UNIT CODE: ACT504 UNIT NAME: AUDITING
Written Assignment Information
Semester 2 2020
Marks and Weight: 90 marks and to be weighted @ 30%
Length: Maximum 3,000 words
This assignment may be submitted at or before 11.59pm (ACST) Sunday, 4th October 2020, (Study Week 10)
Assignments are to be submitted by one of the following means;
· The assignment must be lodged on or before the due date indicated in the assignment details.
· Submit your Assignment as one document, using PDF or Word doc format1
Ensure your file is named using a file naming convention that allows the lecturer to identify to whom it belongs. Failure to use an acceptable file naming convention may result in your assignment lodgement being rejected (For students working in groups, ONLY the group leader will submit the Assignment - be sure to indicate all the Names and Student Numbers on the front cover/first page).
· The assignment must conform to the requirements set out in this assignment
· The assignment must be lodged online via the ACT504 Learnline Assignment Lodgement link on the
ACT504 Learnline site.
· DO NOT LODGE VIA EMAIL or FAX - assignments lodged by email or fax will not be accepted.
KEEP A COPY - Ensure you have a copy of the assignment lodged.
1 Instructions for creating PDF documents and/or combining documents of different formats are provided on the Learnline site.
Students will now be required to affirm at the point of submission that the work they are submitting is their original work. This is built into the submission point.
The submission text reads as follows:
By clicking the SUBMIT button I certify that this assignment is my own work, based on my own personal study and research, and that I have acknowledged all material and sources in the preparation of this assignment, whether they be books, articles reports, lecture notes, images, videos, any other kind of document or personal communication.
I also certify that this assignment has not previously been submitted for assessment in any other course or at any other time in the same course (except as a DRAFT submission) and that I have not copied in part or whole or otherwise plagiarised the work of other students and/or persons.
I have read Charles Darwin University's Academic and Scientific Misconduct Policy (pol-001) and Student Breach of Academic Integrity Procedures http://www.cdu.edu.au/governance/procedures/pro-092.pdf and understand its implications.
The assignment may be completed manually, or with the use of an electronic spreadsheet, word processing software or with the use of accounting software. Marks may be deducted for illegible or partially illegible papers. If completed using multiple file formats or manually, the document must be combined into one document, in PDF format2.
As a general rule resubmission of assessment items is NOT possible, however the Lecturer may ask for resubmission if it is deemed appropriate. Details for such resubmission will be made available by the Lecturer if and when the situation occurs.
Oral Test or Viva Voce
Lecturers may, at their discretion, ask students to verbally present their assignment submissions or rewrite some selected part/s of their answer in a controlled setting. Lecturers may exercise this discretion where they feel that the assignment was not the student’s own work.
University Plagiarism policy!
Plagiarism is the unacknowledged use of material written or produced by others or a rework of your own material. All sources of information and ideas used in assignments must be referenced. This applies whether the information is from a book, journal article, the internet, or a previous essay you wrote or the assignment of a friend.
Plagiarism policy is available at:
http://www.cdu.edu.au/governance/policies/pol-001.pdf and Student Breach of Academic Integrity Procedures http://www.cdu.edu.au/governance/procedures/pro092.pdf
2 Instructions for creating PDF documents and/or combining documents of different formats are provided on the Learnline site.
Extensions and Late Lodgements
LATE ASSIGNMENTS WILL GENERALLY NOT BE ACCEPTED UNLESS AN
EXTENSION TO THE DUE DATE HAS BEEN GRANTED BY THE HEAD OF SCHOOL.
Exceptions will only be made where assignments are late due to special circumstances that are supported by documentary evidence, and may be subject to a penalty of 5% of assignment marks per day. Partially completed assignments will be accepted with appropriate loss of marks for the incomplete portion.
Should students foresee potential difficulties with submission of assessment items, they should contact the lecturer immediately the difficulties come to notice, to discuss suitable arrangements etc for the submission of those assessment times. An Application for Assignment Extension or Special Consideration should be completed and provided to the Head of School, School of Law and Business.
This application form, explanation and instructions is available on the ACT504 CDU Learnline course site or direct from
Please note that it is now Faculty policy that all extension requests must be approved by the Head of School. The lecturer is no longer able to personally approve extension requests.
Leaving a request for an extension, special assessment or special consideration until the last moment, based on grounds that students could have reasonably been able to foresee, may result in the application being rejected.
Ensure that you maintain suitable backup copies of your assignment during preparation, before completion and after lodgement. Loss of data/assignment due to failure to maintain a suitable backup will not constitute grounds for an extension.
