Question 4 You are the audit senior on the audit of Harmony Pty Ltd, a large manufacturing company, for the year ended 30 June 2020. It is now 25 August, 2020 and you are reviewing the audit working papers prepared by the audit assistant, Ellen Richards, and notice the following matters:
a. Ellen attended the stocktake on 30 June and observed that the client followed the stocktake instructions. She selected numerous items for test inventory from the client’s inventory sheets and all were found to be correct. Cut-off details were noted and subsequently checked and found to be correctly treated. Ellen concluded that inventory was fairly stated.
b. Ellen selected 20 invoices to test the control that the sales clerk checks that the prices agree with the authorised price list. She found 3 instances where the sales clerk had not signed the “prices checked” box in the invoice. The sales manager explained that the sales clerk always checks the prices but sometimes forgets to sign the box. As the prices on all the invoices agreed with the authorised price list. Ellen concluded that the control was operating satisfactorily.
c. As part of her work on subsequent events, Ellen noted that there were a large number of returns in July of Product 75L. However, as this product was first sold in June and represented only 1% of sales for the year, Ellen concluded that the amount was immaterial and no further work was necessary.
d. Advertising expenses are material, although only 50% of last year’s balance. Ellen selected a large sample of entries and agreed them to supporting documents. No errors were found. Ellen concluded that advertising expenses was reasonable.
e. As part of the verification work on accounts payable, Ellen carried out a search for unrecorded liabilities. She tested a random sample of 20 payments made after 30 June, 20X7 and found 3 instances of cheques that related to services provided in June, which had not been accrued. However, as the total of the 3 cheques was immaterial, she concluded that no adjustment was required for unrecorded liabilities.
Required
For each of the five scenarios presented above, indicate whether you believe that sufficient appropriate audit evidence has been obtained to support the conclusions reached. Give reasons for your decision.