You have been the partner in charge of the audit of Concord Engineering Ltd. for

Question

You have been the partner in charge of the audit of Concord Engineering Ltd. for many years. You have never given a qualified audit report because the internal control system of the company was satisfactory, the business in which the company engaged was quite stable and the results of compliance and substantive indicated that the account balances were fairly stated.

In the current year’s audit, you assigned a recently recruited staff as senior in charge of the job and reporting directly to you. You informed the senior in charge that the time budget should remain the same as in previous years and he agreed that he would try his best to maintain the same audit time frame. An interim audit was conducted and the following issues were reported. The company recently computerized its stock and general ledger systems; the chief accountant had resigned and the position was vacant for two months; and a number of errors were detected in the compliance tests of the system. The original time budget was not revised despite of the above findings. Because of the tight time budget, the computerized systems were not tested by the computer auditors. The year ended audit was completed just within the time budget. You were very pleased as this implied effectiveness and efficiency of the audit team.

A few months after the year end, Concord Engineering Ltd. was in financial difficulties. The newly appointed chief accountant fled and took with him $2 million cash. Subsequent investigation revealed that stocks had been overstated because wrong prices had been used in the computer system and obsolete stocks were not adequately provided for. Sales and debtors were overstated as the chief accountant had falsified some sales invoices in order to maintain the sales volume at similar level as in previous years. It was also revealed that the audit assistant responsible for auditing stocks, who was a fresh graduate, had only tested a few items. Errors in stock pricing revealed from this sample were concluded as immaterial and no detailed work relating to subsequent sales of year end stock was carried out. Further, debtors’ confirmations were not carried out because of time constraint.

Required:

Discuss five deficiencies of the audit in the above case and elaborate with reasons.

Explanation / Answer

1)The stock has been overstated it means the ending inventory will be higher by which the COGS will come down and profit will be overstated

2)Sales and Debtors are overstated by which the net income will be higher but there will be problem with the cash flow

3)The obselete stock has to be reported as expense which is not shown by which expense are under estimated

4) Bad debta has to be write off , but not done by which expense are under estimated

5)The stock pricing is not done properly by which the figures of begining and ending inventory will be wrong and COGS will be under/Over estimated

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