QUESTION 1(20 MARKS)Case 1During the financial year 2020/2021, you are one of the audit partnerswith Summitand Associates CAs, a large and experienced audit firm.You have been approached to accept the audit of Chem SafeLtd (Chem Safe), a medium-sized chemical manufacturer. The manufacture of the chemicals results in highly toxic waste and Chem Safeis 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 Chem Safeand its management that you should consider before making the decision to accept the engagement.(2 Marks)Case 2Chem SafeLtd (Chem Safe) imports a number of pharmaceutical products. In order to hedge itsforeign currency transactions, Chem Safeentered into a number of forward rate agreements this year. Prior to this time Chem Safehad 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 Chem Safe, 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. (2 Marks)
Asia Pacific College of Business &LawSemester 1 2021Page 5of 10Case 3Summitand Associates CAshas agreed to take on a new auditclient, Reaction Pty Ltd, a small garage door manufacturer that has never previously been audited. Summitand Associates CAshas issued an engagement letter prior to commencing work for the current year. While conducting the audit, the audit team is unable togain sufficient appropriate audit evidence around accounts receivable due to a lack of documentation. Youhave informed client management that you need to issue a modified auditor’s report due to the scope limitation. In response, management has requestedthat 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.(4Marks)Case 4Consider 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 TimeLtd, 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. (8 marks)b)Describe a safeguard, if any, which could be implemented to reduce each of the independence threats.(4marks)[2+ 2+ 4 +8 + 4= 20marks]
Asia Pacific College of Business &LawSemester 1 2021Page 6of 10QUESTION2(10 MARKS)Case BackgroundYou are the audit senior on the audit of BestFurniture Manufacturers Pty Ltd (Best).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 Bestand to understand its business operations, its environment and system of internal control.You noted and documented the following:•Bestwas founded 30 years ago and makes ‘grandfather’ clocks (freestanding, weightdriven, pendulum clocks).•The clocks are made in one factory (situated in the Alice Springs) 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, Best’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 Best’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 Best’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. •Besthas 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 Best’s financials:➢the current ratio as at 30 June 2020is 1.24➢the shareholders’ funds to total assets ratio is 30%➢gross profit margins and net profit margins for the year ended 30 June 2020have dropped to the level where losses are being incurred.NB: An excerpt of Best’s Financial Reports is attached.
Asia Pacific College of Business &LawSemester 1 2021Page 7of 10BestFurniture Manufacturers Pty Ltd (Best)Balance Sheet202020192018Current assetsDebtors748,681774,469665,939Sale or return debtors483,020499,657429,638Inventory300,035305,013256,3761,531,7371,579,1401,351,953Non-current assetsProperty, plant and machinery1,967,4041,993,0581,867,593Total assets3,499,1413,572,1983,219,546Current liabilitiesTrade and other creditors395,019343,545289,049Bills payable509,494517,947435,355Bank overdraft135,57613,33755,672Current portion of bank loans200,000200,000200,0001,240,0901,074,830980,076Non-current liabilitiesBank loans1,200,0001,400,0001,600,000EquityShare capital500,000500,000500,000Retained earnings559,051597,368139,4701,059,0511,097,368639,4703,499,1413,572,1983,219,546Profit and Loss AccountGross sales6,077,2966,233,1245,350,321Returns200,551-153,958-123,057-Net sales5,876,7456,079,1665,227,264Cost of salesMaterials2,066,2812,100,5631,765,606Labour1,397,7781,153,128963,058Other516,570506,130438,7263,980,6293,759,8203,167,390Standard Cost VariancesPurchase price(121,546)(49,865)(16,051)Labour cost(182,319)(62,331)(26,136)(303,865)(112,196)(42,187)Operating profit1,592,2522,207,1492,017,686ExpensesAdministration791,918754,208600,841Sales and marketing663,198642,012524,331Financing175,452156,789123,4571,630,5691,553,0091,248,630Net profit (loss)(38,317)654,140769,057Tax0196,242230,717Net profit after tax (loss)(38,317)457,898538,340
Asia Pacific College of Business &LawSemester 1 2021Page 8of 10Best’sbank 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 Best. The bank covenant, which is due for review shortly, requires Bestto:➢maintain a current ratio of 1.2➢maintain a shareholders’ funds to total assets ratio of at least 30%➢maintain net sales of a minimum of $100,000 per quarter➢prepare a general purpose financial report for the year ended 30 June 2020and have it audited according to Australian Auditing Standards. Note that this is a requirement of the bank covenant as Bestis not required to produce a general purpose financial report under the Corporations Act.Required:Based on the background information above and your use of preliminary analytical procedures, answer the following questions:a)Identify and explain two (2) asset accounts at risk of material misstatement(4marks).b)Describe one (1) issue regarding the prior year’s figuresand explain why(2 marks).c)Describe twofactors that may bring into question the going concern assumption for Best.(2 marks)d)Disregarding the evaluation of management’s assessment of the going concern assumption, briefly describe the effect of the facts on your audit planning(2marks).[4+ 2+ 2+ 2= 10marks]
Asia Pacific College of Business &LawSemester 1 2021Page 9of 10QUESTION 3(10 MARKS)BackgroundSafe Netis the wealth management division of SecurityBank (Security) 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 Safe Netunit.
