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ACT303 Principles Of Auditing

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Question:

You are an audit partner with Billings & Associates, a large and experienced audit firm. You have been approached to accept the audit of Pharmaceuticals Ltd (Pharmaceuticals), a medium?sized chemical manufacturer. The manufacture of the chemicals results in highly toxic waste and Pharmaceuticals is currently under investigation by the Environmental Protection Agency for a significant spill of toxic chemicals into a nearby river. The media have reported that senior employees were allegedly involved in trying to cover up the spill.
 
Required:
 
Identify and explain the key ethical matter regarding Pharmaceuticals and its management that you should consider before making the decision to accept the engagement.
 
Pharmaceuticals Ltd (Pharmaceuticals) imports a number of pharmaceutical products. In order to hedge its foreign currency transactions, Pharmaceuticals entered into a number of forward rate agreements this year. Prior to this time Pharmaceuticals had had little exposure to derivative instruments, but a series of bad experiences resulting from fluctuating exchange rates convinced the company that a hedging strategy was necessary. During planning for the audit of Pharmaceuticals, the company’s hedging arrangements were identified as inherently risky and increased testing was carried out in this area. A number of small errors were noted in accounting for hedge transactions, but there did not appear to be any material errors and as such no adjustments were made. A review of the audit file suggests that the errors noted were a result of inexperience and poor controls in the area. While all of the errors were brought to the attention of the treasurer, who is responsible for the company’s hedging strategy, no further action has been taken to date.
 
Required:
 
Outline what further action the auditor should take in response to the errors and control weaknesses identified. Justify your response.
 
Billings & Associates has agreed to take on a new audit client, Reaction Pty Ltd, a small garage door manufacturer that has never previously been audited. Billings & Associates has issued an engagement letter prior to commencing work for the current year. While conducting the audit, the audit team is unable to gain sufficient appropriate audit evidence around accounts receivable due to a lack of documentation. You have informed client management that you need to issue a modified auditor’s report due to the scope limitation. In response, management has requested that the engagement become a review engagement with the associated lower level of assurance, as they are not required to have an audit.
 
Required:
 
Outline the appropriate response to this situation. Provide reasons to support your response.
 
Consider the following independent situations:
 
1. You are the auditor of Hail Pty Ltd a medium sized furniture manufacturer. Your audit firm has finalised the financial statements after the client has substantially prepared the accounting records. However, the client admits to having limited knowledge of identifying and calculating impairment and has asked for your assistance. You have proposed a number of adjustments to account for the impairment of assets.
 
2. You are the auditor of Travel Time Ltd, a large travel agent that also handles all your audit firms travel arrangements on normal commercial rates and provides excellent service. The managing director of Travel Time has indicated that the company is having a tough time of it due to the lack of consumer confidence in the economy at the moment and has asked if you could help by recommending their services to your other audit clients. He has said that he will understand if you are not able to do so. You happily agree to provide the recommendation, as you have always been satisfied with their service.
 
3. Your audit firm has been approached by a new client, Civil Constructions Ltd, to conduct the audit for the coming year. As part of your client acceptance procedures, you identify that the wife of one of the audit firm’s partners has a substantial shareholding in Civil Constructions Ltd.4. Your audit client, Pleasure Cruises Ltd, is having cash flow problems and has not paid any of the current year’s fee by the time the auditor’s report is due to be issued. They expect business to pick up in the coming year and have requested an additional time to pay the bill.
 
Required:
For each of the independent situations above:
a) Identify the type of potential threat to independence. Justify your answer.
b) Describe a safeguard, if any, which could be implemented to reduce each of the independence threats.

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