Question 1

The audit of most large companies will focus on testing the system of controls with only limited amounts of substantive testing.

You are conducting the audit of Plexus Ltd a manufacturer of bottle tops. The audit work reveals:

  1. the sales ledger is reconciled to the nominal ledger by the cashier who is also responsible for the bank reconciliation.
  2. goods received notes for purchased goods are not prenumbered.
  3. the company has no predefined limit for seeking approval for capital expenditure transactions.
  4. statements are not sent to customers showing the amounts currently outstanding for goods sold by Plexus.
  5. Plexus does not reconcile statements received from suppliers for goods and services it has purchased.
  6. There is only one member of the wages department who does all of the calculations and no reconciliation of the movement in wages from one month to another is prepared.

For each of the items numbered 1 to 6 above explain why this is a control weakness, also indicating for each case how the truth and fairness of the financial statements may be affected by the weakness.

(3 marks each in total 18 marks)

Question 2

  • What generic procedures are used to obtain audit evidence?
  • Explain how those procedures could be used to verify balances and disclosures in the financial statements about:
    (i) The factory premises (4marks)

(ii) Motor vehicles (4marks)