CAF 8: Audit & Assurance
Suggested Solution – Test # 08
A.1
(0.5 mark)
1. External Confirmation is a highly reliable audit evidence , because it is external, written and
(0.5 mark)
direct evidence.
2. Management can request auditor not to send confirmation request to parties, however, ISAs require
auditor to:
(0.5 mark)
inquire Reason , and
(0.5 mark)
obtain evidence to their validity and reasonableness.
If request of management is reasonable:
(0.5 mark)
1. Auditor shall obtain evidence by performing alternative procedures e.g. subsequent transfers
into control account, inspection of internal documents (e.g. BRS, Deposit slips by distributors).
(0.5 mark)
2. If evidence is obtained from alternative procedures, auditor shall express unmodified opinion.
3. If evidence is not obtained from alternative procedures, this will be a scope limitation:
(0.5 mark)
auditor shall communicate this matter to TCWG.
auditor shall express qualified opinion (if effect is material), or disclaimer of opinion (if effect is
(0.5 mark)
pervasive).
If request of management is NOT reasonable:
1. This will be an inappropriate scope limitation by management.
(0.5 mark)
auditor shall communicate this matter to TCWG.
auditor shall express qualified opinion (if effect is material), or disclaimer of opinion (if effect is
(0.5 mark)
pervasive).
2. Auditor shall also revise his:
(0.5 mark)
assessment of risk of material misstatement, including risk of fraud , and
(0.5 mark)
nature, timing and extent of other audit procedures.
A.2
(a)
Confirmation received via email:
Risk:
(0.5 mark)
Confirmation may not be from intended party.
What should auditor do:
Auditor shall check controls over electronic transmission of data (e.g. digital signature) to ensure identity
(01 mark)
of the sender, and authenticity of the message.
Confirmation received indirectly through CFO:
Risk:
(0.5 mark)
Management may have tempered it before sending to auditor.
What should auditor do:
(0.5 mark)
Auditor shall contact the confirming party, shall confirm contents of the response with him
(0.5 mark)
and shall ask him to resend the response directly to auditor.
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If it is identified that response was Forged or Tempered:
Auditor shall:
(0.5 mark)
revise his assessment of risk (including fraud) , and
(0.5 mark)
revise nature, timing and extent of audit procedures.
(b)
1. Representation is not appropriate in this situation, as other sufficient appropriate audit evidence is expected
(0.5 mark)
to exist in case of receivables.
(0.5 mark)
2. Auditor shall obtain evidence to the validity and reasonableness of request.
If request of management is reasonable:
(0.5 mark)
1. Auditor shall obtain evidence by performing alternative procedures e.g. checking cash received
(0.5 mark)
from debtor subsequent to the year, inspection of internal documents (e.g. Account statements,
Sales Order, GDN, Sales Invoice).
(0.5 mark)
2. If evidence is obtained from alternative procedures, auditor shall express unmodified opinion.
(0.5 mark)
3. If evidence is not obtained from alternative procedures, this will be a scope limitation :
(0.5 mark)
auditor shall communicate this matter to TCWG.
auditor shall express qualified opinion (if effect is material), or disclaimer of opinion (if effect is
(0.5 mark)
pervasive).
If request of management is NOT reasonable:
(0.5 mark)
1. This will be an inappropriate scope limitation by management.
(0.5 mark)
auditor shall communicate this matter to TCWG.
auditor shall express qualified opinion (if effect is material), or disclaimer of opinion (if effect is
(0.5 mark)
pervasive).
2. Auditor shall also revise his:
(0.5 mark)
assessment of risk of material misstatement, including risk of fraud , and
(0.5 mark)
nature, timing and extent of other audit procedures.
Procedures to evaluate recoverability of receivable:
(0.5 mark)
Dispute with debtor indicates that full amount may not be recovered from debtor. Therefore,
auditor should perform following procedures to confirm Valuation assertion of debtor:
(0.5 mark)
inspect correspondence between parties to understand the nature of dispute.
(0.5 mark)
Obtain lawyer’s opinion on the disputed matter.
(0.5 mark)
Check subsequent collection from receivable.
(0.5 mark)
Evaluate basis of provisioning on this receivable, and its reasonableness.
Audit and Assurance | Page 3 of 3
A.3
(i)
Audited Revenue of prior year 7,560,000
(01 mark)
Add: Effect of increase in price (7,560,000 * 5%) 378,000
(01 mark)
Add: Effect of new contract (150,000 * 6) 900,000
(01 mark)
Less: Effect of expired contract (90,000 * 3) (270,000)
(01 mark)
Expected Revenue for the current year 8,568,000
(ii)
1. For Audited Revenue of prior year, agree with prior year working papers/audited financial
(0.5 mark)
statements.
(0.5 mark)
2. For increase in prices, agree to board minutes and invoices.
(0.5 mark)
3. For new contract, agree price of contract and start date with original contract.
(0.5 mark)
4. For expired contract, agree price of contract and end date with original contract.
(iii)
Expected Revenue 8,568,000
Actual Revenue 8,668,000
(0.5 mark)
Difference (in amount) 100,000
As difference between expected and recorded revenue (100,000) is greater than materiality level
(0.5 mark) (0.5 mark)
determined using rule of thumb 86,680 (8,668,000 * 1%) , there is a risk that recorded
(0.5 mark)
revenue is materially overstated.
(0.5 mark)
1. Auditor shall inquire of management , and shall evaluate those responses by taking into
account:
(0.5 mark)
auditor’s understanding of entity and its environment and
(0.5 mark)
other audit evidence obtained during audit:
2. If no adequate explanation is given by management, auditor shall perform other audit procedures
(0.5 mark)
(e.g. tests of details).
A.4
(01 mark)
(i) Source of information
(01 mark)
(ii) Controls over accuracy and completeness of information
(01 mark)
(iii) Nature and Relevance of information (Budget can be used if it is prepared on the basis of
expected results, and not as challenging targets)
(01 mark)
(iv) Comparability of financial information (Broad industry data may need to be supplemented
to be comparable for company selling single product)
(THE END)
