Question 1:
You are an audit manager with Bishop and Knight (BK) .For the past three years BK has been the auditor of Escape Holidays (EH), a travel company.Geoff the audit partner has asked you to contact
Dave ,the CEO of EH with a view to BK being re-engaged as the auditor for the upcoming audit of the 30 June 2015 financial report.
Geoff has indicated that he intends to allocate Michael ,a first year accountant fresh out of University and Jane an accountant from BK's tax advisory department to the EH audit for the first time as the two auditors doing the day to day audit work as he believes from their background they would be ideally suited to audit the firm.You have held discussions with both of the staff and Dave the CEO of EH and excerpts of these conversations follow:
1. Discussion with Dave ,CEO of EH:
Dave stated : "The Board was impressed with last years audit and would like to reappoint BK as auditor of the 30 June 2015 financial report audit .The Board would also like to invite Geoff to give a speech about EH at the next travel agency seminar, to assist in promoting EH's business to attract more investors.I understand that this is outside BK's normal practice , however the Board expressed the view that it would be very difficult for EH to continue any business engagements with BK should Geoff refuse to provide such assistance".
2. Discussion number two with Dave ,CEO of EH:
Dave stated : "To express our sincerity towards BK and Geoff , and to maintain the good relationship in anticipation of another smooth audit for 2015, EH would like to present a complimentary 14 day holiday package voucher for four people to the Greek Isles for both Geoff ‘s and your family .All expenses,including accommodation and travelling costs will be paid by EH".
3. Excerpt from discussion with Michael
Michael stated : "I am very excited to be part of the audit team . I believe that I will be a valuable asset to the team , as my Dad is EH's financial controller.He is responsible for preparation of EH's financial report.
4. Excerpt from discussion with Jane
Jane stated : "I'm glad that I have been allocated to this year's EH audit team .It's going to be a very efficient audit this year as I was on a temporary assignment at EH just a month ago ,helping EH with its tax calculations and preparing accounting entries that will be reflected in the 30 June 2015 financial report so I don't think there will be much audit work required around the tax accounts.It will be great to catch up with everybody at EH again as they are so easy to work with.
Required:
(a) Identify the ethical principles violated
(b) In each discussion /excerpt above identify the specific threat to independence.
QUESTION 2
Office Supplies Products Ltd is a large office supplies company. It has separate purchasing and receiving departments for its paper,writing products and printing supplies.The paper department requisitions most purchases for the various office supplies stores and these purchases need to be approved by the department manager . Other departments are able to raise requisitions for goods and services without authorisation . The purchasing department is responsible for obtaining goods and services a soon as the requisition is received , using unnumbered purchase orders . For convenience , the purchase order book is accessible to all purchasing department staff.
Required:
(a) List the internal control weaknesses in the above
(b) Outline recommendations to overcome the internal control weaknesses in part (a)
QUESTION 3
You are the auditor of Kodor Pty Ltd and have made the following notes on Kodor's cash receipts procedures :
- Cheques from customers are received by mail and from sales representatives, who may obtain the cheques directly from the customers
- All cheques are to be then forwarded to the credit control clerk in the sales order department, who restrictively crosses the cheques so that they can only be banked into Kodor's bank account.
She then enters the details of the cheque into the system via a terminal . She attempts to age the receipt from the remittance advice details provided by the debtor , as attached to the cheque. If inadequate details are provided , she allocates the receipts to the oldest balance first.
- After all cheques have been processed , the credit control clerk prints the daily cash receipts report. This report details all cheques input into the system since the production of the previous report.She agrees all cheques to this report, prepares a bank deposit slip and banks the cheques.
- At the end of the day ,the accounts receivable master file is updated with cash receipts data .
Required:
(a) Identify any weaknesses in the above internal controls.
(b) Discuss the implications(effect on the audit ) from the weaknesses identified.