In the course of the audit of ABC Stationers Ltd. for the year ended 30 June 2001, you have noted and recorded in the audit working papers, the following evidential matters: 1. Flowcharts of the company‘s payroll prepared by your audit assistant backed up by tests of controls. 2. An oral statement by the production director that the expected working life of plant acquired during the year is ten years. 3. A letter to the managing director from the company‘s bank manager indicating that the bank intends to extend overdraft facilities for a period of one year. 4. A list of items of inventory counted by a member of your audit team during observation of the company‘s annual stock count. 5. A letter from a customer to your firm in reply to a confirmation request indicating agreement with the balance recorded in the books of ABC Stationers Ltd. Required: With respect to each matter listed above, explain its relevance to the overall audit objective of forming an opinion and reporting on the financial statements and Explain your judgment on the reliability of the audit evidence obtained in five ways listed above

The audit assistant has used a flow chart to document his understanding of the accounting and internal control system over the company‘s procedure. This is an important step in the audit because it assists in building the auditor‘s understanding of the system. The test of controls are carried out where the auditor wishes to rely on some of the controls to reduce the level of substantive testing to be carried out on the payroll expenses. The results of the test of controls are therefore important to support the level of substantive testing that the audit assistant has planned to carry out and ultimately to support his conclusion on whether there is any misstatement in the payroll expenses.
This evidence is reliable because it has been prepared by the auditor and is in writing.
(ii) The statement provides evidence as to the appropriateness of the depreciation policy adopted by management. This would be necessary to inquire further the reasons behind the choice of ten years as the expected useful life and where possible to get this in writing. Further evidence could be obtained by considering the useful lives of similar items of plant in the past or consulting trade journals, which may detail the relevant information. If the depreciation policy adopted is considered reasonable then the auditor should re-compute the depreciation charge for the year as a test for completeness and accuracy of what the client has provided for.
To make the oral representation from management more reliable the auditor should seek to obtain other information to corroborate what the directors have indicated.
(iii) The letter provides evidence that the company will be able to access credit facilities in the next foreseeable future and therefore mitigate any factors that could be raising questions as to the going concern of the company. As the evidence is from a source external to the company, it is reliable but would be more so if the letter had been sent direct to the auditors.
(iv) Attendance at a clients stock-take and performance of test counts provide evidence as to the existence of stock and whether the stock take was properly conducted and the whether the results can be relied upon. As the evidence was documentary, prepared by a member of the audit firm, and is based on physical inspection, it is very reliable. The items counted should be agreed to the final stock valuation by the client to confirm the completeness and accuracy of the stock valuation.
(v) Direct confirmation from a debtor provides reliable evidence as to the existence and accuracy of the debtors figures included in the balance sheet as the evidence is documentary, and from a source external to the company. To further support the evidence, the receipt of cash from the debtor, after the year end could be checked.

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