TUTORIAL DISCUSSION AUDITING - AFU-07305 BAC 2 QUESTIONS ON AUDIT PLANNING AND ANALYTICAL PROCEDU QUESTION 0: Background information B-Star is a theme park based on a popular series of children’s books. Customers pay a fixed fee to enter the park, where they can participate in a variety of activities such as riding roller-coasters, playing on slides and purchasing themed souvenirs from gift shops. The park is open all year and has been in operation for the last seven years. It is located ina country which has very little rainfall — the park is open-air so poor weather such as rain results in a significant fall in the number of customers for that day (normally by 50%). During the last seven years there have been on average 30 days each year with rain. B-Star is now very successful; customer numbers are increasing at approximately 15% each year. Ticket sales Customers purchase tickets to enter the theme park from ticket offices located outside the park. Tickets are only valid on the day of purchase. Adults and children are charged the same price for admission to the park. Tickets are pre- printed and stored in each ticket office. Tickets are purchased using either cash or credit cards. Each ticket has a number comprising of two elements — two digits relating to the ticket office followed by six digits to identify the ticket. The last six digits are in ascending sequential order. Cash sales 1. All ticket sales are recorded on a computer showing the amount of each sale and the number of tickets issued. This information is transferred electronically to the accounts office. Cash is collected regularly from each ticket office by two security guards, The cash is then counted by two accounts clerks and banked on a daily basi The total cash from each ticket office is agreed to the sales information that has been transferred from each office. 4. Total cash received is then recorded in the cash book, and then the general ledger. we Credit card sales 1. Payments by credit cards are authorised online as the customers purchase their tickets, 2. Computers in each ticket office record the sales information which is transferred electronically to the accounts office. 3. Credit card sales are recorded for each credit card company in a receivables ledger. 4. When payment is received from the credit card companies, the accounts clerks agree the total sales values to the amounts received from the credit card companies. less thecommission payable to those companies. ‘The receivables ledger is updated with the payments received, You are now commencing the planning of the annual audit of BeStar, The date i 4 June 2013 and B-Star’s year end is 30 June 2013. Required: List and explain the purpose of the main sections of an audit strategy document and for each section, provide an example relevant to B-Star. QUESTION TWO. Describe substantive procedur Institute of Finance Mi end creditors of the s the auditor should perform on the Yeu pagement (IM), QUESTION THR! Describe substantive procedures an auditor would perform in verifying 20 Billion shillings of the Majembe Company's bank balance, QUESTION FOUR Describe substantive procedures the external auditor of National Housing Corporation (NIC) should adopt to verify EACIL of the following assertions in relation to an entity's property. plant and equipment (PPE (i) Valuation; (i and \Completene: (iii) Rights and obligations. QUESTION FIVE Define “going concern’ and discuss the auditor's responsibilities in respect of going concern. QUESTION SIX mithson Co provides scientific services to a wide range of clients. Typical assignments range from testing food for illegal additives to providing forensic analysis on items used to commit crimes to assist law enforcement officers, ‘The annual audit is nearly complete. As audit senior you have reported to the engagement partner that Smithson is having some financial difficulties. Income has fallen due to the adverse effect of two high-profile court cases, where Smithson’s services to assist the prosecution were found to be in error, Not only ity for Smithson, but a number of clients withdrew their left Smithson, stating lack of investment in new analysis information being provided by the company. icant additiona did this provide adverse publi th machines was increasing the risk of incorre A cash flow forecast prepared internally shows Smithson requiring s within the next 12 months to maintain even the current level of services. Smithson's auditors ssurance report on this forecast. contracts. A senior employ have been asked to provide a negativea) State the audit procedures that may be carried out to try to determine whether or not Smithson Co is b) Explain the audit procedures the auditor may take wh Smithson Co is unlikely to be a going concern, ©) In the contest of the cash flow forecast, define the term *hegative assurance” and explain how this differs trom the assurance provided by an audit report on statutory financial statements. going concern, the auditor has decided that QUESTION SEVEN You are an audit senior of Scarlet & Co and are in the process of review ing the systems {esting completed on the payroll cycle of Bronze Industries Co (Bronze), as well the audit programmes for the final audit. Is preparing Bronze operate several chemical processing factories across the country. it manufactur hours a day. seven days a week and employees work a standard shift of eight hours and are Paid for hours worked at an houtly rate, Factory employees ate paid weekly, with approximately 80% being paid by bank transfer and 20% in cash: the differem payment methods are due to employee preferences and Bronze has no plans to change these methods, The administration and sales teams are paid monthly by bank trans Factory staffare each issued a sequentially numbered clock card which details their employee number and name, Employees swipe theit cards at the beginning and end of the eight-hour shifi and this process is not supervised. During the shift employees are entitled to a 