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HI6026 Audit, Assurance And Compliance
Question:
Purpose:
This assignment is designed to assess your level of knowledge of the key topics covered in this unit
- Demonstrate an understanding of the reporting requirements and auditing standards.
- Demonstrate an understanding of the auditor’s professional, legal and ethical responsibilities to their clients and third parties.
- Identify the elements of the financial report audit process.
- Understand the audit planning procedures, evaluate the business risk and assess the internal control.
- Prepare auditing procedures for transactions and balances by conducting control and substantive Tests.
- Understand the auditor’s reporting obligations.
Q1.
Section 301 of the Corporations Act requires companies to have their financial reports audited. Academic research suggests that Big-4 auditors charge higher fees than other auditors and their audit reports are more credible than those issued by other auditors.
Required:
In times of economic recession would you expect:
- the demand for audits to increase or decrease? (3 marks) (100-150 words)
- clients to shift from large (Big-4) auditors to smaller auditors, or from smaller auditors to Big-4 auditors? Why or why not? (4 marks) (100-150 words)
Q2.
Godwin, Key & Associates is a small, but rapidly growing, audit firm. Its success is largely due to the growth of several clients that have been with the firm for more than five years. One of these clients, Carolina Company Ltd, is now listed on the ASX and must comply with additional reporting regulations. Carolina Company Ltd’s rapid growth has meant that it is financially stretched and its accounting systems are struggling to keep up with the growth in business. The client continuance decision is about to be made for the next financial year.
The managing partner of Godwin, Key & Associates, Rebecca Sawyer, has recognised that the audit firm needs to make some changes to deal with the issues created by the changing circumstances of its major client and the audit firm’s overall growth. She is particularly concerned that the audit firm could be legally liable if Carolina Company Ltd’s financial situation worsens and it fails.
Required:
- Provide guidance to Rebecca about the steps she can take to avoid the threat of litigation if Carolina Company Ltd fails. (3 marks) (150 -200 words)
- What should Rebecca consider when making the client continuance decision for Carolina Company Ltd for the next financial year? (4 marks) (300-350 words)
Q3.
Audit tests include tests of controls and substantive procedures. Substantive procedures can be divided into substantive analytical procedures, tests of balances, tests of transactions and tests of disclosures.
Required:
For each test in the table below, select the type of audit test it represents. (3 marks) ( 30-50 words)
|
Test |
Type of test |
|
|
1 |
Examine the financial report to determine whether all related party loans are properly presented |
|
|
2 |
Recalculate depreciation figure |
|
|
3 |
Trace sales recorded in the sales journal to shipping documents |
|
|
4 |
Examine sales invoices for initials to indicate that prices and extensions have been checked |
|
|
5 |
Check cost of closing inventory to subsequent sales prices |
|
|
6 |
Confirm loan balances with financial institutions |
- You are the audit senior on the audit of Marsa Ltd, a large manufacturing company, for the year ended 30 June 2020. It is now 16 July 2020 and you are reviewing the audit working papers prepared by the audit assistant, Trena Berk. You notice the following matters:
- As part of her work on subsequent events since balance date, Trena noted that there were a large number of returns in July of product XLP. However, as this product was first sold in June and represented only 1 per cent of sales for the year, she concluded that the amount was immaterial and that no further work was necessary.
- Trena selected 20 invoices to test the control that the salesclerk checks that the prices agree with the authorised price list. She found three instances where the salesclerk had not signed the ‘prices checked’ box on the invoice. The sales manager explained that the salesclerk always checks the prices, but sometimes forgets to sign the box. As the prices on all the invoices agreed with the authorised price list, Trena concluded that the control was operating satisfactorily.
Required:
For each of the two scenarios presented above, indicate whether you believe that sufficient appropriate audit evidence was obtained to support the conclusions reached. Give reasons for your decision. (4 marks) (130- 150 words)
Q4.
Mighty Tools Hardware runs a network of small hardware retail outlets across the state. All sales are made for cash or on credit card and processed through electronic tills. A wide range of goods are stocked by the stores, meaning that the business deals with a large number of suppliers. All goods are purchased on credit with varying terms, depending on the supplier. Invoices are paid by cheque after a package of documents is collated and approved for payment. Ordering of goods and subsequent payments are processed by the central office with delivery direct from supplier to the stores — no central warehouse is used. Mighty Tools uses a perpetual stock system and conducts test counts at regular periods throughout the year.
