Reference no: EM132607280

Your firm has recently been appointed as auditors of Sydney Today Pty Ltd and you have been assigned as audit senior to the audit for the year ended 30 June 2020. Your engagement partner and the assistant auditor conducted an interim audit visit to the client four months before this year end; however, this is the first time you have been on the audit. There were no major issues identified at the interim audit visit and the assistant informs you that she thinks that the results of the interim audit are applicable for the full year.

Sydney Today produces a monthly giveaway magazine that is distributed across Sydney. Articles are written by locals and largely consist of reports on upcoming community events. It is general practice for the chief executive officer (CEO) to attempt to convince the local writers that the resulting publicity for their community event means that the article should be published without payment. Most of the time the CEO is successful, and only about half the magazine's articles are paid for. The CEO accumulates articles, so that there is always a 'bank' of articles available for the next edition.

Sydney Today's revenue consists of advertising by local businesses. The sales director and her staff actively pursue sales opportunities in each area. Advertising is mostly sold in three-edition or six-edition bundles. Occasionally there are a few one-off monthly advertisements, especially from seasonal businesses.

The magazine offers a discount to advertisers if they place orders early, and the discount increases the earlier the order is placed (for example, a bigger discount is offered if an advertiser wants an advertisement in a magazine next year than if they want one in next month's issue). Responsibility for invoicing the advertiser and recording the details lies with whichever member of the sales team signs the advertiser.

You make enquiries about the purchase of articles and photographs for the magazine and have been provided with the following responses from the CEO:

• Writers submit articles to the magazine and the CEO evaluates each article and then decides which ones are suitable for publication.
• The CEO uses an order book specially allocated to him to prepare orders for those writers that will be paid for their work. The orders are mailed out to the writers. The CEO drafts and sends out a letter of thanks to the writers who were not selected.
• The CEO and the art director select the photographs to be used. Notes are not kept of the result of their discussions.
• Photographers are freelancers, who are paid for every photo published. The CEO writes out the orders and they are mailed out to the photographers.
• Invoices are received from the writers and photographers and matched to the orders. A rubber stamp is used by the bookkeeper to put the date of receipt on the invoice, as well as providing for the checking of the invoice details for accuracy and classification (allocation to a general ledger account).
• Prices and calculations on the invoices are checked by the bookkeeper and she puts her initials onto the relevant sections of the stamp.
• The invoices then go to the CEO for approval for payment and the bookkeeper enters them into the accounts payable system.
• Electronic funds transfers to creditors take place on the due date for payment, which is usually 30 days after the end of the previous month (writers and photographers do not send out statements).

Required

Assume that you have decided that it is appropriate to test internal controls over the relevant transactions.

Question (a) Identify three tests of controls that you would use to obtain sufficient appropriate evidence regarding the purchases of articles and photographs.

Question (b) Indicate whether it is appropriate to follow the advice of your assistant auditor to accept the results of the interim audit as applicable for the whole year. Why/ Why not?