For purposes of required (f) and (g), assume that the following audit procedures have been successfully completed: Obtain schedules reflecting the computation of the VAT balance and deferred tax asset as at 31 December 2021. Re-perform the calculations on these schedules. Agree the total to the balances in the general ledger, trial balance and the financial statements. Agree the opening balances to prior-year working papers and financial statements. Part (f) Formulate the additional substantive audit procedures you would perform on the VAT balance in the statement of financial position as at 31 December 2021.
ANSWER
Here's a shorter, simpler explanation of the audit procedures:
VAT Balance
The auditors will check:
Invoices and Dates: They'll review a sample of sales and purchase invoices, especially those around year-end, to confirm Barista recorded them in the right tax period.
New Machine: They'll specifically examine the new machine's invoice to verify that Barista incorrectly claimed the VAT in December 2021 when the invoice was dated January 2022.
Deferred Tax Asset
The auditors will check:
Future Profits: They'll critically evaluate management's financial forecasts to see if they're realistic. Since Barista is struggling, there must be enough believable future profit to use the deferred tax asset.
Management Letter: They will get a signed letter from management confirming they are responsible for the forecasts and believe the company can recover the tax asset.
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