QUESTION 1 (16 MARKS)
You had been recently promoted to Senior Auditor of the audit firm Jose Rizal and Associates and was asked to consider the following independent situations:
A. Leanna David is part of the audit team for the current audit of Jupiter Pty Ltd (Jupiter). After 2 weeks at the client, he has advised you that he has been offered a job at Jupiter as soon as the current audit is finished.
B. One of your major clients, Just Squeeze Juice Pty Ltd, has talked to you about a consulting engagement next 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 questions. 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.
C. You have audited Avatar Pty Ltd, a stable engineering firm, for several years. At the start of this year, the finance director, Michelle Cruz, retired after 10 years with company and was replaced by Sherlon Dizon, a long-time friend of the audit manager Karlo Arcilla, who was best man at Sherlon’s recent marriage.
D. One of your audit clients, Amethyst Pty Ltd (APL) is a large superannuation fund. The Australian Taxation Office has advised APL that it has rejected its taxation treatment of a material amount of income from investments and that it disagrees with the taxation advice APL gave to its members. The matter has been referred to the Superannuation Complaints Tribunal and APL has requested that you represent them at the Superannuation Complaints Tribunal.
For each of the independent situations above:
(a) Identify the type of potential threat to independence. Justify your answer. (8 marks)
(b) Explain what safeguards, if any, that could be implemented to reduce the independence threats. (4 marks)
(c) Assess whether audit independence can be achieved. (4 marks)
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
[8 + 4 + 4 = 16 marks]
QUESTION 2 (14 MARKS)
You are an assurance services senior at Reeves & Associates and have noted the following independent issues in relation to the audit of Fancy Pty Ltd:
A. The accounting system at Fancy Pty Ltd did not operate effectively during the first year of operations. Consequently, some general ledger accounts had to be based on estimates, as the actual data relating to these balances had been lost.
B. As a result of cost constraints, the directors of Fancy Pty Ltd did not implement effective internal controls
for debt collection. The debtors’ turnover is 3.2 times.
C. Due to increased competitive pressures, Fancy Pty Ltd has recently moved the manufacture of some of its clothing lines out of Melbourne into regional areas. While Fancy Pty Ltd saves around 20% in costs, the manufacturing process takes longer and on several occasions late delivery has resulted in lost sales.
(a) Describe the components of the Audit Risk Model. (2 marks)
(b) Explain the impact of each of these separate issues on your assessment of audit risk, the materiality level and the audit strategy that would be adopted. (12 marks)
[2 + 12 = 14 marks]
QUESTION 3 (30 MARKS)
You are the audit senior on the audit of Resilient Furniture Manufacturers Pty Ltd (Resilient). 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 Resilient and to understand its business operations, its environment and system of internal control. You noted and documented the following:
• Resilient was founded 30 years ago and makes ‘grandfather’ clocks (freestanding, weight driven, 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, Resilient’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 Resilient’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 Resilient’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.
• Resilient 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 Resilient’s financials:
? the current ratio as at 30 June 2019 is 1.24
? the shareholders’ funds to total assets ratio is 30%
? gross profit margins and net profit margins for the year ended 30 June 2019 have dropped to the level where losses are being incurred.
NB: An excerpt of Resilient’s Financial Reports is attached.
Resilient Furniture Manufacturers Pty Ltd (Resilient)
2019 2018 2017
Debtors 748,681 774,469 665,939
Sale or return debtors 483,020 499,657 429,638
Inventory 300,035 305,013 256,376
1,531,737 1,579,140 1,351,953
Property, plant and machinery 1,967,404 1,993,058 1,867,593
Total assets 3,499,141 3,572,198 3,219,546
Trade and other creditors 395,019 343,545 289,049
Bills payable 509,494 517,947 435,355
Bank overdraft 135,576 13,337 55,672
Current portion of bank loans 200,000 200,000 200,000
1,240,090 1,074,830 980,076
Bank loans 1,200,000 1,400,000 1,600,000
Share capital 500,000 500,000 500,000
Retained earnings 559,051 597,368 139,470
1,059,051 1,097,368 639,470
3,499,141 3,572,198 3,219,546
Profit and Loss Account
Gross sales 6,077,296 6,233,124 5,350,321
Returns - 200,551 - 153,958 - 123,057
Net sales 5,876,745 6,079,166 5,227,264
Cost of sales
Materials 2,066,281 2,100,563 1,765,606
Labour 1,397,778 1,153,128 963,058
Other 516,570 506,130 438,726
3,980,629 3,759,820 3,167,390
Standard Cost Variances
Purchase price (121,546) (49,865) (16,051)
Labour cost (182,319) (62,331) (26,136)
(303,865) (112,196) (42,187)
Operating profit 1,592,252 2,207,149 2,017,686
Administration 791,918 754,208 600,841
Sales and marketing 663,198 642,012 524,331
Financing 175,452 156,789 123,457
1,630,569 1,553,009 1,248,630
Net profit (loss) (38,317) 654,140 769,057
Tax 0 196,242 230,717
Net profit after tax (loss) (38,317) 457,898 538,340
Asia Pacific College of Business & Law Semester 2 2020
Resilient’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 Resilient. The bank covenant, which is due for review shortly, requires Resilient to:
? 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 2019 and have it audited according to Australian Auditing Standards. Note that this is a requirement of the bank covenant as Resilient is not required to produce a general purpose financial report under the Corporations Act.
