Worked Solution
✓ VerifiedSHORT NOTES ON FOUR AUDIT TOPICS
(a) AUDIT OF DISCOUNTED BILLS RECEIVABLE DISHONOURED
When a bill receivable is discounted with a bank and subsequently dishonoured, the auditor must verify: (1) the bill was validly recorded initially and all particulars were correct; (2) dishonour is confirmed from the bank statement and proper notice was received; (3) the amount plus bank charges has been credited back to the customer's account and the bill restored to receivables; (4) if the dishonour date is before year-end, the bill should appear in the financial statements as a dishonoured bill or receivable, not as a discounted bill; (5) if dishonoured after year-end but within the audit period, it should be disclosed as a contingent liability or post-balance sheet event; (6) recovery efforts and subsequent adjustments are properly documented; (7) in case of partial recovery, only the recovered amount should be credited. The auditor should examine the original bill, bank dishonour advice, journal entries, and ledger accounts. Key risk is improper disclosure where a dishonoured bill before year-end is still shown as discounted.
(b) AUDITOR'S LIEN
Auditor's lien is the legal right of an auditor to retain possession of the company's books, records, and documents until the auditor's fees are paid. Nature: It is a particular lien (not general), applying only to books and records, not other company properties. Conditions for exercise: (1) fees must be genuinely due and unpaid; (2) proper notice must be given to the company before exercising lien; (3) during the statutory audit period, lien should not be exercised in a manner preventing the audit. Limitations: (1) cannot retain documents required for court proceedings or statutory obligations; (2) auditor must provide certified copies when requested; (3) lien lapses if the auditor releases possession voluntarily; (4) lien is not available against appointed auditors in certain situations. Practical considerations: Auditor should obtain confirmation regarding fees outstanding, maintain proper records of unpaid amounts, and communicate any intention to exercise lien in writing before the year-end.
(c) INHERENT RISK
Inherent risk, as per SA 315, is the susceptibility of an assertion to misstatement that could be material, either individually or in aggregate, before considering internal controls. It is an important component of the audit risk model: Risk of Material Misstatement = Inherent Risk × Control Risk. Factors affecting inherent risk: (1) nature and complexity of transactions (e.g., related party transactions, new products); (2) degree of judgment involved (e.g., valuation estimates, revenue recognition); (3) potential for fraud or management override; (4) extent of manual versus automated processes; (5) industry and regulatory factors; (6) previous audit findings and management integrity. High inherent risk areas: revenue recognition, inventory valuation, fair value measurements, estimation of provisions, and transactions involving significant judgment. Auditor's response: When inherent risk is high, auditor must: (1) increase the nature, timing, and extent of audit procedures; (2) increase sample sizes; (3) engage more experienced team members; (4) perform detailed examination (examination in depth) rather than analytical procedures; (5) obtain more reliable audit evidence; (6) perform substantive procedures at year-end rather than interim. Assessment of inherent risk is documented in the audit plan and risk assessment memorandum.
(d) CUT-OFF ARRANGEMENTS
Cut-off procedures ensure that transactions are recorded in the correct accounting period to which they relate. This is critical for accurate period-end financial statements. Areas requiring cut-off testing: (1) Revenue: goods must be recognized when control passes (usually on shipment for sales); auditor examines sales invoices issued 2-3 days before and after year-end, traced to GRNs at customer location; (2) Purchases: recorded based on receipt of goods (FOB destination) or transfer of title (FOB shipping point); auditor reviews purchase invoices and GRNs for similar period; (3) Inventory in transit: verified for FOB terms to determine whether buyer or seller records; proper documentation (airway bills, shipping documents) examined; (4) Payroll and accruals: salary for December included based on period covered, not payment date; (5) Returns and allowances: recorded in period when authorized, not when payment processed. Auditor's procedures: (1) identify last few purchase invoices and GRNs before year-end; (2) identify first few invoices/GRNs after year-end; (3) verify that goods recorded match delivery documentation; (4) test manual adjusting entries for period-end accruals; (5) examine supporting documents for unusual transactions near period-end; (6) trace from source documents through journals to ledger. Red flags: unusual volume of transactions on last day of period, goods shipped without invoices, invoices issued without corresponding deliveries, or significant returns after year-end that relate to current period sales.
Write it like this
1The skeleton
- Pick your 4 first, in the margin, before writing — spending 30 seconds choosing the easiest topics saves you from abandoning a half-written note at the end and losing full marks on it.
- Open each note with a one-line definition sentence naming the concept explicitly — examiners allocate the first mark to this; if you dive straight into points, that mark evaporates.
- Break each note into labelled mini-sections (Nature / Conditions / Auditor's Duty / Limitations) — even 2-3 such heads signal to the examiner you know the structure, and scanning eyes reward headers over prose walls.
- End every note with the auditor's specific responsibility or procedure, not just theory — this is what separates a 3/4 note from a 4/4 note, because the examiner is testing audit application, not bookish definitions.
- Aim for 8-10 tight lines per note, not more — going beyond without adding new points just dilutes quality; the mark scheme has fixed slots and padding doesn't fill them.
- For 'any four of five', treat the fifth topic as your discard, not a bonus — students who attempt all five split focus and write weaker notes across the board; commit to four and write each one completely.
2Examiner-rewarded phrases
3Common trap
Heads up — the most common killer is writing short notes as long paragraphs with no internal structure; if your note on Inherent Risk is a 12-line block of text, the examiner can't locate the definition, the SA reference, or the auditor's response, and you lose 1-2 marks even if every fact is correct. Use mini-headers or numbered points inside each note, always.