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Question 2c

You are the manager responsible for the audit of Thurman Co, a manufacturing company which supplies stainless steel components to a wide range of industries. The company’s financial year ended on 31 July 2016 and you are reviewing the audit work which has been completed on a number of material balances and transactions: assets held for sale, capital expenditure and payroll expenses. A summary of the work which has been performed is given below and in each case the description of the audit work indicates the full extent of the audit procedures carried out by the audit team.

(c) Payroll expenses
The payroll function is outsourced to Jackson Co, a service organisation which processes all of Thurman Co’s salary expenses. The payroll expenses recognised in the financial statements have been traced back to year-end reports issued by Jackson Co. The audit team has had no direct contact with Jackson Co as the year-end reports were sent to Thurman Co’s finance director who then passed them to the audit team.

Thurman Co employs a few casual workers who are paid in cash at the end of each month and are not entered into the payroll system. The audit team has agreed the cash payment made back to the petty cash records and the amounts involved are considered immaterial. (9 marks)

Required:
In respect of each of the three matters described above:
(i) Comment on the sufficiency and appropriateness of the audit evidence obtained;
(ii) Recommend further audit procedures to be performed by the audit team; and
(iii) Explain the matters which should be included in a report in accordance with ISA 265 Communicating Deficiencies in Internal Controls to Those Charged with Governance and Management.

Note: The split of the mark allocation is shown against each of the matters above.