Audit, Assurance, and Compliance - Question 1

Appropriateness of Going Concern

Mitigating Factors

Operational indicators :

The demand for the air conditioning systems manufactured by the company has declined significantly owing to changes in the preferences of customers – a lot of customers now prefer to install their own systems. This may have a significant impact on the ability of the company to generate its revenue in the long run and therefore it would have an impact on the suitability of going concern assumptions for the company.


The management has made plans for an extensive research and development programme that is to be carried out so as to bring modification/updation in the air- conditioning systems manufactured by the company, such that they are as per the preferences of customers and industry demand.

Operational indicators:

The contracts with customers are the only source of revenue for the company, and there are no contracts in existence for the next year. This is an indicator that if a company is unable to get any more contracts then it will have to cease its operations.

Management of the company has made plans to explore international markets in certain developing countries where the air conditioning systems manufactured by the company are still prevalent. This will enable the company to generate its revenue from international markets even if it is unable to procure contracts from Australian customers,


The bank with which the company has financed its short term loans has requested for cash flow forecasts from the management and has given an indication that it will withdraw its funding if the cash flow forecasts provided by management do not appear as sufficient

Management has made plans to obtain restructuring of its current loan repayments and has made plans to reduce its fixed expenses by 10 percent, this will enable the company to have more cash for meeting is debt repayment obligations

Audit, Assurance, and Compliance - Question 2

a) Administrative controls– Non one should be able to access the system apart from the persons who are authorized to access it.

 Controls over program changes- These are required to make sure that there are no unauthorized changes into the system (ACCA Global, n.d.).

Control over maintenance- These ensure that all the changes that are made into the system are properly authorized and a proper trial is maintained of any changes into the system.

Auditor is concerned as these changes may prevent the auditor from identifying any frauds or errors that may have taken place in relation to the inventories held by the company.

b) The ASA 530 “Audit Sampling" provides guidance to the auditor on the selection of audit samples while deciding the extent of audit procedures to be carried out by the auditor. According to this standard, if the auditor perceives the risk of material misstatement to be high and the internal controls that exist are weak, then the auditor must select a larger sample size and vice versa (AUASB, 2009). In this case, as the internal controls in relation to the inventory control system are perceived to be weak and auditor considers the system to be unreliable, the auditor should obtain evidence from every month in the year.

c) If the auditor conducts tests of controls at an interim date then, it would not be appropriate to conclude that the controls also relate to the end of period date because this would give rise to the audit risk that certain misstatements that may be existing at the balance sheet date may remain undetected by the auditor (PCAOB, 2010). Moreover, the extent of this audit risk is increased if the time gap between the interim date at which the internal controls were tested by the auditor and the actual balance sheet date is huge. If the auditor simply relies on the tests of controls at an interim date only, those frauds or errors that could have taken place after the interim date and up to the balance sheet date, will not be identified by the auditor.

Audit, Assurance, and Compliance - Question 3

(a) Key account

balance at risk:

(b) Key

assertion at


(c) Explanation:

(d) Substantive test of detail/ Audit


Stock in hand


As the products supplied by this new company are new to the market and there have been some complaints regarding the poor quality, there is the existence of a risk that the components may not be reliable or be defected, and the company may not be forced to sell these at below their purchase costs. In that case, the current valuation of stock will be rendered incorrectly.

 A report should be obtained from an independent industry expert regarding the suitability of electric components supplied by the husband of the finance director through his private company. It must be sought that considering the type of electronic components supplied by the company, whether the use of the said products supplied by Nimat Marshall is commercially feasible for the company.

Trade Debtors


As the major debtor Mimosa Ltd is facing financial issues and is taking very long to make payments, there exists a possibility that the debt owed by the company may turn into a bad debt.

Seeking direct confirmation from the debtor about the outstanding balance and discussion with management about the reasons as to why this debt should not be considered as a doubtful debt. Also, written communication should be sought from the CEO/CFO/Board of directors of Mimosa Ltd asking them to indicate the time frame within the outstanding payments will be made by them.

