HI6026 Audit Assurance and Compliance : Consulting Firm


Question 1
a: Explain the ‘audit expectation gap’. What causes the gap?
b: Potter and Partners are a chartered accounting firm with offices in capital cities in most states. The head of the business development department is seeking to grow the firm’s revenue from non-audit services.
What non-audit services could a chartered accounting firm provide to its listed company clients? Explain why a company would buy these services from its audit firm instead of another consulting firm. 
Question 2
The audit team is preparing to audit a new client in the toy retail industry. The client imports items from manufacturers in several Asian countries and retails them in a chain of shops located throughout the country.
You have access to the following information for the client:
prior period financial reports
anticipated results for the current year
industry averages.
Explain how you would use the information to understand your new client.  
Question 3
You are testing the controls over bank accounts for your audit client, Orleans Ltd. You note that the responsibility for bank reconciliations has changed due to a corporate reorganisation halfway through the current financial year. Both the staff member performing the bank reconciliations and the supervisor have changed. You are able to talk to only the current staff member and supervisor because the other staff took voluntary redundancies and left the client’s employment six months ago.
(a) What techniques are available to you to gather evidence about the bank reconciliations? Explain how you would use each technique and comment on the quality of the evidence obtained from each .
(b) When you ask the employees responsible for bank reconciliations about how they perform the reconciliations there is a possibility that they will not tell the whole truth about their performance of the reconciliations. Given this, will you bother to ask them? Explain
(c) Explain the impact of the staff changes on your controls testing program.
Question 4
You are the senior in charge of the audit of Jewels Manufacturing Limited. The information below has been prepared to assess the going concern of the company at the planning stage of the audit and to identify other issues that may impact on audit risk.  
Ratio    Unaudited 2020 figures    2019    2018    2017
Inventory turnover    1.45    1.83    2.69    3.35
Quick asset ratio    0.97    1.4    1.81    1.8
Accounts Receivable turnover    3.8    5.5    4.1    5.4
Required: Identify issues that affect going concern and/or raise issues and explain the audit steps that you would undertake to minimise audit risk. Complete the table below in the answer box.    
Question 5
Consider the following independent situations relating to the audit of five different audit clients for year ended 30 June 20X8. Assume that all the situations are material. 
(i) A new client has changed its valuation method of property, plant and equipment. It has adopted the Fair Value Revaluation Model to replace the Historic cost measurement method. Whilst the auditor does not object to the change in the valuation model, the new method has a material effect on the financial statements and has not been disclosed. A special meeting was held between the CFO and the Finance Team and the Lead Partner from the Audit team, but nothing was resolved.
(ii) A new start-up company specialising in air-drone mail/package delivery has grown strongly in the past year. Over the past three years the company has made consistent losses, borrowed heavily, experienced staff turnover and dealt with some significant regulatory and operational issues. Nonetheless, the current CEO believes the company is turning around and will soon improve profitability. She is a high wealth individual who has invested more funds (equity) into the company, which is fully disclosed. No material misstatements were noted in the Auditor’s report.
(iii) The Auditors of ROME, a high-profile bank, were unable to obtain sufficient and appropriate audit evidence concerning the carrying amount of ROME’s investment in ITA Pty Ltd as at 30 June 20X8. ITA Pty Ltd is a small firm of five financial planners in total. The auditors were denied access to the financial information of ITA, and they were not allowed to interview ITA’s Management. Consequently, the auditors were unable to determine the correct valuation of ITA Pty Ltd.
(iv) The introduction of a new accounts receivable system in August 20X7 resulted in numerous errors in accounts receivable. As at the date of the Audit report, management was still in the process of correcting the system errors. As a result of these issues, the Auditors were unable to determine whether any adjustments are required in relation to the recorded or unrecorded inventories and accounts receivables, as well as the elements making up the Income statement and the Cash Flow statement.
For each of the above cases, state the appropriate audit opinion that the auditor would require. Give reasons.
Question 6
ACCO Ltd is a large producer of organic medicinal products. The audit report for the year ended 30 June 20X8 was signed on 6 August 20X8 and along with the financial report was mailed to shareholders on 11 August 20X8.
Consider the following independent events. Assume that each event is material.
i.On 5 July, ACCO Ltd entered into a new contract to supply organic facial and skin treatment products to MYA, a new major department store. The contract was similar in nature to other contracts previously negotiated.
ii.ACCO Ltd has invested significant funds in developing a new range of organically sourced skin cancer treatment ointments. On 8 July, ACCO Ltd applied for a patent for the ointment, only to discover that a competitor had lodged a similar application on 20 June. The granting of ACCO Ltd’s application is now in serious doubt.
iii.Internal audit has uncovered a major fraud at one of ACCO Ltd’s branches. The fraud was perpetrated by two senior staff, acting in collusion over a number of years. The internal auditors released their report to management on 15 July, after a highly confidential investigation spanning several months.
iv.One of ACCO Ltd’s major customers, Cheap Vitamins Pty Ltd, suffered a fire on 20 July. Since Cheap Vitamins Pty Ltd was uninsured, it is unlikely that their accounts receivable balance will be paid.

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