Question

Ch.1 Discussion How would you audit the automobile revenues (say $100 billion) of General Motors? Let's say that each car and truck has an invoice on the window and in GM's computer system, and that 8 million cars and trucks were sold. Then, how many invoices out of 8 million should you want to examine (audit) in order to verify the $100 billion of revenues in the financial statements? So, you, as the auditor, would feel comfortable" to sign the auditor's report (issuing your professional opinion as the auditor) attached to the GM's annual report to shareholders.

Answer 1

Analysis of above case – General Motors – Automobile revenue $ 100 Billion . This revenue derived from sold of 8 Million cars and trucks . Question – How as the Auditor would feel “ comfortable “ to sign Auditors report –

Under Auditing rule ( as per International Auditing and Assurance Standard Board ( IAASB ) – in terms of ISA 200, the purpose of an audit is to enhance the degree of confidence of intended users in the financial statement . The Auditor express an opinion on whether the financial statement are prepared in all “ Material “ respects .

As per ISA 320 , states that this assessment of what is material is a matter of professional judgement . As per IAS 320 , the auditor has to set “ Performance Materiality” . This material signifies that as an amount that is less than the material for the financial statement as a Overall material. It includes materiality that is applied to particular transactions , account balance .

As per IAS 320 , does not suggest a particular benchmark or formula . Several common rule available to check material like :

1. 0.5% of total Assets value
2. 1% of total Revenue

As per Methods from Discussion paper 6 – Audit risk and material  , as issued in July 1984, Auditor can opt for below method while calculating Material

1. 0.5% to 1% Gross Revenue

Other than Material , Auditor also ensure that revenue recognised and disclose as per new accounting standard “ revenue from Contract with Customer “ as amended ( ASU 2014-09) , on a modified retrospective basis by recognised a cumulative effect adjustment to the opening Balance of Retained Earnings .

Particularly revenue recognising of Automobile sales – as per Standard , need to ensure that the return in estimation of transaction price .

Automotive net sales and revenue represents the amount of consideration to which we expect to be entitled in exchange for vehicle , parts and accessories