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ACT303 Principles Of Auditing

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  • Course Code: ACT303
  • University: Charles Darwin University

    MyAssignmentHelp.com is not sponsored or endorsed by this college or university

  • Country: Australia

Questions

Part A 

Consider the following independent situations:

1. You have established an audit practice with two separate divisions: account preparation and Each division has a different partner and staff team. Your firm commonly prepares financial accounts and conducts audits. Your firm has recently been provided with a trial balance from a listed client Red Ribbon Ltd, for whom your firm is preparing the financial accounts and conducting the audit. The client has significant expertise and approves all adjusting journal entries.
 
2. Daniel Jackson is part of the audit team for the current audit of Jupiter Ltd. After 2 weeks at theclient, he has advised you that he has been offered a job at Jupiter Ltd as soon as the current audit is finished.
 
3. One of your major clients, Fruity Juices Ltd, has talked to you about a consulting engagementnext year for you to do a complete review of the adequacy of the entity’s quality controls over the production of its fruit juices. However, the managing director has indicated that some of the Board are concerned about you taking up too much of their staff’s time asking unnecessary  Therefore, he has suggested that your chances of getting the engagement will be significantly improved if you keep your questions of staff to a minimum during the current audit.
 
4. You have audited Apex Ltd, a stable engineering firm, for several years. At the start of thisyear, the finance director, Carol Ling, retired after 10 years with company and was replaced by Eric Lay, a long-time friend of the audit manager Bruce Li, who was best man at Eric’s recent marriage.
 
5. One of your audit clients, Super Trooper Ltd (STL) is a large superannuation fund. TheAustralian Taxation Office has advised STL that it has rejected its taxation treatment of a material amount of income from investments and that it disagrees with the taxation advice STL gave to its members. The matter has been referred to the Superannuation Complaints Tribunal and STL has requested that you represent them at the Superannuation Complaints Tribunal.

Required:

For each of the independent situations above:

a. Identifythe type of potential threat to independence. Justify your answer.
 
b. Explain what safeguards, if any, that could be implemented to reduce the independence threats.
 
c. Assesswhether audit independence can be achieved.

You may like to present your answer in the form of a table as below.

Situation

a) Threat

Justification

b) Safeguard

c) Assessment of audit

independence

Part B Background

WMD is the wealth management division of Eastpac Bank (Eastpac) and provides investment, superannuation, insurance and private wealth solutions to corporate and institutional customers. The following is a list of the auditor’s planning file notes in relation to fraud detection for the audit of the WMD unit.

1. Ensureall material fraud instances are detected.
 
2. The auditor is responsible for maintaining professional scepticism throughout the audit, considering the potential for management override of controls and recognising the fact that audit procedures that are effective for detecting error may not be effective in detecting fraud.
 
3. Respondappropriately to fraud or suspected fraud identified during the audit.
 
4. A discussion among all of the audit firm’s staff on how and where the entity’s financialstatements may be susceptible to material misstatements due to fraud, including how fraud might occur.
 
5. Make enquiries of management, and others within the entity as appropriate, to determinewhether they have knowledge of any actual, suspected or alleged fraud affecting the entity.
 
6. Obtain sufficient appropriate audit evidence to confirm all potential fraud instances have beenuncovered and their impacts considered.
 
7. Test the appropriateness of journal entries recorded in the general ledger and other adjustmentsmade in the preparation of the financial statements.
 
8. Determine whether management has sufficient skills to prevent and detect fraud (e.g. throughproof of attendance at appropriate industry seminars and workshops, or past experience with fraud).
 
9. Obtaina copy of the client’s code of ethics document, and ensure employees have access to it.
 
10. Evaluatewhether the accounting policies selected by the entity may be indicative of fraud.

Required:

Identify the activities that are part and the activities that are not part of the auditor’s responsibilities relating to fraud under ISA 240.

Part C 

Background

You are the senior auditor on the audit of Amistad Furniture Manufacturers Pty Ltd (Amistad). Your firm has recently been appointed as the first auditors of the company. You interview the managing director of the company to obtain background information on Amistad and to understand its business operations, its environment and system of internal control. Amistad was founded 30 years ago and

makes ‘grandfather’ clocks (freestanding, weightdriven, pendulum clocks). The clocks are made in one factory (situated in the Blue Mountains) and are distributed through boutique homeware and antique furniture stores. The clocks are advertised mainly in local newspapers and through pamphlet drops.

