Subject Title: Auditing and Assurance
QUESTION 1:
Using examples where appropriate (and treating each group independently of the other), briefly define the following terms and explain their connection to each other:
1. Sufficiency appropriate audit evidence (SAAE) vs Audit risk
2. Sufficiency appropriate audit evidence (SAAE) vs Audit opinion
3. Audit procedures and Audit risk
4. Fraudulent Financial Reporting and Misappropriation of Assets
5. Audit opinion and subsequent event
6. Material misstatement vs Audit opinion
Answer: definition, explain and example
QUESTION 2:
When completing an audit, the auditor considers Going Concern (ASA 570) and Subsequent Events (ASA 560). What are the two types of subsequent events and the potential accounting effect of each type? Describe three types of procedures that an auditor should perform when a question arises regarding “going concern”?
QUESTION 3:
You are part of the audit team conducting the audit of Kites4Fun Ltd. As part of the audit James Jones the audit manager has requested you to carry out audit checks on cut-off at the year end.
The company maintains details of stock quantities, on its computer, which it updates using the goods received notes (for items purchased) and sales invoices (for items sold). The company ceases operations (i.e. stops trading) and counts all stock at the year end, in a single stock take. While the bulk of the inventory is held in two adjoining warehouses belonging to Kites4Fun, a material amount is held by a third party in a separate warehouse in a different suburb.
During the planning phase of the audit you noted that the following potential material misstatements may occur or exist, and that there are no relevant controls that could prevent them from occurring:
(a) Due to poor labeling procedures, some empty containers may be included in the inventory count
(b) Obsolete and damaged skates and related components may be overlooked in the warehouse
(c) The lower-of-cost or net realisable value method may have been incorrectly applied.
REQUIRED:
1. Describe a substantive test of detail that will substantiate whether each of the potential misstatements noted above will occur
2. For each substantive test of detail you describe above (in 1.), indicate the financial report assertion to which it relates
Question 3 - Answer:
Describe a substantive test of detail that will
substantiate whether each of the potential misstatements noted above will occur Indicate the financial report
assertion to which it relates
QUESTION 4: 15 Marks (Please answer in the space provided)
Van Ltd is an ongoing audit client of your audit firm. The company’s main line of business is to supply and distribute fruit and vegetable to both wholesale and retail businesses.
As part of the planning process of the audit of the financial statements for the year ending 30 June 2016 you met with Peter Van, the General Manager of the company and in discussions with him you have ascertained the following:
a) The company plans to upgrade its general ledger reporting by acquiring a new software package. The conversion is planned for three months prior to its financial year end and should commence on 1 April 2016.
b) The company has experienced considerable staff turnover in its accounts payable department, including the departure of the chief accounts payable officer, who resigned early in October 2015. This has created some delays in the processing of payments.
c) The company decided to evaluate its operations and to rationalize and streamline its activities as part of its cost-cutting program. One of the main decisions that has been made in September 2015 as a result of this was to retrench its internal audit department by the end of April 2016.
REQUIRED:
How will each of the above matters affect your overall plan for the expected scope and conduct of the audit?
QUESTION 5: 30 Marks (Please answer in the space provided)
For each of the following independent situations, assume that -
1. It is material and/or significant;
2. The client is a reporting entity;
3. General purpose financial statements have been prepared and audited for the year ended 30 June 20X6.
(A) As part of your examination of inventory of Kleen Chem Ltd you discover that the client has a large store of chemicals that have been valued at cost. An allowance for obsolete inventory has been made and is shown at $ 330 000. The audit procedures carried out by you indicate that this allowance should be $ 865,000. In addition a chemical used in the production process was completely destroyed on the 7 July 20X6 and is valued at $ 525 000 in the balance sheet as at 30 June 20X6. Kleen Chem Ltd thinks that any adjustment should be made in the July 20X6 accounts.
(B) You, the auditor were engaged on the 15 July 20X6 to carry out the audit of the financial report of Kindness Ltd. This was after the annual physical stock count had been done. The accounting records are not sufficiently reliable to enable the auditor to become satisfied as to the year-end inventory balance.
(C) Sudoku Ltd changed its valuation method for land and building moving from cost basis to fair value basis at the year end. The auditor engaged a firm of chartered surveyors and valuers to verify the valuation of the fair value of land and buildings included in the client’s financial statements. The independent report confirmed the value as being reasonably close to the client’s calculation and supports the values in the financial statements. All disclosures relating to this change on accounting policy have been made in the notes to the accounts.
(D) The auditor has substantial doubt about Manitoba Ltd’s ability to continue as a going concern for a reasonable period of time, due to recurring operating losses, adverse key financial ratios and working capital deficiencies. The entity has adequately disclosed its financial difficulties in a note to the financial statements, which includes any adjustments that might result from the outcome of this uncertainty.
(E) The finance director of Reginald Ltd a reporting entity refuses to adopt AASB 124 Related Party Disclosures on the grounds that this would mean that the company would have to disclose highly sensitive and confidential information to the public.
REQUIRED: Identify the type of audit opinion that should be issued in each of the above situations and give reasons for your answer. Assume that in each case management will not take further action regardless of the circumstances.
Type of Auditor’s Report
Reasons
A
B
C
D
E
nt event matter disclosure in the financial report
of the report or to prevenreliance on the auditor’s report