ACC3AUD Auditing & Assurance

Question 1 (12 marks)

Consider each of the following independent situations concerning companies incorporated under the Corporations Act 2001. Assume that in each situation the auditors have no concerns other than those prescribed:

(a) You are the auditor of Dawn Limited (Dawn). Dawn has intangible assets, being trademarks, which are recorded in the accounts at $3,500,000. The value is the same as in the prior year. During the year, your client commissioned an independent valuation of the trademarks. This valued them at $2,475,000. Management refuses to adjust the financial report to reflect the revised calculation. The materiality for the client has been set at $1,300,000. Assume that, with the exception of this issue, you are satisfied in all other material respects.

(b) Your client has lost most of its accounting records due to a fire in its accounts department. Although, it is able to partially reconstruct its financial statements due to an asset stocktake and third-party confirmation procedures, there is no documentation to support other transactions for the year.

(c) You are the auditor of Bevit Ltd. Management of Bevit Limited has decided not to disclose related party transactions as they are not material. You cannot convince management to change is decision. However, you do agree that the amounts are not material.

(d) Management of Coco Limited has estimated the provision for warranty should be $550,000. As auditor you believe that the allowance should be $675,000. Management will not change its estimate. Profit before tax for the year is $440,000.

(e) You are the auditor of National Ltd. You were unable to obtain confirmations from two of the client’s major customers that were included in the sample. These customers wrote on the confirmation letters that they were unable to confirm the balances because of their accounting systems. The auditor was able to become satisfied by other audit procedures.

(f) You are the auditor of PNB Ltd (PNB). Due to recurring operating losses and working capital deficiencies, the status of the PNB as a going concern is extremely doubtful. However, the financial statement disclosures concerning these matters are adequate.

Required:

For each of the above situations (a-f), determine the appropriate audit opinion to be issued and explain providing the appropriate reasons.

(6 situations *2= 12 marks)

Question 2 (8 marks)

You are the auditor of Brand Boy Ltd (BB). BB manufactures mini hi-fi systems. BB’s draft financial information for the year to 30 June 2021 is as follows:

Required:

Based on above information identify four (4) audit risks which would impact on the audit of BB. You also need to include the account and assertion most affected by the risks identified.

(4 audit risks*2= 8 marks)

Question 3 (4+4+6=14 marks)

Part A

You are the audit senior at Best Accountants and are conducting the audit of Revglow Ltd for the year ended 30 June 2021. The audit assistant, Tanya Robinson, has just completed testing of the depreciation of property, plant and equipment (PPE). An extract from her audit working papers is as follows:

In testing depreciation, Tanya selected a sample of 35 items with a value of $1,672,000. She established a tolerable error 5% of base values. The results of the tests showed systematic errors in the sample of $72,400.

Based on the results, Tanya has concluded that this is an acceptable error and no further work is required.

Required:

Identify and explain two (2) reasons why Tanya’s conclusion is incorrect.

(2 reasons*2= 4 marks)

Part B

Great Accounting Partners (GAP) is a mid-size audit firm. It has built up its audit work over the last eight years. During the last eight years, GAP has obtained new clients each year and many of its existing clients have grown. GAP has clients in many industries, but none of its clients are in the financial industry. At this month’s planning meeting, the audit partners will consider whether they will tender for audit work for a potential new client that is operating in a financial industry.

Required:

Explain whether GAP Partners should tender for the audit work for the potential new client.

(4 marks)

Part C

Consider the following two independent situations:

(i) Doutta Gala operates several nursing homes in Australia. The company charges a fixed fee per week as set by legislation from all residents. Due to the quality of care provided, occupancy rates are always at or are very close to full. You have tested internal controls surrounding occupancy revenue and results support a very high level of reliance on these controls.

(ii) You are the auditor of Godfrey Ltd (Godfrey). Godfrey is majority owned and run by Karina Gill. It operates a chain of discount stores selling a range of continually changing merchandise. Karina handles all inventory purchases for the business, scouring auction houses in order to buy large lots of liquidated stock at bargain prices. Karina makes all decisions regarding what stock to purchase, the price to pay and, given that goods sold at auction have to be paid for immediately, is the sole signatory to the company’s bank account. You have determined that there are no controls over inventory purchases on which you can place reliance. However, you do note that Karina keeps all available documentation, which is passed on to the accountant for checking and processing.