In order to promote longer production runs and minimise finished goods stocks, Amistad’s retail distributors are offered stock on a ‘sale or return’ basis. This means that the homeware and antique furniture stores are invoiced immediately, subject to a 90-day term of payment, but are allowed to return the stock up to 30 days before payment is due. Only the marketing manager has been given the authority to make these offers. All of Amistad’s timber is obtained from offshore sources. Timber prices, which are denominated in US dollars, have risen substantially over the past two years and the recent drop in the value of the Australian dollar has caused them to rise even further. Timber purchases are secured by providing Amistad’s suppliers with letters of credit which become due when the container shipment of timber arrives in Australia. Labour costs are high due to the craftsmanship and quality required for the production of the grandfather clocks. Skilled labour is not easy to obtain and wage rates have recently risen. Amistad has found it difficult to pass on these timber and labour price increases to customers.

An analysis of costs indicates that there have been material negative purchase price variances in purchases of timber over the course of the year. You have compiled the following information from Amistad’s financials:

  • thecurrent ratio as at 30 June 2016 is 24
  • onan annualised basis, net sales are $350,000
  • theshareholders’ funds to total assets ratio is 30%
  • gross profit margins and net profit margins for the year ended 30 June 2016 have dropped tothe level where losses are being 

Amistad’s bank finances the company’s timber purchases using bills of exchange drawn at 90 days from the date of payment of the shipment. It has also extended loan finance to Amistad. The bank covenant, which is due for review shortly, requires Amistad to:

  • maintaina current ratio of 1.2
  • maintaina shareholders’ funds to total assets ratio of at least 30%
  • maintainnet sales of a minimum of $100,000 per quarter
  • prepare a general purpose financial report for the year ended 30 June 2016 and have it auditedaccording to Australian Auditing Standards. (Note that this is a requirement of the bank covenant as Amistad is not required to produce a general purpose financial report under the Corporations Act 2001.)

1. Required:

For parts (a), (b) and (c) of this question, please disregard all going concern considerations. Based on the background information above and your use of preliminary analytical procedures, answer the following questions:

a. Identifyand explain two asset accounts at risk of material misstatement.
 
b. Describeone issue regarding the prior year’s figures.
 
c. Describe three factors that may bring into question the going concern assumption for Amistad
 
d. Disregarding the evaluation of management’s assessment of the going concern assumption,briefly describe the effect of the facts on your audit planning.

2. Required:

After examining Amistad’s detailed trial balance, you notice that one of the expenses of the sales and marketing department is ‘sales bonuses’. You question this expense and the company’s accountant informs you that a monthly bonus of 10% of salary is paid to all sales and marketing staff if sales for the month exceed the budgeted target. The marketing manager is entitled to a 20% bonus if the targets are achieved. This incentive was implemented during the previous financial year and was in place for the last six months of the year. You note that the bonus has been paid every month since the incentive was implemented (except for the previous month, when sales were much lower than expected). This seems a little unusual because Amistad had only achieved its budgeted sales targets in two out of the six months prior to the start of the scheme. You investigate results for the last six months of the year

and find that:

  • saleswere above the monthly budget figure when bonuses were paid
  • therewas no significant change in gross margins
  • returns of stock sold on the ‘sale or return’ basis were well below those in the first six monthsexcept in the final month of the year
  • debtors’ levels (measured in days outstanding) were above their budgeted levels but returned toa more normal level at year end.

On further enquiry, the accountant advises that the marketing manager is authorised to do the following with regard to the stock sold on a ‘sale or return’ basis:

  • offer customers a ‘sale or return’ deal as long as the deal is within the company’s pricingstructures and the terms of the scheme
  • initiate and approve the invoicing of customers when a sale is made (i.e. if the stock is notreturned within 60 days)
  • initiate and approve the issue of credit notes for these customers when returns are made within60 days or when pricing or quality issues arise.

3. Required:

Based on the information to , answer the following questions:

a. Explainone internal control issue at Amistad.
 
b. Identify two fraud risk factors at Amistad.
 
c. Identify one account balance at risk and its two assertions at risk as a result of the fraudrisk factors identified in (b) above. Justify your answer with reference to the background scenario.
 
d. Describe two audit procedures that would address potential misstatements arising fromfraudulent financial reporting. Ensure that your procedures are specific to the scenario and the fraud risk factors identified in (b) above
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