Assignment Task:
Case One: (500 Words)
The following facts relate to Sporty Pty Ltd:
1. Sporty operates fitness centers across Australia.
2. The company is owned by the five directors who have financed the purchase of shares by taking out personal loans, which are secured on their homes.
3. The directors aim to expand the business and then float the company on the ASX.
4. The strategy involves charging lower prices than their competitors in order to attract new members.
5. The directors are expanding by buying out small independent fitness clubs.
6. The purchase and refurbishment of the new clubs is financed by bank loans.
The managing director wants to maintain good corporate governance and business practices and therefore would like to carry out a review of business risks but does not know anything about it.
Required:
Question: Explain the benefits of carrying out a business risk assessment and describe the steps involved in risk management. In your comments, give examples of specific business risks faced by Sporty Pty Ltd.
Case Two: (1000 Words)
ZERO is a listed limited-liability company with a year-end of 30 June. ZERO's main activity is selling home improvement or 'do-it-yourself' (DIY) products to the public. Products sold range from nails, paint and tools to doors and showers; some stores also sell garden tools and furniture. Products are purchased from approximately 200 different suppliers. ZERO has 103 stores in 8 different countries.
ZERO has a well-staffed internal audit department, who report on a regular basis to the audit committee. Areas where the internal and external auditors may carry out work include:
Question: 1. attending the year-end inventory count in 30 stores annually. All stores are visited on a rotational basis
Question: 2. checking the internal controls over the procurement systems (e.g. ensuring a liability is only recorded when the inventory has been received)
Question: 3. reviewing the operations of the marketing department.
Required:
For each of the above three areas, discuss:
(a) The objectives of the internal auditor
(b) The objectives of the external auditor
(c) Whether the external auditor will rely on the internal auditor and, if reliance is required, the extent of that reliance. (4 marks)
Case Three: (1000 Words)
You are currently auditing Kool Ltd, a wholesaler and manufacturer of gardening tools sold in hardware stores. Kool has branch offices in Sydney, Melbourne and Adelaide; and head office is located in Sydney. The company's only factory is also located in Sydney. The audit is administered out of your Sydney office with some work performed by your firm's branch offices.
Your manager has asked you to complete the audit programs for various audit file sections by inserting detailed instructions on sample selection. In order to maintain tight control over costs, the audit manager wants all samples to be selected by the Sydney head office auditors. Branch offices will then simply be given details of the items they are to test.
You have the following information about various account balances of Kool.
1. Kool's fixed assets consist of office furniture and equipment (held at all branches) and factory machinery (held in Sydney). Factory machinery comprises around 50 items totalling 80% of the value of fixed assets. Each branch maintains its own fixed asset register on an off-the-shelf software package.
You need to select a sample of fixed assets for existence testing.
2. Accounts payable are handled centrally in Sydney. Branches send in authorised invoices with related supporting documents for processing on a weekly basis. Each month, an alphabetical list of creditors is produced showing the invoices outstanding and the total balance owing. Kool uses a wide range of suppliers and accordingly there are no individually significant creditors.
You need to select a sample of creditors for valuation testing.
3. Each branch processes its own sales invoices using a unique series of invoice numbers (i.e. each branch has a different sequence). Sales listing is produced monthly by each branch, and gives a sequential listing of the invoices used, the customer name and code, date and amount.
You need to select a sample of sales invoices on which to perform tests of controls to ensure credit limits are complied with.
4. Debtor collections are handled centrally at head office. A consolidated monthly alphabetical debtors listing is produced showing the invoices making up each debtor's balance, the amounts paid that month and the amount outstanding. Ageing details are also provided (current, >30 days, >60 days and >90 days).
You need to select a sample of debtors for existence testing.
5. To meet reporting deadlines at year-end, each branch handles its own accruals. Once the creditors ledger is closed off, branches track year-end related invoices using a manual listing showing creditor name and cost, invoice amount and accrual amount.
You need to select a sample of accruals for valuation testing.
6. About 200 of Kool's inventory lines carry 12-month 'free replacement' warranties. When a customer in a particular state makes a warranty claim, the item is returned to that branch office. Each branch keeps a list of items returned in product number order, so that trends in warranty claims can be identified by product. At year-end, the warranty provision is calculated by determining the return percentages of major sales items, plus a general allowance for other items.
You need to select a sample of items to test valuation of the warranty provision.
Required:
For each independent situation above:
Question: (i) describe the steps you would follow to select a sample for testing. Include details of any information you might require from the client's branch offices and assume only manual selection techniques will be used.
Question: (ii) briefly describe the analytical procedures that could help corroborate the evidence gained from detailed testing of the sampled items.
What action would you take if:
(i) a sales invoice you selected was subsequently found to be cancelled?
(ii) your sampling plan for debtors resulted in no debtors from the Melbourne branch being selected?
Give examples of situations where sampling from the recorded population might not be appropriate.
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Attachment:- Auditing and Professional Practice.rar