Question 1 - Substantive testing (3% of total subject assessment)

 

Jimmy Ltd is a retailer of car batteries. Jimmy Ltd was facing its first loss since listing on the ASX five years ago, however Chairman of the Board and CEO John Bremner was not prepared to allow this loss to be reported. John's bonus was tied to reported earnings, he owned shares in the company and knew the psychological impact a first time loss would have on his companies share price. John asked his staff who were also affected by the bonus plan rules to turn the loss into a small profit by using the following methods:

a) Creating fictitiousinventory by adding false count sheets to the inventory count.

b) Bringing sales for the first 10 days of the subsequent year forward.

c) Postponing recognition of supplier’s invoices until the subsequent period.

d) Create false claims for credit on goods returned and volume discounts that had been supposedly agreed to by suppliers.

 

Required:

For each of the methods listed above:

1. Identify the accounts affected and whether this will be an overstatement or understatement.

2. For each account identified in a) identify and explain the most relevant audit assertion affected (you should identify no more than 2 assertions for each account).

3. For each method, identify and explain an audit procedure that would detect these attempts to manage earnings.

Format your answer in the following manner:

Method Account(s) affected U/O Assertion(s) Audit procedure(s)