Reference no: EM131018193 , Length: 3000 words

Auditing theory and practice

DICK SMITH HOLDINGS - ASSIGNMENT 1 (AUDIT PLANNING CASE STUDY):

REQUIREMENTS/QUESTIONS:

(a) From your research, identify four (4) issues or events (accounting or otherwise) that may have an impact on the planning of the audit of Dick Smith for the reporting period ending 31st December 2015.

HINTS: Students should use initiative in answering this question.

• Remember auditors are trying to find conditions or events that might give rise to material misstatement. Whilst not necessarily related to Dick Smith, ASA 315 provides some examples of common conditions and events that may indicate the existence of ‘risks of material misstatement'. Please go to Appendix 2 of ASA315 of your Auditing Handbook for a broad categorisation of possible events or conditions that might possibly apply to Dick Smith. Please be warned however that you MUST demonstrate clearly (with substantive research evidence that is appropriately referenced) that an identified issue relates specifically to Dick Smith and the planning of its audit.

• Inclusion of evidence of research is critical. Do NOT merely use information from the company's financial reports - to score well you must find independent research evidence to support the issue. Better quality research = better quality marks.

• Be sure to use in-text referencing (see Harvard Referencing Guide on the Unit Website).

• Check your assignment carefully for typographical and grammatical errors.

(b) State what audit evidence you would gather in order to gauge the issues identified in part (a) above, for inclusion in the planning strategies for the audit of Dick Smith.

HINTS: When auditors identify conditions or events that give rise to the risk of material misstatement, they design information (evidence) gathering procedures in order to establish whether or not the identified risk exists and may result in material misstatement in the financial reports. This question is asking you to use your ‘best judgement' to identify relevant audit evidence you might seek in the audit of Dick Smith. All the different types of audit evidence that might be referred to, is shown in paragraphs A10 to A25 of ASA 500. The challenge for students is to make the evidence gathering activities SPECIFIC to the risks you identified in part (a) above. We do not expect you to know EXACTLY what documentation etc you would find at Dick Smith, but you should be able to identify documents or records or information you would look at and/or people you would speak to, from your experience and studies in the Unit. Broad brush answers (eg "look at sales documents for evidence of unusual sales") will not be sufficient. Think about the specific information you might seek in a real world situation. Where appropriate, be sure to use in-text referencing.

PRESENTATION, USE OF APPROPRIATE REFERENCING CONVENTIONS, GRAMMAR AND SPELLING

ASSIGNMENT 2 (2,000 WORDS):

REQUIRED:

1. Identify what you consider to be the ‘key' inherent risk factors that could have an impact on the audit of Dick Smith for the year ended 31st December 2015 and/or future audits.

For each of the inherent risk factors identified, describe the risk clearly and state how and why you consider the issue may create the risk of potential material misstatement in the financial statements of Dick Smith for the year ended 31st December 2015 and beyond. You are expected to identify five (5) critical inherent risks.

Objectives of the assignments

Having completed the assignments, students should be able to:

• Identify risk factors facing the auditor and understand the impact on audit procedures and the collection of audit evidence;
• Apply accounting knowledge (lifelong learning skills) in identifying the risk of errors in financial reports;
• Use the skills they have learned in previous units to think critically about the quality of information.
• Exercise judgment and learn about the investigative nature of audit tasks.
• Apply theory to a simulated real world case.

#1 - Operating effectively with and upon a body of knowledge....

This is a simulated real world case that requires the application of your prior learning to test your ability to apply principles to the case at an appropriate depth of understanding.

#2 - Is prepared for life-long learning.....

Once again, the solution to this case will not appear in the texts for this unit. It is expected that you will be able to think creatively and practically, realising that each audit client will be unique, requiring different approaches to solving business issues or planning an audit. In other words, a lifelong learning skill is that there is no ‘cook- book' that gives the right answer, and the real skill is examining the information, applying general principles, undertaking research and developing practical solutions.

#3 - Is an effective problem solver, capable of applying logical, critical, and creative thinking....

