ACG510 Risk Based Auditing And Audit Management

Question:

Question 1

You are the audit manager assigned to the audit of Seagreen Pharmaceuticals Pty. Ltd. (SP) a wholly owned subsidiary of Universal Pharmaceuticals Inc. (UP), a company listed on the New York Stock Exchange. SP was established in 2006 to provide UP with access to the Australian and South East Asian markets. Since establishment SP have found trading conditions difficult. The audit evidence obtained, and final review of this evidence suggests that unless SP receives a significant cash flow injection or trading conditions improve, it will be bankrupt within three months.

You have approached the CEO of SP with your concerns and he has indicated that there is nothing for you to worry about. The company’s owners have guaranteed financial support of the company for as long as it takes to establish a market presence.

  1. Evaluate the impact of the parent company’s support on your assessment of the going concern at SP. (4 marks)
  2. What further evidence will you require to assess the appropriateness of going concern at SP? (4 marks)
  3. Explain the reason for assessing the probability that any company will continue as a going concern. (7 marks)

Question 2

One Stop Supplies Pty Ltd is a single-store retailer that sells a variety of tools, garden supplies, lumber, small appliances, and electrical fixtures to the public, although about half of One Stop Supplies’ sales are to construction contractors on account.

Retail customers pay for merchandise by cash or credit card at cash registers when merchandise is purchased. A contractor may purchase merchandise on account, if approved by the credit manager based only on the manager’s familiarity with the contractor’s reputation. After credit is approved, the sales associate files a pre-numbered charge form with the accounts receivable supervisor to set up the receivable.

The accounts receivable supervisor independently verifies the pricing and other details on the charge form by reference to a management-authorised price list, corrects any errors, prepares the invoice, and supervises a part-time employee who mails the invoice to the contractor. The accounts receivable supervisor electronically posts the details of the invoice in the accounts receivable subsidiary ledger; simultaneously, the transaction’s details are transmitted to the bookkeeper. The accounts receivable supervisor also prepares a monthly computer-generated accounts receivable subsidiary ledger without a reconciliation with the accounts receivable control account, and a monthly report of overdue accounts.

The cash receipts functions are performed by the cashier, who also supervises the cash register clerks. The cashier opens the mail, compares each cheque with the enclosed remittance advice, stamps each cheque “for deposit only”, and lists cheques for deposit. The cashier then gives the remittance advices to the bookkeeper for recording. The cashier deposits the cheques daily, separate from the daily deposit of cash register receipts. The cashier retains the verified deposit slips to assist in reconciling the monthly bank statements, but forwards to the bookkeeper a copy of the daily cash register summary. The cashier does not have access to the journals or ledgers. The bookkeeper receives the details of transactions from the accounts receivable supervisor and the cashier for journalising and positing to the general ledger. After recording the remittance advices received from the cashier, the bookkeeper electronically transmits the remittance information to the accounts receivable supervisor for subsidiary ledger updating. The bookkeeper sends monthly statements to contractors with unpaid balances upon receipt of the monthly report of overdue balances from the accounts receivable supervisor. The bookkeeper authorises the accounts receivable supervisor to write off accounts as uncollectible when six months have passed since the initial overdue notice was sent. At this time, the credit manager is notified by the bookkeeper not to grant additional credit to that contractor.

Describe five internal control weaknesses in One Stop Supplies’ internal control for the cash receipts and billing functions. Explain why each is a weakness.

Question 3

Buggsy Ltd is a mattress manufacturer that achieved a net profit before income tax of $1 842 000 for the year ended 30 June 2021.

You have identified the following matters from your audit work:

  1. Buggsy Ltd’s inventory amounted to $1,941,000 at 30 June 2021. To move some of its old stock, in July 2021 the company sold 25 per cent of its finished goods inventories held at 30 June 2021 for $82,189 below their original cost. Management has indicated that as the sales occurred after 30 June 2021, it believes that the value of finished goods at that date should remain at cost. The remainder of the inventory has only been purchased recently and is in great demand.
  2. Buggsy Ltd’s accounts payable at 30 June 2021 amounted to $1,726,000. Subsequent payments testing revealed that in July 2021, invoices totalling $53,751 were paid that related to June 2017 purchases of inventories. The relevant invoices were omitted from the balance of accounts payables at 30 June 2021. Management has indicated that it does not intend to adjust the financial report in relation to this issue.
  3. Buggsy Ltd’s accounts receivable balance at 30 June 2021 amounted to $2 540 000. Your testing has revealed that the accountant used an incorrect exchange rate to translate overseas debtors at 30 June 2021. As a result, the balance of the accounts receivable account was overstated by $75,650. Again, management has indicated that it does not intend to adjust the financial report in relation to this issue.

(a) Explain the two circumstances under which a modified audit opinion is issued and explain the three different types of modified opinions.

(b) Explain whether the issues arising from your audit work (matters 1 to 3 above) will individually have any effect on your audit opinion. Justify your answer, using calculations.

(c) Identify the type of audit opinion that you will include in your audit report for Buggsy Ltd for the year ended 30 June 2021. Justify your answer.

Question 4

Part A

Wagga Sports Club (WSC) is an indoor community sporting facility in the heart of Wagga Wagga. WSC has recently been acquired and the new management committee of the club is keen to provide environmentally friendly facilities to its members. WSC is committed to protecting the natural environment and enhancing the economic sustainability for future generations. As a result the management committee has hired Jacqui Bowen, the environmental and sustainability expert at your audit firm to check its current energy use patterns for two months based on its internal records, and physically inspect the premises to identify factors that affect energy usage. Jacqui is to report the results of her testing to the management committee, so that they can consider areas where energy use may be reduced.

  1. Referring to the relevant Australian auditing pronouncement, describe the level of assurance that Jacqui can provide on this engagement.
  2. Identify the key information that Jacqui should collect in undertaking this engagement.

Part B

Your audit client Georgie Green has recently implemented a business to business (B2B) electronic commerce system. Alex Matthews, the audit senior has stated that she would like to be able to determine the reliance that can be placed on the internal controls. However, she has limited knowledge of how, in such an IT environment, you can test controls sufficiently to justify relying on them.

Explain to Alex the audit implications of the B2B e-commerce system.

Identify the computer assisted audit techniques (CAATs) that might be appropriate to aid the testing of the controls, highlighting any strengths and weaknesses of the CAATs that you discuss

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