Problem:
You have been assigned the peer review of an audit file after the client was convicted of financial statement fraud. The client, Grande Stores, a large store chain, materially overstated net income by understating accounts payable and recording fictitious supplier credits that reduced accounts payable. You have been asked to assess the evidence that was collected during the audit of the accounts payable audit.
Required:
For each of the points below, describe the evidence that was assessed and provide a conclusion as to its quality. State what additional audit evidence should have been gathered, and why the evidence that you recommend is of better quality.
Q1. Vendor credits were supported by a 114 page list of about 1100 vendors, supporting advertising credits of $300,000. The auditors selected a sample of 4 items for direct confirmation. One item was confirmed by telephone, one traced to cash receipts, one to a vendor credit memo for part of the amount and cash receipts for the rest, and one to a vendor credit memo. Two of the amounts verified differed from the amount on the list, but there is no explanation in the audit file.
Evidence collected and quality: Additional evidence needed and why:
Q2. There was $257,000 in credit memos from one of Grande's main suppliers of health and beauty aids. The supplier did not respond to the auditor's confirmation about the details of the credit memos but instead the supplier placed a telephone call to the auditors and provided an explanation of the credit memos.
Evidence collected and quality: Additional evidence needed and why:
Q3. A review of invoices received after the year end for possible understatement of accounts payable revealed that thirty percent of the sample examined ($160,000) related to the prior year and had not been recorded in the accounts payable. Projections indicated that there could be a potential unrecorded liability of about $500,000. Management agreed to increase accounts payable by $260,000.
Evidence collected and quality: Additional evidence needed and why: