Auditing and EthicsSubjectiveQuestion 5691 of 212
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Question 4 (a) CA Pari is conducting the audit of Heavy Ltd., a company with large number of customers which are generally small retail shop owners. While verifying sundry debtors, CA Pari assesses the risk of material misstatement (ROMM) as low and internal control is operating effectively. With reference to SA 505 (External Confirmations): (i) Which type of confirmation request is most likely to be used by CA Pari in this scenario? (1 Mark) (ii) What are the conditions necessary for using such a confirmation request effectively? (4 Marks) (b) M/S ABC & Co., Chartered Accountants, have been appointed as the statutory auditors of DEF Ltd., which is a listed company, for the Financial Year 2024-25. CA X, a seasoned Chartered Accountant with over 15 years of experience has been assigned as the engagement partner for this audit. CA X takes responsibility for maintaining overall quality on this audit engagement in accordance with SA 220. What do the actions of engagement partner and appropriate messages to the other members of the engagement team, in taking responsibility for the overall quality on audit engagement emphasize? (5 Marks) AUDITING AND ETHICS (c) While auditing the accounts of PQR Ltd., a member of the audit team wants to carry out test of controls for checking the effectiveness of internal control over sales as a part of debtor's audit procedure. State any four points that need to be considered in respect of trade receivables. (4 Marks)

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Detailed Solution & Explanation

(a) (i) CA Pari is most likely to use Negative Confirmation Request since she has assessed the risk of material misstatement as low and internal control is operating effectively. (ii) The auditor shall not use negative confirmation requests as the sole substantive audit procedure to address an assessed risk of material misstatement at the assertion level unless all of the following are present: • The auditor has assessed the risk of material misstatement as low and has obtained sufficient appropriate audit evidence regarding the operating effectiveness of controls relevant to the assertion; • The population of items subject to negative confirmation procedures comprises a large number of small, homogeneous, account balances, transactions or conditions; • A very low exception rate is expected; and • The auditor is not aware of circumstances or conditions that would cause recipients of negative confirmation requests to disregard such requests. (b) As per SA 220, “Quality Control for an audit of Financial Statements”, leadership responsibility of an engagement partner is to take responsibility for the overall quality on each audit engagement. The actions of the engagement partner CA X and appropriate messages to the other members of the engagement team, in taking responsibility for the overall quality on each audit engagement, emphasise on: (I) The importance to audit quality of: (i) Performing work that complies with professional standards and regulatory and legal requirements; (ii) Complying with the firm’s quality control policies and procedures as applicable; 52 SUGGESTED ANSWER (iii) Issuing auditor’s reports that are appropriate in the circumstances; and (iv) The engagement team’s ability to raise concerns without fear of reprisals. (II) The fact that quality is essential in performing audit engagements. (c) To carry out test of controls for checking the effectiveness of internal control over sales as a part of the debtors’ audit procedure, following points need to be considered in respect of trade receivables by audit team of PQR Ltd: • Only bona fide sales lead to trade receivables. • All such sales are made to approved customers. • All such sales are properly recorded in the books of accounts. • Once recorded, the debtors can be settled only by receipt of cash or on the authority of a responsible official. • Segregation of duties at every point in sales transaction. (accounting for debtors, collecting the payments, sending reminders etc.) • Debtors are collected on time. • In case debtors are not collected in time, sending reminders and taking legal actions if required. • Balances are regularly reviewed. • A proper system of follow up exists and if necessary, adequate provision for bad debt should be made by preparing adequate ageing schedule of the debtors.

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