Roshan Textiles: analytical procedures and audit sampling

Tick each point that your answer made clearly and only once. Points here are this site's own. A real examiner may accept other valid points.

• Gross margin 20X5 = (12,000 - 9,600) / 12,000 = 20%.
• Gross margin 20X4 = (10,000 - 7,500) / 10,000 = 25%.
• Receivable days 20X5 = 2,300 / 12,000 x 365 = 70 days.
• Receivable days 20X4 = 1,370 / 10,000 x 365 = 50 days.
• Inventory days 20X5 = 2,400 / 9,600 x 365 = 91 days.
• Inventory days 20X4 = 1,500 / 7,500 x 365 = 73 days.

Marks counted: 0 of 6

Tick each point that your answer made clearly and only once. Points here are this site's own. A real examiner may accept other valid points.

• Revenue rose by 20% but the gross margin fell from 25% to 20%, so the entity may have cut prices, or cost of sales may be overstated or revenue may be misstated.
• Receivable days rose from 50 to 70, which points to a risk that revenue is overstated, for example through poor cut-off or fictitious sales, and a risk that receivables are not recoverable.
• Procedures for receivables: send confirmation requests to a sample of customers and examine cash received after the year end.
• Procedures for revenue: test cut-off by agreeing invoices around the year end to dispatch notes, and review credit notes issued after the year end.
• Inventory days rose from 73 to 91, so there may be slow-moving or obsolete inventory that is valued above its net realisable value.
• Procedures for inventory: attend the inventory count, and compare cost with selling prices after the year end to test net realisable value, and review the age of items.
• Management's explanations of the changes must be supported by evidence such as sales contracts and price lists, and not accepted without checking.
• The rise in receivables and inventory may put pressure on cash flow and raise a going concern question, so the auditor should review the cash flow forecast and the loan terms.

Marks counted: 0 of 8

Tick each point that your answer made clearly and only once. Points here are this site's own. A real examiner may accept other valid points.

• The sampling interval is 4,000 / 100 = every 40th invoice.
• The auditor chooses a random starting point between 1 and 40 and then selects every 40th invoice from there.
• A weakness is that if the invoices follow a pattern, for example a large invoice at the end of each week, the interval may miss or over-select those items.
• Monetary unit sampling would suit the test better, because it gives large invoices a higher chance of selection.
• Any misstatements found must be investigated and projected over the population. For example, errors of $1,500 in a sample of $150,000 would project to $30,000 for a population of $3,000,000.
• The projected misstatement is compared with the tolerable misstatement. If it is greater, or close to it, the auditor extends the sample or does more work.

Marks counted: 0 of 6