Case Scenario of Quality Paper Ltd


Part A: Case 1

Quality Paper Ltd (QPL) operates a pulp and paper mill that makes high-grade paper, using wood from surrounding forests. Highly toxic chemicals are used to manufacture this paper and are discharged into the nearby river. QPL is currently the subject of an investigation by the Environmental Protection Agency (EPA) for a significant spill of toxic chemicals into the river. There have also been media reports that senior employees of QPL were allegedly responsible for this spill. In addition, the Green Earth Society is threatening to sue QPL for excess logging of old growth forests in the vicinity of its mill.

Despite reappointing its current auditors only two months ago for the audit of the current financial year ended 30 June 2018, QPL has now approached you to do the audit, claiming that the current auditor cannot provide the management advisory services that you can offer, and which are required for implementing a necessary major restructure of the company’s internal control system.


Outline briefly what information you should obtain from the previous auditor.

Case 2

You are the audit senior on the audit for the year ended 30 June 2019 of Neptune Pty Ltd, a large manufacturer of lighting accessories. This is the first year that your firm has performed Neptune’s audit. As part of the planning work, you have annualised Neptune’s interim financial accounts and performed analytical procedures on the annualised figures and compared the results to industry averages and last year’s audited financial information. The results are given below.


Industry Average

Neptune Pty Ltd






Current ratio





Net profit ratio





Gross profit ratio





Inventory turnover ratio





Receivables turnover ratio





Return on total assets






Providing a brief explanation of each of the above ratios, outline what conclusions can be drawn about Neptune’s financial position and identify potential audit risks to be investigated further.

Case 3

Supremo Ltd is a major manufacturer of industrial machinery. When the stores department requires items to be purchased, they issue a three-part pre-numbered purchase requisition that needs to be approved by the store’s manager. Copy 1 is sent to the purchasing department, copy 2 is sent to the accounts payable department and copy 3 is filed in the stores department.

On receipt of an approved purchase requisition, the purchasing department issues a five-part pre-numbered purchase order. Copy 1 is sent to the supplier, copies 2 and 3 are forwarded to the receiving department, copy 4 is forwarded to the accounts payable department and copy 5 is filed in the purchasing department.

When goods are received, the receiving department just stamps ‘order received’ on its two copies of the purchase order, which then forms its receiving record. One copy of the receiving record is filed in the receiving department and the other is   forwarded to the accounts payable department.

The accounts payable department checks that there is a purchase requisition, purchase order and receiving record for each supplier invoice and then approves it for payment. The accounts payable department prepares a pre-numbered payment voucher and forwards it, along with the supplier’s invoice, purchase requisition, purchase order and receiving record, to the financial accountant, who signs the payment voucher, completes the payment by bank transfer to the supplier and returns the supporting documents to the accounts payable department.

At the end of the month, the assistant accountant undertakes a sequence check of all pre-numbered documents. The financial accountant receives the monthly bank statement, prepares a bank reconciliation and investigates any reconciling items. 


Identify the weaknesses in Supremo’s internal control concerning the purchases and payments functions. Explain why each is a weakness and provide a recommendation as to how to overcome the weakness.

 Case 4  

You are the audit senior on the audit of Travel Unlimited Ltd, an Australian holiday experiences retailer. During 2018, the management of Travel Unlimited recognised that it needed to allow customers to make bookings online if it was to remain competitive. Travel Unlimited’s  customers include the general public, as well as Australian and overseas travel agents selling packaged tours.

Given the need for an interface between the web-based booking system and the general ledger, Travel Unlimited upgraded its existing accounting software and acquired additional hardware to cope with the additional speed of processing and the increase in required storage space.

During the year ended 30 June 2019, Travel Unlimited upgraded its entire general ledger system to include an integrated purchasing module and an accounts payable module. The integrated purchasing module and the accounts payable module programs were installed on all company computers. As part of the audit planning, you have identified the following relevant IT application controls (AC) and IT general controls (GC) from the integrated purchasing and accounts payable modules. 

(a) The IT manager assigns each new staff member a user profile and an initial password, based on advice provided by the IT administrator. The initial password is generic. The first time the new employee logs onto a company desktop computer, they are automatically forced to change their password. Passwords must be changed every 30 days.

(b) There are clerks responsible for ordering and receiving (purchasing clerks) and clerks responsible for processing invoices and preparing remittance advices (processing clerks). Purchasing clerks only have access to the purchasing module, and processing clerks only have access to the accounts payable module. Each type of clerk has exclusive access to their module via a separate password-protected menu.

(c) The purchasing module automatically assigns each order a sequential purchase order number. The purchasing clerk only has to enter the supplier code, stock code and quantity ordered. The unit price is automatically generated and cannot be overridden by the purchasing clerk.

(d) Supplier information is contained in a supplier master file (SMF). Each supplier has a unique supplier code. If the purchasing clerk attempts to place an order with a supplier not in the SMF, the order cannot be processed.

(e) When goods are delivered, the purchasing clerk enters the order number and the date received. The quantity of goods received cannot be overridden by the purchasing clerk. A ‘Yes/No’ prompt confirms the receipt of the goods. The purchasing clerk is required to enter ‘No’ if the quantity received is incorrect. If ‘No’ is entered, the order cannot be processed for payment. 


For each of the IT controls described above, identify whether it is an IT application control (AC) or an IT general control (GC) and explain your answers.

Part B:

Download the Annual Report of 2020 of Michael Hill International Ltd (ASX:MJH) and answer the following questions.


  • Which firm did audit the financial reports of 2020 of Michael Hill International Ltd? Is the firm one of Big Four?
  • Did the auditing firm make Auditor’s Independence Declaration to the Directors of Michael Hill International Limited? Did the Chairman and/or CEO mention about this declaration in their reports?
  • Did Michael Hill have an audit committee in 2020? Mention the names of the members of that committee.
  • The auditor made the following opinion on financial reports of 2020:

“In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including:

  1. a) giving a true and fair view of the consolidated financial position of the Group as at 28 June     2020 and of its consolidated financial performance for the year ended on that date; and
  2. b) complying with Australian Accounting Standards and the Corporations Regulations 2001”.

On what basis did the auditor make this opinion?

  • The existence of inventories was a key audit matter due to the size of the recorded asset (28 June 2020: $178,472,000) which represents 36% (2019: 47%) of the Group’s total assets, the nature of the inventory and its location.

How the auditor addressed this matter.

  • Mention other key matters in addition the above that were addressed by the auditor.
  • Did the auditor provide any non-audit service to Michael Hill International Ltd? How much was paid for those services?

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