Reference no: EM132508943

BAAC4203 AUDITING AND CONTROL II - Higher College of Technology

Problem 1
When you audited one of your client, you realised that the company is having a robust internal control system in purchase process. You decided to test the internal control system, but the manager of the client explained to you the process of how the internal control system works and you find it convincing. You did not test the control system and assumed that the risk of material misstatement will be less and decided not to apply any analytical procedure. During the process of your audit work, you learned that your father has an investment in shares of this company worth RO 1000. You know that it is a violation of ethical principle of independence but you convinced yourself that it is negligible amount and it will not affect your decisions. Your brother is a graduate in accounting and this company offered a job for him with immediate effect, but you rejected it because of lower salary offering by the company.

While auditing the fixed assets of the company, you found that the company used a method of valuation which is different from that of pervious year. You received a clarification from the senior manager in charge who stated that the company was in a transition stage and if they use the prior method of valuation the profit would be reduced or sometimesmay even reach a loss. You calculated the valuation again and you realised that whateversaid by the manager was right. You did not mention this in your report. Since the depreciation method used by the company was complicated and you don't know how to evaluate the same to see whether there are any mistakes or not, you decided to ignore that area and moved to other aspects of auditing.

Question 1. Identify at least 5 ethical issues in this case. Give reason for your answer.

Question 2. Do you think it is an ethical issue of independence even if the investment in the client is a negligible amount? Give reason for your answer.

Question 3. Do you find any of the required qualities of an auditor missed by the audit team in the above case other than ethical issues?

Problem 2

You couldn't get much time to think of various initial engagement requirement of the audit before you take up this audit because of time constraint. You directly started the audit after signing the engagement letter. You have only two weeks remaining to complete the audit engagement with your client now. If you fail to submit report on time, your audit fee will be withheld by the client by 20% as per the agreement. So, you and your team is trying to complete your audit on time. You realised that you are only halfway in accumulating and evaluating audit evidence related to many aspects of the financial statement. And you know that the evaluation of reliability and relevance of audit evidence is a tough task to complete on time, hence you outsourced the to a third party for a nominal fee.

You tried to collect many audit evidences through conducting some analytical procedure. Your manager stopped you by citing the reason that physical evidence are more reliable than result derived from analytical procedures. One of your team assistant collected account statement from the finance manager, the customers bank account details from the banks and confirmation from the customer himself to verify the amount of money transferred to him as part of refund for a returned product. Your audit assistant is not sure which of the above source of evidence is most appropriate.Since you are also confused a little, you told her that youwill clarify later.

While evaluating management estimates and selection of accounting policies, the team members were not able to reach a conclusion that whether the selected policy or estimate are reasonable or not. You also noticed that some of the team members are performing their work causally without checking the cost effectiveness of the results of decision made by the management.

Q1. Do you agree with your manager that physical evidences like vouchers are more reliable than the evidences collected through analytical procedure? Give reason for your answer.

Q2. Do you feel the audit team violated some ethical principles in this case? Give reason

Q3. What do you think as the reason for this audit team unable to complete their audit work on time? Do you have any suggestion for them to improve for next time?

Problem 3

While auditing the total wage bill of your client, you realised that the company doesn't have a good internal control system in wage payment. You learned that if there is no proper internal control, it add more risk of material misstatement in the financial statement. Since you are in a dilemma, what procedures to be used to get the audit evidence in this regard for wage payment, one of your team member suggested analytical procedure. You have decided to go for an analytical procedure to get more audit evidence in this for this and you have collected the details of number of employees and their total wage bill for past three years.

You read and understood from the minutes of meeting of the board that there is no salary hike for the employees for last year except that the company paid a retirement expense of RO43,000 to three employees in the year 2019 and that is included in the salary bill. Since you got this details of wage bill and number of employees from an unofficial record published by a website, you are not sure the authenticity of the data. Company is paying salary of all its employees through bank account.

Q1. What audit evidence would you derive from the above analytical procedure? How would you defend yourself with the result?

Q2. As an auditor, would you investigate the result of all analytical procedure that you have conducted? If yes, when will you decide to investigate?

Q3. Can an auditor use any kind of data for their analytical procedure? If yes, what are the precaution he has to take before using the data?

Problem 4

You are very happy to audit with your current client because you have been auditing them for past two years. The management is very cooperative in getting evidence and clarification for various queries. When you spoke to the finance director informally, you learned that the company is under some pressure from financial institution and banks to show more profit otherwise they may stop extending credit to the company further. When you investigated further, you found that the company's net cash flow is unfavourable for last two quarters and loan repayment was severely affected. On another day you spoke to the finance director again regarding the same issue and he told that he was trying to find an alternative source of fund for the company for next quarters and was not sure himself whether they could arrange the same or not.

While verifying the liabilities side of the balance sheet, you found that the amount of wage payable is abnormally high for the last two quarters. A detailed inquiry in this matter highlighted non-payment of salary to 50% of employees by the company. While assessing the audit file, you found that there are substantial evidence pertaining to non-compliance of IFRS by the company in valuation fixed assets and inventory. When you enquired about this, the general manager clarified that since the company is reeling under pressure from various stake holders, they don't have a choice but follow this system for the benefit the company. Audit evidence collected by the team shows that there is a material misstatement in revenue recognition too.

You are required to:

Q1. Are you able to find any instances that may cast significant doubt over the company's ability to continue as going concern? You may list more than one if applicable. Give explanation for your answer.

Q2. Assume that this company prepared its financial statement on going concern basis. What will you mention in your audit report regarding "suitability of going concern assumption"?

Q3. What type of audit opinion you are planning to express in this case? Substantiate your answer.

Problem 5

You are about to complete the audit of your client (Grand Muscat LLC) by next week. Your team is busy with assessing and accumulating the required audit evidence for expressing your audit opinion. When you assessed the evidences, you found that the inventory is misstated, and it is deemed to be material but not pervasive to the financial statement. Your team audited the financial statement of the client comprising of Income Statement, Balance Sheet including the notes, Statement of Changes in Equity and Cash Flow Statement including the summary of significant accounting policies and other explanation.

The following additional information are also available based on your evaluation of audit evidence.
1. The financial statements are prepared in accordance with applicable reporting standard.
2. The auditor complied with the required ethical requirement as per ISA 200
3. Based on the audit evidence obtained, the auditor has concluded that due to substantial erosion of company's net worth for last two years, the companies' ability to continue its operation in subsequent years is at stake.
4. The professional judgement of the auditor reveals that the estimates made by management on future profit of the company has high level uncertainty. The company disclosed this in one of the notes annexed to financial statement, but auditor feel this is important for users understanding of financial statement.
5. Those charged with responsibility of oversight differs from those charged with preparation of financial statement.

Based on the available information, you are required to prepare an audit report in a proper format with the following heading/paragraph with detailed explanation.
1. Opinion Paragraph
2. Basis of opinion Paragraph
3. Key audit matters if applicable
4. Other matters paragraph
5. Responsibilities of management and TCWG for the financial matters.
6. Assessment of going concern paragraph if applicable

Attachment:- AUDITING AND CONTROL.rar