ACC3AUD-Auditing And Assurance
Question 1
Consider each of the following situations:
A.One of the mitigating controls that you wish to rely on is that any increases in credit limits are authorised by the financial controller. The audit assistant checks the company’s policy manual and notes that this control procedure is required. He concludes that the control is operating effectively and can be relied on.
B.A test of controls of 48 sales transactions was undertaken which resulted in four errors. The working papers noted that none of the errors found was material and the conclusion from conducting the test was that: ‘the system is operating satisfactorily’.
C.Trade payables is a material balance sheet account comprising 20 large and 200 small creditors. Your client presented the audit assistant with a list of creditors making up the balance shown in the trade payables control account in the general ledger. In your absence the audit assistant decided to utilise a judgemental sampling technique to test these creditors. The only procedure the audit assistant used was to randomly select 30 creditors from listing. These were traced to reconciled creditors’ statements.
D.SJO Pty Limited (SJO) is currently in dispute with the taxation authorities. This year an assessment was issued by the taxation authorities requiring the company to pay an additional $150,000 in taxes. SJO believes that the basis for the assessment was incorrect and inappropriate. Notwithstanding this, it paid the $150,000 to the taxation authorities under protest and lodged a formal objection against the assessment. SJO is carrying forward the $150,000 paid as an ‘other receivable’ in its year-end financial report. The audit assistant has verified this other receivable by agreeing it to the cash payments books and the bank statement.
Required:
You are the audit senior and have been presented with the above information by the audit assistant (a new graduate). In each of the above situations, explain why the audit assistant has not obtained sufficient appropriate audit evidence or has concluded incorrectly.
Question 2
Fab & Fit Ltd (FAF) refinanced its existing loans with National Bank and also obtained additional borrowings from them during the year. National Bank has included covenants in the new loan agreements stipulating that FAF must make a profit before tax in every financial year and that it must maintain a net current asset position (i.e. current assets exceed current liabilities at all times). You have been provided with an extract of FAFs financial report for the year ended 30 June 2020, which shows that FAF made a profit before tax $110,000 and had a net current asset position of $40,000.
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Extract from the Statement of Financial Position
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30 June 2020 $000
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30 June 2019 $000
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Cash and cash equivalents
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200
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206
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Trade and other receivables
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1414
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1234
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Inventories
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684
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688
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Total current assets
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2298
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2128
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Trade and other payables
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(604)
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(560)
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Deferred revenue
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(420)
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(602)
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Loans and borrowings
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(1202)
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(812)
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Employee benefits
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(32)
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(28)
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Total current liabilities
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(2258)
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(2002)
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Net current assets
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40
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126
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Required:
From the above information provided in relation to FAF:
1.Identify TWO key accounts that are at risk of misstatement due to fraud.
2.For each account identified in (1) above:
(a)Provide a brief explanation as to why the account is at risk:
(b)List the key assertion where audit efforts should be concentrated; and
(c)Describe substantive tests of detail you would perform to gather sufficient appropriate audit evidence in relation to the assertion identified in (b) above.
Question 3
Consider the following independent material scenarios. Assume that all entities involved have a year end of 30 June 2020.
(a)You are the auditor of the Strong Group. Although you did not act as auditor of Delicate Pty Ltd, Sturdy Pty Ltd and Hardy Trading Pty Ltd (all entities owned by Strong Group), you were able to obtain copies of their unqualified auditor’s report. However, despite having received a copy of the audited (and unqualified) financial report for Delicate Pty Ltd, you don’t believe that this financial report is suitable for consolidation with the other entities in the group. This is because Delicate Pty Ltd operates in Egypt, which has a vastly different accounting framework from that used in Australia. You have been able to quantify the financial effects of the required adjustments on the Strong Group’s financial report. However, management has refused to make these adjustments, and instead has consolidated the existing versions of the four entities’ financial reports.
(b)PM Ltd is a listed company. The finance director of PM Ltd refuses to adopt AASB 124 Related Party Disclosures on the grounds that it requires confidential information to be disclosed to the public that should remain known only to the parties concerned. You are satisfied that the current financial report is materially correct in all other respects.
(c)You have completed the audit of Big Dreams Limited (BDL). During the finalisation of your subsequent event review, you come across a letter from the major bank just prior to signing the audit report. It states that the bank is withdrawing its loan to BDL due to some recent (after the year-end) breaches of their loan contract. The loan contract states that the loan is payable within 28 days of receiving the letter from bank. The loan represents 80% of BDL’s long-term liabilities and, 65% of total liabilities.
(d)You are the auditor of KKK Limited. Management of KKK Limited has decided not to disclose directors’ fees in the accounts as they are not material. You cannot convince management to change its decision. However, you do agree that the amounts are not material.
