You are conducting the 30/06/15 audit of Ivory Ltd which manufactures small- to medium- sized home appliances. This is the second year you are conducting the audit. You have had documented your assessment of inherent risk and control risk for this audit based on your understanding of the company. Below are some extracted notes from your working papers:
- Over the past several years, the market for domestic storage solutions has been favourable and the industry, as a whole, has been growing steadily.
- Tasman Ltd recently switched to a new integrated central accounting system. During the switch, audit trails were not kept intact due to system failures.
- Tasman Ltd has recently appointed a new financial controller. The old controller resigned to take a job on mainland Australia.
- Tasman Ltd has always been a follower in the industry and seen as a bit old-fashioned and conservative.
For each item state the impact on inherent risk and/or control risk and justify your answer.
You are conducting the 30/06/20 audit of Tasman Ltd, a Hobart based manufacturer of home storage solutions. This is the second year you are conducting the audit. Below are some extracted notes from your working papers (based on your review of the flowchart for sales and cash receipts):
- Customers have to fax their orders, and all sales orders are approved by the credit manager before they are processed.
- Sales invoices are pre-numbered, and a sequence check is completed to ensure that all invoice numbers are accounted for. All invoices are checked for prices.
- Cash receipts are matched to specific sales invoices in posting to the accounts receivable master file.
Using the above information, complete the table provided detailing three (3) key controls for Tasman Ltd. Indicate one (1) account balance and one (1) assertion on which each control will have an effect and provide an example of one (1) procedure that could be used to test each control.
Consider each of the following independent situations. In each case, assume the client is a reporting entity and that a generalpurpose financial report has been prepared and audited for the financial year ended 30 June 2020.
For each independent situation, a) through d), you need to decide:
- the type of audit report to be issued and,
- if the audit report is to be modified, identify the nature of the matter that gives rise to that type of auditmodification.
You are the audit manager in charge of auditing the accounts of Jamieson Ltd. Materiality for the audit has been set at $250,000. The balance date was 30 June 2020. It is the 18thof August 2020 and you are at the client’s premises to undertake the audit.Depreciation expense was been calculated by the client as $3,350,000.
- Explain how you would verify this balance using analytical procedures.
- What verification work do you need to perform on the data used in these analytical procedures?
- How much reliance would you place on the results from your analyticalprocedures? Include in your answer appropriate justifications.
You are the audit manager in charge of auditing the accounts of Jamieson Ltd. Materiality for the audit has been set at $250,000. The balance date was 30 June 2020. It is the 18thof August 2020 and you are at the client’s premises to undertake the audit.The pre-audited balance of accounts receivable for Jamieson Ltd at 30 June 2020 is $925,000. The audited balance of accounts receivable as at 30 June2019 was $555,000.
- Identify and explain which assertion(s) related to accounts receivable is/aremost likely to be at the greatest risk of material misstatement.
- Suggest substantive procedures to verify the assertion(s) you identified in part a and explain why the tests are appropriate in this scenario.
You are the audit partner of Bigger and Better, assigned to the audit of Fabulous Ltd. You issued an unmodified auditor's report for the year ended 30 June 2019. In December 2019, three employees of Fabulous Ltd. were charged with systematically and deliberately entering fictitious transactions and embezzling about $12 million.Your firm has been notified by the legal representatives of Fabulous Ltd. that they are taking legal action against your firm based on the audit for the year ended 30 June 2019. They claim that you and your audit team were negligent in conducting the audit, due to your failure to identify the activities of the employees of Fabulous Ltd.
- Describe the nature of the activity that the three employees had engaged in?
- What are the legal requirements to successfully sue an auditor for negligence? Provide a detailed explanation based on this assessment on whether or not the audit firm, Bigger and Better, could be found guilty of negligence based on the facts outlined in this case?
- Do you think Fabulous was guilty of negligence? Provide support for your position.
You are currently part of the audit team that is conducting the audit of Big TrucksLtd(Big Trucks)fortheyearended30June2020.Big Trucksisan importer of large pickup trucks such as Ford’s F250 and Dodge’s Ram 2500. Big Trucksconverts these vehicles to comply with Australian road rules and standards. Your audit manager has asked you to oversee the audit of Big Trucks’ inventory account balance, which is highly material. Big Trucks maintains details of stock quantities on its computer system. These stock quantities are updated from goods received notes and sales invoices. Due to the nature of its end-product, Big Trucks holds a large number of highly specialised component parts, for which there is no secondary market. Big Trucks conducts a ‘wall-to-wall’ count of inventory, whereby all operations cease and they count all inventory in a singlestocktake. This stocktake takes several days to complete and is conducted over the last week of the financial year.
- Identify the two key assertions at inherent risk of misstatement for Big Trucks’ inventory and explain thereasonswhy.
- Outline an audit programof substantive testing to be conducted on the inventory account of Big Trucks. Provide a brief reasonfor each audit procedure chosen. Group the selected procedures under the following categories:
i Initial Procedures.
ii Analytical Procedures.
iii Tests of Details of Transactions.
iv Tests of Details of Balances.
v Presentation and Disclosure.