Problem
You are the auditor of Modern World, a limited liability company which manufactures and sells small fluffy toys by mail order. The company is managed by Mr Jamal and two assistants. Mr Jamal authorises important transactions such as wages and large orders, one assistant maintains the payables ledger and orders inventory and pays suppliers, and the other assistant receives customer orders and despatches cuddly toys. Due to other business commitments Mr Jamal only visits the office once per week.
At any time, about 100 different types of cuddly toys are available for sale. All sales are made cash with order - there are no receivables. Customers pay using credit cards and occasionally by sending cash. Turnover is over £5.2 million. You are planning the audit of Modern World and are considering using some of the procedures for gathering audit evidence recommended by ISA 500 as follows:
1. Analytical Procedures
2. Inquiry
3. Inspection
4. Observation
5. Recalculation Required
• For EACH of the above procedures:
o Explain its use in gathering audit evidence.
o Describe one example for the audit of Modern World.
• Discuss the suitability of each procedure for Modern World, explaining the limitations of each.