PBL2 Case Study

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PBL2 Case Study
Question 1
In preparing the audit plan for PBL2, the auditor needs to take into consideration any foreseen difficulties in any single area. In planning for PBL2 audit, the auditor recognized some possible difficulties in auditing stock. These include;
The total inventory at PBL2 is worth $4 million of which the majority of it is of low value. It would be difficult to do a complete physical check on these low value items as the process may take a lot of time. PBL2 only employs five employees two of which are directors. This makes it even more difficult to verify these items through a physical count as there are no staff to carry out the physical counting and especially because the three staff members are directly involved with the issuance and receipt of the goods. However, one of the directors should be involved in the counting in order to provide the auditor with appropriate physical evidence.
There is a problem in verifying the stock that is in transit. It will be difficult for the auditor to provide audit evidence. According to AUS 502 Audit Evidence, the auditor is required to gather sufficient evidence from which he will base the audit opinion. It will be difficult to verify the existence and value of the goods that are in transit. The existence and ownership and rights of ownership can be verified through verification of transaction documents.
That obsolete and slow moving inventory should be valued using the lower of cost and net realizable value. This will determine the accuracy that inventory has been valued according to the recommended guidelines provided as per AASB102 Inventories.
Question 2
The auditor will use assertions in identifying the recognition, measurement presentation and disclosure in the financial reporting and in assessing risks and in evaluating the possible sources of material misstatements. Assertions will assist in ensuring that the audit evidence gathered by the auditor is of good quality and enhances its reliability and relevance.
AUSI 502 Audit Evidence provides three types of audit assertion; on classifying the financial transactions and events that occur during the period being audited; account balances at the end of the period under audit; and presentation and disclosure. The key financial report transactions that are at risk at PBL2 are in classification of some of the stock which will likely affect the balances at the end of the period in the following ways:
Existence: The auditor is expected to ...