BUACC 3741 Auditing Assessment
This assignment has three parts.
Part A: Background
Section 301 of the Corporations Act requires companies to have their financial reports audited. Academic research suggests that larger auditors (Big4 auditors) charge higher audit fees than smaller auditors (non-Big4 auditors), and their audit reports are more credible than those issued by smaller auditors.
In times of economic recession
1. Advise your clients on whether to increase or decrease the demand for auditing?
2. Advise your clients on whether to shift from larger auditors (Big4 auditors) to smaller auditors (non-Big4 auditors), or from smaller auditors to Big4 auditors? Explain your reasons.
Using at least two academic research articles to support your background research.
Part B: Background
According to ASA 240 The auditor’s responsibilities relating to fraud in an audit of a financial report (para. 27):
‘When identifying and assessing the risks of material misstatement due to fraud, the auditor shall, based on a presumption that there are risks of fraud in revenue recognition, evaluate which types of revenue, revenue transactions or assertions give rise to such risks.’
Write a letter to your Audit manager Mr Bobby Brown in which you address the following:
1. Relying on the information in ASA240 (refer to link above). Explain the difference between the responsibility of management and those charged with governance and the auditor in relation to the prevention and detection of fraud.
2. Discuss the misconception that exists in society surrounding the role of the auditor in relation to the prevention and detection of fraud in an audit of financial statements.
3. Provide three reasons why an auditor presumes that there are potential risks of fraud relating to revenue recognition in entities. Make sure that you explain your reasons clearly.
4. Provide two case examples of revenue misstatements that have been reported in the media.
ABC Partners is a growing accounting firm in Australia. During the year of 2019, ABC Partners gained a new client, Medical Services Holding Group, which owns 100 per cent of the following two entities: (1) Austin Nursing Home, a private nursing home group, and (2) Twister Pty Ltd, a private oncology clinic that specialises the treatment of cancer. Year-end for all Medical Services Holding Group entities is 30 June 2019.
Twister Pty Ltd owns three relatively old linear accelerators used in radiation therapy. Recently, there have been some concerns raised from radiographers that using these linear accelerators have adverse radiation impacts on patients.
The general manager of Twister Pty Ltd, Betty Smith, has approached Lisa Dallimore, the audit partner responsible for the financial report audit, about undertaking an engagement in respect of linear accelerators. Betty has requested Lisa to provide an opinion that the three linear accelerators are fit for use. Betty pointed out that the Twister Pty audit is up for tender the following year and suggested ABC Partners might like to take on the linear accelerators without charging a fee as a gesture of goodwill.
Prior to the appointment of ABC Partners as the auditor for Medical Services Holding Group for the 2019 financial year, some preliminary analysis by Lisa identified the following situations:
(1) One of the accountants intended to be part of the audit team owns shares in Medical Services Holding Group. The accountant’s interest is not material to him.
(2) ABC Partners was previously engaged by Medical Services Holding Group to value its intellectual property. The consolidated balance sheet at 30 June 2019 includes intangible assets of $7 million, which were valued by ABC Partners on 1 February 2019 following Medical Services Holding Group’s acquisition of Austin Nursing Home. The intangibles are considered material to Medical Services Holding Group.
1. Explain why Lisa Dallimore should have reservations about accepting the engagement in respect of linear accelerators. (Note: Use appropriate fundamental ethical principles to support your answer).
2. Use your knowledge of APES 110 to identify and explain the potential type of threat to ABC Partners’ independence in scenarios (1) and (2) above.
3. What action should ABC Partners take to eliminate the potential threats to independence in scenarios (1) and (2) above? What safeguards should be instituted to reduce the risk of similar independence threats occurring in the future?