. Identify the account balances and assertions that may be misstated,
2. Explain why your analytical procedures indicate that the assertion might
be misstated, and

367904 Advanced Auditing Tutorial Mini Audit


3. Discuss possible audit strategy to detect misstatements if they exist.

c. Preliminary Judgments on Materiality


Outline your preliminary judgments about materiality for Vospa Ltd. This is the stage
where the auditor makes preliminary decisions about what will be considered
material when setting the scope of audit procedures. You should draw conclusions
about:
(1) Materiality at the financial statement level and
(2) Materiality at the account balance level where you allocate the overall
financial statement materiality to appropriate balance sheet accounts.
Discuss your consideration of both quantitative and qualitative factors in your
discussion.

367904 Advanced Auditing Tutorial Mini Audit


d. Results of Analytical Procedures Performed in Audit Planning
The following memo reviews the results of analytical procedures performed during
audit planning. The memo analyzes ratios and information associated with (1)
earnings and profitability, (2) the Companys operating cycle, (3) liquidity and (4)
solvency. The following analysis both compares company performance against
industry as well as compares the current year unaudited numbers against prior
years audited results.
Use the following ratios to explain your concerns and strategies for the
audit of Vospa Ltd:
Ratios
Earnings and Profitability
Sales Growth

Asset turnover (Sales/Total Assets)

Sales to net fixed assets

Gross profit margin

Profit before taxes


Return on assets
Return on equity

Explanations

Operating Cycle
Account receivable turnover in days

Inventory turn days

Accounts payable turnover

Liquidity
Current and quick ratios
Solvency
Debt to net worth ratio

Overall Conclusions?

367904 Advanced Auditing Tutorial Mini Audit


e. Refer to Exhibit 1 and Exhibit 2 and see how a rough estimate for
planning materiality is determined and allocated to the accounts
Exhibit 1: Provides a rough estimate of planning materiality

1 % of Total Assets
Variable Percent of Total Assets
1% of Total Revenues
Variable Percent of Total Revenues

$
$
$
$

Base
22,978,691
22,978,691
35,274,720
35,274,720

5% of Pre-Tax Income
10% of Pre-Tax Income
1% of Gross Profit

$
$
$

788,988
788,988
9,876,922

$
$
$
$

Materiality
Estimate
229,787
145,202
352,747
194,510

$
$
$

39,449
78,899
98,769

Exhibit 2: Allocation of Materiality to Accounts

367904 Advanced Auditing Tutorial Mini Audit

THE AUDIT OF VOSPA LTD


For the year ended 31 December 20X3
TQ8: Assessing General Control Risks
Read ISA (NZ) 330: The auditors responses to assessed risks
Your inquiries and observations of Vospa Ltds general control environment
revealed the following information:
Integrity and Ethical Values
Craddock Vaugh (the company MD) and his son Conrad (the Chair of
the Board) have always placed a premium on values of integrity and ethics.
For years, business was conducted on a handshake, and commitments made
by the company were always honoured. Company employees also value
integrity and ethics. This quality is evidenced in employee who has been with
the company for more than a year or two.
Management Philosophy and Operating Style
The primary focus of Vospa Ltds strategic plan is to grow revenues and
earnings. In recent years, the company has directed resources to a new
product line, and the companys business strategy has focused on revenue
growth. Sales grew by 30% in 20x2 and unaudited results showed 28% sales
growth in 20x3. Management was willing to take calculated risks in order to
support growth in market share and brand recognition. The current generous
profit sharing plan for the sales executives is designed to reward them for
revenue growth. The previous auditor experienced a one-time problem
associated with revenue recognition.
Commitment to Competence
In order to successfully manage growth, the MD expanded his
management team by appointing James Doyle (with over 13 years of industry
experience) as Chief Operating Officer (COO) and Julia Anderson (previously
an audit manager with Reddy and Able) as Chief Financial Officer (CFO). Julia
was hired because of her familiarity with benefits and risks of enterprise
resource planning systems.
Julia Anderson, the CFO, has responsibility for the company's financing
needs, accounting, and information systems. Many accounting and
information systems issues have been delegated to her. Julia immediately
initiated a project to upgrade the company's computerized accounting
system. She reviews the progress on the new system installation with the IT
manager on a monthly basis.
The CFO recently hired Jay Harris as the new IT director. Jay Harris is
given the task of implementing a new enterprise resource management
system for the company. The new system is needed to handle the companys
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367904 Advanced Auditing Tutorial Mini Audit


