Auditing Assignment Example | Topics and Well Written Essays - 1500 words

Auditing - Assignment Example This report will discuss several audit problems which can impact the materiality of financial statements. Wentworth Brewster limited specializes with the manufacture of sports equipment. All the products are sold to specialist retailers and private member gym clubs. The company owns a large number of freehold premises than it generally requires. The surplus office is usually sub-let to three other businesses. All sales are on a credit basis and customers are authorized and credit checked by the credit controller before an account is being set up. Detailed records on stocks are also maintained. The audit risk areas for Wentworth relate to debtors, stocks, claims on damages and rent income. Debtors have been circularized and no evaluation on replies and follow ups on non-replies had been done. There was also a dispute from a particular debtor with regard to account balance. There were also slow-moving stocks whose valuation was questionable. Rental income had not been audited since it was argued that its amount was less than that of sales income. Finally, there were no provisions made for claims or contingency. The audit duration will be a period of one month and the audit team will from time to time visit the site to obtain information. Communication shall also be done via emails when necessary. Debtors The main purpose of circularizing debtors is to obtain evidence regarding the ownership, existence and value of debtors in the financial statement. Debtors are third parties and thus are considered to be an external source of information. Obtaining evidence from different sources or types especially from third parties increases the level of assurance (Kumar and Sharma 2006). Circularization is done by writing to debtors directly requesting them to confirm their account balances. Debtors’ circularization can either be positive or negative. In positive circularization, the debtors are required to respond whether they agree or disagree to the contents of the circular. In negative circularization, the debtor is required to respond whether they disagree with the contents of the circular. The major drawback of negative circularization is that in case the debtors fails to reply to the contents of the circular, the auditor assumes that he is in agreement with the contents of the circular. The auditor of Wentworth Brewster limited sent circulars to a sample of 30 debtors to confirm year end balances. There were replies and non-replies to the circular. Second request was done to non-replies where some debtors replied but five did not reply. One of the debtors who failed to reply had a zero balance while three of these debtors had balances ranging between ?5,000 and ?20,000. There were no follow ups done on these accounts. The fifth customer was a major customer, Multi-gym ltd and had a yearend balance of ?145,000. The audit senior had discussions with the credit controller of Wentworth with regard to this account as part of the follow up proce ss. According to the credit controller, Multi-gym limited had disputes on a number of invoices worth ?95,000. The amount related to a model of rowing machines bought from Wentworth and Multi-gym disputed that the machines were inefficient as they kept on jamming every time. Upon the receipt of replies, the