ADVANCED AUDITING Audit Procedures Assignment Questions
Question 1 - Internal Control
Leisure Holidays Limited (LHL) is a resort company based in the Bay of Islands. Its tourist activity operations include boating, diving and deep-sea fishing, a backpackers' hostel and a family hotel. Brian and Valerie Baxter own the majority of the shares in the Baxter Group Limited which controls LHL. Brian is the chairman of the board of directors of both LHL and the Baxter Group, and Valerie is a director of both companies as well as the Chief Financial Officer (CFO) of LHL.
Brian and Valerie have a fairly laid-back management style. They trust their workers to work hard for the company and reward them well. The accounts staff, in particular, are very loyal to the company. Brian tells you that some accounts staff enjoy their jobs so much they have never taken any annual leave, and hardly any workers ever take sick leave. Brian and Valerie have not bothered much in the past with formal procedures and policies, but they have requested the accounts staff to start documenting the more common procedures. They do not conduct formal performance reviews and rely on their staff to tell them when there is a problem.
There are three people currently employed as accounts staff, the most senior of whom is George King. George heads the accounts department and reports directly to Valerie. He is in his fifties and plans to retire in two or three years. George prides himself on his ability to delegate most of his work to his two accounts staff, Angela and Karen. He claims he has to do this because he is very busy developing the policy and procedures manual for the accounting department. The delegated work includes processing cash payments, cash receipts, customer and supplier invoices, banking funds received, performing reconciliations, posting journals and performing the payroll function. Karen recently completed the CA Program and received her Chartered Accountant designation. Angela works part-time 3 days a week; she is responsible for posting all journal entries into the accounting system and the payroll function. Karen does the remainder of the work, but they often help each other out in busy periods. Angela authorises Karen's transactions and Karen returns the favour by authorising Angela's transactions. Together, they usually make the accounts balance.
As the audit senior for LHL, you are aware of the requirements of ISA (NZ) 265 Communicating Deficiencies in Internal Control to those Charged with Governance and Management.
Required: Write a management letter to Brian and Valerie Baxter. The letter should include identifying issues and making recommendations relating to deficiencies in:
a) the control environment of LHL, and
b) internal control.
Question 2 - Tests of Control
You are testing the controls over bank accounts for your audit client, Kiwiana Ltd. You note that the responsibility for preparing and approving the bank reconciliations has changed due to a corporate reorganisation halfway through the current financial year. The staff member performing the bank reconciliations and the supervisor both took voluntary redundancy and left Kiwiana three months ago. As a result, you are only able to talk to the current staff member that prepares the bank reconciliation and their supervisor. You are aware that these employees may not tell the truth about how the necessary procedures are performed.
Required:
a) What audit procedures are available to you to gather evidence about the bank reconciliations for Kiwiana? Explain how you would use each procedure and comment on the quality of the evidence obtained from each.
b) What attitude should the auditor have in making enquiries of client employees? Explain, using the bank reconciliation as an example.
c) Explain the impact of the staff changes on your controls testing program. Identify any additional audit procedures required.
Attachment:- Assignment Files.rar