Reference no: EM132554154

Question - You are a newly promoted audit manager in the accountancy firm Norvic. You have been asked to undertake the audit of Builders Merchants plc (Builders) for the year end 31 March 2020. Although Builders has been audited by Norvic for a number of years, this is your first experience of working on the Builders audit. You have collected the following information to help you plan the audit.

Builders opened its first branch in Norwich 20 years ago and has since established 25 branches in the East Anglia region. Each branch is linked to the Norwich head office by a computerised accounting system.

The purchasing department is based in Norwich head office. Branch managers submit their requests for building supplies to the central purchasing department. These are collected together and purchase orders are issued to suppliers specifying the goods ordered and the branches to which they are to be delivered. The suppliers issue a confirmation setting out the prices, quantities and agreed discounts. The suppliers also provide a goods delivery note for the goods despatched to each branch.

The branches send the delivery notes to the purchasing department to confirm the goods have been received, and also report any discrepancies between goods ordered and delivered. The suppliers submit invoices monthly to the purchasing department. The invoices are checked against the delivery notes to confirm the goods have been received, and the prices and discounts are checked. Any discrepancies are adjusted for by the purchasing department. Once the invoices are approved for payment they are passed to the accounting department for entering on the purchase ledger and for payment.

The system has generally worked well and no problems were found at the interim audit. However, following a recent upgrade, the computer system has frequently crashed and communication between branches and head office have been severely disrupted for the three months leading up to the year end. To avoid disputes between Norvic and its suppliers, the finance director has authorised the processing and payment of suppliers invoices without checking against purchase order, goods delivered, pricing and discounts. The finance director has expressed confidence that this will not cause problems for the year end accounts and audit because of good, long standing relationships of trust between Norvic and its suppliers.

Required -

a) Identify three sources of audit confidence.

b) Discuss the audit work you would carry out to gain sufficient confidence that the purchases and trade payables figures are materially correct.

Explain what enough and appropriate means. Ask the suppliers to confirm how much they owed. Explain why that's better than checking the figures could they may have been an administrative error.

c) Comment on the reliability of the sources of audit evidence you have used in seeking to assess whether the purchases and trade payables figures are materially correct.

d) What options are available if you are unable to satisfy yourself that the amounts for purchases and trade payables are materially correct?