growing information system needs. Jay Harris is also responsible for
managing the current system, overseeing data control and systems security
until the new system has been tested and is ready for use.
Further, the CFO recently hired Harry Alston as internal auditor for the
company. Harry reports directly to Julia. The internal auditor is currently given
the task of reviewing all the reconciliations for the various bank accounts. The
board of directors approved the hiring of the internal auditor. Julia intends
plans to discuss internal audit findings with the board of directors, in the
absence of an audit committee, and on an annual basis.
Board of Directors and Audit Committee
Vospa Ltd is essentially a family owned business. Its board of directors is
dominated by family members. The Board of Directors includes Craddock
Vaugh, the MD; Conrad Vaugh, the current Chairman; Howard Vaugh, a family
member with a business background in the retail jewellery sector; Catherine
Vaugh, another family member who is trained in jewellery design, and Fred
Harris, the independent director. Harris is also the Senior President of a large
regional bank. The Board of Directors has not appointed an audit committee,
although it recently approved the hiring of an internal auditor on the
recommendation of Julia Anderson, CFO.
Organizational Structure
The current senior management team is made up of Conrad Vaugh (the
Chairman of the Board), James Doyle (COO) and Julia Anderson (CFO). The IT
director (Jay Harris) reports directly to Julia Anderson. Jay Harris is responsible
for data control and systems security in the companys small computer
environment. Within IT department, there are separate managers for
computer operations and programming. Also, the internal auditor reports
directly to the CFO.
Assignment of Authority and Responsibility
Authority for many business decisions rests largely with senior
management. Business decisions associated with IT rest solely with the CFO
and the IT Director. The CFO also has sole authority for purchasing and selling
short-term share investments. Julia is currently under pressure to produce
financial statements within ten days after the end of the month. Both
Craddock and Conrad Vaugh consider this as essential to good business
management. Once the financials are produced they are closely reviewed
with managers of day to day operations to ensure that managers are held
accountable for the resources they are entrusted with.
Human Resource Policies and Practices
Personnel involved in the companys core manufacturing and sales
functions have significant experience with the Company. In the accounting
department, you observed that there is a particular accounting staff who
requires more training. The staff is a challenge for the CFO. The company has
hired competent individuals from outside to meet the companys IT and
internal audit needs. These roles are new. In order to keep up with growing
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367904 Advanced Auditing Tutorial Mini Audit


demands, employees, particularly in the accounting and the IT departments
are very overworked.
Other procedures performed to obtain an understanding of internal control
revealed the following information:
1. The company has identified a small group of independent jewellery
retailers in the high end market. Their sales have deteriorated to the
point that it is now doubtful whether they are able to repay Vospa Ltd
for their purchases. However, Vospa Ltd has decided to continuing
making deliveries to these retailers, but on the basis of cash on
delivery (COD). It is anticipated that a large provision for doubtful
debts may be necessary to reduce these accounts to estimated
realizable value.
2. The accessories inventory consists of a conglomeration of small
miscellaneous items of insignificant unit prices, totalling $42,395.89,
again making up an insignificant portion of total inventories.
3. The purchased parts stockroom is segregated from the production
areas by a wire fence. While visiting the factory, you noted that the
gate was left open all day and access to the stockroom (which contains
many valuable and easily concealed items) was accessible to any
employee. The stockroom's perpetual inventory records were formerly
checked by an employee who made periodic test counts. This employee
has retired and has not been replaced. As a result, period test counting
has ceased. You expanded your tests in view of these situations and are
satisfied that the perpetual records reasonably reflect the quantities on
hand.
4. The board of directors has recently adopted a policy that allows the
company to invest excess funds in short-term share investments. The
CFO has sole authority for purchasing and selling the shares
investments. Company shares purchased will be credited to a company
account at a local brokerage house. The shares are held in the
Company's name. All correspondence related to the share investments
are sent directly to the CFO. She in turn, forwards brokerage advices to
her assistant for recording in the accounts.
5. A complete physical inventory of Company's stock of completed and
work in progress jewellery have recently been counted.
Required:
a) Identify the control environment factors that would impact the company's
internal control.
b) List the strengths and weaknesses in Vospa Ltd's general internal control.
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367904 Advanced Auditing Tutorial Mini Audit


c) Make suggestions for improving the weaknesses identified in (b) above.
d) For the accounts receivable and inventory accounts identify one assertion
for which you would assess control risk at the maximum or slightly below
the maximum. Explain your logic.

