Semester 2, 2020 Page 1 of 10
FINAL ASSESSMENT COVER SHEET
SEMESTER 2, 2020
FINAL ASSESSMENT DETAILS
Faculty: Business, Design and Arts
Unit Code: ACC30010
Unit Title: Auditing
50% of overall assessment covered by this Final Assessment
Duration: 24 hours
CANDIDATE DETAILS Student to complete
ID: _______________________ Surname: _____________________ Given names: _______________________
• I am the person stated above
• I agree to obey the instructions for proper conduct of the final assessment
• I have read and understood the Instructions to Candidates provided
• I understand that it is my responsibility to ensure that I have been correctly enrolled for the above subject and that I am fully liable for any outstanding fees and charges
• I am aware that I am not allowed to present for any special assessment unless approval has been granted by the appropriate Swinburne or external authority
STUDENT SIGNATURE OR EMAIL: ____________________ DATE: ________________________
INSTRUCTIONS TO CANDIDATES
This is an open book assessment.
(1) Non-programmable calculator
This Final Assessment is worth 50% of the available marks for this semester. To pass this unit, you need to get an overall accumulated mark of at least 50% from all the pieces of assessment.
There are 10 pages in this Final Assessment paper.
This paper comprises of EIGHT (8) questions. All questions are COMPULSORY and must be answered. Marks will be given for all relevant workings and logical answers.
Marking summary (to be used by the Final Assessment markers only)
Semester 2, 2020 Page 2 of 10
Answer ALL of questions (1) to (8).
In your own words, explain the relationship between the information gap and the audit expectation gap. (4 marks)
Consider the following independent situations in relation to Adventure Travel Ltd (ATL), a major client of your audit firm, KC Associates:
(i) Terry is the eldest son of the managing director of ATL. During vacation work at KC Associates, Terry is assigned to the audit of ATL. Terry’s work comprised testing the internal controls of the cash payments system.
(ii) ATL contributes around 20% of the total audit fee revenue and 30% of the non-audit fee revenue of KC Associates. ATL has not paid any of the fees, citing cash flow problems. The partners at KC Associates are reluctant to put any pressure on ATL for outstanding fees as ATL is a high-profile client that they wish to retain.
(iii) The partners at KC Associates frequently hire cars from ATL to visit long-distance clients. ATL gives 10% discount to its loyal customers, including KC Associates. Recently, an audit manager at KC Associates, Michael Jones, hired a four-wheel drive from ATL to go on holiday with his family at the same terms as those offered to KC Associates.
For each of the above independent situations (i) to (iii), state whether APES110 has been breached, and justify your answer.
[Total: 13 marks]
Semester 2, 2020 Page 3 of 10
Paragraph A31 of ASA500 “Audit Evidence” provides five (5) principles to guide auditors to obtain audit evidence which are more reliable.
During the Covid19 pandemic of 2020, whereby auditors were not able to physically travel to clients’ locations to perform audit procedures, which of the five (5) principles provided the greatest challenge for auditors? Explain your answer.
You are auditor in charge of the audit of Symphony Ltd, a large manufacturing company, for the year ended 30 June 2020.
It is now 25 August 2020 and you are reviewing the audit working papers prepared by the audit assistant, Mary Dunn. You notice the following matters:
(i) Mary selected 20 invoices to test the control that the sales clerk checks that the prices agree with the authorised price list. She found 3 instances where the sales clerk had not signed the “prices checked” box in the invoice. The sales manager explained that the sales clerk always checks the prices but sometimes forgets to sign the box. As the prices on all the invoices agreed with the authorised price list, Mary concluded that the internal control was operating satisfactorily.
(ii) Advertising expenses are material, although only 50% of last year’s balance. Mary selected a large sample of entries and agreed them to supporting documents. No errors were found. Mary concluded that advertising expenses was reasonable.
(iii) As part of the verification work on accounts payable, Mary carried out a search for unrecorded liabilities. She tested a random sample of 20 payments made after 30 June 2020 and found 3 instances of cheques that related to services provided in June which had not been accrued. However, as the total of the 3 cheques was immaterial, she concluded that no adjustment was required for unrecorded liabilities.
