You are the audit manager of JDM, an accounting firm with offices in the Sydney metropolitan area. JDM is a middle tier auditing firm specialising in the audit of firms in the manufacturing and property development industries. During May 2020 you met with the audit senior of JDM, Tyrone Vickery, to discuss a number of findings and issues Tyrone has identified relating to several of JDM's clients.

Sufficiency and appropriateness of audit evidence at Perkins Ltd.

Tyrone has indicated that he has completed testing on accounts payable and sales Perkins Ltd, a small manufacturer of confectionary goods. Tyrone has performed the following tests:

• In relation to accounts payable, Tyrone selected a random sample of creditors from the accounts payable ledger and agreed these to statements, invoices and reconciliations. The balance of the accounts payable ledger was then agreed to the general ledger and the trial balance. Tyrone found no discrepancies. 
• A positive debtors confirmation was performed on the 30 June balances. Baker Pty Ltd had an outstanding balance as per the confirmation of $10,000, however in their reply they noted that they only owed $9,000. The difference is due to invoice 1938 dated 1 July 2020. Tyrone has noted that Baker's account appears to be overstated but the amount is immaterial and he has not performed any additional work. 
• Tyrone performed tests of control over payroll. Out of 50 items he found 4 breaches of control. Tyrone notes that as the errors were immaterial and the error rate was below 10% no further work is required as everything complied with the accounting standards and controls over payroll can be relied on. 

Question

Whether Tyrone's testing has obtained sufficient appropriate evidence for the relevant assertions (where appropriate) pertaining to Perkins Ltd. 

 

Answer:

I have studied the audit evidence that you have gathered with respect to Perkins Limited. It is true that an auditor uses various procedures of audit in an attempt to gather audit evidence on the basis of which an opinion is formed on whether the financial statements of an entity are free from any material misstatements and whether they reflect a correct view of the financial position of the organization. Audit evidence is being mainly used such as to draw a conclusion on the basis of which an opinion is provided by the auditor on the financial statements of an organization. The testing on accounts payable of Perkins Limited has been correctly conducted through selection of a random sample of creditors from the ledger and agreeing them to invoices, statements, and reconciliations.

Sufficiency of audit evidence mainly indicates the number of audit evidences used in the conduction of audit which in the case of Perkins Limited could be the selection of number of samples, the use of audit procedures, and obtaining required documents by the auditor. Appropriateness is mainly with respect to the quality of audit evidence. The use of positive confirmation on the year end debtor balances is considered as very important to verify the amounts with respect to accounts receivables. It has been found that the account of Baker Pty Limited, one of the customers of the organization, is being overstated by $1,000 due to inclusion of an invoice dated 1^st July, 2020. As the amount is insignificant, no additional work has been undertaken in this regard.

In this regard, I think that the account balance of Baker Pty Limited must reflect $9,000 as balance on 30^th June, 2020 as the invoice of $1,000 is related to next financial year. If it reflects $10,000 as ending balance on 30^th June, 2020, it would not provide a true and correct view of its balance at the end of the year. As the mistake is identified, it should properly be brought down to reflect its correct balance of $9,000. Moreover, the conduction of test checks over payroll control has established 4 breaches out of 50 items tested. No further work has been undertaken in this respect as the breaches are not that material and are within 10% of the error rate. The financial statements of Perkins Limited are in compliance with that of the accounting standards and the payroll controls could also be relied upon.

But according to me, I think that the payroll control breaches must be reported to the management of the organization and dealt in an appropriate manner. They might be immaterial but as they have been identified, efforts should be made such as to correct the same.