30-minute Paid break and employees do not need to clock out to access the dining area. Clock card data links into the payroll system, which automatically caleulates gross and net pay along with any statutory deductions. The payroll supervisor for each payment run checks on a sample basis some of these calculations to ensure the system is operating effectively. Bronze has a human resources department which is responsible for setting up new permanent employees and leavers. Appointments of temporary staff are made by factory production supervisors. Occasionally overtime is required of factory staff usually to fill gaps caused by staff holidays. Overtime reports which detail the amount of overtime worked are sent out quarterly by the payroll department to production supervisors for their review. To encourage staff to attend work on time for all shifts Bronze pays a discretionary bonus every six months to factory staff: the production supervisors determine the amounts to be Paid. This is communicated in writing by the production supervisors to the payroll department and the bonus is input by a clerk into the system. For employees paid by bank transfer, the payroll manager reviews the list of the payments and agrees to the payroll records prior to authorising the bank payment. If any changes are required. the payroll manager amends the records.For employees paid in cash. the pay packets are prepared in the payroll department and a clerk distributes them to employees: as she knows most of these individuals she does not require proof of identity. Require: Describe substantive analytical procedures you should perform to confirm Bronze Industries Co's payroll expense. QUESTION EIGHT Recorder Communications Co (Recorder) is a large mobile phone company which operates a network of stores in countries across Europe. The company’s year- end is 30 June 2014. You are the audit senior of Piano & Co. Record Is a new client and you are currently planning the audit with the audit manager. You have been provided with the following planning notes from the audit partner following his meeting with the finance director. Recorder purchases goods from a supplier in South Asia and these goods are shipped to the company’s central warehouse. The goods are usually in transit for two weeks and the company correctly records the goods when received. Recorder does not undertake a year-end inventory count. but carries out monthly continuous (perpetual) inventory counts and any errors identified are adjusted in the inventory system for that month. During the year the company introduced a bonus based on sales for its sales persons. ‘The bonus target was based on increasing the number of customers signing up for 24-month phone line contracts. This has been successful and revenue has increased by 15%, especially in the last few months of the year, The level of receivables is considerable higher than last year and there are concerns about the creditworthiness of some customers. Recorder has a policy of revaluing its land and buildings and this year has updated the valuations of all land and buildings. During the year the directors have each been paid a significant bonus. and they have included fe parate disclosure of the bonus is required by local this within wages and salaries legislation. Required: Describe substantive procedures you should perform to confirm the directors’ bonus payments included in the financial statements. UESTION NINE oo : ; Estar is.a theme park based on a popular series of children’s books. Customers pay a fixed fee to enter the park. where they can participate in a variety of activities such as riding roller- coasters. playing on slides and purchasing themed souvenirs from gift shops. ion for the last seven years. It is located in a air so poor weather such as rain for that day (normally by 50%). seach year with rain. The park is open all year and has been in operation country which has very little rainfall - the park is opens results in a significant fall in the number of customers During the last seven years there have been on average 30 daB-Star is now very successful: customer number year. sing at appro: Cash sales |. All ticket sales are recorded on a computer sl number of tickets issued. ‘This information is tra howing the amount of each sale and the nsferred electronically to the accounts oltice, > . 2. Cash is collected regularly from each ticket office by two s counted by wo accounts clerks and banked on a daily basic curity guards. The cash is then 3. The total cash from each ticket office transferred from each office. is agreed to the sales information that has been 4. Total cash received is hen recorded in the cash book, and then the general ledger, Credit card sales Payments by credit cards are authorised online as the customers purchase their tickets. 2. Computers in each ticket office record the sales information which is transferred electronically to the accounts office. 3. Credit card sales are recorded for each credit card company in a receivables ledger 4. When payment is received from the credit card companies, the accounts clerks agree the total sales ‘values to the amounts received from the credit card companies, less the commission payable to those companies. The receivables ledger is updated with the payments received. You are now commencing the planning of the annual audit of B-Star. The date is 3 June 2009 and B-Star’s year end is 30 June 2009. Required: List the substantive analytical procedures that may be used to give assurance on the total income from ticket sales for one day in B-Star, ; ; List the substantive analytical procedures that may be used t0 give assurance on the total income from ticket sales in B-Star for the year. (8 marks) ii QUESTION TEN With reference to ISA 520 Analytical Procedures explain: ailable to the auditor: and an be used. i. That is meant by the term ‘analytical procedur ‘The different types of analytical procedures av ii 4 ocedures ca The situations in the audit when analytical proced