In the audit of Reliable Printers Ltd. (RPL), you have collected the extracted financial statements as below:

Statement of financial position (extracted)

		2014 $	2015 unaudited $
Current assets
Accounts receivable		4 320 000	5 073 309
Gross value		4 530 000	5 313 309
Allowance for doubtful debts		(210 000)	(240 000)

Income statement (extracted)

	2014 $	2015 unaudited $unaudited $
Revenue from operations	37 699 500	43 459 500
Cost of sales	31 620 000	36 855 000
Gross profit	6 079 500	6 604 500

(Adapted from Auditing and Assurance Services in Australia 6e by Gay & Simnett © McGraw-Hill Education (Australia) 2015)

1. What constitutes a complete set of financial statements? 

2. What are the eight general features of a complete set of financial statements?

3.Assume you are a new auditor in this field and are asked by the auditor-in-charge to suggest suitable substantive tests for various accounts.

Required:

In relation to sales account:   

a. The auditor-in-charge has indicated to you that your team needs to focus on ensuring that “There are no fictitious sales transactions recorded in the year so that the sales are not overstated”. Which management assertion is addressed and which is an appropriate substantive test to confirm this.

b. The auditor-in-charge has indicated to you that your team also needs to focus on ensuring that “All sales transactions are recorded so that the sales are not understated”. Which management assertion is addressed and which is an appropriate substantive test to confirm this.

c. The auditor-in-charge has indicated to you that your team also needs to focus on ensuring that “The recorded sales only consist of the sales occurring in the 2015 financial year and sales transactions occurring in 2016 financial year are recorded in the 2016 financial year”. Which management assertion is addressed and which is an appropriate substantive test to confirm this.

d. The auditor-in-charge has indicated to you that your team also needs to focus on ensuring that “The amount of sales transactions is recorded correctly”. Which management assertion is addressed and which is an appropriate substantive test to confirm this.

4. In relation to accounting receivable account:                                                     

a. The auditor-in-charge has indicated to you that your team needs to focus on ensuring that “The amount listed on the account receivable trial balance at the year-end is the actual amount that customers were owing to the client”. Which management assertion is addressed and which is an appropriate substantive test to confirm this.

b. The auditor-in-charge has indicated to you that your team needs to focus on ensuring that “Account receivable is stated at the net realizable value in accordance with accounting standards”. Which management assertion is addressed and which is an appropriate substantive test to confirm this.

5. You have been approached by your client Natural Oils Ltd to undertake the following engagements:

The Australian Government has introduced the Competition and Consumer (Industry Codes—Natural Cosmetics) Act 2017 (the Act), which is effective for the year ended 30 June 2018. The Act introduces a code covering the relationship between retailers and their direct suppliers. As a cosmetics retailer, Natural Oils is required to comply with this Act.

Under the Act, the cosmetics retailer must enter into a supply agreement. The agreement must be in writing and be retained by the retailer. In addition, the retailer must submit a report to the Australian Consumer and Competition Commission (ACCC) detailing its compliance with the code. The Act states that the report must be reviewed by an assurance practitioner.

Required:

With reference to auditing and assurance standards, write a letter addressing the Board of Director of Natural Oils advising them of the appropriate type of assurance engagement that you should undertake for each of the situations above and the level of assurance provided, the benchmark that the auditor should use.

Answer rating: 100% (QA)

What Are Assurance Services Assurance services involve the independent examination of a subject matter by a practitioner These professionals usually establish suitable criteria against which they can ... View the full answer