Auditing and Assurance Services Final Examination
PART A - MULTIPLE CHOICE QUESTIONS
1. Which of the following statements about review engagements of half yearly financial statements for a public company is true?
a) The Corporations Act (2001) requires half-yearly financial statements to be reviewed.
b) Reviews do not express an opinion on whether the financial statements are true and fair.
c) The auditor is not required to reach a conclusion about whether the financial statements are in accordance with accounting standards.
d) The Corporations Act (2001) does not mandate that half-yearly financial statements are reviewed or audited.
2. Assume as auditor you are being sued by the creditors of your audit client on the basis of negligence. Upon which of the following legal precedents would you instruct your lawyers to argue your case:
a) AWA.
b) Esanda.
c) Pacific Acceptance.
d) (b) and (c).
3. Audit services provide economic benefits to society because:
a) The separation of ownership and management gives rise to information asymmetry.
b) An efficient audit will reduce agency costs by more than the cost of the audit.
c) It allows high quality managers to prove that the reported profit is not the result of financial manipulation and therefore they can distinguish themselves from average managers.
d) All of the above.
4. Which of the following statements about auditing of the federal public sector, by the Australian National Audit Office (ANAO), is true?
a) The ANAO has a mandate to audit the entire federal public service.
b) The board of directors of the ANAO appoints the Auditor General.
c) The ANAO does not have to follow Australian Auditing Standards, as they only apply to audits of public companies.
d) The ANAO does not perform financial statement audits of federal government departments, as they do not prepare separate financial statements.
5. ABC Bank Ltd has excellent controls over bad debts but due to the recent economic downturn, you have assessed the business risk over this account to be high. Which audit strategy should you adopt?
a) Many tests of controls, many substantive analytical procedures and no tests of details.
b) Few tests of controls, no substantive analytical procedure and lots of tests of details.
c) Many tests of controls, no substantive analytical procedures and few tests of details.
d) Few tests of controls, lots of analytical procedures and few tests of details.
6. ASA 240: The Auditor's Responsibilities Relating to Fraud in an Audit of a Financial Report requires the auditor to do which of the following?
a) To add an emphasis of matter paragraph to the audit report to state that fraud has occurred, even if the financial statements are true and fair and the fraud has ceased.
b) To maintain professional scepticism about the possibility of fraud, even if the company has no history of fraud and the management are trustworthy.
c) To report all material fraud to ASIC.
d) To require the auditor to only accept an audit client if the directors indemnify the auditor against fraud litigation costs in the engagement letter.
Use the following information to answer questions 7 - 9
Hipster Organic Coffee Roasters Ltd (HOCR) imports, roasts, packages and sells coffee beans to cafes from a factory in Alexandria. The company CEO is Sam Jenkins and there are fifteen other employees. Eight people are employed to roast and pack the beans and four drivers to deliver them. There are three accounts clerks. Their names and responsibilities are:
- Craig Fleming - responsible for inventory management and for organizing deliveries,
- Kirsten Tarrant - responsible for taking customer orders, recording sales, accounts receivable and cash receipts,
- Richard Shearer - responsible for purchases, accounts payable and cash payments.
When Kirsten receives an order from a retail store, she checks with Craig to see if the item is in the warehouse. If it is in the warehouse, Craig generates a dispatch note and updates the inventory records. He gives the dispatch note to a driver, who takes the inventory from the warehouse and makes the delivery. Once the delivery has been made, the driver confirms the quantity of inventory that was actually delivered to the customer. When he returns, he gives the dispatch note to Kirsten who then records the transaction in the sales journal. In addition, Craig reviews the inventory records daily and asks the coffee roasters to make new batches of any items that have low stock levels.
At the end of each month, Kirsten sends statements to all customers with outstanding account balances. Payments are required within 30 days. When a customer pays, Kirsten banks the money and updates the accounts receivable ledger. If payments are not made within this time, Kirsten contacts the customer by phone and letter to try and get them to pay. If payment still hasn't been made after 60 days, Kirsten writes off the debt. When the monthly bank statement is received, Kirsten reconciles it to the ledger and corrects any errors.
The CEO, Sam Jenkins, has a great deal of trust in the accounts clerks and largely leaves them to carry out the accounting functions unsupervised. Her main concerns are that the company is able to meet all orders rapidly and that the suppliers are paid on time. Provided that neither the customers nor the suppliers are complaining and there is enough cash to meet ongoing costs and pay staff, she assumes the accounting functions are being carried out effectively.