1.Ensure all material fraud instances are detected.2.The auditor is responsible for maintaining professional scepticism throughout the audit, considering the potential for managementoverride of controls and recognising the fact that audit procedures that are effective for detecting error may not be effective in detecting fraud.
3.Respond appropriately 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 financial statements 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 determine whether 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 been uncovered and their impacts considered.7.Test the appropriateness of journal entries recorded in the general ledger and other adjustments made in the preparation of the financial statements.8.Determine whether management has sufficient skills to prevent and detect fraud (e.g. through proof of attendance at appropriate industry seminars and workshops, or past experience with fraud).9.Obtain a copy of the client’s code of ethics document, and ensure employees have access to it.10.Evaluate whether the accounting policies selected by the entity may be indicative of fraud.REQUIRED:Identify the activities that are partand the activities that are not partof the auditor’s responsibilities relating to fraud under ASA 240. [10marks]
Asia Pacific College of Business &LawSemester 1 2021Page 10of 10QUESTION 4(30 MARKS)NOTE: In answering this Question, use APAreferencing style and support your answers with relevant accounting and auditing standards as well as published peer-reviewed academic journals. A minimum of 5 peer-reviewed academic journals is expected. (Hint: this is a great opportunity to utilise the University’s Library Services online such as Library Search, Advance Search, eJournals and Databases such as EBSCOhost, etc.)You are expectedto support your answers with the relevant Australian Accounting Standards and Australian Auditing Standards and withauthorised/published Peer-reviewed Academic Journals and Articles.Case BackgroundIn February 2012, the Australian Accounting Standards Boards decided at its meeting to propose the withdrawalof AASB 1031 Materiality. There were several reasons for this proposal which includes: there is no International Reporting Standard equivalent andit does not look like there will be, since 2005 there has been the gradual withdrawal of additional Australian guidance from a number of Australian Accounting Standards, and there is now an updated guidance on materiality in the IASB Conceptual Framework.The major impact of the withdrawal of AASB 1031is the removal of the specific quantitative guidance for materiality. The withdrawal of AASB 1031became effective to annual reporting beginning on or after 1 July 2015.Required:A.Priorto the withdrawal of AASB 1031and with reference to the AASB 1031 Materiality(issued by the Australian Accounting Standards Boards -AASB) and the ASA 320 Materiality in Planning and Performing an AuditandASA 450 Evaluation of Misstatements Identified during an Audit(issued by the Auditing and Assurance Standards Board –AUASB):a)What is materiality as per the Accounting Standards and Auditing Standards?(3marks)b)Outline the qualitativeand quantitativeguidelines of materialityas per the Accounting Standards and Auditing Standards.(6marks)
c)Before theremoval of AASB 1031, how dothe standards and guidelinesof“materiality” influence the auditors’ judgment on materialitylevel and material misstatements?Provide examples.(6marks)
B.Postwithdrawal of AASB 1031, and with supporting academic research articles inaccounting/auditingresearch in materiality, would the removalof AASB1031 MaterialityStandards: a)harmonise/bring uniformity/homogeneityto auditors’ assessment of materiality misstatements or would this bring disparity/heterogeneityto auditors’ assessment of misstatements?Explainyour answer.(6marks)
b)What other factors or influences,if any, the removal of AASB 1031would impactthe auditors’judgment on materiality?Explain your answer.(4marks)
c)What are theimplicationsthis would have on the usefulness of financial reports?Discussyour answerand rationale.(5marks
