Basic Auditing - Midterm test 2

Question 1 (2 marks): Define the meaning of the term materiality as it is used in accounting and
auditing. What is the relationship between materiality and the phrase obtain reasonable
assurance used in the auditor’s report?
Question 2 (2 marks): Explain the distinguish between a qualified opinion, an adverse opinion,
and a disclaimer of opinion and give example of these types of opinion.
Question 3 (3 marks): Audit Sampling
The account receivables population for Albert Company as following:

Population Item Recorded Amount

1 300
2 655
3 150
4 455
5 45
6 1017
7 567
8 2017
9 368
10 2000
11 78
12 200
13 60000
14 1123
15 68

Required:
1. Select a random sample of 5 items from population, using monetary unit sampling with
random number table. Use the starting point of line 08, column 01. Without replacement in
sample selection. Describe the advantages and disadvantages of using monetary unit
sampling with random number table.
2. Select a random sample of 4 items from population, using monetary unit sampling with
systematic selection. Use the starting point of 515. Without replacement in sample selection.
Describe the advantages and disadvantages of using monetary unit sampling with systematic
selection.
Question 4 (3 marks):
You are the senior auditor in charge of the audit of Potholders Ltd, a retailer of garden pots
and gnomes. Your audit firm has been auditor for the last four years. Historically, the firm
has had a competent and qualified internal audit team upon whose work you have placed
significant reliance. Management is well respected and is viewed to have high integrity,
although there was some friction last year when the auditor discovered sales cut-off errors,
which reduced profit and had an adverse impact on management bonuses under the new
bonus scheme. While the company has been very profitable, drought and water restrictions
have placed pressure on management to maintain profitability. In planning the audit you
become aware of the following facts:
1. There is a cash shortage caused by recent business expansions and falls in cash inflow.
2. The accounts payable balance has increased by 30 per cent on last year.
3. Days in debtors has increased from 45 days to 63 days.
4. Due to the difficulty of maintaining sales levels, credit checks are not always carried out.
5. Internal audit department staff levels have been halved.
6. After a recent series of thefts, control over inventory has been tightened. When goods are
received they are counted and inspected and, after a pre-numbered goods received advice is
prepared, the goods are moved to an enclosed storage area with adequate security, including
closed-circuit TV. Goods are released from the store only upon receipt of a properly
authorised requisition form.
7. In the past, all purchases were made centrally at head office. However, store managers are
now asked/allowed to purchase direct from local suppliers in order to obtain inventory at
lower prices and avoid transport costs. Some store managers in North Queensland are
importing from Indonesia.
Required:

1. Identify each component of audit engagement.

2. Outline the facts that increase inherent risks and the facts that increase or decrease control risk