Reference no: EM132857189

Question 1 - You have reviewed the work performed by your assistant, Raymond Snow, on the audit of Tin Ltd for the year ended 30 June 20X8 and you have noted the following two independent matters:

(i) In testing investments in listed securities, Raymond selected all shareholdings with a market value above $200,000 and checked them to the closing market value reported by the Australian Stock Exchange (ASX) to determine the net realisable value of each shareholding. The items tested totaled $5,500,000 or 60% of the total balance. Of the items tested, only one error of $110,000 was discovered. Raymond concluded that the error was not itself material, as it was only 2% of the balance tested. He extrapolated this error to the total population and estimated that the error for the total population would be $185,000, which was also immaterial. Therefore, he concluded that the investments in listed securities were fairly stated at the lower of cost or net realisable value.

(ii) Tin Ltd has 1,000 stock lines that are maintained on a perpetual inventory system. Stock is counted on a cyclical basis so that all lines are covered at least once per year. Raymond attended the March stocktake to observe the counting procedures and conducted 20 test counts from the floor to the client's count sheets and 20 from the client's count sheets to the floor. He uncovered two minor discrepancies of one item each, which he considered to be immaterial. The client also uncovered five minor discrepancies between the perpetual records and the actual quantity on hand. None of these discrepancies were adjusted on the perpetual records, as the amounts involved only totaled $50,000 and were considered to be immaterial. Raymond concluded that no further work was considered necessary on stock quantities at year end.

Required - Explain whether sufficient appropriate audit evidence has been obtained for each of the above situations. Give reasons for your answer.

Question 2 - The following financial ratios have been calculated for Nova Ltd for the year ended 30 June 2008:

Ratio	Actual results	Budgeted results	Previous Year	Industry Average
Current ratio	1.97	1.92	1.87	1.92
Quick asset ratio	1.06	1.06	1.06	1.11
Inventory turnover	4.21	4.91	4.86	4.76
Net profit ratio	0.05	0.03	0.03	0.03
Gross margin	0.65	0.59	0.61	0.61

Required - Provide four possible explanations for the results of the various ratios for Nova Ltd and explain their implications for the audit.

Question 3 - Magi Chen is the managing director of Sun Construction Pty Ltd, a family owned business that provides construction services. As Magi is interested in purchasing some new construction equipment's for her business, she has approached her local bank for finance. The bank has asked that Magi provide an audited financial statement to assist them in considering her loan application. Magi has approached your audit firm for this service and you have been allocated the task of auditing Sun Construction for the year ended 30 June 2019. You have undertaken a preliminary review of the business and determined that a substantive testing approach would be suitable and appropriate. You are currently preparing an audit program for the revenue cycle. The following information has been obtained from your review:

Magi usually works 120 hours a fortnight. Part of this time is spent travelling between different clients and is not charged to the clients. The remaining time is charged at $60 per hour, regardless of the task undertaken.

Customers typically pay Magi in cash for the work undertaken, except for a small number of regular small-business customers. Magi allows these customers to pay on account by bank transfer on a monthly basis.

Magi supplies each cash customer with a written receipt, prepared manually from a receipt book purchased at the local news-agency. The book contains pre-numbered blank receipts, which are completed in duplicate.

Required - For each of the assertions of occurrence, completeness and accuracy, identify a procedure(s) you could use to audit Sun Construction's revenue.