For each item (i) to (iii) above:
(a) State whether sufficient appropriate audit evidence has been obtained. (3 marks)
(b) Provide reasons for your answer in part (a). (6 marks)
[Total: 12 marks]
Semester 2, 2020 Page 4 of 10
Lightning Ltd distributes and supplies electrical appliances. The company is an ongoing client of your audit firm.
From a discussion with the General Manager during the planning of the audit, you have ascertained the following:
(i) During the year, several members of the board of directors retired and were replaced by prominent businesspeople previously associated, but not directly connected, with the company.
(ii) The company has experienced considerable staff turnover in the accounts payable department, including the resignation of the manager early in the year. This has created some delays in the processing of payments.
(iii) The company plans to upgrade its general ledger reporting with a new software package. The conversion is planned for three months before financial year end.
For each situation (i) to (iii) above.
(a) State the effect on Inherent Risk or Control Risk. (3 marks)
(b) Provide an explanation for your answer in part (a). (6 marks)
(c) Briefly discuss how the situation will affect your overall plan for the expected scope and conduct of the audit. (6 marks)
[Total: 15 marks]
Semester 2, 2020 Page 5 of 10
You have been engaged by the management of Aurora Ltd to review its internal control over the purchase, receipt, storage and issue of raw materials.
You have prepared the following comments, which describe Aurora Ltd’s procedures.
• Raw materials, which consist mainly of high-cost electronic components, are kept in a locked storeroom. Storeroom personnel include a supervisor and four clerks. All are well trained and competent. Raw materials are removed from the storeroom only upon written or oral authorisation of one of the production supervisors.
• There are no perpetual inventory records; hence the storeroom clerks do not keep records of goods received or issued. To compensate for the lack of perpetual records, a physical count is taken monthly by the clerks, who are ell supervised. Appropriate procedures are followed in making the inventory count.
• After the physical count, the storeroom supervisor matches quantities counted against a predetermined reorder level. If the count for a given part is below the reorder level, the supervisor enters the part number on a materials requisition list and sends this list to the accounts payable clerk. The accounts payable clerk prepares a purchase order for a predetermined reorder quantity for each part and mails the purchase order to the vendor from whom the part was last purchased.
• When ordered materials arrive at Aurora Ltd, they are received by the storeroom clerks. The clerks count the merchandise and check the counts against the supplier’s bill of lading. All suppliers’ bills of lading are initialled, dated and filed in the storeroom to serve as receiving reports.
Note: You may assume that any procedures which are not documented above have not been performed.
(a) Identify six (6) weaknesses in Aurora Ltd’s internal control procedures for the purchase, receipt, storage and issue of raw materials. (6 marks)
(b) For each weakness identified in part (a), recommend an improvement to Aurora Ltd’s procedures. (6 marks)
[Total: 12 marks]
Semester 2, 2020 Page 6 of 10
Consider the following material and independent situations below:
You are auditing the sales and trade receivables of Grande Fiesta Ltd (GF). All of GF’s customers are in South America. Due to language differences and the current political situation in many countries, direct confirmation of receivables’ balances is unlikely to give satisfactory results.
You are auditing the purchases and trade payables at Tortoise Shell Ltd (TS). One of TS’s overseas suppliers is very slow in sending invoices for goods delivered. Also, owing to a quality control problem, a large number of goods supplied to TS have been deemed faulty and have had to be returned to the supplier with a request for credit.
(a) For each of the situations (1) and (2) above, identify two (2) key audit assertions at risk in relation to the balances described. (4 marks)
(b) Describe two (2) substantive audit procedures you would perform in order to obtain sufficient appropriate audit evidence to address each audit assertion identified in part (a). (8 marks)
[Total: 12 marks]
Semester 2, 2020 Page 7 of 10
You are testing the accounts receivable account of Fruity Ltd for possible material misstatement.
Listed below are the initial 10 items from the accounts receivable population:
Name of Receivable
The total of the accounts receivable listing is $450,000, with over 150 customers.
You are undertaking a sampling plan of 30 items, and the tolerable error is set at $20,000.
(a) Would you be more likely to be concerned with testing for overstatement or understatement? Explain your answer. (3 marks)
(b) Assume that Dollar Unit Sampling (DUS) with selection by a systematic sampling technique is to be used. You have determined a random start of 6,320.