Required:

Explain how the information provided above would affect the nature, timing and extent of substantive procedures for occupancy revenue in situation (i) and purchases for situation (ii).

(2 situations*3= 6 marks)

Question 4 (10 marks)

You are the auditor of BB Ltd (BB). Consider each of the following material events that occurred or were discovered after the end of the reporting period. In each case assume that:

· the financial report date is 30 June 2021;

· the Directors’ Declaration and the Audit report were signed on 25 August 2021; and

· the financial statements were issued on 10 September 2021.

(i) On 1 August a lawsuit was filed against BB Ltd for damages that allegedly occurred before 30 June. In the opinion of BB’s lawyers, there is a danger of a significant loss.

(ii) On 15 August you found that Tanish, a debtor of BB, went bankrupt on 10 August. The most recent sale had taken place on 25 May and no transactions had occurred since that date.

(iii) On 1 September you discovered that a legal action commenced against BB in relation to a faulty product sold in May 2017.

(iv) On 30 September you discovered that John Cummins, a debtor of BB, went bankrupt on 15 July. Sales to John Cummins were all made before the end of the reporting period.

(v) On 1 October you discovered that Tara Brown, a debtor of BB, went bankrupt on 25 September. The sale had taken place before the end of the reporting period, but the amount had appeared collectable at the date on which the auditor’s report was signed.

Required:

For each of the events described above (i-v), select the appropriate action from the list below, and justify your response.

A. Adjust the 30 June 2021 financial report.

B. Disclose the information in the notes to the 30 June 2021 financial report.

C. Request that the client recall the 30 June 2021 financial report for revision.

D. No action is required. (5 events*2= 10 marks)

Question 5 (8 marks)

Assume you are an audit senior working for a large accounting firm, Big4 Accounting Ltd. Your accounting firm audits Rio Mining Ltd (Rio), a large mining firm that operates all over Australia. Consider the following two situations:

A. Rio owns some highly specialised mining tools and equipment. These tools and equipment are held at various remote regions across the country. You have engaged an independent expert to carry out a physical audit check of the equipment and mining tools at each location. The expert will also be performing an independent valuation of each material asset (equipment and mining tools).

B. During the audit, you realised that the majority of Rio’s customers are in Vietnam. Due to language barrier, direct confirmation of the account receivables’ balances is not likely to give satisfactory results.

Required:

1. List two (2) key assertions at risk in relation to each account balance described in these two situations above. (2 marks)

2. For assertions at risk outlined in (1) above, explain the audit procedures you would perform to gather sufficient appropriate evidence. (6 marks)

Question 6 (8 marks)

Simon commenced work as a senior member of the audit team at Rural Assurance Partners (RAP) on 1 July 2020. RAP is an accountancy firm in Mildura, which provides accountancy, business advisory and audit services to local firms. Prior to 1 July 2020, Simon was employed as the chief accountant at Sunshine Ltd, a medium sized manufacturing firm in the same regional town as RAP. One of Simon’s first tasks at RAP is to assist with the audit of Sunshine Ltd. Simon is not the senior audit partner whose task it is to provide an audit opinion. However, Simon is heavily involved in the planning of the audit and is required to conduct many audit tests.

Simon arrives at Sunshine Ltd for five days to conduct audit testing and is given his old office to work in. He discovers that he forgot to take several expensive paintings from the office when he ceased working for Sunshine Ltd. Before commencing any testing for the audit, he is seen by many Sunshine Ltd employees and several members of the public, placing these paintings into his car. The CEO of Sunshine Ltd helped Simon carry the paintings out of the building.

Simon commences the testing at Sunshine Ltd and discovers some large errors with the balances of three accounts. The accounts in question are all cash or cash equivalent accounts. Before Simon has a chance to raise the issue, John, the new chief accountant, tells Simon that he is very good friend with the pop band BTS and that he can arrange for Simon’s daughter (who is a huge BTS fan) to meet the band in Seoul following the audit. Simon agrees and John books and pays for flights for Simon and his daughter to travel to Seoul.

Simon has not disclosed any of this information to other audit team members or to management at RAP.

Required:

Identify and explain four (4) potential threats to Simon’s independence as Sunshine Ltd.’s auditor. (4 threats*2= 8 marks)