7. Which of the following is not a control weakness?
a) Having the driver fill out the details of the delivery on the dispatch note and then give it to Kirsten.
b) The bad debt follow-up and write off procedure used by Kirsten.
c) Craig's procedures to avoid inventory overproduction.
d) Sam's oversight of the accounting function.
8. Which of the following items would most improve the level of control at HOCR?
a) Having Richard Shearer do the bank reconciliations.
b) Having Sam Jenkins check and sign the customer statements before Kirsten sends them out.
c) Having Kirsten Tarrant take over inventory management duties from Craig Fleming.
d) Having Sam Jenkins approve all bad debt write-offs before Kirsten makes them.
9. The control weaknesses at HOCR are most likely to affect which account and assertion
a) Existence of Inventory.
b) Valuation and Allocation of Inventory.
c) Completeness of Cash.
d) Accuracy of Sales.
10. An auditor is only required to find fraud at a client if?
a) The fraud is material.
b) The auditor has assessed the integrity of the board of directors as being poor.
c) The fraud is of an extent that it could affect the going concern assumption.
d) The fraud has been conducted by directors or senior managers.
11. Which of the following statements about greenhouse gas (GHG) auditing is true?
a) The Clean Energy Regulator (CER) selects auditors to perform presubmission audits of company GHG disclosures.
b) Accounting firms must appoint external engineering experts to conduct audits of scope 1 GHG emissions, which have been measured by the direct measurement method, as accountants lack the scientific and technical skills to do so.
c) There is no government requirement for pre-submission audits of GHG emissions.
d) Direct measurement is the only legal method of measuring scope 1 GHG emissions.
12. Before an external auditor can use internal auditors to directly assist with the external audit, the external auditor must assess which of the following items?
a) The level of competence of the internal audit function.
b) Whether the internal audit function applies a systematic and disciplined approach, including quality control.
c) The extent to which the internal audit function's organisational status and relevant policies and procedures support the objectivity of the internal auditors.
d) The external auditor must not use internal auditors to provide direct assistance on the external audit engagement.
PART B -
Question One -
Your audit client, Norse Scandinavian Furniture Limited ("Norse") is an Australian based importer of high quality hand-made Scandinavian timber furniture, which it sells through boutique retail stores in Australia's major cities. It also provides furniture directly to major corporate customers. It buys most of its furniture through Roskilde Eksport Møbler Selskab (REMS), a Danish exporter, who sources the furniture from a number of small family owned firms in Denmark and Sweden. As part of your audit planning for the year ended 31st May 2015, you have received the following information from the company:
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2015 (Unaudited)
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2014 (Audited)
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Sales
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$11.8m
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$17.3m
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Net Profit
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$0.9m
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$2.5m
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Cast at Bank
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$0.5m
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$1.9m
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Inventory
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$0.2m
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$1.3m
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Accounts Receivable
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$2.2m
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$1.5m
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Accounts Payable
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$1.3m
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$0.3m
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Provision for Legal Liability
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$0.1m
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$0.1m
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Borrowings
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$8.0m
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$2.0m
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As part of your audit planning process you have gathered the following additional information:
i. During the year the Australian Dollar has declined by 15% against the US dollar and did not change relative to the Euro and Danish krone.
ii. An Australian based competitor "Mid-Century Furniture Direct" imports timber furniture from Brazil and markets it to the same customers targeted by Norse. Some of the designs bear a close resemblance to Norse's range, yet are up to 50% cheaper.
iii. On 12th January 2015, the Danish government began an investigation of REMS for mislabelling furniture made in a factory in Russia as "Hand Made in Denmark". While this investigation is being undertaken, REMS has been banned from selling its existing inventory.
iv. Shortages of furniture, caused by the REMS sales ban, have resulted in Norse not being able to fulfil a contract to provide furniture for the new 120 room, five star, Excelsior Hotel, which is due to open at Darling Harbour on 3rd July 2015.
v. Norse attempted to negotiate a $10m loan with the Commonwealth Bank, to refinance its maturing debt, but the bank would only lend them $8 million.
vi. On 3rd June 2015 Norse announced that it will be closing its store in Perth when its lease expires on 30th September 2015, due to a large increase in rent and falling sales.
vii. On 12th June 2015, the Fair Work Commission began an investigation of Norse for allegedly underpaying the truck drivers who deliver the company's furniture. Norse has denied any wrongdoing and has claimed that the investigation was instigated by a trade union representative after he received a bad annual performance review.
Part One - Required:
From the available information describe five (5) significant business risks. For each risk you should also indicate the key account and key assertion at risk, and provide a specific and practical test of detail that you would use to gather audit evidence in respect of the risk.
