Question 2: Audit risk & procedures. (20 marks)

Please type your answer in the tables or as instructed below for each part

(a) The Table below shows 6 example audit procedures illustrated in the Lakeside Company case study that were used for obtaining auditing evidence in the left hand column. For each of the 6 example audit procedures listed in the left hand column, write in the right hand column, the type of procedure.

Note: choose from the types of procedure identified in ASA500.A11-A25 (only one type of evidence for each procedure is applicable):

(6 marks)

Sample audit procedures used at Lakeside	Type of procedure
A bank confirmation request was sent to the Virginia Capital Security Bank regarding loan funding for the warehouse expansion (Case 9).
Calculate gross profit rates for Stores and Distributorship in the current & preceding years (Case 3).
Discuss with Miller the operation of the accounts receivable system for Distributorship (Case 5).
Examine invoices for inventory purchases have been correctly authorised (Case 6).
Use the computer to ensure price x quantity on purchase invoices is accurate (Case 6).
Observe the year-end inventory count being conducted (Case 8).

(b) ASA500.A10 sets out the purposes for which audit tests are conducted. These include tests of controls, substantive analytical procedures, tests of details of balances, tests of details of transactions and tests of disclosures.

For each example test in the left hand column of the Table below, write the relevant purpose in the right hand column.

Note: A purpose may be chosen more than once; a purpose may not be applicable

(7 marks)

Example Test	Purpose of the example test
Compare wages expense to previous year and budget.
Confirm loan balances with financial institutions.
Check cost of closing inventory (stock) to subsequent sales prices.
Recalculate depreciation figure.
Examine sales invoices for initials to indicate that prices and extensions have been checked.
Ensure sales recorded in the sales journal have been matched to shipping documents.
Examine the financial report to determine whether all related party loans are properly presented.

(c) Our audit firm, Green & Associates, emphasises to new graduates in professional development training sessions the importance of understanding audit risk to the planning phase of an audit of a financial statements engagement. Green & Associates evaluates the desired level of audit risk by disaggregating it into three components: inherent risk, control risk and detection risk.

For each example test in the left hand column of the Table below, write which of the three components is being most directly illustrated by each example in the right hand column.

Note: only one risk component is most directly illustrated for each test.

(7 marks)

Example test	Most directly illustrated risk
A client has insufficient working capital to continue its operations.
Segregation of duties is inadequate.
Technological innovations within a clients industry have caused one of their major products (inventory items) to become obsolete.
Our confirmation of receivables failed to detect a material misstatement.
A substantive procedure required under the ASAs has not been carried out.
An audit client has a very material cash balance.
Cash payments have occurred without proper approval.