Assignment Instructions: This is an individual assignment with a limit of 2,000 words. This individual assignment consists of 3 Questions. Answer ALL the Questions.
Question 1:
A. Yaso plc is a manufacture company and its financial year ended at 31st December 2019. Total assets are £40m and net profit before tax is £12m. Yaso plc's trade receivables ledger includes a large number of customers. The year-end trade receivables balance is £4m (comparable to £2m in 2018) and the allowance for trade receivables is £400,000 (comparable to £600,000 in 2018).
Requirement - Describe substantive procedures the auditor should perform to obtain sufficient and appropriate audit evidence in relation to Yaso plc's trade receivables.
B. According to ISA 260, it is important for auditors to communicate throughout the audit with those charged with governance.
Requirement - Explain why it is important for auditors to communicate with those charged with governance.
Identify three examples of matters which the auditor may communicate to those charged with governance.
Question 2:
A. Auditors can only control the level of detection risk as the inherent risk and the control risk are out of auditors' control.
Requirement - Discuss the differences between the three types of risks with an explanation of why auditors can only control the detection risk.
B. You are currently planning the audit of your client, DEF plc. Its year end is 31 December 2019 and the forecast profit before tax is £15.5 million. DEF has a small internal audit (IA) department. During the year, IA started a programme of physically verifying the company's assets and comparing the results to the non-current assets register, as this type of reconciliation had not occurred for some time. To date only 15% of assets have had their existence confirmed as IA has experienced significant staff shortages and several members of the current IA team are new to DEF plc. Inventory is held in six locations and on 25 and 26 December a full inventory count will be held with adjustments for movements to the year end. This is due to a lack of available staff on 31 December. The number of audit team members are not enough to attend the counts in all the locations.
In November, there was a fire in one of the inventory warehouses; inventory of £5 million was damaged and this has been written down to its scrap value of £1 million. An insurance claim has been submitted for the difference of £4 million. DEF is still waiting to hear from the insurance company with regards to this claim but has included the insurance proceeds within the statement of profit or loss and the statement of financial position. Bank reconciliations are undertaken monthly by an accounts clerk and details of all reconciling items are included. Where the sum of the reconciling items is significant, the reconciliation is sent to the financial controller for review.
A directors' bonus scheme was introduced during the year which is based on achieving a target profit before tax. In order to finalize the bonus figures, the finance director of DEF would like the audit to commence earlier so that the final results are available earlier this year.
Requirement - Using the information provided, describe Five audit risks and explain the auditor's response to each risk. Note: Prepare your answer using three columns headed The Issue, Audit risk and Auditor's response respectively.
Question 3:
A. Discuss the difference between the Management Letter and the Legal Representation Letter.
B. KLB plc is one of your audit clients for the previous 8 years. The following information are available. The audit team included a manager and two juniors.
The client was asking to finish the audit work early this year otherwise they are going to change the auditor next year. One-week bonus was paid to the audit team through their payroll as the client was happy that they finished auditing 5 days earlier than the planned audit time. The audit team got 10% discounts on the client's products. The same discount is normally given to the client's staff.
Your firm offered this client a bookkeeping service for this year. To reduce the audit cost, the engagement letter was not updated this year as there is no big change in the audit tasks from last year.
Audit fees are based on a percentage of the net profit before tax. One of the audit team received an offer to be appointed in the client's internal audit department as a head of department. The finance director was recently working as an auditor in your audit firm.
Required - Identify and explain FIVE ethical threats which arise from the above actions and for each ethical threat explain the steps which your audit firm should adopt to reduce the threats arising. Note: Prepare your answer using three columns headed The Issue, Ethical threats and Auditor's response respectively.
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