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Acct3044 Tutorial 2 Solution

AUDITING

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JENNIFER LEGG
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11 views

Acct3044 Tutorial 2 Solution

AUDITING

Uploaded by

JENNIFER LEGG
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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University of the West Indies, Mona

Department of Management Studies


ACCT3043 – Auditing I - Semester I

TUTORIAL QUESTIONS 2

 What is the purpose of the engagement letter? What subjects should be covered in such a
letter? (6 marks)

Purpose of the engagement letter is to act as a binding agreement between the auditor
and management to ensure each adheres to their responsibilities. The engagement letter
sets out the preconditions of an audit which include:
 Management use of an acceptable financial reporting framework in preparing
the FS
 Managements agreement that it acknowledges & understanding it’s
responsibility for :
 Preparing the FS
 Establishing internal control to ensure the FS are free of material
misstatements
 Providing the auditor with access to all records & documents and staff

The engagement letter must include the following:


 The objective and scope of the audit
 The auditor’s responsibilities
 Management’s responsibilities
 Identification of the applicable financial reporting framework for the
preparation of the financial statements
 Reference to the expected form and content of any reports to be issued by the
auditor and a statement that there may be circumstances in which a report may differ from
its expected form and content.

 Define what is meant by a related party. What are the auditor’s responsibilities for
related parties and related party transactions (7 marks)
A related party is defined as a connected subsidiary, management or owner of another
entity.
The auditor is required to; obtain an understanding of the recording and measurement
of all related party transactions and balances, perform procedures to verify the
existence and completeness of these balances and transactions, and to ensure they are
appropriately disclosed in the notes to the financial statement

 Zak Co sells garden sheds and furniture from 15 retail outlets. Sales are made to
individuals, with income being in the form of cash and debit cards. All items purchased are
delivered to the customer using Zak’s own delivery vans; most sheds are too big for
individuals to transport in their own motor vehicles. The directors of Zak indicate that the
company has had a difficult year, but are pleased to present some acceptable results to the
members.

The income statements for the last two financial years are shown below, along with an extract of
the Statement of Financial Position:
Required:
 As part of your risk assessment procedures for Zak Co, identify and provide a
possible explanation for unusual changes in the income statement. (8 marks) 2 marks for
each for any of the unusual change
Sales – increase 17%
According to the directors, Zak has had a ‘difficult year’. Reasons for the increase in sales
income must be ascertained as the change does not conform to the directors’ comments. It is
possible that the industry as a whole, has been growing allowing Zak to produce this good result.

Cost of sales – fall 17%


A fall in cost of sales is unusual given that sales have increased significantly. This may have been
caused by an incorrect inventory valuation and the use of different (cheaper) suppliers which may
cause problems with faulty goods in the next year.

Gross profit (GP) – increase 88%


This is a significant increase with the GP% changing from 33% last year to 53% in 2013. Identifying
reasons for this change will need to focus initially on the change in sales and cost of sales.

Administration – fall 6%
A fall is unusual given that sales are increasing and so an increase in administration to support those
sales would be expected.
Expenditure may be understated, or there has been a decrease in the number of administration staff.

Selling and distribution – increase 42%


This increase does not appear to be in line with the increase in sales – selling and distribution would
be expected to increase in line with sales. There may be a mis-allocation of expenses from
administration or the age of Zak’s delivery vans is increasing resulting in additional service costs.

Interest payable – small fall


Given that Zak has a considerable cash surplus this year, continuing to pay interest is surprising. The
amount may be overstated – reasons for lack of fall in interest payment e.g. loans that cannot be
repaid early, must be determined.

Investment income – new this year


This is expected given cash surplus on the year, although the amount is still very high indicating
possible errors in the amount or other income generating assets not disclosed on the balance sheet
extract.

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