Reference no: EM132341160

Find the answers to specified questions regarding the simulated audit which you should use as clues for writing a comprehensive and detailed report to the audit committee of "Bookkeeping Makes Cents Pty. Ltd." indicating the audit observations.

This will give you a chance to learn how to conduct an audit in a simulated business environment. Each team will also present a 8-10 minute power point presentation in-class based around this report but as a "snap-shot" only.

Clues on how to approach the Audit Report - Workplace Audit Simulation

1. Refer to the letter from the ATO in the "Case Study Working Files" that has the reference, BMC 2011/06-1. Also refer to the attachments entitled, GST [Detail - Accrual],GST [Detail - Cash] and the BAS for the quarter, 1/4/2013 to 30/6/2013. In the letter, the ATO confirms, based on the information initially given to the ATO when "BMC" applied for GST registration online, that they would account for GST quarterly, but on an accrual basis. You can assume that the details in this letter are correct.

Also refer to the "BMC" extract from their "Policies and Procedures" manual, point 2 entitled, "GST and BAS reporting" in the"Case Study Working Files". In this, it states that business is registered for GST reporting quarterly on a CASH BASIS. Using the Payroll Activity [Summary] report contained in the "Case Study Working Files" together with the ,GST [Detail - Cash] report, the Accountant for "BMC", Joe Frush has used these reports to complete and submit the last quarter's GST and PAYG.

In your opinion, after investigating this BAS as a sample document as part of your audit, is the BAS correct taking into account all of the evidence and documentation above? If no, what should be the correct payment to the ATO have been?

2. Refer to the three reports entitled, Payroll Tax Year-to-Date 2013,theProfit and Loss Statement and the Balance Sheet for 2012/2013 in the "Case Study Working Files. The company registered for Payroll Tax for the financial year in question. What is the statutory requirement to register for Payroll Tax in Victoria, that is, and what amount of gross salaries and wages does a company need to pay before it exceeds the threshold? Is the non-registration of "BMC" therefore consistent with the statutory requirement to register for Payroll Tax in Victoria?

3. You begin to have serious doubts regarding "BMC's" viability for the 2012/2013 financial year and the issue of it being a "going concern" now enters into your thoughts. You decide to have a closer and more detailed look at the company and begin with the previous financial year's financial statements (Profit and Loss and Balance Sheet to June 2012), the Auditor's Report and the Director's Declaration.

Refer to the "Case Study Working Files" for access to these documents. You notice that even though they did not begin trading as at 30 June, 2012 there was considerable Balance Sheet activity with the purchase of Non-Current Assets and the establishment of a Bank Loan. Furthermore, a considerable amount of Capital was injected into the business by one owner and the Current Assets were totally made-up of cash in the bank.

As a result, "BMC" decided to opt for an independent audit on its financial statements by your audit firm which was then under the control of the Audit Partner, who signed-off the Auditor's Report on behalf of your firm. The Audit Partner has now moved-on to another division of your organisation namely Insolvency and Reconstruction. After inspecting the four documents, is it reasonable to assume that the Auditor's Report and the Director's Declaration are correct? Please give your reasons.

4. You also discover that your firm conducted some consultancy services for "BMC" in that they performed a review of the internal control procedures for Accounts Payable and Receivable and also used your firm's recruitment agency to employ three new Accountants. You feel that there's been a conflict of interest. Therefore, as a result, would you say that there is a significant issue involving the professionalism, ethics, and independence of both firms? If so, what are they specifically and how do you think they may have affected the outcome of the audit? And which Australian Accounting Standards (ASA) and Accounting Professional Ethical Standards (APES) would specifically concern you with respect to this issue?

5. After further significant testing and sampling of the accounts for 2012/2013, your observation regarding whether "BMC" is a going concern hasn't changed but may have in fact shifted towards the company possibly now being technically insolvent. Testing and analysing the financial statements for 2012/2013 (refer to theProfit and Loss and Balance Sheet to June 2013) you ascertain and conclude the following:

a.) The loss for the year is -$100,389.

b.) You undertake some ratio analysis as follows which indicate serious cause for concern:

1.) Profitability - ROA (Return on Total Assets) - (Net Profit/Total Assets) x 100;

2.) Profitability - NPM (Net Profit Margin) - (Net Profit/Sales) x 100;

3.) Efficiency - ASPD (Average Settlement Period for Debtors) - (Trade Debtors/Credit Sales) x 365 (assume all Sales are credit sales; and

4.) Liquidity - CR (Current Ratio) - Current Assets/Current Liabilities).

c.) You have also uncovered missing depreciation journal entries for the 2012/2013 financial year that have a significant effect on the financial performance and position of "BMC". Your findings are as follows:

1.) The motor vehicles have been incorrectly accounted for as they were depreciated, straight-line at 75% per annum instead of 18.75%;

2.) There is no depreciation for both the Office Equipment and the Computer Equipment from when the Assets were purchased on 1/7/2011. The Office Equipment was to be depreciated at 20% per annum straight-line and the Computer Equipment was to be depreciated at 30% per annum, reducing balance.

As the Auditor, you must provide answers with reference to the above as they must be conveyed to the Audit Committee of "BMC".

1. Why do you think the current year loss of $-$100,389 is significant?

2. Complete the four ratios and comment on their significance.

3. What is the effect on the financial statements of the depreciation errors? Show the correct journal entries for the three categories of Assets.

After considering the effect on the financial statements of the above, re-calculate the "loss" for 30/6/2013 and the adjusted "Balance Sheet" as at 30/6/2013 - is it (much) worse than the current one? If so, do you think it is a "going concern" or is "BMC" now insolvent. Would you accept a Director's Declaration similar to the one for the 2011/2012 financial year and would that change the audit opinion of your firm? Please give your reasons.

And which Australian Accounting Standards (ASA) and Accounting Professional Ethical Standards (APES) would specifically concern you with respect to these issues?

6. Classification Issues

You take a closer look at the classification of the elements of both the "Profit and Loss Statement" and "Balance Sheet" for the 2012/2013 financial year. The "Profit and Loss Statement" and maybe the "Balance Sheet" don't seem to be properly classified and may require correction. Do you think that they conform to the requirements of the Australian Accounting Standards in their presentation? Please give your reasons. And which Australian Accounting Standards (ASA) would specifically concern you with respect to this issue?

7. Internal Control problems within Payroll

You gather more audit evidence from testing the payroll internal control procedures and policies and procedures and discover an incorrect classification with respect to an employee, Ms. Kimberley Lee. After referring to "BMC's" Enterprise Agreement 20121-2015, contained in the "Case Study Working Files", you determine that she was incorrectly classified as a Level 2 Clerical Officer and as a result, paid the incorrect hourly rate of $25.31 from 1/2/2013. If in fact her duties covered supervising three employees, preparing a BAS each quarter and holding a Certificate IV in Bookkeeping, what level should she have been correctly classified as and what rate of pay should she have been paid at from 1/2/20213? And what internal control(s) would not have been adhered to or breached by this significant error? What recommendation would you advise the Audit Committee should put in place to ensure this type of error does not occur again?

Attachment:- Case Study.rar