Explain two reasons why Tanya conclusion is incorrect

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Question - Part A - You are the audit senior at Best Accountants and are conducting the audit of Revglow Ltd for the year ended 30 June 2021. The audit assistant, Tanya Robinson, has just completed testing of the depreciation of property, plant and equipment (PPE). An extract from her audit working papers is as follows: Profit before tax $2,737,000, Property, plant and equipment $16,564,000

In testing depreciation, Tanya selected a sample of 35 items with a value of $1,672,000. She established a tolerable error 5% of base values. The results of the tests showed systematic errors in the sample of $72,400.

Based on the results, Tanya has concluded that this is an acceptable error and no further work is required.

Required - Identify and explain two (2) reasons why Tanya's conclusion is incorrect.

Part B - Great Accounting Partners (GAP) is a mid-size audit firm. It has built up its audit work over the last eight years. During the last eight years, GAP has obtained new clients each year and many of its existing clients have grown. GAP has clients in many industries, but none of its clients are in the financial industry. At this month's planning meeting, the audit partners will consider whether they will tender for audit work for a potential new client that is operating in a financial industry.

Required - Explain whether GAP Partners should tender for the audit work for the potential new client.

Part C - Consider the following two independent situations: (i) Doutta Gala operates several nursing homes in Australia. The company charges a fixed fee per week as set by legislation from all residents. Due to the quality of care provided, occupancy rates are always at or are very close to full. You have tested internal controls surrounding occupancy revenue and results support a very high level of reliance on these controls.

(ii) You are the auditor of Godfrey Ltd (Godfrey). Godfrey is majority owned and run by Karina Gill. It operates a chain of discount stores selling a range of continually changing merchandise. Karina handles all inventory purchases for the business, scouring auction houses in order to buy large lots of liquidated stock at bargain prices. Karina makes all decisions regarding what stock to purchase, the price to pay and, given that goods sold at auction have to be paid for immediately, is the sole signatory to the company's bank account. You have determined that there are no controls over inventory purchases on which you can place reliance. However, you do note that Karina keeps all available documentation, which is passed on to the accountant for checking and processing.

Required - Explain how the information provided above would affect the nature, timing and extent of substantive procedures for occupancy revenue in situation (i) and purchases for situation (ii).

Reference no: EM133006312

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