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367904 Advanced Auditing Tutorial Mini Audit

THE AUDIT OF VOSPA LTD


For the year ended 31 December 20X3
TQ9: Audit of Sales & Collection System
THE SALES SYSTEM FOR VOSPA LTD.
Local jewellery retailers usually phone through their orders to the company. The orders
are entered into the computer via terminals located in the sales department. The credit
controller subjects new retail customers to credit checks before they are accepted.
Before a sales order is accepted, the computer checks credit limits, rejecting orders
from retail customers with accounts more than two months overdue; and also the
inventory master file to determine the availability of jewellery items ordered. Each
edited sales transaction is then recorded and stored in the sales order file.
At the start of each day, the computer retrieves the sales order file and prepares a
Goods Despatch List, which also automatically updates the order file. Once the orders
are prepared, the delivery clerk updates the computer file from a terminal located in
the despatch department. This involves:
a. Accessing the appropriate menu.
b. Entering the customer number.
c. Entering the stock item number(s) and quantity.
The input controls here are:
a. Completeness check - fixed format screen.
b. Check digits for both customer and stock item numbers.
c. Existence check for customer and stock item numbers against master files.
The computer then prints out a four copy packing slip/invoice set. The copies are
distributed as follows:
Copy 1: To the retail customer.
Copy 2: To the retail customer - signed and returned as proof of receipt of goods.
Copy 3: Filed in Despatch Department.
Copy 4: To the Accounting Department.
All jewellery despatches have two copies of the invoices attached.
In the Accounting Department, daily accounts processing includes the following steps:
a. Update the accounts receivable master file.
b. Prepare a daily sales journal.
c. Produce a weekly gross margin report by product.
d. Produce a missing/duplicate inventory master file.
e. Update the perpetual inventory master file.
f. Prepare monthly customer statements which are promptly sent out.
You have carried out a preliminary evaluation of the sales system, and decided to rely
on the controls.
REQUIRED:
a) What is the purpose of tests of controls?
b) What is the purpose of substantive test procedures?
c) Discuss the relationship between the tests of controls and substantive tests.

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367904 Advanced Auditing Tutorial Mini Audit


d) What are the audit procedures (tests of controls and substantive tests) you will
carry out during the interim audit of the sales system of Vospa Ltd?

2. THE CASH RECEIPTS SYSTEM FOR VOSPA LTD


Most of Vospa Ltds sales are on credit to wholesaler and retailer jewellers. However,
it also operates a factory shop where all the sales are for cash. The following is a
description of the cash receipts system for the company.
Mail is opened daily by the receptionist. Cheques and remittance advices received in
the mail are separated.
The receptionist prepares a control list of the cheques received which she later gives
to the accountant.
The cheques are sent to the cashier and the remittance advices to the accounts
receivable clerk for posting to the accounts receivable ledger.
Cash from the factory shop sales are also sent to the cashier. The cash register tape
from the shop is handed to the accountant daily.
The cashier prepares a bank deposit slip and banks the cash and cheques daily.
The cashier also writes up the cash receipts journal.
The accountant reconciles the bank account whenever a bank statement is received.
All documents are filed chronologically.
Required
a) Explain the interrelationships between internal control evaluation and tests of
controls for cash receipts, and the final audit of bank accounts.
b) List the procedures you would perform on the cash receipts system described
above.

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367904 Advanced Auditing Tutorial Mini Audit

THE AUDIT OF VOSPA LTD


For the year ended 31 December 20X3
TQ13: Audit of Accounts Receivables, Bad & Doubtful
Debts
You are now starting substantive audit work for verifying Accounts Receivable and
Bad Debts as at 31 December 20X3. Obtain the companys accounts receivable
aged trial balance (Refer to excel file - TQ9 VOSPA LTD Accounts Receivables Aged
Analysis). This schedule is included in the working papers. Assume that you have
checked the aged trial balance with the accounts receivable subsidiary ledger and
that the subsidiary ledger supports the aged trial balance regarding both the
amounts due and age of accounts.
On Tuesday, January 2, you prepared and mailed both positive and negative
accounts receivable confirmations. Vospa Ltds staff provided you with some
assistance.
Positive confirmations were sent to the five customers with balances over
$10,000, as follows:
(1) Frankie's Floral Jewellers,
(2) Tears and Doefall Company,
(3) Anne Charlotte Sparkles,
(4) Young and Beautiful, and
(5) Darings.
Negative confirmations were mailed to all other customers with an accounts
receivable balance.
You have received replies on all of the positive confirmations and no replies to the
negative confirmations, except for the confirmation request sent to Capitol Fine
Rings. It was returned by the Post Office because of its inability to deliver.
The positive confirmations are attached. Upon checking with the accounts receivable
accountant, you learned that a $1,620 credit should have been issued to Anne
Charlotte Pendants, but the credit was never posted.
You also discussed the delinquent accounts with the accounts receivable accountant.
She commented on those customers and their paying habits:
Customer
Alpha Diamonds
Anne Charlotte Pendants
Bobell Beauty Supply
Body Piercings
Capitol Fine Rings
Cut-Rate Discount Stores
Darings
Frankie's Floral Jewels
Incense Ltd
Janis Dept. Store

