question archive a) You are the audit senior on the audit of Marsa Ltd, a large manufacturing company, for the year ended 30 June 2020
a) You are the audit senior on the audit of Marsa Ltd, a large manufacturing company, for the year ended 30 June 2020
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a) You are the audit senior on the audit of Marsa Ltd, a large manufacturing company, for the year ended 30 June 2020. It is now 16 July 2020 and you are reviewing the audit working papers prepared by the audit assistant, Trena Berk. You notice the following matters:
(i) As part of her work on subsequent events since balance date, Trena noted that there were a large number of returns in July of product XLP. However, as this product was first sold in June and represented only 1 per cent of sales for the year, she concluded that the
amount was immaterial and that no further work was necessary.
(ii) Trena selected 20 invoices to test the control that the salesclerk checks that the prices agree with the authorised price list. She found three instances where the salesclerk had not signed the 'prices checked' box on the invoice. The sales manager explained that the salesclerk always checks the prices, but sometimes forgets to sign the box. As the prices on all the invoices agreed with the authorised price list, Trena concluded that the control was operating satisfactorily.
Required: For each of the two scenarios presented above, indicate whether you believe that sufficient appropriate audit evidence was obtained to support the conclusions reached. Give reasons for your decision.
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a.) For the first instane, Terena believed that the amount was immaterial as it represented only 1 percent of the sales. This is depended on the percentage established of materiality and the base chosen. Sufficient audit evidence means that the evidence obtained should not be materially misstated. However, it is also important to consider whether the element will have a pervasive impact on financial statement (affects more than one financial statement. In this case purchase returns does have a pervasive impact. The amount of this account is subtracted from purchases item and increases gross profit and is carried to equity. In this case, sufficient audit evidence was obtained as it represented only 1 percent of sales. However, it is also essential to compare this figure with the gross profit.
B.) As a sample size only 20 invoices were selected and there were three instances where there was internal control weakness. In this case sufficient audit evidence was not obtained. The particular reason for this circumstance is that the sample size is quite low and even the sample selected had errors. Sufficient audit evidence can be obtained if the sample size is increased and will decrease audit risk.
Step-by-step explanation
For these questions, the materiality and sample size were the determinants.
