ACCT3005 Auditing Theory and Practice

Question 1 is assessing students on general auditing principles. Answer all the following parts. Each part is to be treated and answered separately.

“Once the auditor has assessed the control environment, the auditor can determine an appropriate level of control risk and use this to determine the appropriate evidence mix using the audit risk model”.

Required:

Comment on the statement above and explain, in your own words, whether you think the statement is correct.

The above statement is absolutely correct because in the planning phase the auditor is required to assess the control environment of the audit client and then decide on the appropriate level of control risk thereby determining the required amount of evidence mix that is to be ascertained before proceeding with the audit. This means that the auditor is required to check whether there is lesser or more controls existing within the business at the planning phase. If a good control exist, then a mere test of controls along with minor substantive procedures may be enough to comment or provide an impartial view on the prepared financial statements otherwise an extensive substantive testing is required if the controls are found to be weak as per the audit risk model.  

During the audit of Boland Ltd, the auditor has identified that there have been changes to senior management and the Board of Directors. Boland Ltd has also undertaken a significant restructure, closing down some of their operations in Sydney and Adelaide and writing off a number of material (in dollar terms) components of plant and equipment. 

Required:

Briefly explain in your own words how this information will assist the auditor in developing an appropriate evidence mix.

In the presence of the above-mentioned information where it is found during the audit that there has been a major change in the management of the company, Boland Ltd. and the BOD of the company have undertaken major restructuring of the firm where it is noticeable that some of the operations present at Adelaide and Sydney were closed along with writing off many significant and material components of the PPE assets. Therefore, there may be a substantial presence of errors and frauds as well as misstatements within the financial statements prepared by the management.

This is mainly because there has been a major restricting along with a substantial change in the management which provides a hint to check for fraudulent transactions that might be present. Hence, a substantial amount of substantive testing is required to obtain an appropriate amount of evidence mix especially concerning the restructuring and the PPE assets. The “going concern” ability of the firm is also to be substantially verified by the auditor as a number of existing operations have closed and assets written off during the year before commenting on the fairness and viability of the financial statements.

During a staff meeting held at the premises of your audit firm, you overhear two graduate auditors discussing how to audit the “existence and occurrence” management assertion for the sales and collections cycle. One of the graduates does not understand why there are so many different types of “existence and occurrence” when testing the management assertions.

Required:

Using your understanding of the steps in the accounting process introduced to you in your studies in ACCT3005 at UniSA, briefly explain how testing for the existence and occurrence management assertion is undertaken by the auditor. In providing your explanation, you must use the process of a credit sale to a customer to illustrate your answer.

The testing of sales especially for the management assertions of “Existence and Occurrence” is of prime importance for the auditors before commenting on the fairness of these transactions. The auditor has to undertake various audit procedures based upon the amount of audit risk identified. For instance, in order to check for the existence of sales, a sample of customers to whom credit sales have been processed may be obtained and a “Confirmation” may be obtained from these customers. The occurrence of sales may be tested using vouching or tracing where a sample of sales transactions may be obtained from the recorded sales revenue transactions then such sales transactions can be vouched to the sales invoices and traced back to the customer order as well as bills of lading. 

• Pat is working in the audit team undertaking the audit of Ventura, a major technology-based company in Australia. As part of Pat’s audit duties, Pat has been asked to verify the expenditure relating to research and development and to ensure the expenditure is recognised and disclosed in accordance with applicable Accounting Standards. While collecting evidence to assess the expenditure, Pat identifies an amount relating to a patent that is being currently worked on by the company. The patent has the potential to revolutionise mobile phone technology and could result in a significant increase in the share price of Ventura.

Pat’s brother has been considering investing $300,000 of his superannuation balance in technology shares and has asked Pat for some advice about whether to purchase shares in Ventura.

Required:

Using the facts contained in the scenario above, and with reference to the applicable principle(s) from APES110, indicate to Pat what you believe should be the appropriate course of action to ensure compliance with APES110.

 According to the APES110, Pat should not provide any internal details of the client under audit to his brother who is looking for an investment advice and Pat possesses it owing to his involvement within the audit process. Pat should not provide any internal details of his client under audit out of the “Confidentiality” principle which he is required to follow as per the professional engagement. He should not throw away his “Integrity” towards his profession which would otherwise be if he provides his brother with the internal information about his client acquired during the audit. Finally, he should not advice his brother using the client’s internal information out of “Professional Behaviour” where if he does ask his brother to buy shares then he will be discrediting the auditing profession altogether.