Paying habits
Good account.
Credit of $1620 should be allowed.
Good account.
Slow paying, good account.
Probably will collect nothing.
Slow paying, but has always paid.
Established company, good pay.
Good account.
Good account.
Slow paying, good account.

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367904 Advanced Auditing Tutorial Mini Audit


Lone Star Supply
Rausch's Department Store
Tears and Doefall Pearls
William's Pearls
Young and Beautiful

Good account.
Slow pay. Good account.
Good account.
Good account.
Good account.

The Accounts Receivable accountant indicated that she had spoken with the
financial controller and the sales manager, about the delinquent Capitol Fine Rings
account. They were in agreement that it should be written off. Accounts amounting
to $14,200 had been written off during the year; you noted that all write-offs were
approved by the Accounts Receivable accountant, and that they are not listed in the
Accounts Receivable Aged Trial Balance.
From the cash receipts journal you saw the following subsequent payments made on
the accounts receivables balances as of December 31, 20X3.
Customer
Anne Charlotte
Pendants
Darings
Frankie's Floral Jewels
Incense Ltd
Lone Star Supply
Tears and Doefall
Pearls
Young and Beautiful

Payment
Amount
27,100
24,300
37,600
2,000
2,400
68,000
20,000

Payment Date
1-12
1-02
1-14
1-07
1-14
1-02
1-05

Required Exercises
1. Prepare a substantive audit program to test accounts receivable balances and
bad debts. Use the financial statement assertions as the major headings or
captions for your program. List the appropriate steps under each of these
headings:
None of the accounts receivables are fictitious
No accounts receivables have been omitted from the balance sheet
The accounts receivables are genuine claims owed by the company
Pledged accounts receivables used as collateral are disclosed
Receivables from directors, officers are properly disclosed
2. Perform all required audit work on the accounts receivables aged analysis
schedule according to the audit program prepared in (1) above. Prepare a
schedule to analyze the provision for doubtful debts and the bad debts write-off
account for the current year, performing all appropriate audit work. You have
determined that the expected uncollectible percentages from the prior year are
still appropriate for the current year i.e. 3% of total debtors.

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367904 Advanced Auditing Tutorial Mini Audit

CONFIRMATION OF DEBTORS
January 2. 20X3
Frankie's Floral Jewels
602 River Street
Manukau City
Dear Sir or Madam:
For the purpose of providing independent confirmation of our accounts
receivable, please advise our auditors, of the correctness of your balance with
us as of December 31, 20X3, as shown on the enclosed statement.
After comparing the statement with your records, please sign the
confirmation below and return it directly to our auditors in the enclosed,
addressed envelope. If your records differ from the balance shown, please
note your exceptions below.
This letter is not a request for payment, but merely for confirmation of your
account balance. Yours very truly,
VOSPA LTD

Peter Ng
CONFIRMATION OF DEBTORS
Confirmation Request No

D1

Chartered Accountants
425 Davies Rd
Manukau City
Dear Sir or Madam:
Your account showing a balance of $37,600 owing by us, as at 12/31/20X3 is
correct.
Very truly yours,
Frankie's Floral
Jewels
James Whitmore
Chief Accountant
January 16.20X4
Exceptions:
NO EXCEPTIONS

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367904 Advanced Auditing Tutorial Mini Audit