Part Two -
(i) Outline the reasons you might need to rely on the work of an expert to assist you with your audit of Norse. Identify the type of expert required and justify your response.
(ii) Outline the matters you will need to consider when appointing an expert to assist you with your audit.
(iii) What would you consider to be a reasonable level of planning materiality for this client? Justify your answer?
Question Two -
For each of the four independent situations described below, indicate the audit report the auditor should issue and provide justification for your answer. Note, except for the matters discussed in each question, assume that the financial statements present a true and fair view.
(a) Due to the failure of a major customer five days after the balance date, you have determined that it is highly unlikely that your client will be able to continue in business as a going concern for a period of 12 months after reporting date. The client has agreed to disclose this fact in the directors' declaration.
(b) Your audit client has decided against disclosure of employee long service leave entitlements information - as required by AASB 119 Employee Benefits - in the notes to the financial statements, on the basis that doing so will result in financial statements that do not present a true and fair view and that the information cannot be disclosed due to confidentially agreements in employment contracts.
(c) Due to a computer system failure in your client's purchases/accounts payable system, it was impossible for your GAS to access the files and automatically generate a list of creditors for supplier confirmations. This forced you to use subsequent payments testing instead. Accounts payable is a very significant account for your client and they have a strong positive cashflow and a history of paying suppliers on time.
(d) JKL Ltd is an Australian pharmaceutical company that has developed a new drug to treat Alzheimer's disease, called Memocure. A competitor, Global Pharmaceuticals Inc., has recently launched a new Alzheimer's drug called Remcal, which has been a huge success on the international market. JKL is suing Global Pharmaceuticals because it believes that Remcal is so similar to Memocure that it violates JKL's patent. JKL's Lawyers believe that they have a good chance of winning the case. If they succeed, JKL will receive a very large amount of compensation that will more than double their profits for the next five years. This information has been adequately disclosed in the financial statements.
Question Three -
ABC Ltd stores its supplier, purchases, payments and inventory records in the following tables.
Suppliers Table:
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Field
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Data
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10
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Supplier Number
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11
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Supplier Name
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12
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Supplier Address
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13
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Supplier Phone Number
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Purchase Orders Table:
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Field
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Data
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20
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Purchase Order Number
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21
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Supplier Number
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22
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Item Number
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23
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Number of items
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24
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Cost per Item
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25
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Freight Charges
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26
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Date Ordered
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27
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Date Received
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Cash Payments Table:
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Field
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Data
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30
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Payment Number
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31
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Supplier Number
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32
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Amount
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33
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Date
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Inventory Table:
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Field
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Data
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40
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Item Number
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41
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Supplier Number
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42
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Item Description
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43
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Quantity on Hand
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(i) Which computerised input control can be used to prevent the following errors from occurring. State the control, the field it will be applied to and the account and assertion it will affect.
A payment being entered for a supplier that does not exist:
The creation of a purchase order for the wrong supplier:
The omission of an item description when a new item of inventory is added to the Inventory Table:
(ii) For one of the controls you have stated in Section (i), describe one specific test of control that would allow you to determine if the control is working.
(iii) In the Purchase Orders Table, which field is the primary key? What is the purpose of the primary key?
(iv) In the Cash Payments Table, which field is the foreign key? What is the purpose of the foreign key?
(v) Which reports would you get GAS to generate to help you test each of the following assertions? List the exact fields that will be in the report and how you would use the report to help you test the assertion.
Question Four -
For each of the following situations, state which threat to independence (as stated in APES 110 s200.3 - 8) may be occurring and justify your answer.
i) The Federal Government's new "Direct Action" carbon abatement scheme provides government funding to encourage polluters to reduce their emissions. Your audit client, Phoebe Ltd, (Phoebe) is keen to access this funding to assist in the cost of replacement of its aging plant. Phoebe has asked you to support their application to the government advisory panel which determines which carbon abatement schemes receive funding.
ii) Your client, BigBucks Ltd, (BBL) operates a casino in Brisbane. BBL has approached you, their auditor, encouraging you to increase your audit fee by 25% in exchange for a guarantee from you that you will provide an unqualified audit opinion, irrespective of the actual findings on your forthcoming audit.
iii) Your audit client, Munmorah Power Limited (Munmorah) is a power generation company. Several of the Directors of Munmorah are also directors of Wallerawang Power Limited, a company that owns a gas fired power station. You have assisted with the preparation of Wallerawang Power Limited's financial statements for the last 2 years.