Required:
- What controls should exist for inventory movements at the local store level and the central office? (3 marks) (150-180 words)
- Explain how the stocktake for Mighty Tools Hardware should be audited. What details are most important? (4 marks) (230-250 words)
Q5.
OPSM Opticians Ltd is a producer of fashion eyewear. The audit report for the year ended 30 June 20X9 was signed on 5 August 20X9 and along with the financial report was mailed to shareholders on 10 August.
Consider the following independent events. Assume that each event is material.
- On 5 July, OPSM Opticians entered into a new contract to supply eyewears to JDS, a new major department store. The contract was similar in nature to other contracts previously negotiated. (2 marks) (50- 80 words)
- OPSM Opticians has invested significant funds in developing a new type of unbreakable sunglass lens. On 8 July, OPSM Opticians applied for a patent for the lens, only to discover that a competitor had lodged a similar application on 20 June. The granting of Trendy
Accessories’ application is now in serious doubt. (2 marks) (50- 80 words)
- Internal audit has uncovered a major fraud at one of OPSM Opticians branches. The fraud was perpetrated by two senior staff, acting in collusion over a number of years. The internal auditors released their report to management on 15 July, after a highly confidential investigation spanning several months. (2 marks) (50- 80 words)
- One of OPSM Opticians major customers, Leisure Pty Ltd, suffered a fire on 20 July. Since Leisure Pty Ltd was uninsured, it is unlikely that their accounts receivable balance will be paid. (2 marks) (50- 80 words)
- On 25 July, a well-known financial planner advised his clients not to invest in OPSM Opticians due to poor long-term growth prospects. The market price for OPSM Opticians shares subsequently declined by 40%. (3 marks) (50- 80 words)
Required:
For each of the above events, state the appropriate action (if any) that the auditor would require of the client in order to issue an unqualified audit opinion. Give reasons. (11 marks)
Q6.
While completing your audit work for the 30 June 2019 audit of Greenfield Ltd, you become aware of the following material matters:
- On 5 July, Blue Pty Ltd, a major customer of Greenfield Ltd, was placed into liquidation. As Blue Pty Ltd had confirmed the balance due to Greenfield Ltd as at balance date, management of Greenfield Ltd has refused to write off or provide for the Blue Pty Ltd account in the 30 June 2019 financial report. However, they are prepared to disclose this information as a note to the financial report. (2.75 marks) (50- 80 words)
- On 15 July, Greenfield Ltd entered into a new contract to supply wine to Wine Taster, a major new wine store that had set up operations in northern South Australia. The contract was similar in nature to other contracts previously negotiated with other wine stores. Management does not believe that any change to the financial report is required. (2.75 marks) (50- 80 words)
- Greenfield Ltd has capitalised significant funds incurred in developing an improved new wine cap that allows the wine to continue to develop in the bottle. On 20 July, Greenfield Ltd applied for a patent for the cap, only to discover that a competitor had lodged a similar application on 15 June. The granting of Greenfield Ltd’s patent application is now in serious doubt. Management do not believe any change to the financial report is required. (2.75 marks) (50- 80 words)
- A note to the financial report of Greenflied Ltd refers to an agreement to sell its major subsidiary, Bursa Valley Pty Ltd, to a rival wine company. This agreement was finalised the day before the financial report was to be signed and the sale is to take place a month after the audit report is to be signed. You have verified this transaction. However, when reviewing the ‘Chairman’s Review’, which is to be included in the annual report that contains the audited financial report, you see that:
- plans for expanding Bursa Valley Pty Ltd’s facilities are outlined.
- the additional revenue to be generated over the next ten years as a result of this expansion is tabulated; and
- there is no reference to the sale of Bursa Valley Pty Ltd.
Management believe that it is too late to make any changes to the annual report, as it is ready to send to the printers, as soon as the audit report is signed. (2.75 marks each) (50- 80 words)
Required:
For each independent situation, state the type of audit report that you should issue and give reasons for your answer.
HI6026 Audit, Assurance And Compliance
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