Which receivables will be the first three included in the sample? Show all calculations. (4 marks)
(c) If the total amount for the samples is $60,000 and the misstatement found in the samples is $3,000, explain whether the accounts receivables balance is materially misstated. Show all calculations. (3 marks)
(d) What possible courses of action can you take for your results in part (c)? (2 marks)
[Total: 12 marks]
Semester 2, 2020 Page 8 of 10
Consider the following independent and material situations (i) to (iii) below.
In each situation, the following dates apply:
• Balance date: 30 June 2020
• Date of audit report: 12 August 2020
• Audited financial report and audit report sent to shareholders: 20 August 2020
• Annual general meeting: 18 September 2020
(i) Your client, PQR Ltd, reached an out of-court settlement on 3 August 2020 of $300,000. The settlement was in relation to a litigation case dating back to 2017. A provision of $150,000 was recorded in the 30 June 2020 financial report.
(ii) On 21 August 2020, you discover a debtor of your client, STU Ltd, was placed in provisional liquidation on 7 August 2020. The debtor owed $600,000 as at 30 June 2020, and an allowance for doubtful debts of $300,000 was made at this date. On preliminary information, the likely payout to unsecured creditors such as STU Ltd is zero.
(iii) A flood occurred in the warehouse of your client, VWX Ltd, on 2 July 2020. Inventory valued at $2,000,000 was destroyed. The insurance company agreed to replace all the inventory destroyed, and the new inventory arrived at VWX Ltd’s premises on 6 August 2020.
For each of the events (i), (ii) and (iii) above:
(a) Describe one (1) audit procedure that the auditor could have taken in order to learn of the subsequent event. (3 marks)
(b) State the appropriate action to be carried out on the audited financial statements. The alternative actions are as follows:
• Adjust the 30 June 2020 financial statements, or
• Disclose the information in the notes to the 30 June 2020 financial statements, or
• Request the client to recall the 30 June 2020 financial statements for revision, or
• No action is required
Give reasons for your decision. (9 marks)
[Total: 12 marks]
Semester 2, 2020 Page 9 of 10
Consider the following independent and material situations:
(i) During your review of the final copy of Company A’s annual report prior to signing the audit report, you identify the following information in the Chairperson’s Report:
The large increase in the profits of the company is attributable to increased market share based on our successful marketing strategy, expansion of operations and product range.
Information in the audited financial report shows the following:
Net profit before tax
(ii) Company E is a listed company with three subsidiaries – Company F, Company G and Company H. Company H is audited by another firm of auditors, who have qualified Company H’s audit report on the basis that continual financial support from Company E is required for Company H to continue as a going concern.
In auditing Company E and the group, you are satisfied that the going concern basis of preparing the financial report is appropriate. In addition, you are satisfied that the carrying value in Company E’s financial report of the investment in Company H is not stated above its recoverable amount. Company E and the group made profits for the financial year.
(iii) Company M is a property developer. It holds freehold property purchased for development and resale which is classified as inventories. This property, as disclosed in the notes to the financial report, has been valued at cost of $5,000,000. In your audit, you found that the net realisable value of the property is $3,500,000.
Although material, Company M does not consider that the value of the property should be written down as future development will result in the property to be worth more than the current book value. The write-down would have no tax effect. Company M made a profit for the financial year, and has other assets of $25,000,000 and liabilities of $7,000,000.
(iv) During the course of the audit of Company P, you noted that the current ratio has dropped to 1.75:1 The company’s loan covenant requires the maintenance of a current ratio of 2:1, or the company’s debt is all immediately due. You and the company have contacted the bank, which is not willing to waive the loan covenant because Company P has been experiencing operating losses for the past few years and has an inadequate capital structure.
You have substantial doubt that Company P can find adequate financing elsewhere and may encounter difficulties staying in operation. Management, however, is confident that it can overcome the problem. Company P does not deem it necessary to include any additional disclosure in the notes to the financial report, because management members are confident that an alternative source of funds will be found by pledging their personal assets.
Semester 2, 2020 Page 10 of 10
For each of the situations (i) to (iv) above:
(a) Indicate the type of audit opinion you would issue. (4 marks)
(b) Give reasons for issuing the particular audit opinion. (8 marks)
[Total: 12 marks]
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