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The document outlines audit procedures for Dashing Co, including steps for positive receivables circularization and substantive procedures for verifying accuracy, completeness, and valuation of receivables and redundancy provisions. It also discusses the impact of unresolved issues on the auditor's report, specifically regarding material misstatements and the required opinion type. Additionally, it details procedures for other companies like Hyacinth Co and Gooseberry Co concerning inventory valuation, R&D expenditures, and completeness of payables.

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Abdlle Osman
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6 views9 pages

Case Study Answers

The document outlines audit procedures for Dashing Co, including steps for positive receivables circularization and substantive procedures for verifying accuracy, completeness, and valuation of receivables and redundancy provisions. It also discusses the impact of unresolved issues on the auditor's report, specifically regarding material misstatements and the required opinion type. Additionally, it details procedures for other companies like Hyacinth Co and Gooseberry Co concerning inventory valuation, R&D expenditures, and completeness of payables.

Uploaded by

Abdlle Osman
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Case Study answers

By : Abdullahi Osman Ahmad

CASE ONE – DASHING CO: AUDIT PROCEDURES

(a) Describe the steps the auditor should perform in undertaking a


positive receivables circularization for Dashing Co.

1. Select Sample of Receivables:


Choose a representative sample of receivables based on
criteria such as size, age, overdue balances, and any unusual
transactions.

2: Prepare Confirmation Letters:Draft positive confirmation


requests on Dashing Co’s letterhead.
Ensure each letter includes the balance as per Dashing Co’s
records, and a request for the customer to confirm or correct
it.
Obtain Client Authorization:
Have the letters signed by Dashing Co’s finance personnel to
ensure authorization and cooperation.

3: Send Confirmations Directly:

the auditor sends the letters directly to customers to preserve


independence and integrity. Email, post, or confirmation platforms can be
used, depending on reliability and documentation needs.

4: Follow-up with Non-Respondents:If no response is received, send at


least one reminder.For positive confirmations, a response is required even
if the balance is agreed.

5: Investigate Discrepancies: If the customer disagrees with the balance,


reconcile the difference by checking invoices, receipts, credit notes, or
returns.¹
(b)Describe substantive procedures, other than a receivables
circularization, the auditor should perform to obtain sufficient and
appropriate audit evidence to verify EACH of the following assertions
in relation to Dashing Co’s receivables:
(i) Accuracy, Valuation, and Allocation

(!) Accuracy to make Accuracy apply the following steps

1: Review the Aged Receivables Listing to assess old or doubtful debts.

2: Check Subsequent Cash Receipts after year-end to confirm


recoverability.

3: Review Customer Correspondence for disputes or requests for credit.

4: Examine Credit Notes issued after year-end to see if they relate to pre-
year-end sales.

4: Evaluate Bad Debt Provision by reviewing historical write-offs and


discussing estimates with management.

5: Recalculate Total Receivables and provision amounts for accuracy.

Completeness

1: Trace Goods Dispatch Notes to invoices and then to the sales ledger to
ensure all sales are recorded.

2: Match Receipts to Sales: Check if payments received post-year-end


correspond to unrecorded sales.

3: Compare the Sales Ledger Control Account to the General Ledger to


ensure no balances are omitted.
Valuation, and Allocation

1: Review the Aged Receivables Listing to assess old or doubtful debts.

2: Check Subsequent Cash Receipts after year-end to confirm


recoverability.

3: Review Customer Correspondence for disputes or requests for credit.

4: Examine Credit Notes issued after year-end to see if they relate to pre-
year-end sales.

5: Evaluate Bad Debt Provision by reviewing historical write-offs and


discussing estimates with management.

6: Recalculate Total Receivables and provision amounts for accuracy.

Describe substantive procedures the auditor should perform to obtain


sufficient and appropriate audit evidence in relation to the redundancy
provision at the year end ?

1: Review Board Minutes or HR Documents to confirm the decision to close


the production site and approve redundancy

2: Obtain Detailed Redundancy Schedules showing employees affected,


expected payments, and basis of estimates.

3: Verify Legal or Contractual Basis for redundancy amounts – check


against employment laws or contracts.

4: Inspect Correspondence with Employees regarding redundancy notices


or agreements.

5: Check Post-Year-End Payments made to affected employees as evidence


of obligation at year-end.

( B ) Discuss the issue and describe the impact on the auditor’s report, if
any, should this issue remain unresolved.

The issue in this case is that audit team estimates the required
redundancy provision should be $305,000, but only $110,000 is
recognized. The difference of $195,000 is material (7.5% of profit before
tax of $2.6 million).