• Vivian is part of the audit team auditing Speedy Foodz (‘Speedy’), a company specialising in transportation of fresh food around Australia. Speedy has grown rapidly over the last 5 years and during the current reporting period, purchased 100% of the equity of Supply and Logistics Australia (SALA), a competitor of Speedy. Vivian was given a parcel of $10,000 of shares in SALA by her parents as a graduation gift. These shares are now valued at approximately $27,500 and are still held by Vivian at the end of the current reporting period.

Required:

Using the facts contained in the scenario above, and with reference to the applicable principle(s) from APES110, indicate to Vivian what you believe should be the appropriate course of action to ensure compliance with APES110.

Vivian who is a part of the audit team employed in auditing Speedy who acquired 100% equity stake at SALA. Vivian possesses $10,000 worth shares in SALA which have now matured and became $27,500. So, in such a case a “Conflict of Interest” is arising for Vivian where it may cause biasness during the audit leading to loss of “Objectivity” as per the APES 110. So, Vivian should not be allowed to become the part of the audit team auditing Speedy who owns SALA. 

This is a question about audit quality and auditor liability.

You have been hired to audit a large multi-national banking company NBA Banking (NBA) which has been operating since 1890. The company focuses on financial activities. Profits have been strong for the previous 10 years but have been steady for the year ending 31^st December 2021.

During the reporting period, NBA has begun negotiations to merge with another financial institution in Australia. Negotiations to merge have not progressed significantly in the last 6 months of the reporting period. In July 2021, the company had signed an agreement to purchase 100% of the equity of Klinsman Banking, based in Germany for $1,800 million. The deal was finalised before the end of the current reporting period.

In September 2021, NBA were involved in a major incident involving a substantial number of transactions that were linked to money being invested into NBA in $10,000 amounts. These amounts were associated with criminal activities within Australia and the total amount invested into NBA from these activities totally $260 million throughout the course of 3 years. As a result of these transactions, an internal audit has been initiated by NBA in the current reporting period. Further, as a result of this incident, NBA replaced its CEO and CFO. The new CEO and CFO will take their posts on 1 January 2022.

In April 2021, NBA closed down the majority of their physical banks as the majority of the transactions were being undertaken online by customers due to Covid-19. Earlier, in March 2021, NBA created a crypto currency division within their organisation with a view to entering the crypto currency market. Specifically, NBA were marketing 100% equity loans to investors up to the value of $50,000 for the express purpose of purchasing crypto currency.

The audit partner is extremely nervous and wants to make sure the planning of the audit is undertaken in accordance with appropriate requirements from the Auditing Standards (ASA’s) and to remove the possibility of being held liable for negligence relating to the conduct of the audit.

Required:

Using the facts contained in the case study above and with reference to applicable Auditing Standards (ASA’s), identify five (5) procedures the auditor should undertake in the audit that represent compliance with appropriate requirements from the Auditing Standards (ASA’s) to assist with collecting sufficient appropriate evidence to form an opinion.

If you were not sure what the question is asking, you are required to tell the audit partner five things the auditor needs to do if the auditor (based on the facts in the case above) was going to undertake the audit and to make sure the audit is undertaken in accordance with the requirements contained in the ASA’s. To assist you with your answer, you have been provided with an example of one procedure and also an example of a procedure which is considered too broad. (You are to complete all three columns for each of the four procedures you identify)

Applicable ASA	Planning Procedure Required	Brief explanation why this procedure is undertaken
ASA210 – Agreeing the terms of audit engagements	The auditor needs to agree the terms of the audit engagement with management of NBA and those charged with governance.	It is important that the responsibilities of the auditor are clearly stated from the beginning of the audit.
Example of an answer which is too broad and gets no marks   ASA500 – Audit Evidence	The auditor must collect sufficient appropriate evidence to form an opinion.	The auditor needs enough evidence to provide an opinion as to the accuracy and reliability of the reports.
(3) ASA 315 Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment.	Inspection of the documents concerning purchase of 100% equity stake at Klinsman Banking.	This procedure is important to check whether the purchase actually happened and whether there is actual movement of cash or not.
(2) ASA 240 Auditor’s responsibilities relating to fraud in an audit of a financial report.	Inspection of all transactions concerning the investment of $10,000 into NBA out of criminal activities.	This procedure is necessary in order to check whether there is possibility of money laundering, Material misstatement or fraud present or not.
(3) ASA 315 Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment.	Observation of the internal audit and internal control in action especially concerning the investigation of the $260 million investment into NBA out of criminal activities.	This procedure is of material importance in order to check the vigilance and viability of the internal control thereby ascertaining the appropriate control risk.
(4) ASA 240 Auditor’s responsibilities relating to fraud in an audit of a financial report.	Carrying out analytical procedures in order to identify the sudden changes in financials over the years especially after the replacement of the old CEO and CFO.	This analytical procedure is of urgent importance as it will portray any abrupt or sudden changes in financials over the years which is to be further investigated in details during the audit. This is to be done because there has been a replacement of the old CEO and CFO in the current year owing to a discovery of criminal investment into the NBA which might be pointing towards money laundering or fraud and material misstatement present within the prepared financial statements.
(5) ASA 570 Going Concern	Observation of the working of the new Crypto division of NBA where confirmation may be taken from the investors who have invested in it.	This is important as the bank has been raising a considerable amount of money through 100% equity loans to investors which might alter the capital structure which in turn may be threatening the “going concern” ability of the firm.

