Reference no: EM132959328

HI6026 Audit, Assurance And Compliance

Question 1 Explain the definition of the audit expectation gap? Then, discuss some approaches to reducing the expectation gap.

Question 2 The audit partner has just advised you that he has been approached to accept the appointment of auditor to Bungie Limited. Bungie Limited is a manufacturer of gaming machines and has been named in a recent anti-corruption enquiry as having offered incentives to state government members to support a proposed bill that would allow an increased number of gaming machines in licensed premises. No charges have yet been laid against Bungie Limited or any of its employees. The audit partner explains to you that Bungie Limited's auditors were re-appointed for the current financial year at the Annual General Meeting held two months ago. However, Bungie Limited's managing director is unhappy with the existing auditing firm as the audit partner assigned to Bungie Limited has been changed.

Required:
The audit partner is unsure whether he should accept the appointment and has asked you to outline any ethical, legal, and other factors to consider in his decision about whether to accept the appointment for the current year and indicate the steps that need to be taken prior to the appointment.

Question 3 You have reviewed the work performed by your assistant, Samson Chow, on the audit of Bexca Ltd for the year ended 30 June 2018 and have noted the following two independent matters:

(i) In testing investments in listed securities, Samson selected all shareholdings with a market value above $200,000 and checked them to the closing market value reported by the Australian Stock Exchange to determine the net realisable value of each shareholding. The items tested totalled $5,500,000, or 60% of the total balance. Of the items tested, only one error of $110,000 was discovered. Samson concluded that the error was not itself material, as only 2% of the balance was tested. He extrapolated this error to the total population and estimated that the error for the total population would be $185,000, which was also immaterial. Therefore, he concluded that the investments in listed securities were fairly stated at the lower of cost or net realisable value.

(ii) Bexca Ltd has 1,000 stock lines that are maintained on a perpetual inventory system. Stock is counted on a cyclical basis so that all lines are covered at least once per year. Samson attended the March stocktake to observe the counting procedures and conducted 20 test counts from the floor to the client's count sheets and 20 from the client's count sheets to the floor. He uncovered two minor discrepancies of one item each, which he considered to be immaterial. The client also uncovered five minor discrepancies between the perpetual records and the actual quantity on hand. None of these discrepancies was adjusted on the perpetual records, as the amounts involved only totalled $50,000 and were considered to be immaterial. Samson concluded that no further work was considered necessary on stock quantities at year-end.

Required:
(a) Explain what is meant by sufficient appropriate audit evidence.
(b) Explain whether sufficient appropriate audit evidence has been obtained for each of the above situations. Give reasons for your answer.

Question 4 You are currently involved in planning for the audit of Spot Light Ltd (SLL), a national company producing curtains and blinds. The curtain and the blind market is highly competitive, and SLL has been experiencing declining sales over the past three years. Cost-cutting has proven very difficult, as the cost of materials used in the company's production lines has increased each year. SLL's bank has continued to provide SLL with loan facilities; however, it has indicated that it expects to see improved results in the next financial report and has placed a number of quite restrictive covenants in SLL's lending agreements. Recent articles appearing in the financial press concerning SLL's expected financial results have been very pessimistic about its likely performance.

Required:
Based on the information provided:
(a) Discuss the overall impact on audit risk. Which specific component(s) of audit risk would be affected?
(b) In refer to Question No. 5, for each matter explains from 1 to 3, outline how each matter considers as fraud audit risk factors in relation to Colette Hayman Ltd (CHL)'s case study

Question 5
You are an audit manager at Carillion & Associates and have been assigned to the audit of Colette Hayman Ltd (CHL) for the year ending 30 June 2020. CHL is an Australian manufacturer, wholesaler and retailer of women's handbags and shoes. CHL manufactures all its products at its Melbourne factory and sells via retail outlets throughout Australia. CHL is listed on the Australian Securities Exchange, and Carillion & Associates has been its auditor for several years.

