Consider each of the following independent and material situations. In each case:
- the balance date is 30 June 2020.
- the fieldwork was completed on 25 August 2020.
- the financial report and audit report were signed on 28 August 2020.
- the financial report and audit report were mailed to the members on 1 September 2020.
- Your client, Central Mining, owns a mineral exploration licence in Central Australia. At 30 June 2020 this licence was valued by an independent expert at $50,000,000. This valuation is reflected in the financial report. On 8 September 2020 Central Mining received notice that a claim was being lodged under the Native Titles Act for land which included that subject to the exploration licence. If the claim is successful the exploration licence will be worthless.
- Your client, Bird Pty Limited, derives approximately 10% of revenues from selling aviary supplies to city-based bird breeders.
A draft copy of a government report, leaked to the press and reported in the media on 11 September, recommends that strict limits be placed on the number of birds that are allowed to be kept in suburban areas. Bird Pty Limited estimates that if the recommendations are enacted, about 70% of its customers will have to cut their flocks by 50% or more. This would affect not only future sales but also their ability to pay existing debts. No further information, other than the draft report, is available as at 15 September.
- Your client, Gem Pty Limited, made an out of court settlement on 1 August 2020 of $300,000. The settlement related to a litigation case dating back 4 years. A provision of $150,000 was recorded in the 30 June 2020 financial report.
- On 14 September 20X7, you discover that a debtor of your client, Galaxy Ltd, was placed in provisional liquidation on 8 September. The debtor owed $600,000 as at 30 June 2020; at this date the amount had been considered collectable by the company.
- A flood occurred in the warehouse of your client SuperSpring Ltd on 21 September 2020. Inventory valued at $2m was destroyed. The directors believe only half of this value will be recovered from the insurers.
For each of the above events (i) to (v), state the appropriate action that the auditor would need to carry out in order to find out about the above and what the company would need to do for each of the above.
Consider the following independent situations found during audit testing of by auditors in various companies which have a balance dates of 30 June 2020. Assume that all the situations are material.
(i) A recent investigation has seen the Cradle company discover that it has been underpaying its workers for over 10 years.As the company is attempting to obtain
further finance and refinance its existing debt it advises it is willing to pay all its workers all their backpay and is willing to adjust its current financial statements but is unwilling to adjust previous years financial statements.
(ii) For the Messina Company a large order from an overseas supplier was shipped FOB (free on board) from its port of origin on 1 June 2020. The order arrived on 20 July 2020. The purchase is not reflected in the 30 June 2020 financial report.
(iii) The draft chairman’s report of Able Ltd states that the profits of a particular segment of the company’s operations increased by 70% during the period. On checking the figures, you found profits increased by only 4%.The profit figure has been verified when carrying out your normal audit procedures
(iv) You have asked your New Zealand branch office of your firm to carry out an investigation of the inventory figures in the New Zealand division of the Quick company.Your New Zealand branch have advised they were unable to attend the stocktake due to a sudden flood . This both prevented the auditors from attending the stocktake, and destroyed documentation which would have enabled them to substantiate inventory by other means. The New Zealand division represents about 15% of CD Ltd’s operations.
(v) The entire Queensland operations of the company are under investigation by the Tax Office for alleged failure to pay the appropriate amount of PAYG tax. Your preliminary investigations reveal that the Tax Office has a strong case against the company. No mention of the dispute is made in the financial report.
Assume that no adjustments are made. For each situation,taking into account all aspects , identify the type of audit report including the opinion required explain the basis of your answers.
You are an audit senior at Thompson & Associates and have noted the following independent issues in relation to the audit of Creek Ltd:
- The Creek company Ltdusually carried out its stocktake on balance date after it had closed its stores for the day but due to illness the stocktake was not carried out until twenty days after balance date.
- The audit of the accounting system found numerous severe internal control weaknesses during the interim audit .
- Due to increased competitive pressures, Creek Ltdhas recently moved the manufacture of some of its clothing lines out of Melbourne into regional areas. While Creek Ltd saves around 20% in costs, the manufacturing process takes longer and on several occasions late delivery has resulted in lost sales.
Explain the impact of each of these separate issues on your assessment of audit risk, the materiality level and the audit strategy that would be adopted.
