Question 1:
You are an audit manager with ConstantinTsiakos(CT) .For the past four yearsCT has been the auditor of Touring Away (TA), a travel company specialising in overseas adventure holidays .Peter the senior audit partner has asked you to contact Jake ,the CEO of TA with a view to CT being re-engaged as the auditor for the upcoming audit of the 30 June 2016 financial report.
Peter has indicated that he intends to allocate Michael ,an accountant who came out ofUniversity in November 2014 to your firm and this will be his first audit for the firm and Jackie an accountant who has been working in CT's tax department for the past four years to the TA audit for the first time as the two auditors doing the day to day audit work . Peter believes from their background they would be ideally suited to audit of the Touring Away firm.You have held discussions with both of the staff and Jake the CEO of TA and excerpts of these conversations follow:
1. Discussion with Jake ,CEO of TA:
Dave stated : "The Board was impressed with last years audit and would like to reappoint CT as auditor of the 30 June 2016 financial report audit.The Board would also liketo invite Peter to give a speech about TA at the next travel agency seminar, to assist in promoting TA's businessto attract more investors.I understand that this is outside CT's normal practice , however the Board expressed the view that it would be very difficult for TA to continue any business engagements with TA should Peter refuse to provide such assistance".
2. Discussion number two with Jake ,CEO of TA:
Jake stated : "To express our sincerity towards CT and Peter , and to maintain the good relationship in anticipation of another smooth audit for 2015, TA would like to present a complimentary 14 day holiday package voucher for four people to Croatia for both Peter's and your family .All expenses,including accommodation and travelling costs will be paid by TA".
3. Excerpt from discussion with Michael
Michaelstated : "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 TA's financial controller.He is responsible for preparation of TA's financial report.
4. Excerpt from discussion with Jackie
Jackie stated : "I'm glad that I have been allocated to this year's CT audit team .It's going to be a very efficient audit this year as I was on a temporary assignment at TA just a month ago ,helping TA with its tax calculations and preparing accounting entries that will be reflected in the 30 June 2016 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 TA 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:
The Automotive One Supplies is anautomobile parts supply company. It has supplies of most parts for all common motor vehicles . It has five staff who all serve the customers when they come in and the store is run by a store manager .The staff will sell the part to the customer if it is in stock but when a customer comes in and asks for a part which is out of stock the staff member serving the customer will look up the catalogue for the car and contact the supplier mentioned in the catalogue by telephone and order the goods over the telephone,without making a record of the order .When the goods are received one of the staff signs the delivery docket from the supplier acknowledging receipt of the goodsThe staff member then puts the parts away in the store in a convenient location according to the car type ,however the store does not make a written record of the stock received . The customer requesting the goods is contacted to come and purchase the goods. At 30 June each year the Automotive One Supplies carries out a stocktake and uses this as a record of its stock at this date.
Required:
List the internal control weaknesses in the above
QUESTION 3:
You are a partner at the Askin and Salter audit firm in the city and the following situations have come to your attention during various audits you have done recently.
1. The Edible Food company asked you to do an audit in accordance with the accounting standards and the Corporations Act.During your review of the internal control structure you have learned that the company makes sales by cash and credit and will issue receipts for sales only if requested and while customers making purchase on credit can refer to their original invoice,any cash customers will only receive a receipt if requested by them. Cash sales comprise about 30% approximately oftotal sales however this cannot be verified due to the lack of records.
2. The Lucan Mining corporation has its Head office in Australia .It carries out mining in Australia and it has just started mining in Namibia .It has had its accounts audited and they give a true and fair view apart from the fact that the company is unwilling to give details of anypayments or receipts it has with the subsidiary in Namibia or what the executives in Namibia have been earning which are all required as related party disclosures under AASB 124(IAS24).
3. The Digital company has just been advised on 28th June that it has lost its main customer .This will have severe effect on the company's revenue as this customer made up more than 40% of its revenue and this will place considerable doubts ability to continue as a going concern as it has a very highly specialised product in a very limited market.
4. The Automotive Equipment company has stores throughout Australia with some in very remote locations .The company has been using the LIFO method of stock management instead of FIFO which has led to a material error in its stock valuation .The company is unwilling to correct the valuation of its stock .The auditors are satisfied with the accounts apart from the use of the incorrect
method of valuation and the material misstatement of its stock.
Required:
(a) Identify any weaknesses in the above internal controls.
(b) Discuss the implications(effect on the audit ) from the weaknesses identified.