Question 1 -
Substantive testing (3% of total subject assessment)
Jimmy Ltd is a retailer of car batteries. Jimmy Ltd
was facing its first loss since listing on the
ASX five years ago, however Chairman of the Board and CEO John Bremner was not
prepared to allow this loss to be reported. John's bonus was tied to reported
earnings, he owned shares in the company and knew the psychological impact a
first time loss would have on his companies share price. John asked his staff
who were also affected by the bonus plan rules to turn the loss into a small
profit by using the following methods:
a) Creating
fictitiousinventory by adding false count sheets to the inventory count.
b) Bringing sales for
the first 10 days of the subsequent year forward.
c) Postponing
recognition of supplier’s invoices until the subsequent period.
d) Create false
claims for credit on goods returned and volume discounts that had been
supposedly agreed to by suppliers.
Required:
For each of the methods listed above:
1.
Identify the accounts affected
and whether this will be an overstatement or understatement.
2.
For each account identified in a)
identify and explain the most relevant audit assertion affected (you should
identify no more than 2 assertions for each account).
3.
For each method, identify and
explain an audit procedure that would detect these attempts to manage earnings.
Format your answer in the following manner:
Method
Account(s) affected
U/O
Assertion(s)
Audit procedure(s)