Assignment
Question 1-
It has been suggested that independence of auditors is compromised through the business risk audit approach.
Task
Prepare a report that:
a) Explains and evaluates the need for audit independence
b) Briefly describes the business risk audit approach
c) Evaluates the impact that this approach has on the independence of auditors.
Criteria
Explanation and evaluation of need for audit independence.
Complex and highly detailed explanation and clear critical evaluation of need for audit independence.
Brief description of the business risk audit approach.
Logical and detailed description of the business risk audit methodology demonstrating deep understanding of the process.
Evaluation of the impact that the business risk approach has on the independence of auditors. Well structured and highly detailed evaluation of the impact that the business risk approach has on the independence of auditors demonstrating a deep understanding of the influences on audit services.
Question 2-
Case
You are currently planning the audit of Wood Art Furniture Pty Ltd. You have calculated the following ratios in order to assist you in identifying potential audit risk areas:
|
Ratio
|
Unaudited 30/6/15
|
Audited 30/6/14
|
Industry average
|
|
Cost of goods sold/sales (%)
|
60
|
75
|
69.24
|
|
Operating expenses/sales (%)
|
12
|
14
|
14.81
|
|
Selling and Administrative expenses/sales (%)
|
3
|
5
|
4.90
|
|
Interest expense/sales (%)
|
7
|
1.50
|
5.23
|
|
Total cost/sales (%)
|
85
|
95.50
|
93.25
|
|
Profit/sales (%)
|
5
|
4.50
|
5.15
|
|
Inventory turnover (times per year)
|
1.96
|
1
|
2.15
|
|
Accounts receivable turnover (days)
|
75
|
95
|
75.00
|
|
Current assets/current liabilities
|
2
|
1.20
|
1.45
|
|
Receivables/current liabilities
|
0.25
|
0.25
|
0.40
|
|
Profit/capital (% per year)
|
13
|
11
|
18.19
|
|
Times dividend earned
|
1.60
|
2
|
1.80
|
In addition you have the following information:
• Wood Art Furniture Pty Ltd is a large proprietary company involved in the manufacture and wholesale of high end wooden furniture such as expensive dining tables and chairs and desks. The company was growing well in previous years but growth appears to have stopped in 2014 but has picked up again in 2015.
• Current year operating profit has increased by nearly 15% while sales have fallen slightly from last year's levels.
• A computerised wood cutting machine purchased in January 2014 was found to be defective and could not be made to work properly. A replacement machine was purchased from another supplier as Wood Art could not afford to be without a computerised cutting machine and no longer trusted the reliability of the original supplier's machines. Wood Art are currently negotiating with the supplier of the first machine for a refund. The supplier does not want to give a refund, instead they want to replace the machine.
• In order to finance both computerised machines Wood Art doubled its bank loan.
• Industry average data was obtained from the Australian Bureau of Statistics, and is calculated using figures from all furniture manufacturing companies in Australia.
Your assistant has reviewed the data and made the following notes:
1. Cost of goods/sales, operating expenses/sales, and selling and admin expenses /sales have all fallen, indicating an improvement in management efficiency. In addition, these ratios are all lower than industry averages, indicating Wood Art Pty Ltd has good cost control measures in place.
2. The inventory turnover ratio has fallen, indicating that inventory is held for less time than prior years. This should lessen our concerns regarding obsolescence.
3. Debtors are now being collected 20 days (or 16%) faster than the prior year, reducing cash flow concerns and lessening pressure on the provision for doubtful debts.
4. Current assets to current liabilities has increased, indicating an improvement in Wood Art Pty Ltd's liquidity position. In addition, this ratio is above industry average.
Required
a) Examine the ratios that your assistant has prepared and the validity of your assistant's comments, and where appropriate provide an alternative interpretation and analysis.
b) Evaluate the implications of your analysis on the year-end audit testing.
Adapted from the Professional Year Programme of The Institute of Chartered Accountants in Australia - 2000 Accounting 2 Module
Criteria
Use of the formulae which underpin the information provided by the assistant to check the statements made by the assistant for any errors and if errors found to provide the correct interpretation. This demonstrates the ability to use business risk analysis in a novel situation and to use critical and reflective judgment. All errors in assistant's judgment identified. Correct interpretation provided demonstrating a sophisticated understanding of how the formula can be used to analyse the risks that a business faces.
Correlation of correct interpretation with additional information provided. This demonstrates the ability to use business risk analysis in a novel situation and to use critical and reflective judgment.
All additional information taken into consideration when developing correct interpretation of ratios. Further demonstrating the high level of understanding of business risk analysis.
Identification of year-end audit test that will need to be completed to minimise audit risk identified through the analysis of the ratios and the additional information. This demonstrates the ability to design an audit plan (10 Marks). All appropriate year end audit tests identified with a clear statement as to how these will minimise audit risk. This demonstrates a sophisticated level of audit planning.
Question 3-
The following are misstatements that have occurred in Fresh Foods Co-operative, a retail and wholesale food business:
1. The incorrect price was used on sales invoices for billing shipments to customers because the wrong price was entered into the computer master file of prices.
2. A vendor's invoice was paid twice for the same shipment. The second payment arose because the vendor sent a duplicate copy of the original 2 weeks after the payment was due.
3. A vendor was paid for the full amount on the invoice but the vendor then complained that the full payment was not received. The vendor then discovered that their billing department had added goods to the invoice after the original invoice was sent to Fresh Foods. Fresh Foods has no evidence that these goods were received.
4. During the physical count of inventory, one counter wrote down the wrong description of several products and miscounted the quantity.
5. A salesperson sold an entire carload of lamb at a price below cost because she did not know the cost of lamb had increased in the past week.
6. On the last day of the year, a truckload of beef was set aside for shipment but was not shipped. Because it was still on hand it was counted as part of the inventory. The shipping document was dated the last day of the year, so it was included as a current-year sale.
7. An accounts payable clerk processed payments to himself by adding a fictitious vendor address to the approved vendor master file
Required
a) For each misstatement, identify one or more types of controls that were absent.
b) For each misstatement, identify the transaction- related audit objectives that have not been met.
c) For each misstatement, suggest a control to correct the deficiency.
Criteria
Identification of absent controls. This demonstrates the level of understanding of the role of internal controls. Identification of all absent controls demonstrating a deep understanding of the role of internal controls.
Identification of unmet audit objectives.
Identification of all unmet audit objectives demonstrating a sophisticated understanding of the development of an audit plan.
Identification of the control to correct the deficiency. Identification of all of the controls to correct the deficiencies, demonstrating critical and reflective thinking and a deep understating of the role of internal controls.
Professional communication
Work contains distinct understandable statements with no errors.
Extremely well organised.
Content is structured in a manner that facilitates the reader's understanding.
Appropriate resources and correct referencing
Used four or more sources.
All work has been referenced correctly as per APA (6th edn) requirements.
Total Word limit- 2000 words.