Once again, the answers to the case will not be found in a text book. You need to take on the role of business analyst so that you can identify, from an audit point of view, the critical areas for focus in the gathering of evidence. This takes creative thought, and logical but critical thinking.

#4 Can work both autonomously and collaboratively...

Students need to show they can use initiative and undertake work in an autonomous manner. Working as an individual is rewarding as you are responsible for the assignment input, and will reap the benefit of having covered all areas. We encourage you to discuss the issues with your colleagues but do not collaborate when submitting your work for assessment.

#5 Is committed to ethical action and social responsibility...

We have included this real world case so that you may gain an appreciation of the work undertaken by an auditor in planning an audit. As the next generation of professional accountants, it is our aim that you will have a better appreciation of what is required in planning an audit and gain an understanding of the theory in a practical environment.
#6 Communicates effectively....

Your report will be assessed for structure, professional presentation, language and content. Case analysis assists in developing logical thought processes which should translate to written and oral communication skills.

#7 Demonstrates an international perspective

Specifically addressed in this assignment; the entity under consideration has international exposure.

ASSIGNMENT 1 BROAD GUIDANCE NOTES

Question (a)

You are required to identify four (4) issues and/or events, accounting or otherwise which may impact on the planning of the audit of Dick Smith. They may, for example, relate to the ability of the entity to continue as a going concern; the risk of material misstatements in the financial reports; impacts of industrial economic or international markets that are specific to Dick Smitj and supported by your research; or perhaps the possibility of incentives for management to misstate information contained in the financial reports. ASA315 Appendix 2 will provide some further insight into the types of broader issues that may raise the risk of misstatement.

Each event MUST link to the planning of the audit. For example, you may find information related to the reducing of costs in a specific segment. This is an accounting issue which is allowed for this question - however, the discussion of this event/issue must be in terms of how this issue/event then relates to the planning of the audit. It can be any aspect of the planning stage of the audit - collection of evidence, determining the type of evidence, determining the impact on any of the risk components in the audit risk model. As long as it relates to the planning of the audit and it is clear in the discussion that there is a link to the planning of the audit. It is always easier to establish this link by trying to link your discussion to a specific section of the Auditing Handbook. You may try to link it to one of the key standards in ASA500, ASA220, ASA240, ASA315 and ASA570. This is where planning becomes a key part of your strategy. Give yourself time to become familiar with the question, what it is asking you to do and how to address it based on the guidance given in these appendices.

The issues can relate to any aspect of the planning of an audit - ie they can relate to assessment of inherent risk, business risk, control risk, the ability to collect sufficient evidence to form an audit opinion and the assessment of business risk to name a few. This list is not exhaustive - focus on any issues you believe to be relevant to the planning of the audit of Dick Smith and/or the collection of sufficient evidence to form an opinion in relation to the financial reports of Dick Smith. Remember Dick Smith is a real world entity. INDEPENDENT research is required on the entity to complete this assignment. You must also use in-text referencing as evidence of the research.

You are required to use research outside of the Dick Smith website - for example, online newspaper sites and library databases (using their newspaper or serial directories - eg ProQuest), ASX announcements, business news websites etc. External and independent websites are a rich source of information because they provide an independent assessment of the entity. Focusing on Dick Smith's website may mean you do not identify the key issues impacting on Dick Smith for the period in question as you are only obtaining the news Dick Smith want released and in the way they would like it received.

You need to be as specific as possible to Dick Smith in the identification and explanation of the issues or events - the more detail you provide the easier it is to see how the issue directly relates to the planning of the audit. Broad general statements and discussion will not accrue many (if any) marks.

For example, you might find an article which says that 150 staff had their jobs terminated because they were stealing from the company. This would help you with discussion of issues or events in that it appears that certain types of assets may be susceptible to fraud and theft, and there may be some concerns about the company's control environment. Events identified in this assignment can relate to any aspect of the planning of the audit.

Please note: Students cannot use termination of jobs, job cuts, redundancies as one of the 4 events/issues for assignment 1. No marks are awarded to a discussion of issues related to the termination of jobs or staff redundancies or the like.