In recent years, CHL has been finding it difficult to meet its projected profit forecasts due to increased competition from new local competitors, imported products and online shopping; the increasingly high Australian dollar; and the impact of the global and USA financial crisis on consumer spending.

During the planning stage of the audit, you become aware of the following matters:

1. CHL has significant loans from its bank. The bank has indicated that it is concerned about CHL's ability to meet specific loan covenants, particularly the return on total assets (net profit/total assets).

2. The aged trade accounts receivable listing indicates that the percentage of accounts receivable exceeding 90 days has jumped from 15 per cent to 37.5 per cent during the last 12 months. The credit manager has indicated that this is because some of CHL's customers are currently experiencing financial difficulty.

3. In order to reduce costs, CHL changed one of its major suppliers of raw materials in February 2020 to a cheaper overseas supplier. However, the number of product returns has increased significantly since April 2020, and your discussions with management have indicated that the increased returns have involved customer complaints concerning the quality of the product.

4. Your review of the payroll system has indicated that when an employee is hired or terminated, the payroll clerk immediately prepares the paperwork and enters the information into the master file of the payroll computer system.

5. The payroll department at CHL's head office processes payroll weekly. The factory manager signs off all timesheets that are submitted by factory workers. The timesheets are input into the computer by the factory manager, and the payroll department then makes payment.

Required:

(a) Describe the two types of misstatement in a financial report that may arise from fraud.

(b) Explain the difference between general and application controls. In refer to matters 4 and 5 above, outline one weakness in either the control activities or information systems.

(c) Describe how the internal control weakness could lead to the material misstatement in the financial report.

(d) For each weakness provided in your response to (b) above, describe one practical manual general control and one practical IT-automated application control.

Question 6
Kangaroo Bedding Ltd is a bedding manufacturer that achieved a net profit before income tax of $1 842 000 for the year ended 30 June 2019. Kangaroo Bedding Ltd has a major loan from Westpac Bank (WB) for financing daily and other operations, carrying an interest rate of 7 per cent per annum.

Kangaroo Bedding Ltd is required to adhere to financial covenants imposed by WB, and in the event that the covenants are breached, the annual interest rate on loan will increase to 10 per cent. Kangaroo Bedding Ltd has disclosed these details in the notes to the financial report.
You are satisfied that the note in the financial report complies fully with the accounting standards; however, you form the view that your audit report should draw attention to this note.

In addition, you have identified the following matters from your audit work:

1. Kangaroo Bedding Ltd's inventory amounted to $1 941 000 on 30 June 2019. In order to move some of its old stock, in July 2019, the company sold 25 per cent of its finished goods inventories held on 30 June 2019 for $82 189 below their original cost. Management has indicated that as the sales occurred after 30 June 2019, it believes that the value of finished goods at that date should remain at cost. The remainder of the inventory has only been purchased recently and is in great demand.

2. Kangaroo Bedding Ltd's accounts payable on 30 June 2019 amounted to $1 726 000. Subsequent payments testing revealed that in July 2019, invoices totalling $53 751 were paid that related to June 2019 purchases of inventories. The relevant invoices were omitted from the balance of accounts payables on 30 June 2019. Management has indicated that it does not intend to adjust the financial report in relation to this issue.

3. Kangaroo Bedding Ltd's accounts receivable balance on 30 June 2019 amounted to $2 540 000. Your testing has revealed that the accountant used an incorrect exchange rate to translate overseas debtors on 30 June 2019. As a result, the balance of the accounts receivable account was overstated by $75 650. Again, management has indicated that it does not intend to adjust the financial report in relation to this issue.

Required:
(a) Explain whether drawing attention to the note will result in the expression of a modified audit opinion. Justify your answer.
(b) Explain whether the issues arising from your audit work (matters 1 to 3 above) will individually have any effect on your audit opinion. Justify your answer, using calculations
(c) Identify the type of audit opinion that you will include in your auditor's report for Kangaroo Bedding Ltd for the year ended 30 June 2019. Justify your answer.