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Mastering case study for Audit & Assurance (CA, ACCA, CMA Exam)
Here, I have try to summarize different audit question, same time I try to better understanding my reader providing my best solution, where they can easily better perform their professional Exam like, CA, CMA, ACCA.
Let’s start me summarize different audit question & solution:
Question (01) (New Accounting system)
The ABC Co.LTD . A new accounting system was introducing in march-2023 .it had been successful tested prior to its implementation and management had such confidence in the new system that they did not consider it necessary to undertake further testing after implementation.
If you are asking, is there any audit risk & what auditor response to such risk?
Ans: Risk & responses
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Audit risks |
Auditor’s response |
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A new accounting system was introducing in march-2023 and post implementation testing has not been conducted. There is a risk opening balances on the new system being misstatement and loss of ongoing data if they have not been transferred from old system correctly. if new system is not operating effectively there is a risk of misstatement of the accounting record. |
The audit team should undertake details testing to confirm that all balances have been completely & accurately transferred to the new accounting system. They also should discuss with the management any issues which have occurred since the new system was implemented. |
Question (02) (Research & development Expense)
Any research & development Expense occurrences in any organization for smooth functioning, say for example developing a new production process & Tk.10,50,000 was capitalized in the year as development expenditure.
If you are asking, is there any audit risk & what auditor response to such risk?
Ans: Risk & responses
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Audit risks |
Auditor’s response |
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According to IAS-38, Intangible assets requires research expenditure to be recognized as an expense as incurred & development expenditure capitalized only it strict criteria are satisfied. There is a risk that research expenditure has been incorrectly classified as development expenditure resulting in overstated intangible assets &under stated research expense. |
The audit team should discuss with the management regarding accounting policy applied particularly in respect of identifying the research & development stages. A details review of capitalized cost & also obtain supporting document which meet relevant criteria against where or not it is research or development expenditure. |
Question (03) (Directors Bonuses)
The XYZ company LTD. Being forecast performance for the year as the directors are paid a Bonus based on a percentage of profit before tax.
If you are asking, is there any audit risk & what auditor response to such risk?
Ans: Risk & responses
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Audit risks |
Auditor’s response |
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The directors are paid a Bonus based on a percentage of profit before tax for the year. There is a risk that the director will try to overstate the profit, and therefore their bonuses by increase the revenue and income recorded & decreasing expense.
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The audit team should be aware of the increases risk of manipulation and should assigned more experienced about member to significant estimates & estimate judgement area. |
Question (04) (Inventory Valuation -WIP, Finished goods)
Describes substantive procedures the auditor should perform to obtain sufficient & appropriate audit evidence in relation to (Inventory Valuation -WIP, finished goods inventory).
Ans:
Here, your asked answer to the question (Inventory Valuation -WIP, finished goods inventory) by substantive procedure, at first we should to know when substantive procedures are used? Answer is A substantive procedure is used to test the figure in the financial statements with the aim of identified material misstatement in the financial statements.
Substantive procedures for valuation of (Inventory -WIP, Finished goods):
01.Obtain a schedule of all raw material finished goods and work in process(WIP) inventory during the year and cast to confirm completeness & accuracy of the revaluation adjustment agree the trial balance & financial statements.
02.Obtain breakdown of wip and agree a sample of wip assessed during the inventory count to the wip schedule, agreeing the percentage completion to that recorded at the inventory count.
03.Discuss the basis of wip valuation with management and asses its reasonableness.
04.Select a sample of year end finished good and compare cost with past year end sales invoices.
05.The auditor should present physically, there at the year end inventory is counted for valuation of inventory & Finished goods.
6.Review the financial statement disclosure relating to inventory and wip to ensure they comply with IAS-2(Inventories).
Question (05) (A flood occurred at the offsite warehouse)
The audit is now almost complete & auditor report is due to be signed shortly. The following matter has been brought to your attention.
A flood occurred at the offsite warehouse this resulted some damage to inventory, property plant & equipment(PPE). It is estimated that value of the damage inventory & property plant & equipment was 7 m and there is no scrap value.
Are you think, there is any subsequent event exist. What are the audit procedure when you are an audit manager of XYZ company LTD.?
Ans:
This even occurred after the reporting period & is not an event which provides evidence of a condition at the year end and so this is an non adjusting event.
The following audit procedures should be applied to form a conclusion on any amendment.
1.obtain a schedule showing the damage property plant & equipment and agree net book value to the non-current assets register to confirm the total value of affected assets.
2. obtain a schedule of water damage inventory visit the offsite warehouse & physically inspect the impacted inventory. Confirm quantity of goods actually present at the time of food damage.
3.Review the damages property plant, equipment, inventory & discuss with the management about the flood damage.
4. Discuss with the management whether they will disclose the effect of flood as an non adjusting event in the year end financial statements.
Question (06) -Revaluation of property plant & Equipment(PPE)
You are asking for describing substantive procedures, you should perform to obtain sufficient appropriate audit evidence in relation to the revaluation of property plant & equipment(PPE).
How do you overcome answering by this question when management of the corporate practice bd Ltd. Wants to revalued their property plant & equipment(PPE)?
The following answer may be appropriate-
Ans:
1.Obtain a schedule of all (PPE) revalued during the year and cast to confirm completeness & accuracy of the revaluation adjustment agree the trial balance & financial statements.
2.Consider whether the valuation under taken provide sufficient objective audit evidence.
3.Agree the revalued amount to the valuation statement provides by valuer.
4.Review the valuation report and consider if all assets in the same categories have been revalued in line with IAS-16, property plant & equipment(PPE)?
5.Recalculate of total valuation adjustment and agree correctly recorded in the revaluation surplus.
6. Recalculate of depreciation charges for the year to ensure that the assert revalued during the year.
7.Review the financial statement disclosure relating to the revaluation to ensure they comply with IAS -16.
Question (07) –Claim against food poisoning
When hotel customer suffered severe food poisoning from food eaten at the Hotel & claiming substantial damages.
Describes substantive procedures the auditor should perform to obtain sufficient & appropriate audit evidence in relation to food poisoning claim.
Ans:
1.Review the correspondence from the customers claiming food poisoning.
2.Send an inquiry letter to the lower to investigate claiming food poisoning.
3.Discuss with the management as to whether they propose to include a contingent liability disclosure or not.
4.Review board minutes to understand whether the director believe that the claim will be successful or not.