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HI6026 Audit Assurance and Compliance

Question

Answered

Question:

Learning Outcomes:

1.Demonstrate an understanding of the reporting requirements and auditing standards;

2.Demonstrate an understanding of the auditor's professional, legal and ethical responsibilities to their clients and third parties;

3.Identify the elements of the financial report audit process;

4.Understand the audit planning procedures, evaluate the business risk and assess the internal control;

5.Prepare auditing procedures for transactions and balances by conducting control and substantive tests;

6.Understand the auditor’s reporting obligations.

Week 1

You are the audit manager of Overseas Explorer Ltd (OEL), which acquired the small proprietary company Local Pty Ltd (Local) on 30 June 2018. The price of the acquisition was agreed at $5 million, on the condition that OEL is satisfied with the financial records of Local. As Local is a small proprietary company, it has not prepared statutory financial reports or undergone an audit since its incorporation in 2016. However, Local has agreed to allow your firm, which is the auditor of OEL, to access its books and records. The CEO of OEL, Wendy Champion, has requested that your firm provide assurance on the following three items:

  • The management accounts for the year ended 30 June 2017
  • All transactions occurring from the date negotiations commenced until the settlement date, to ensure that all transactions were within the normal course of operations
  • The financial report prepared at the acquisition date of 30 June 2018

In order to clarify your responsibilities, you requested that OEL indicate the level of assurance that they require for each item. Wendy replied that the financial report as at acquisition date is very important, as are the transactions since negotiations commenced, but that she is willing to have less work done on the previous year’s management accounts.

Required:

Indicate the type of engagement that will most likely be undertaken for each of the three tasks and the level of assurance to be provided. Explain your selections.

Week 2

You have been the auditor of Data Ltd for two years. Your auditor’s report for Data for the year ended 30 June 2018 was unmodified, indicating that in your opinion the financial report gave a true and fair view. In August 2018, Data obtained a large loan from Better Bank Ltd, to provide additional working capital. Subsequently Data suffered severe trading difficulties and was placed into liquidation in late December 2018, with insufficient funds to repay the loan to Better Bank.

Required:

Outline a defense for your audit firm to any legal action taken by Better Bank to recover its loss.

Week 3

You are an audit manager at Hall & Associates, who have been approached to conduct the audit of Computer Games Ltd (CGL), a manufacturer of interactive computer games, for the year ended 30 June 2013.

Hall & Associates has not previously audited CGL’s financial report, although it has undertaken other types of engagements for CGL. Last year CGL hired Hall & Associates to assist in the redesign of CGL’s accounting software to ensure that internal controls over internet sales were adequate to ensure the confidentiality of customer data and accuracy of recording. The new software was implemented at the beginning of the current year and appears to be working satisfactorily. As part of this year’s audit, you expect to review the internal controls at CGL, including the controls within the IT systems.

As part of CGL’s financing arrangements with its bank, Easymoney Ltd, it has a loan covenant that stipulates that the quick asset ratio cannot be less than 1:1 or Easymoney Ltd has the right to withdraw all funding. The board has advised you that CGL’s quick asset ratio is currently at 0.9:1 due to industrial action holding up the sale of goods imported from overseas. The board has asked you to ignore this temporary breach of the loan covenant, explaining that CGL is a stable and financially sound company, and that the ratio will return to a positive level on resolution of the industrial dispute. The board has indicated that unnecessarily disclosing this within the audit report would force it to reconsider its plans to use your audit firm for other engagements.

As a result of CGL’s current cash flow difficulties, the board has requested that Hall & Associate’s audit fee for 2013 be paid in CGL shares. The board has indicated that the market value of the shares will equate to the value of the audit fee charged by Hall & Associates.

The management of CGL is currently reviewing the structure of its audit committee to ensure that it complies with the requirements of the ASX Corporate Governance Principles and Recommendations. However, the board is confused by the reference in the ASX Corporate Governance Principles and Recommendations to both independent directors and non-executive directors, as they thought that they were the same thing. As a result, they have sought your advice concerning the structure of their audit committee.

Required:

a) Identify and explain three separate key threats to Hall & Associates’ independence that may arise under APES 110.

b) For each independence threat identified in a) above, describe the course of action Hall & Associates needs to take to ensure compliance with APES 110

Week 4

You are the audit senior responsible for the audit of Sampson Limited. You are currently planning the audit for the year ended 31 December 20X7. During your initial planning meeting held with the financial controller, he told you of the following changes in the company’s operations.

(i) Due to the financial controller’s workload, the company has employed a treasurer. The financial controller is excited about the appointment because in the two months that the treasurer has been with the company he has realised a small profit for the company through foreign-exchange transactions in yen.

(ii) Sampson has planned to close an inefficient factory in country New South Wales before the end of 20X7. It is expected that the redeployment and disposal of the factory’s assets will not be completed until the end of the following year. However, the financial controller is confident that he will be able to determine reasonably accurate closure provisions.

(iii) To help achieve the budgeted sales for the year, Sampson is about to introduce bonuses for its sales staff. The bonuses will be an increasing percentage of the gross sales made, by each salesperson, above certain monthly targets.

(iv) The company is using a new general ledger software package. The financial controller is impressed with the new system, because management accounts are easily produced and allow detailed comparisons with budgets and prior-period figures across product lines and geographical areas. The conversion to the new system occurred with a minimum of fuss. As it is a popular computer package, it required only minor modifications.

(v) As part of the conversion, the position of systems administrator was created. This position is responsible for all systems maintenance, including data backups and modifications. These tasks were the responsibility of the accountant.

Required:

For each of the scenarios above, explain how the components of audit risk (inherent, control or detection risk) are affected.

Week 5

The following financial ratios have been calculated for Nova Ltd for the year ended 30 June 2008:

 

Actual

Budgeted

Previous year

Industry average

 

results

results

 

 

Current ratio

1.97

1.92

1.87

1.92

Quick asset ratio

1.06

1.06

1.06

1.11

Inventory turnover

4.21

4.91

4.86

4.76

Net profit ratio

0.05

0.03

0.03

0.03

Gross margin

0.65

0.59

0.61

0.61


Required:

Provide possible explanations for the results for the various ratios for Solar Ltd and outline their implications for the audit.

HI6026 Audit Assurance and Compliance

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