Required – Q3 Part 1:
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) Identify and explain two (2) asset accounts at risk of material misstatement (6 marks).
b) Describe one (1) issue regarding the prior year’s figures and explain why (2 marks).
c) Describe three (3) factors that may bring into question the going concern assumption for Resilient.
Disregarding the evaluation of management’s assessment of the going concern assumption, briefly describe the effect of the facts on your audit planning (6 marks).
[6 + 2 + 6 = 14 marks]
Now, after examining Resilient’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 Resilient 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:
? sales were above the monthly budget figure when bonuses were paid
? there was no significant change in gross margins
? returns of stock sold on the ‘sale or return’ basis were well below those in the first six months except in the final month of the year
? debtors’ levels (measured in days outstanding) were above their budgeted levels but returned to a 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 pricing structures and the terms of the scheme
? initiate and approve the invoicing of customers when a sale is made (i.e. if the stock is not returned within 60 days)
? initiate and approve the issue of credit notes for these customers when returns are made within 60 days or when pricing or quality issues arise.
Required – Q3 Part 2:
Based on the background information above, answer the following questions: a) Explain one (1) internal control issue at Resilient (2 marks).
b) Identify and explain two (2) fraud risk factors at Resilient (4 marks).
c) Identify two (2) assertions (as defined by ASA 315) at risk as a result of the fraud risk factors identified in (b) above. Justify your answer with reference to the background scenario (6 marks).
d) Describe two (2) audit procedures that would address potential misstatements arising from fraudulent financial reporting. Ensure that your procedures are specific to the scenario and the fraud risk factors identified in (b) above. You may wish to refer to Appendix of ASA 240 (4 marks).
[2 + 4 + 6 + 4 = 16 marks]
QUESTION 4 (30 MARKS)
In February 2012, the Australian Accounting Standards Boards decided at its meeting to propose the withdrawal of AASB 1031 Materiality. There were several reasons for this proposal which includes: there is no International Reporting Standard equivalent and it 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 1031 is the removal of the specific quantitative guidance for materiality. The withdrawal of AASB 1031 became effective to annual reporting beginning on or after 1 July 2015.
1. Summarize the significant changes and impact on financial reporting with AASB 1031 Materiality (issued by the Australian Accounting Standards Boards - AASB) from 1995 to 2015. (8 Marks)
You can present your answer using a table format:
Time period Changes in AASB1031 Materiality
Standard Impact on financial reporting
2. Prior to the withdrawal of AASB 1031 and 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 Audit and ASA 450 Evaluation of Misstatements Identified during an Audit (issued by the Auditing and Assurance Standards Board – AUASB), (12 Marks):
a. Define materiality.
b. Outline the qualitative and quantitative guidelines of materiality.
c. How the constructs of “materiality” influence the auditors’ professional judgment on misstatements?
3. Post withdrawal of AASB 1031, would this withdrawal of AASB1031 Materiality Standards:
a. harmonise/bring uniformity to auditors’ assessment of materiality misstatements or would this bring disparity to auditors’ assessment of misstatements? Why so?
b. What other influence, if any, this would bring to the auditors’ judgment on misstatements and what impacts or implications this would have on the usefulness of financial reports? Discuss your answer and rationale.
(Support your answers with the relevant Australian Accounting Standards and Australian Auditing Standards as well as authorised/published Peer-reviewed Academic Journals and Articles.) (10 Marks)
NOTE: In answering Question 4, use APA referencing 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.)
[8 + 12 + 10 = 30 marks]
*** End of Assignment***