You have been hired to assist with the implementation of appropriate internal controls for Maximum Entertainment, a company hired by the South Australian Government to oversee the sale of tickets for a festival to be held in Adelaide in March 2022. The festival will involve many acts from both Adelaide, interstate and oversees and will run for 30 days across approximately 100 venues throughout Adelaide.

During your discussions with the owners of Maximum Entertainment, you are made aware that the events will have varying ticket prices ranging from $5 for the cheapest shows to $95 per ticket for the most expensive shows. Due to Covid restrictions, no cash is allowed for the purchase of tickets by customers. All ticket sales will be made using electronic facilities (credit cards) and no physical tickets will be printed and distributed to the customers. The South Australian Government wants to stop the use of printed tickets and has asked for electronic ticketing to be used – the Government wants the tickets to be distributed to customers by electronic means and have asked Maximum Entertainment to determine the best way to do this which will minimise fraud and error in ticket sale revenue.

The South Australian Government is also aware of the issues associated with Covid and have asked Maximum Entertainment to adhere to all Covid related restrictions imposed by the South Australian Government. To help with this, a staff member from the South Australian Government has been assigned to provide information to Maximum Entertainment relating to the Covid restrictions.

Required:

Using the facts contained in the case study above, identify and explain, in your own words, and with as much detail as possible, four (4) internal controls that you would implement to assist in minimising errors and/or fraud for Maximum Entertainment. Use the table below to identify (a) the internal control to implement, (b) the misstatement that the control will minimise/prevent and (c) the audit objective that the internal control will help achieve (you may identify either a transaction related objective or balance related objective).

Provide as much detail as possible to explain the implementation of the internal control(s). Provide your answer in the section shown below.

Internal Control Identified	Misstatement Minimised/Prevented by the Internal Control	Audit Objective (Transaction or Balance Related)
Example   Appropriate hiring procedures – make sure that adequate interview procedures are implemented to identify staff that can be relied upon to sell tickets to customers.	This minimises inappropriate conduct such as providing tickets to friends for free.	Transaction related objective(s) – Accuracy and occurrence.
Hiring of proper and experienced IT personnel	Hiring of experienced and proper IT personnel will help to resolve any technical issues during the sale of tickets via an online mode. It can resolve issues concerning processing of finds after sale of tickets.	Transaction related- Accuracy and Completeness.
Proper segregation of duties of IT personnel with that of the ticket clerks.	This will restrict any presence of fraud or intentional mistakes as no single person will have the compete information about the transactions thereby reducing fraud.	Transaction and balance related- Accuracy and completeness and Occurrence.
Proper authorization for persons handling cash and bank records	It will reduce the incidents of mismanagement of cash or cash frauds.	Transaction related- Accuracy and Completeness.
Proper supervision of the entire proceedings.	It will reduce any mechanical or manual errors or early detection of fraudulent transactions.	Transaction and balance related- Occurrence, Existence, Accuracy and Completeness.
Periodic and sudden internal audits.	Timely detection of errors and frauds.	Transaction and balance related- Occurrence, Existence, Accuracy and Completeness.

This is a question about the planning stage of the audit and undertaking a risk assessment to determine an appropriate evidence mix.

You have been hired to audit a large national company that transports fuel throughout Australia. Profits have been strong for the past 10 years. Reporting date is 31^st December 2021.

During the reporting period, the company began negotiations to take over two smaller companies in New Zealand and Singapore. Negotiations to purchase the company in Singapore began in early 2021 but have not progressed significantly in the last 6 months. In August 2021, the company had signed an agreement to purchase 100% of the equity of the company in New Zealand for $200 million. The deal was to be finalised before the end of the current reporting period. In October 2021, the Government in New Zealand locked down all international trade resulting in a freeze on any negotiations continuing with the company in New Zealand.

