Get Ready for a Fun Business Audit Adventure!
1. Why has the payables payment period increased for Chelsea Co?
A. Chelsea Co received a prompt payment discount from one of its suppliers for the first time in 20X8
B. Chelsea Co obtained a trade discount from one of its biggest suppliers which has reduced the amount owed to that supplier by 10% in the year
C. Chelsea Co purchased an unusually high level of goods in July 20X8 to satisfy a large order
D. Chelsea Co took advantage of extended credit terms offered by a new supplier in respect of a large order which it had fully settled by the year end
Answer:
The increase in payables payment period for Chelsea Co might be due to extended credit terms offered by a new supplier.
Explanation: The payables payment period for Chelsea Co has increased as they may have taken advantage of extended credit terms offered by a new supplier. This option is presented in statement D in question 1. One time purchases, like the one in July 20X8, can cause sudden changes in the payables period. However, they would likely settle these quickly, so it may not account for the full extension.
2. What should the auditor do regarding the inconsistency in the balance with Oxford Co?
A. The auditor should take no further action as this is a timing difference which was resolved upon receipt and posting of the invoice
B. The auditor should request that the purchase ledger balance is amended at the reporting date
C. The auditor should contact the supplier and request a supplier statement as at the current date to reflect the recent invoice
D. The auditor should request that an accrual is created in respect of the goods received but not yet invoiced
Answer:
The auditor dealing with the Oxford Co balance should request a supplier statement to validate the balance.
Explanation: In relation to the inconsistency with the Oxford Co balance, the auditor should request a supplier statement to see if this has been amended at the reporting date. This is represented in statement C in question 2. Discrepancies could be due to timing differences, but it's important to ensure that the correct amount is recorded.
3. What could be a valid explanation for the difference in respect of Poole Co?
1. An invoice for $156,403 has been paid twice
2. An invoice for $156,403 has been posted as a debit note
3. An invoice for $156,403 has been received and processed prior to receipt of the goods
Answer:
The difference with Poole Co could be due to errors such as paying an invoice twice or processing before receiving goods.
Explanation: The difference in respect of Poole Co could occur if an invoice has been paid twice, posted as a debit note, or processed before the receipt of goods. This includes all statements; 1, 2, and 3 in question 3.
4. Which of the following would NOT provide sufficient and appropriate audit evidence over the COMPLETENESS of the purchase ledger balance in respect of Bath Co?
A. Obtain the journal book and confirm that all invoices recorded as received from Bath Co dated 29-31 July have been manually adjusted for
B. Review the accruals listing to ensure goods received from Bath Co post year end for which an invoice has not been received have been recorded in the correct period
C. For post year-end cash book payments to Bath Co, confirm date of matching invoice and if pre
D. Review a sample of invoices received from Bath Co recorded post year end and match to Goods Received Note (GRN) to agree to liability
Answer:
A. Obtain the journal book and confirm that all invoices recorded as received from Bath Co dated 29-31 July have been manually adjusted for
Explanation: Adequacy of audit evidence over the completeness of the purchase ledger balance could be provided by reviewing post year end invoices and matching them to Goods Received Note (GRN), ensuring invoices have been manually adjusted and post year-end payments match dated invoices. Therefore, statement A in question 4 might not provide sufficient audit evidence.