AUE3702 Assignment 2 - Semester 1 OF 2022.

AUE3702 Assignment 2 - Semester 1 OF 2022.1. Audit Sampling – Inventory 1.1. Comments on the size of sample selected Considering that in prior years, no instances of empty boxes had been found, internal controls in the receiving and issuing of inventory and physical controls over inventory are operating effectively for the year ended 30 April 2021 and the company has a strong control environment with the risk of material misstatement assessed as low, the sample size can be reduced. However, 30 out of 15 000 (0.2%) only were sampled which will increase the sampling risk as the sample seems too low. Out of the sample of 30, one of the boxes representing 3.33% was found to be empty and resealed very carefully, which then increases the risk that many more boxes can be empty. One out of thirty might seem too low but when this applies to the whole inventory batch there is a possibility that 500 (15 000 * 3.333%) are empty. When escalated, there is a possibility that the risk maybe material after all. The auditor should consider the confidence level required, the higher the confidence level, the higher the sample size and the lower the confidence level the lower the sample size. The tolerable misstatement also has to be taken into account. If the tolerable misstatement is above or equal to the 3.33% error discovered in the sample, then the auditor can place confidence in the results but if the tolerable misstatement is below 3.33%, the sample size should be increased. After escalating the results of the one box, it is found that the expected misstatement from the pilot sample results is that 500 boxes will be empty. This figure seems too large, as a result it is reasonable under the circumstances to increase the sample size. Downloaded by DESMOND CHIKASHA 8 () lOMoARcPSD| The population size also plays a role in determining the sample in some instances. Considering that there are 15 000 inventory items, a sample of 30 seems too small as it only represents 0.2%. The fact that the one anomaly box was found to be carefully resealed shows a well - orchestrated intention to steal, which represents a materiality in nature which might warranty increasing the sample size to verify the extent of the theft if the suspicions are right. The sample should also take into account the variety of the products offered. 1.2. Comment on the opinions of the audit team Mpho suggested that considering that only one box in 15 000 hardly makes a difference as this is not material. This is wrong considering that it was not one empty box out of 15 000 (0.00667%) but it was rather one out of 30 (3.333%). When escalated there is a possibility that more boxes may be empty. It should also be noted that materiality is not only measured by size, it is also measured by nature. The size of the misstatement may be immaterial but it may be material in nature. Considering that there can be suspected theft, this might result in materiality from the viewpoint of the nature of the act. If not stopped this can increase to the extent of affecting the size in the long run and also affecting the overall ethics in the entity. Lethabo`s opinion to open another 30 boxes can be reasonable but ignoring the one box can be detrimental if the cause is material in nature. Furthermore, the auditor should exercise professional judgement in determining the additional sample as it should be representative of the population. For example, it might be more reasonable to pick our sample of PS4, Xbox1, Nintendo Switch and Gaming PCs in the ratio of 5 000:5 000:2 500:2 500 respectively as this represents the proportions of these units in the population. A decision has to be made on whether statistical or non – statistical sampling should be applied. The confidence level desired will also have a role in determining whether more units should be sampled. Bandile`s argument is that one out of 30 is a tolerable error rate. The tolerable error rate can be skewed due to the sample selected, if a second sample of 30 is obtained, you might find that a greater quantity of boxes can be empty. Consideration should also be given to the expected misstatement and by escalating the results of the pilot sample to the population, we find that there Downloaded by DESMOND CHIKASHA 8 () lOMoARcPSD| is possibility of 500 boxes being empty which might be exceed the acceptable misstatement. Bandile also ignores the materiality in nature. Lesedi`s opinion that the tolerable error might not be relevant if the nature of the error is material is right. The act of theft can signify an act of dishonest which might spread in the organization. The fact the one box which was found to be empty was carefully resealed shows that the emptying of the box is possibly an intentional act of theft. If left unchecked this might even continue resulting in further heavy losses. It is very important that the materiality in the nature of the acts resulting in the error should also be taken into account. Mpho suggests that the warehouse manager is fussy about being careful when opening the boxes and suggest that they should record the finding and move on. The fussy on its own creates doubts on the intentions of the warehouse manager and may be a possible reason to increase the sample size to assess the possibility of more empty boxes. The response will just be to handle the products of the client with due care. 2. Substantive audit procedures to obtain evidence in respect of occurrence, accuracy and cut off Occurrence Inspect the supporting documentation (official purchase order forms, supplier delivery note, goods received note and invoice) to confirm that the documents are made out to Ujabule (Pty) Ltd; Inspect the supporting documentation to confirm that Division (Pty) Ltd is an approved supplier who appears on the supplier masterfile; Inspect all documents to confirm that they are correctly cross-referenced to each other; Inspect the requisition supporting the purchase and confirm that it was signed by the warehouse manager; Inspect all the supporting documentation including signed documentation and verify that they are of a type used by the company; Inspect the cash payments records / EFT schedules /bank statements to confirm that the goods were appropriately paid for; the payment was authorised, the payment was made to the correct payee, and the correct amount was paid; Verify with Division (Pty) Ltd that the purchase relating to the invoice was made from them with the selected supporting invoice number, at the recorded amount and on the recorded date; and Inspect the stores records and verify that the recorded goods were actually received on document date and were details captured on the system matched the supporting documentation. Downloaded by DESMOND CHIKASHA 8 () lOMoARcPSD| Accuracy Confirm the mathematical accuracy of the invoice by recalculating all extensions (quantity multiplied by price), casts and discounts; Agree the quantity of items charged on the invoice, against the quantity on the goods received note; Confirm prices and trade discounts used on the invoice by inspection of the order or purchase contract; Recalculate VAT, and by inspection of the invoice, confirm that discounts are taken into account prior to the calculation of VAT; By inspection, confirm that the VAT number and details of the supplier as well as the supplier’s VAT number are clearly presented on the supplier tax invoice.