CONFIRMATION OF DEBTORS
Confirmation Request
No D2 Chartered Accountants
425 Davies Rd
Manukau City
Dear Sir or Madam:
Your account showing a balance of $72,100 owing by us, as at 12/31/20X3 is
in correct
Very truly yours,
Tears and Doefall Pearls
Witlam. Okeefe, Controller
1/11/20X4
Exceptions:
$68,000 payment made prior to December 31, 20X3. Balance as of
12/31/20X3 should only be $4,100
--------------------------------------------------------------------------------CONFIRMATION OF DEBTORS
Confirmation Request No D3
Chartered Accountants
425 Davies Rd
Manukau City
Dear Sir or Madam:
Your account showing a balance of $30,120 owing by us, as at 12/31/20X3 is
in correct
Very truly yours,
Anne Charlotte Pendants
Jane Thompsom
January 12. 20X4
Exceptions:
We returned $1,620 of merchandise in November. We were promised credit
but have not yet received it. The balance at 31.12.20X3 should be $28,500

17

CONFIRMATION OF DEBTORS
Confirmation Request no D4
Chartered Accountants
425 Davies Rd
Manakau City
Dear Sir or Madam:
Your account showing a balance of $28,000 owing by us, as at 12/31/20X3 is
incorrect
Very
truly yours,
You
ng and Beautiful
Roger Mc Adams
President
1/9/20X4
Exceptions:
We only owe $8,000. Balance above is incorrect.
-------------------------------------------------------------------CONFIRMATION OF DEBTORS
Confirmation Request no D5
Chartered Accountants
425 Davies Rd
Manukau City
Dear Sir or Madam:
The statement of our account showing a balance of $31,900 as of 12/31/20X3
is correct.
Very
truly yours,
Darings
Rosemary Williams
Head Bookkeeper
1/15/20X4
Exceptions:
No exceptions

18

THE AUDIT OF VOSPA LTD


For the year ended 31 December 20X3

TQ15: Audit of Cash and Bank


As the audit manager, you found that company staff involved in the area of
cash and bank are generally competent and that general controls over cash
receipts and payments are also satisfactory.
1. Prepare a substantive audit program for Cash at bank to test the following
assertions:
a) The amount of cash is not materially more than the amount shown on
the balance sheet.
b) All cash has been recorded.
c) Cash is correctly shown as a current asset.
d) Cash is not restricted to non-current use.
3. Use the audit program you have prepared and perform the necessary audit
work to verify cash at bank.
You are given the following information to complete the audit of cash at bank
as at 31 December, 20X3 (the information are found in the Excel file: TQ11
VOSPA LTD Cash at Bank & Bank Reconciliation):
A copy of the reconciliation for the month of December, 20X3 (Schedule
A4)
Selected portions of the cash receipts (Schedule A1) and cash
disbursements journals (Schedule A2)
You have received directly from the banks the confirmation and cut- off
bank statements that you requested for, on January 2, 20X4:
The cut-off bank statements for the period from January 1 to January 12,
20X4 (Schedule A3)
Assume that cheques written in December and not shown as presented on
the cut-off bank statement were cleared on the December bank statement.
The following working papers were prepared for you by the client or obtained
directly from the bank. They are included for your use (refer to the Excel
spreadsheets provided).

19

STANDARD FORM TO CONFIRM ACCOUNT BALANCE


INFORMATION
WITH FINANCIAL INSTITUTIONS
Original 1
To be mailed to the Auditor
Customer Name: VOSPA LTD
Big City National Bank
Queen St Auckland
Please provide our Auditors the following information as at 31.12.20X3, regarding our deposit and loan
balances. Please confirm the accuracy of the information, noting any exceptions to the information
provided. II the balances have been left blank, please complete this form by furnishing the balance in
the appropriate space below.' Although we do not request nor expect you to conduct a comprehensive,
detailed search of your records, it during the process of completing this confirmation additional
information about other deposit and loan accounts we may nave with you comes to your attention,
please include such information below. Please use the enclosed envelope to return me form directly to
our accountants.

Sheila Webb, January 2, 20x4


(Customer's Authorized Signature)
Please return this form directly to our accountants:

1. At the close of business on the date listed above, our records indicated the following deposit
balance(s):
ACCOUNT NAME
Vospa Ltd

ACCOUNT NO.
58-4329

INTEREST RATE

BALANCE'

N/A

$415,624

2. We were directly liable to the financial institution for loans at the close of business on the date listed above as
follows:

ACCOUNT
NO./
DESCRIPTIO

BALANCE'
^

DATE DUE

INTEREST
RATE
^

DATE THROUGH DESCRIPTION OF


WHICH INTEREST COLLATERAL
IS PAID

The information presented above is in agreement with our records. There are no other deposits or loan
accounts have come to our attention except as noted below.