Retro Pty Ltd is a major manufacturer of industrial machinery. Detailed below is a description of its purchasing and payments system.
(i) When the stores department requires items to be purchased, they issue a three-part pre-numbered purchase requisition that needs to be approved by the store’s manager. Copy 1 is sent to the purchasing department, Copy 2 is sent to the accounts payable department and Copy 3 is filed in the stores department.
(ii) On receipt of an approved purchase requisition, the purchasing department issues a five-part pre-numbered purchase order. Copy 1 is sent to the supplier, Copies 2 and 3 are forwarded to the receiving department, Copy 4 is forwarded to the accounts payable department and Copy 5 is filed in the purchasing department.
(iii) When goods are received, the receiving department logs in the shipment by stamping “order received” on its two copies of the purchase order, which then forms its receiving record. One copy of the receiving record is filed in the receiving department and the other is forwarded to the accounts payable department.
(iv) The accounts payable department checks that there is a purchase requisition, purchase order and receiving record for each supplier invoice and then approves it for payment.
(v) The accounts payable department prepares a pre-numbered disbursement voucher and forwards it along with the supplier’s invoice, purchase requisition, purchase order and receiving record to the financial accountant.
(vi) The financial accountant prepares a cheque for each supplier, signs the cheque and records it in the cash disbursements journal. The cheque is immediately mailed to the supplier. Supporting documentation is returned to accounts payable for filing.
(vii) At the end of the month, the assistant accountant undertakes a sequence check of all accountable forms. The financial accountant receives the monthly bank statement, prepares a bank reconciliation and investigates any reconciling items.
a)Identify five (5) internal control weaknesses in Retro’s internal control concerning the purchases and payments functions. Explain why each is a weakness.
b) identify a test you would carry out for each of the above weaknesses identified in part a and the assertions for the accounts you are carrying out tests for.
The following identifies issues that can have an impact for auditors when carrying out their audits:
(i) You are Margaret Strong , one of the partners in the Accounting firm Barder,Strong ,Fleece and Co.You have a large client ,Bench Ltd , for which your firm has carried out a range of tax,consultancy, audit and other services .The firm now obtains significant fee income, above 25% of its total for the past three years ,from Bench Ltd . An amount of $45,000 has still to be paid for work carried out earlier in the year for consultancy advice
to Bench about internal controls around its new purchasing system introduced earlier in the year.
The planning work for the year end audit is about to commence and it will be the twelfth year
you have carried out the audit . The relationship between Bench and the audit team is excellent and the same audit staff have been happy to carry out the audit for the last seven years , which has been welcomed by Bench’s accounting staff who feels this allows the audit to be done quickly and efficiently .
Bench is very happy with the quality of the audit staff and in fact has recently offered the role of Financial Controller to the audit team senior ,Sue Bring . Sue has accepted and will be starting the new role before the year end audit visit. Sue has decided to take the audit team out for dinner to say goodbye and thank them for their hard work over the last seven years.
Identify the risks to independence from the above and suggest how these threats may be mitigated
(ii) Nora Peak has been working at Dave Young and Associates for the past three years .Nora and her husband ,Tom , are both very interested in environmental issues and follow closely environmental issues in the media . During an audit of a pharmaceutical company
Pharma Ltd for the year ended 30 June 2019 ,Nora notices that it has changed its contractor for waste management to Big Dumper Ltd .Nora has read on the internet that Big Dumper is being investigated by the local council for the level of toxic waste at one of its sites .
The waste management contract between the Big Dumper and Pharma Ltd does not specify damages and has not been signed by the Big Dumper ,who are the cheapest waste removalist for chemicals and other materials . The contract is for three years and is for a substantial amount and Nora is concerned about the implications .The local council is very strict in its inspections for toxic waste dumping and imposes heavy fines if any of the waste is found to be improperly dumped .
Nora raises the issue with Dave Young , the partner in charge of the audit .”This is
the reality Nora “ Dave says.”As far as I am concerned we are responsible for the
correctness of the financial report, nothing else . Besides you do not have the qualifications
to judge whether a company is being a good corporate citizen or not . We are not concerned with the business management “ Nora is told to mind her audit without raising any fuss .
Explain the ethical issues here and a course of action for Nora .