Answer:
(I) Special Consideration with Regard to Inventory: As per SA 501 “Audit Evidence- Specific Considerations for Selected Items”, when inventory is material to the financial statements, the auditor shall obtain sufficient appropriate audit evidence regarding the existence and condition of inventory by: (1) Attendance at physical inventory counting, unless impracticable, to: (i) Evaluate management’s instructions and procedures for recording and controlling the results of the entity’s physical inventory counting; (ii) Observe the performance of management’s count procedures; (iii) Inspect the inventory; and (iv) Perform test counts; and (2) Performing audit procedures over the entity’s final inventory records to determine whether they accurately reflect actual inventory count results. (II) Attendance at Physical Inventory Counting Not Practicable: In some cases, attendance at physical inventory counting may be impracticable. This may be due to factors such as the nature and location of the inventory, for example, where inventory is held in a location that may pose threats to the safety of the auditor. The matter of general inconvenience to the auditor, however, is not sufficient to support a decision by the auditor that attendance is impracticable. Further, as explained in SA 200 “Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing”, the matter of difficulty, time, or cost involved is not in itself a valid basis for the auditor to omit an audit procedure for which there is no alternative or to be satisfied with audit evidence that is less than persuasive. Further, where attendance is impracticable, alternative audit procedures, for example, inspection of documentation of the subsequent sale of specific inventory items acquired or purchased prior to the physical inventory counting, may provide sufficient appropriate audit evidence about the existence and condition of inventory. In some cases, though, it may not be possible to obtain sufficient appropriate audit evidence regarding the existence and condition of inventory by performing alternative audit procedures. In such cases, SA 705 on Modifications to the Opinion in the Independent Auditor’s Report, requires the auditor to modify the opinion in the auditor’s report as a result of the scope limitation.
Answer:
The auditors, GHK Associates wanted to ensure and obtain sufficient appropriate audit evidence regarding the presentation and disclosure of segment information in accordance with the applicable financial reporting framework by obtaining an understanding of the methods used by management in determining segment information. SA 501 guides in this regard. As per SA 501- “Audit Evidence—Specific Considerations for Selected Items”, example of matters that may be relevant when obtaining an understanding of the methods used by management in determining segment information and whether such methods are AUDIT EVIDENCE likely to result in disclosure in accordance with the applicable financial reporting framework include: (i) Sales, transfers and charges between segments, and elimination of inter-segment amounts. (ii) Comparisons with budgets and other expected results, for example, operating profits as a percentage of sales. (iii) The allocation of assets and costs among segments. (iv) Consistency with prior periods, and the adequacy of the disclosures with respect to inconsistencies.
Answer:
As per SA 530, “Audit Sampling”, the auditor shall evaluate: (a) The results of the sample; and (b) Whether the use of audit sampling has provided a reasonable basis for conclusions about the population that has been tested. If the auditor concludes that audit sampling has not provided a reasonable basis for conclusions about the population that has been tested, the auditor may: (I) Request management to investigate misstatements that have been identified and the potential for further misstatements and to make any necessary adjustments; or (II) Tailor the nature, timing and extent of those further audit procedures to best achieve the required assurance. For example, in the case of tests of controls, the auditor might extend the sample size, test an alternative control or modify related substantive procedures.
Answer:
External Confirmation: As per SA 505, “External Confirmations”, negative confirmation is a request that the confirming party respond directly to the auditor only if the confirming party disagrees with the information provided in the request. Negative confirmations provide less persuasive audit evidence than positive confirmations. The failure to receive a response to a negative confirmation request does not explicitly indicate receipt by the intended confirming party of the confirmation request or verification of the accuracy of the information contained in the request. Accordingly, a failure of a confirming party to respond to a negative confirmation request provides significantly less persuasive audit evidence than does a response to a positive confirmation request. Confirming parties also may be more likely to respond indicating their disagreement with a confirmation request when the information in the request is not in their favour, and less likely to respond otherwise. In the instant case, while performing audit of Star Limited, the auditor sent the negative confirmation requesting the trade payables having outstanding balances in the balance sheet. One of the old outstanding of ` 20 lakh has not sent the confirmation on the credit balance. In case of non-response, the auditor may examine subsequent cash disbursements or correspondence from third parties, and other records, such as goods received notes. Further non-response for negative confirmation request does not mean that there is some misstatement as negative confirmation request itself is to respond to the auditor only if the confirming party disagrees with the information provided in the request.