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1 1. Introduction This handbook outlines the requirements of your Dissertation and provides clear guidance on the preparation of a Dissertation , prior to its submissi ...

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BUACC 3741 Auditing Assessment

Question

Answered

Task:

This assignment has three parts.

Part A: Background

Assignment

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.

Required:

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.’  

Required:

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. 

Background:  

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. 

Required:

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?

BUACC 3741 Auditing Assessment

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