In April 2021, the company sold one of its major mining divisions for $50 Million to Australian Transport Limited, one of their competitors operating in Australia. The company also issued $20 Million in debentures which will be fully redeemed in 2030. Preliminary assessment of the internal controls has indicated the internal controls are strong, in line with previous assessments of the internal controls. However, further investigations are being undertaken by the company in relation to a breakdown of operational controls resulting in the environmental incident in New South Wales.

Required: 

Using the information provided in the case study, identify recommend an appropriate evidence mix for the audit of the entity. In your recommendation (answer), please make sure you use the audit risk model (the components of the audit risk model), to provide a brief justification for the evidence mix you have recommended.

As per the initial investigations, the client possesses a strong internal control and as a result the “control risk” can be said to be low and as a result a mere “Test of controls” can be undertaken by the auditor where an “Inquiry” into the management is to be launched regarding the takeover decisions of firms in Singapore and New Zealand. The agreement which was signed between the firm and the firm in New Zealand reding the takeover of the firm in New Zealand must be “Inspected” to find out material details about it.

The government restrictions imposed by the New Zealand government must also be inspected to check for the possibility of the deal. It is to be noted that there exists an inherent risk in the “going concern” ability of the business as it has sold one of its major mining operations to one of its competitors and has not yet been able to acquire any foreign company. So, there exists a medium to high inherent risks. Therefore, substantive procedures are to be run for testing the going concern ability as well as for testing the impact of low operational controls which might involve financial outflow or loss for the client owing to environmental incidents in NSW. So, a medium to high amount of evidence mix is required to provide an impartial view on the fairness and reliability of the financial statements.

You are the auditor of Pacific Foods Limited (PFL), a company that provides food for major corporate events throughout South Australia. The balance date for ACL is 31/12/21. On the 15^th of January 2021, PFL was contacted by the legal team of one of their clients, Adelaide Holdings (ADEL). ADEL alleged that PFL had obtained information from ADEL without permission from ADEL that allowed PFL to gain a significant commercial advantage in contract negotiations between PFL and ADEL for a major contract. The legal team for ADEL has advised that civil proceedings will be launched against PFL, claiming $10 million in damages as compensation. An internal investigation by PFL has uncovered evidence that information was obtained fraudulently by an employee of PFL (without the knowledge of PFL management) and this information proved instrumental in assisting PFL in their negotiations with ADEL. This employee was subsequently fired by PFL.

In the event of a successful action against PFL by ADEL, ADEL is also intent on recovering future losses associated with the court case from PFL. The balance sheet of PFL discloses net assets of $20 million. The board of PFL advise you that they are relieved that although PFL was contacted by ADEL, and court proceedings have already begun, they believe the court action does not need to be disclosed to the shareholders until the next financial year. Management of PFL have therefore decided that the court case will not be disclosed in the financial reports at all as they feel it will mislead investors.

In addition to the class action, you are aware of a major restructure undertaken by PFL during the reporting period ended 31/12/21. During this restructure a property in Adelaide owned by PFL has been decommissioned (will no longer be used). PFL would like to sell the property (the likely selling price will be $5 Million) however, a buyer has not yet been found. In the meantime, the property will no longer be used by PFL and will remain vacant until a suitable buyer can be found. The property has been valued and disclosed in the financial reports at its fair value ($8 Million). The board of ACL are very clear in their opinion that the property in Melbourne must be recognised in the balance sheet at its fair value until such time it is sold to a third party.

Required:

Using the facts contained in the case study above and with reference to appropriate Auditing Standards, what type of audit report would you issue if management refused to accept your advice in relation to the issues identified above? (HINT: Make sure you use the steps outlined in the exam revision lecture for the audit opinion example to answer this question.)

As per the above case of PFL where the management have decided not to disclose the class action being filed against them by one of its customers, ADEL where PFL have the knowledge that it was their fault and they are likely to lose the court case, an “Qualified” audit report will be offered. This is because the audit client PFL possesses the knowledge reading their involvement in fraud case for which ADEL have launched legal proceedings against them. The total assets in possession of PFL is $20 million out of which a property at Melbourne worth $8 million is decommissioned and is no longer in use and is likely to be sold at a loss at $5 million which is below the fair value. Now, if all these material information is not revealed by the management to the shareholders as a part of the financial statements especially notes then an “Qualified” audit opinion and report is to be offered in accordance with the auditing standard, ASA 700 “Forming an opinion and reporting on a financial report.”

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