5.24

5.24Key facts:Speciality retail storeInventory is materialItems range in value $1 to $500Prepayments: Orders 6 months in advance from overseas suppliers, require large deposits

Speciality retail store where type of merchandise changes every season and ordered with special branding & promotional packagingInventory is material and items range in value $1 to $500Prepayments: Orders 6 months in advance from overseas suppliers, require large deposits15.24AssertionDescriptionExistenceAuditors search for evidence to verify the asset, liability and equity items included in the balances in the financial report actually existImportant = risk of overstatementRights & ObligationsAuditors search for evidence to verify that recorded assets are owned by the entity and that recorded liabilities represent commitments to the entityImportant = risk of recorded assets/liabilities are not owned by the entity25.24AssertionDescriptionCompleteness

Auditors search for evidence that all assets, liabilities and equity interests that should have been recorded, have been recordedImportant = risk of understatementValuation & AllocationAuditor searches for evidence that assets, liabilities and equity items have been recorded at appropriate amounts and allocated to the correct general ledger accountsImportant = risk of over or undervaluation5.24InventoryExistenceInventory can change every seasonOpportunity for theft and missing material inventoryNeeds physical evidence trace from documents to clients records to confirm classification, accuracy and completenessValuation & allocationThey can incur a risk of overstatement if inventory wasnt appropriately recorded at the lower price/costNeeds computational evidence check the accuracy of the valuations within the financial report

5.24PrepaymentsExistenceMake up prepayment to over-value assets that dont even exist to over-value assetsNeeds physical evidence - to inspect the inventory to see if it has been sold and deliveredRights & obligationsRecorded as an asset but is not owned by the company/entityNeeds documentary evidence - supplier invoice to show the transfer of assets and owned by the entity

5.34Key facts:Susan was talking to client staff and had a tour around the various construction sites and officesShe is Working on spread sheet of the clients previous FR and unaudited interim data

5.34 aSusan has been gathering the following types of evidence:Verbal evidenceResponses of key client personnel to auditor enquires throughout the course of the audit Computational evidenceEvidence gathered by an auditor checking the mathematical accuracy of the numbers that appear in the financial report5.34 aPhysical evidenceinspection of a clients tangible assets to assess condition and to reconcile to clients records Documentary EvidenceEvidence is information that provides proof about details recorded in a clients list of transaction

85.34 bCould indicate problem areas for further investigation, and to calculate trends and ratios, including common size statements, to quantify the fluctuations.Susan will use the results of the analytical procedures to justify increased or decreased focus on specific areas, and the nature, timing and extent of further procedures.She will analyse the specific movement of physical materials used in construction and whether this is consistent with the financial data

5.34 cSusan is gathering evidence through inspection of her client's tangible assets.She vouches recorded amounts to assets to gain evidence that the asset existsShe does this to show that the assets physically exists.New = newly purchased and the client needs to have supporting records of this transactionOlder = can mean that her client are having difficulty on selling the goodsUnused = equipment may be obsolete and cannot be sold

5.35Key facts:KFP Partners auditors for SecurimaxSecurimax has a small internal audit department that is headed by an ex-partner of KFP RydellRydell, who left KFP six years ago

5.35ASA 600 requires a group engagement partner to consider the work of component auditors.A component auditor means an auditor who, at the request of the group engagement team, performs work on financial information related to a component for the group audit.must meet the independent requirements that are relevant to the group audit.The engagement partner retains responsibility for the audit and signs the audit report.meet the same independence requirements as the engagement auditor

5.35No mention in the case of a group of companiesBut, ASA 600 also applies where an auditor involves other auditors in the audit of financial reports that are not group financial reportsRydell Creek heads the internal audit department at SecurimaxCould not meet the independence requirements for the external auditorASA 600 would not allow their work to be treated as though it is done by a component auditor

5.36Key facts:You have been asked to circulate the receivables confirmationsShady Oaks AR arise from the use of hospital facilities (inc. provision of nurses, anaesthetists, operating theatres and supplies) by medical in private practiceTR considered materialPayment date is 14 days from invoice60% invoice outstanding from 5 different medical practitioners40% numerous smaller amounts, most outstanding for more than 60 daysAny allowance for doubtful debts is taken directly against AR and not shown separately.

5.36StrengthsWeaknessesProves existence and ownership (rights & obligations), as debtors confirm they owe the clientExternally generated evidence sent directly to the auditor are considered the most reliable and best qualityIndependent of the client as they dont have the opportunity to alter itMost persuasive when the source is reliable and trustworthy

Very little information regarding valuation & allocation as debtors are asked to confirm amounts outstanding at year endDebtors only confirm amount owing, not the intention to pay