If management refuses to adjust the provision, it results in a material


misstatement in the financial statements.

This affects profit before tax, liabilities, and compliance with IAS 37.

Impact on the Auditor’s Report:

Type of Opinion: Qualified Opinion (“except for”) – because the financial


statements are materially misstated, but not pervasive.

Required Additions to Report:

A Basis for Qualified Opinion paragraph explaining:

The nature of the understatement.

The effect on the financial statements.

CASE TWO
Substantive procedures the auditor should perform to obtain sufficient and
appropriate audit evidence in relation to the VALUATION of Hyacinth Co’s
inventory

1: To verify that Hyacinth Co’s inventory, particularly the ‘Crocus’ product


line, is valued correctly at the lower of cost and net realisable value (NRV)
in accordance with IAS

Inventories, I would perform the following procedures:

• Compare Cost vs Net Realisable Value (NRV)

• Compare the cost of the inventory ($450,000) with its estimated selling
price ($90,000).

• Confirm that the inventory is valued at the lower of these two figures, as
required by IAS
1. Review Management’s NRV Estimate

• Evaluate how management arrived at the $90,000 estimate.

• Assess whether the estimate is realistic and supported by market data,


enquiries with potential buyers, or sales history.

2. Inspect Post-Year-End Sales

• Review any actual sales of ‘Crocus’ inventory after 30 April 20X5.

• Confirm the selling prices to validate the NRV used by management.

• Inquire with Production and Sales Departments

✅ (b) Substantive procedures the auditor should perform to obtain


sufficient and appropriate audit evidence in relation to Hyacinth Co’s
research and development expenditure

1. Obtain a Detailed Breakdown of R&D Projects

• Request a list of the three products in development and details of


expenditures incurred for each.

• Identify which stage of development each product is at.

2 . Compliance with IAS 38 Recognition Criteria

• Verify that each capitalised development project meets all six IAS 38
recognition criteria:

• Technical feasibility of completion,

• Intention to complete and use/sell the asset,

• Ability to use/sell the asset,

• Obtain a Detailed Breakdown of R&D Projects


CASE THREE – Gooseberry Co

(a) Substantive Procedures – R&D Expenditure


(b)Obtain R&D register with all 9 products.
(c) Assess if IAS 38 development recognition criteria are met.
(d)Trace costs to supporting documentation.
(e) Review commencement of amortization (should start when use
begins).

Check consistency with prior year policy (3-year life).

Substantive Procedures – Depreciation

Obtain updated asset register.

Review basis for revised useful lives and depreciation methods.

Agree changes to maintenance records, usage logs, or external valuations.

Recalculate depreciation for sample assets.

Ensure consistency with IAS 16 requirements.

(f) Substantive Procedures – Directors’ Bonuses

Inspect service contracts to confirm entitlement and formula.

Recalculate bonus amounts based on net assets excluding intangibles.

Verify payments made after year-end.


Check disclosure by individual director as required by law.

CASE FOUR – Airsoft Co

(a) Substantive Procedures – Completeness of Payables & Accruals

• Review post-year-end payments and match to payables ledger.

• Inspect GRNI log for goods received not invoiced at year-end.

• Match supplier statements to payables.

• Use audit software to identify unmatched deliveries/invoices.

(b)Substantive Procedures – Bank Balances

Obtain year-end bank confirmations.

Inspect bank reconciliations and agree to statements.

Review cut-off bank statements (10 days after year-end).

Confirm classification: overdraft as liability, savings as cash equivalent.

Recalculate interest income and confirm consistency with savings


balances.

CASE FIVE – Daisy Co & Fuchsia Co


Completion Stage Procedures:

Attempt to recover data from backup (none available).

Obtain customer confirmations or bank receipts as alternative evidence.

Trace payments to cash book and delivery notes.

(i) Auditor’s Report:

If no sufficient evidence is obtained:

→ Disclaimer of Opinion due to limitation of scope

Fuchsia Co – Issue: Going Concern Doubts

(i) Materiality:

Current year loss = $4.4m

Forecast cash outflow = $3.2m

→ Highly material and potentially pervasive

(ii) Completion Stage Procedures:


Review updated cash flow forecasts and assumptions.

Obtain evidence of funding arrangements.

Discuss contingency plans with management.

Get written representation on going concern.

(iii) Auditor’s Report:

If adequate disclosure is made: → Unmodified opinion with Material


Uncertainty paragraph

If disclosure is inadequate: → Qualified or Adverse Opinion depending on


pervasiveness

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