HA3032 Auditing and Internal Control Environment


Question 1
“The auditor’s determination of materiality is a matter of professional judgement, and is affected by the auditor’s perception of the financial information needs of users of the financial report.”
With reference to the statement above from ASA 320, define materiality and discuss how the “needs of users” will affect how materiality is determined.
Question 2
What is the purpose of tests of controls? With reference to the three (3) main risk components of the Audit Risk Model, explain the circumstances where it is NOT appropriate for the Auditor to test the controls of the client entity. 
Question 3 – Independence
A senior partner in a large incorporated accounting firm has 400 shares in a large client’s company. Whilst this ownership stake is considered an insignificant part of the partner’s total share portfolio, the firm has strict requirements about equity investments in clients based on s307C of the Corporations Act and the APES 110 Code of Ethics for Professional Accountants.
a)Has the partner violated the independence requirements of the firm? Discuss
b)Explain whether the ownership is likely to affect the partner’s independence in fact. 
Question 4
Your firm Temasek, Smith & Partridge are currently auditing the financial accounts of Riddell Ltd for the year ending 30 June 2021. You are the Audit Manager on this engagement and one of your new graduates has performed the following audit procedures in relation to the sales and collection process of Riddell Ltd, as follows:
1.Examined a sample of shipping documents to determine whether each document has a sales invoice number included on it.
2.Added the columns on the aged trial balance and compared it to the total noted on the general ledger.
3.Observed whether the financial accountant makes an independent comparison of the total in the general ledger with the trial balance of accounts receivable.
4.Examined a sample of customer orders to see whether each order has a credit authorisation.
5.Compared the date on a sample of shipping documents a few days before and after the balance sheet date with related sales journal transactions.
6.Computed the ratio of the provision for doubtful debts divided by accounts receivable and compared it with previous years.
7.Examine a sample of non-cash credit entries in the accounts receivable master file to determine whether the internal auditor has initialled each one.
For each audit procedure stated above from 1) – 7), identify the applicable type of audit evidence, type of test and provide an explanation of the purpose of the audit procedure.
Question 5
“If, after the financial report has been issued, a (material) fact becomes known to the auditor that, had it been known to the auditor at the date of the auditor’s report, may have caused the auditor to amend the auditor’s report,
a)Based on the statement provided above from ASA560, explain the actions required of the auditor in this situation, that is, where a material fact arises after the financial report was issued.
b)What are the potential risks to the auditor when this problem arises? Discuss.
Question 6
The following are four (4) independent situations. For each case, state the type of audit opinion which should be expressed and provide an explanation for your choice of audit opinion in each case shown below a) – d), as follows: 
a.Whilst auditing the Long-Term Investments account of Brownllow Medal Ltd., the auditor has been unable to obtain the audited financial statements for a material investment of an entity located in an overseas jurisdiction. The auditor concludes that sufficient and appropriate evidential matter regarding this investment cannot be obtained in the required time. Additionally, as the Audit Manager in charge of the audit-engagement, you have to weigh up the requirements of the audit-engagement with the additional cost of spending extra time at the client’s premises.
b.Due to recurring operating losses and ongoing working capital deficiencies, the auditor has some serious doubts about BMP Ltd.’s ability to continue as a going concern for a reasonable period of time. However, the financial statement disclosures concerning these matters, which you have now reviewed and evaluated, are adequate, and the BMP Ltd. senior management team has been co-operative and helpful with all information requests. Nonetheless, your professional scepticism leads you to suspect there are likely to be serious operational challenges for BMP Ltd in the next twelve months.
c.Mirrabella Pty Ltd has completed the preparation of its financial statements for 2020/2021, but it has decided to exclude the Income Statement. The Chief Financial Officer (CFO) of Mirrabella Pty Ltd explains to you that the users of their financial statements find the Income statement confusing, too long and unnecessary because the Balance Sheet already has the essential information which shareholders require. Accordingly, the CFO has refused to have the Income Statement in the annual report for the year ending 30/06/21. Furthermore, the CFO has implied that Mirrabella Pty Ltd will be seeking to appoint a different auditor for the next audit.
d.Your client, Metro-Quinn Ltd, operates a chain of fast-food outlets throughout Australia. It is now the end of the audit and it was found that major internal control deficiencies exist in relation to the completeness of recording and banking of cash sales. Cash register tapes are not available to determine which cash sales amounts should have been recorded and banked. There is a lack of separation of duties between the custody of cash and its recording. Metro-Quinn Ltd senior management have not provided any explanation for these deficiencies, nor have they indicated that they will act on your recommendations to remediate the problems and issues in the internal control environment.

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