(e)You have just completed the audit of Dreamer Limited. You experienced a number of difficulties during the audit, including significant disagreements over the valuation of Dreamer’s investment property holdings. The audit partner had suggested that the property value was overstated by $8 million, a figure which was twice the level of materiality of $4 million set for the audit. As a result of discussions with the audit committee, the CEO of Dreamer agreed to revise the valuations downward by $5 million. All other issues were resolved to the satisfaction of the audit partner, resulting in an overall misstatement in the financial report of $3 million.
Required:
For each of the above situations (a-e), determine the appropriate audit opinion to be issued. Give reasons.
Question 4
Consider each of the following independent and material situations, identified below (i-vi). In each case:
the balance date is 30 June 2020;
the field work was completed on 12 August 2020;
the Directors’ Declaration and the Audit report were signed on 20 August 2020;
the completed financial report accompanied by the signed Audit report were mailed to the shareholders on 26 August 2020.
(i)On 26 September 2020, you discovered that a debtor at 30 June 2020 had gone bankrupt on 2 September 2020. The debt had appeared collectible at 30 June 2020 and 20 August 2020.
(ii)On 12 August 2020, you discovered that a debtor at 30 June 2020 had gone bankrupt on 5 August 2020. The cause of the bankruptcy was an unexpected loss of a major lawsuit by the debtor on 15 July 2020.
(iii)On 14 August 2020, you discovered that a debtor had gone bankrupt on 5 August 2020. The sale took place on 2 July 2020. The cause of the bankruptcy was a major uninsured fire at one of the debtor’s premises on 30 June 2020.
(iv)On 19 August 2020, the company settled a legal action out of court that had originated in 2016 and was listed as a continent liability at 30 June 2020.
(v)A draft investigative report commissioned by a government enquiry was leaked to the media on 10 August 2020. The report has questioned the continued need for a segment of your client’s business. Accordingly, there is a significant uncertainty regarding the future necessity for one of the services offered by your client and its industry colleagues. There have been significant media attention and speculation on this issue.
(vi)Your client, BHP Mining, owns a mineral exploration licence in Western Australia. At 30 June this licence was valued by an independent expert at $20,000,000. This valuation is reflected in the financial report. On 17 August BHP Mining received notice that a claim was being lodged under the Native Titles Act for land which included that subject to the exploration licence. If the claim is successful, the exploration licence will be worthless.
Required:
1.For each of the situations described above (i-vi), select the appropriate action from the list below, and justify your response.
A.Adjust the 30 June 2020 financial report.
B.Disclose the information in the notes to the 30 June 2020 financial report.
C.Request that the client recall the 30 June 2020 financial report for revision.
D.No action is required.
2.If no action is taken by management for each of the events described above (i-v), determine the most appropriate audit opinion to be issued.
Question 5
Using your firm’s sampling technique, you have selected representative sample of Property, Plant and Equipment (PPE) items from the asset register. You have decided to use this sample to test whether the depreciation rate assigned to PPE is appropriate and in line with the present condition and expected use over the remaining life of each sample item. The relevant details of the sample selection and results of your test are summarised below:
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Profit before tax
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$1,875,000
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PPE account balance
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$11,345,000
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Sample size
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35
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Dollar value of sample taken
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$1,145,000
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Error in the sample (depreciation rates for some Items were too low and/or remaining useful Life to equipment was overstated)
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$48,500
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Required:
(a)What conclusion would you draw about ‘valuation and allocation’ of PPE from the above information? Justify your conclusion.
(b)Assuming that management refuses to amend the error, discuss the impact of the above information on your audit opinion.
Question 6
Okawa Limited is a leading automotive repair centre in Victoria. The Okawa manager is responsible for raising the initial repair orders which are then sent to the administration area for invoicing.
The administration consists of a bookkeeper and a finance manager. The bookkeeper undertakes all invoicing and banking, along with follow-up of any outstanding accounts. A monthly report of amounts invoiced, banked and outstanding debtors is given to the finance manager.
The Okawa engages three full-time staff and up to 5 casuals at any time. Overtime is often worked on weekends by all staff. Inventory is stored in the Okawa warehouse which is accessible by all staff on an ‘as needs’ basis, based on a work order raised by the Okawa manager.
Your initial review of the business has highlighted the following risks:
(i)Non-collectability of debts;
(ii)Overpayment of overtime to employees;
(iii)Inventory being stolen; and
(iv)Payments being made to suppliers prior to receipts of goods.
Required:
For each of the risk identified above in i-iv, determine a practical preventative internal control procedure that would assist in mitigating the risks identified above.