Bill Churchill
Financial Institution Authorised
Signature

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Tutorial Discussion Questions


EXCEPTIONS AND COMMENTS
NONE

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Tutorial Discussion Questions

THE AUDIT OF VOSPA LTD


For the year ended 31 December 20X3
Read ISA (NZ) 540: Auditing accounting estimates, including fair value
accounting estimates and related disclosures and NZ IAS 37: Provisions,
Contingent Liabilities and Contingent Assets before attempting the following
questions

TQ20: Audit of Provision for Contingent Liabilities


Vospa Ltd produces toxic waste as a by-product of the jewellery manufacturing
process. The waste is stored in a special warehouse in a town about one
kilometer from Whangarei. The people living in the town have recently
expressed doubts about the safety of the storage facility but Vospa Ltd claims
that the risks are lower than those that government regulations permit.
Question:
a. What are the issues you would wish to consider in this case? What
questions would you
ask?
Assume that one month before the year end, a lorry carrying waste on behalf of
Vospa Ltd hit the gate post of the special warehouse, and the waste spilled and
ran into a river running through the nearby town.
Questions
b. What matters would you consider in deciding if a present obligation
exists?
c. As the auditor of Vospa Ltd, what actions do you think should be taken
to decide if there is
a legal or constructive obligation?
d. What audit steps would you take to determine the amount of the
obligation, if any?
Assume that Vospa Ltd had decided to set up a provision of $1,000,000 as at
31 December 20X3 for obligations arising from the toxic waste spillage (the
event).
Questions:
a. How should this matter be disclosed? You may assume that you
have satisfied yourself that the provision is justified. What actions
would you take as an auditor? Read the accounting standard before
answering this question.
During the year to 31 December 20X3, it becomes clear that there was an overprovision at the previous year-end of $500,000, but Vospa Ltd has decided to
set other costs which are not related to the toxic waste matter against the
provision.
Questions:
b. Assuming that you have satisfied yourself that the amount of the
over-provision has been properly determined, how would you
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Tutorial Discussion Questions


advise management about this matter? Would you be concerned
that the estimates at the previous year-end had turned out to be
substantially wrong?

THE AUDIT OF VOSPA LTD


For the year ended 31 December 20X3
Read ISA (NZ) 700: Forming an opinion and reporting on Financial
Statements; ISA (NZ) 705: Modifications to the opinion in the independent
auditors report; ISA (NZ) 706: Emphasis of matter paragraphs and other
matters paragraphs in the independent auditors report before attempting the
questions.

TQ22: Audit Reporting


Vospa Ltds financial report for the year ended 31 December 20X3 disclosed a
note about a claim for compensation of $250 000 from the neighbouring
company for toxic waste leakage on their property (refer to TQ20: Audit of
Provision for Contingent Liabilities) The directors have not recognised the liability
in the Balance Sheet as they believe the claim can be successfully defended. This
matter however has been adequately accounted for and properly disclosed in the
Financial Report.
Independent legal advice sought by the auditors indicated that the legal case
could be decided either way and that the amount of compensation is uncertain.
The case is due for hearing in June 20X4.
An extract of Vospa Ltds Balance Sheet and Profit and Loss Account as at 31
December 20X3 showed the following:
SHARE CAPITAL AND RESERVES

$1 250 000

Represented by:
Fixed Assets
Current Assets
Non-current Liabilities
Current Liabilities
NET ASSETS

3 600 000
1 600 000
2 450 000
1 500 000

5 200 000
3 950 000
$1 250 000

REVENUE STATEMENT
Operating profit before tax
Income tax expense
Operating profit after Taxation
Accumulated losses at 1 January 20X3
RETAINED EARNINGS AT 31 DECEMBER 20X3
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2 900 000
(1 400 000)
1 500 000
(900 000)
$600 000

Tutorial Discussion Questions


You should assume that the company will not receive a tax deduction for any
damages paid.
REQUIRED:
1. State with reasons, the audit opinion you would give for the above situation.
What would you disclose in the audit report?
2. Discuss the basis for the audit report, giving also the audit report disclosure
requirement if:
2.1. The matter has been adequately accounted for and properly disclosed
in the
financial report, and the amount of the claim was $750 000.
2.2. The directors refused to make any disclosure of the claim of $250 000.
2.3. The auditors are prevented from obtaining sufficient evidence to give
an opinion on this matter of uncertainty:

The amount of the claim is $250 000

The amount of the claim is $750 000

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Tutorial Discussion Questions

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