Question 1 Assurance of greenhouse gas statements (15 marks)
The senior audit partner at Milimani Chartered Accountants, Stephanie Snook, is worried. ‘As there was an agreement at the Climate Change Conference in Paris last year, if we don’t start offering services that can provide assurance on greenhouse gas statements soon, we’ll lose clients’. She has asked you to investigate what may be involved in providing assurance services on greenhouse (GHG) statements.
Conduct an internet search for one (1) Australian company whose website includes a GHG emissions disclosure and provide a brief report for Sarah Snook that:
(a) identifies the voluntary and regulatory components of the company’s disclosure (3 marks)
(b) summarises the structure and contents of the company’s disclosure (including the categories of disclosure) (4 marks)
(c) indicates which two (2) audit assertions would be of greatest concern to Milimani and explains why (4 marks)
d) suggests audit procedures to collect sufficient and appropriate audit evidence relating to those two audit assertions (4 marks)
Question 2 Legal liability of auditors (15 marks)
You are the external auditor of Jacqui’s Jaunts Ltd, a company which promotes tours of New Zealand to Australians and owns a chain of duty-free shops. You have been auditing the company since it was listed on the Australian Stock Exchange (ASX) 10 years ago. Although the accounts have never been qualified, you are aware that the company has been making losses for the past three years as a result of short-term cash flow difficulties. The company has no long-term loans but the bank overdraft is near its limit at the end of the financial year.
During the financial year, the company upgraded its accounting system to a computer database. A consultant was hired to aid in the correct changeover of files for this system. At year-end, this new system had been in place for 6 months, and the directors report they are happy with the way in which it is operating. You do not have the expertise to review and evaluate the database management system, so you ask an independent expert to undertake this role. This person concludes that the system appears reliable and that the changeover was correctly carried out. You have never before audited this type of system, so you attend some courses to familiarise yourself with its features. Your firm has a standard work program that you use to test the controls operating within the system.
In your review of the minutes of the board of directors' meetings, you become aware that the New Zealand parent company, Choice-Bro Ltd (which owns 40% of the shares of Jacqui’s Jaunts), is considering making an offer for the remaining shares. This is because the company's share price is trading well below its net asset backing.
After the audited 30 June 2015 financial statements are published, the takeover offer from Choice-Bro Ltd proceeds on the basis of an offer price equivalent to the net asset backing of $1.10 per share (as determined from the financial statements). Thtakeover results in acceptances of 96% of the issued capital, and compulsory acquisition proceedings have been instituted for the other 4%.
While these compulsory acquisition proceedings are being instituted, it is discovered that there were errors in the changeover of the computer system, which resulted in inventory at the duty free stores being materially misstated. After the subsequent write-down of inventory, a new asset backing of $0.70 per share is established. Choice-Bro Ltd is suing you for alleged negligence for its loss of $0.40 per share.
With reference to case law and the auditing standards, determine whether or not:
(a) you have failed to exercise 'due care' in the audit of Jacqui's Jaunts; (6 marks)
(b) Jacqui's Jaunts Ltd is guilty of contributory negligence; (3 marks)
(c) you owe a duty of care to Choice-Bro Ltd (assuming you are negligent). (6 marks)
Question 3 Planning and risk assessment (15 marks)
You are planning the 30 June 2015 audit of Georgie’s Gorgeous Gifts Pty Limited (GGG) a home wares retailer. Using the company’s financial report, its current budget and industry benchmarks, as well as your understanding of GGG under ASA315, you have compiled the following preliminary information:
2015 Actual 2014 Industry
Return on equity % 12.9 16.6 14.8 15.5
Return on total assets % 10.7 14.2 13.1 14.5
Gross margin % 8.5 9.0 9.5 9.0
Marketing expenses/sales % 2.6 1.8 2.0 2.2
Admin expenses/sales % 1.6 1.6 1.8 2.0
Interest coverage ratio 5.4 8.1 6.4 6.0
Days in inventory 33.1 30.4 31.1 30.0
Days in accounts receivable 50.0 48.0 49.7 45.0
Current ratio 1.3 1.2 1.2 1.5
Quick ratio 0.81 0.77 0.77 1.0
Debt to equity ratio 0.51 0.33 0.41 0.40
The business environment
GGG operates in a low gross margin environment, which typically means that large volumes are required to cover overhead costs and generate profits. It also means that overheads need to be kept under control to ensure that a net profit results from its operations.
The company did not reach industry benchmarks with regard to profitability in the previous year, and budgeted to do better than this in the current year. It thought that it could do so by keeping its costs down in relation to sales while allowing its gross margin to drop, evidently planning to generate a larger volume of sales.
The company also planned to improve its working capital management by reducing levels of inventory and accounts receivable. It budgeted for a drop in debt levels, indicating that it expected to produce a healthy cash flow to enable it to do so.
(a) Identify three (3) ratios from the table above that would be of interest to you as you continue your planning for the audit of GGG. Explain your answers. (6 marks)
(b) Based on the background material provided, identify three (3) key account balances at risk. (3 marks)
(c) For each of the three account balances at risk you identified in (b) above, identify and justify the key assertion at risk. (6 marks)
Question 4 Internal control (15 marks)
You are the audit senior on the Pippin Pty Limited (Pippin) audit. Pippin is a distributor of equipment to the mining industry.
Pippin uses an on-line computer system. No goods are manufactured in-house; rather, Pippin maintains a stock of raw materials and sub-contracts the manufacture of its products to third parties. Approximately 50 suppliers and sub-contractors are used and all have proven to be reliable. You have made the following notes about the inventory system:
Procedures for raw materials
Separate systems, staff and warehouses are maintained for both raw materials and finished goods.
Purchase orders are automatically generated by the computer when stocks of any raw material fall below 70% of the prior month’s usage. The purchase orders contain the following details:
• supplier name and address;
• raw material needed.
) Identify seven (7) weaknesses in the internal controls described. Discuss the potential financial statement implications for each of the weaknesses you have identified. (7 marks)
(b) Assume your IT audit division is to perform testing of controls for the inventory systems described. Identify and justify three (3) tests that you would recommend they perform. (3 marks)
(c) Identify and justify three (3) Computer Assisted Audit Techniques (CAATs) that you would request the IT auditors run to assist you in testing the valuation of inventory. (3 marks)
(d) Assume your IT auditors ran a CAAT on inventory data contained in Pippin's management accounts. You intend to use this data to assist in your analytical procedures work. Identify two tests that you would perform on the data produced by the CAAT, prior to placing reliance on the data. (2 marks
Covering material from topics 1 to 6, this assessment has been designed to develop your abilities to:
o appraise the expanding scope of auditing in the current international business environment;
o explain the role of assurance services and providers;
o identify and evaluate the influences on the audit processes, including common law and Australian and international professional standards, professional bodies and public expectations within a global market.
o appraise the client's business environment and apply the risk model;
o explain, select and apply procedures involved in the audit process.