Audit, Assurance, and Compliance - Question 4

a) Key audit matters are those matters which according to the opinion and judgment of the auditor are of high importance in relation to the audit of financial statements of the entity for the current period. These matters are selected by the auditor from those matters which invited major attention from the auditor and were communicated by the auditor to the management and the audit committee. In a nutshell, these are those matters where there is a possibility of the existence of a high risk of material misstatement or those areas that involved major judgments made by the management (EY, 2015).

These matters have not affected the format of audit reports because these matters are not a substitute to any disclosures in financial statements or to the qualified/unqualified/modified audit opinion of the auditor or to the emphasis of matter paragraph (EY, 2015). These are reported by the auditors as some additional information within the auditor’s report that is provided in the form of certain paragraphs within the “Key Audit Matters” section in the auditor’s report.



Event/ Accounting Treatment


Private placement of shares after the balance sheet date

Non-adjusting event. Only a disclosure is required in the financial statements.

There was no indication of the existence of this decision to make a private placement at the balance sheet date.

Acquiring a subsidiary company (60 percent stake)

Non-adjusting event. Only a disclosure is required in the financial statements

The contract for acquiring a 60percent stake had not been signed until the balance sheet date and is yet to be signed.

Legal proceedings against the company after year-end and concrete evidence to prove the company guilty is available to the claimant

Non-adjusting event. No adjustment should be made to figures presented in financial statements but only an appropriate disclosure should be made in this respect.

This event indicates a condition that did not exist on the date of the balance sheet. Even though many writs had been lodged against the company in previous years, the responsibility and liability of the company had not been established. It would not be right to consider this as an adjusting event because although a lot of writs had been filed against the company in past, there was no concrete evidence against the company and no court decision had been made against the company. This writ in which the claimant had evidence against the company was lodged after the year-end and hence does not indicate a condition that existed on the balance sheet date.

Recovery of doubtful debts and bad –debt of a large customer

Both the events are adjusting events.

Cash recoveries are related to those debts which were regarded as doubtful on the balance sheet date and the debtor who went bankrupt was regarded as safe on the balance sheet date, hence both these events provided evidence of conditions that were present on balance sheet date.

Audit, Assurance, and Compliance - Question 5


Audit Opinion


As the organization has not maintained proper supporting vouchers or receipts for a substantial portion of its expenses, it cannot be determined by the auditor that expenses reported in financial statements are correct, valid and genuine.

Qualified Audit Opinion

A qualified audit opinion is justified in this case as the entity has not maintained its accounting records as per GAAP, but the auditor has not identified any misrepresentations and believes that apart from that particular matter, the financial statements provide a true and correct view.

There is an overstatement of profit and overstatement of closing stock.


There is non-compliance with the accounting standard AASB 111 Construction contracts and financial statements do not provide a true and fair picture.

A misstatement exists in the financial statements which are below the material limit set by the auditor

Unqualified Audit opinion with emphasis of matter

As all other issues were resolved (except for overstatement of properties by $6 million), it is justified to issue an unqualified audit opinion, however as a misstatement still exists in the financial statements which are not material, the same should be highlighted through EOM paragraph.

Going concern assumption is affected

Adverse Audit Opinion

The cancellation of the contract with band Eclipse has significantly affected the company and it is believed that going concern assumption is not appropriate for the company.

References for Audit, Assurance, and Compliance

ACCA Global. (n.d.). Auditing in a computer-based environment (2). Retrieved from

AUASB. (2009). Auditing Standard ASA 530 Audit Sampling. Retrieved from

(2015). Key Audit Matters: what they are and why they are important. Retrieved from

IFAC. (2008). International Standard on Auditing 570 Going Concern. Retrieved from

PCAOB. (2010). Auditing Standard No. 13 The Auditor's Responses to the Risks of Material Misstatement. Retrieved from

Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Audit and Assurance Assignment Help

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