You can discuss issues related to control risk, materiality, acceptable audit risk, evidence mix, and planned detection risk. The key thing is that you need to provide a brief explanation as to how the information will impact on the planning of the audit.

A simplified example of how to set out your answer to this question is provided in this appendix (see below).

Please note that this question will take some time to complete. It is therefore advisable that you do not leave this to Week 4 to begin. As always, you are welcome to post questions on the Assignment 1 Discussion Forum before submitting. If you leave it to the last minute, it is unlikely you will receive the assistance that you require to complete the assignment.

The first assignment requires students, as a minimum, to look at topics 1 - 3 to be able to successfully complete the assignment. However, the assignment does relate to all aspects of the planning of the audit. Hence, students can discuss issues related, for example, to the internal control structure in assignment 1 even though the topic relating to internal control will not have been covered before the due date of the assignment. With this in mind, it is important to note that students are not required to discuss any issues in the planning stage relating to topics taught after the due date of the assignment. Students can still score a very high mark by focusing on the issues related to the first three topics in the Unit. Students may also find the first assignment a little less challenging if they read ahead and apply some of the subsequent theory to the first assignment.

Question (b)

Having identified 4 issues in part (a), you are now required to identify evidence that the auditor would collect to assess the issue that has been identified. For example, if an issue identified was that 150 staff had just lost their jobs, examples of the evidence to be collected might be the to collect details of the amount of employee entitlements paid to those who had lost their jobs; a review of redundancy liabilities outstanding at balance date; a closer review of leave provisions and payments during the year; and the issue of a solicitor's letter to determine if there is any litigation from disgruntled employees for wrongful dismissal. Evidence is easier to identify if you focus on documentary evidence specifically related to the issue identified in part (a). The more specific you are in your discussion in part (a), the easier it will be to answer part (b). Conversely, general discussion in part (a) will make it very hard to answer part (b).

Evidence: While you are not required to design specific audit tests you are required to explain what actions you would take and information (evidence) you would obtain about the areas of concern you have identified so you can plan detailed audit procedures. Ensure that the factors identified relate directly to the entity. ASA500 contains the different types of evidence that can be gathered by an auditor. Once again, do not use the example above relating to staff redundancies and the like as an event in assignment 1.

ASSIGNMENT 2 BROAD GUIDANCE NOTES

Question 1

Identify what you consider are the inherent risk factors which would impact on the audit of Dick Smith. You are encouraged to use financial information relating to Dick Smith and the industry in which it operates for the period in question. Once again, simply discussing the announcement of profits, budgets or dividends or revised financial forecasts, of themselves, is not considered a major event or an inherent risk and this will not accrue any marks if identified and discussed as inherent risks. Non-financial information can be a goldmine which can assist you in identifying potential inherent risks by giving you clues as to what to research.

Be careful to answer the question - that is, it asks what are the "inherent risk factors". You should be clear about what "inherent risk factors" mean. Another term often used is "areas of concern". Overall these terms mean what areas of the financial statements are there likely to be risks of material misstatements (which might ultimately impact on the auditor's opinion and report). Specifically, the information may lead you to think that some areas may have an error (mistake) or fraud in them as a direct result of certain events or issues that the company has experienced or may experience. Your task for this assignment is to identify that information and how and why it may present a possible risk of material misstatement in the financial reports.

Further, you will need to clearly explain why and how you have arrived at each risk factor. Simply stating information without applying it to a risk factor will not attract any marks.

How you set out the answer to question 1 is up to you, but you must clearly address all three aspects of the question:

1. What is the inherent risk? (A simple explanation will suffice for this part of the question).

2. Why is it an inherent risk? (To do this, you need to explain and give an example of a specific misstatement that could occur if this risk is present in Dick Smith). Do not simply state "this will cause potential misstatement" or ‘this may result in fraud' or ‘the directors will misstate the financial statements'. You must provide a specific example of a potential misstatement that could occur. This is not as easy as it sounds. The potential misstatement must be specifically related to Dick Smith and be both reasonable and plausible.