• Internal Code :
  • Subject Code : TACC608
  • University :
  • Subject Name : Auditing and Assurance

Auditing and Assurance - Part A

Auditing and Assurance - Question 1

Who appoints a company’s auditor?

  1. The Australian Securities and Investment Commission.
  2. The audit committee of the company.
  3. The members / shareholders of the company.
  4. The managing director of the company.

Type your answer here:

The members / shareholders of the company

Auditing and Assurance - Question 2

What are the main reasons that Auditing Standards exist?

  1. they provide assurance of the minimum standards that should have been employed by the auditor in arriving at the opinion.
  2. they are necessary to maintain a cost-effective service.
  3. they will safeguard the auditor when they are sued.
  4. all of the above.

Type your answer here:

they provide assurance of the minimum standards that should have been employed by the auditor in arriving at the opinion.

Auditing and Assurance - Question 3

Concerning errors, suspicious things/mistakes and illegal acts, the auditor should plan their audit with what sort of attitude?

  1. adversarial pursuit.
  2. cautious mistrust.
  3. seasoned pessimism.
  4. professional scepticism.

Type your answer here:

professional scepticism.

Auditing and Assurance - Question 4

Internal control has been recognised as important by management and auditors for many years.

Which of the following is a major factor contributing to this importance?

  1. The operations of the business entity have become so unwieldy that management must rely on the chief financial officer to effectively control operations.
  2. Checks and reviews protect against employee collusion and reduce the chance of employee fraud.
  3. Internal control procedures must be utilised to maintain accurate accounting records.
  4. It is impractical for auditors to audit most companies within economic fee limitations without relying on the client’s system of internal controls.

Type your answer here:

Internal control procedures must be utilised to maintain accurate accounting records.

Auditing and Assurance - Question 5

Incompatible duties allow an irregularity to be perpetrated:

  1. and concealed through collusive actions.
  2. by two or more employees.
  3. and concealed by a single employee.
  4. by accounting personnel.

Type your answer here:

and concealed through collusive actions

Auditing and Assurance - Question 6

When planning his/her audit the auditor assesses materiality at which two levels?

  1. the preliminary level and the final level.
  2. the company level and the divisional level.
  3. the financial report level and the account balance level.
  4. the account balance level and the transaction level.

Type your answer here:

the preliminary level and the final level.

Auditing and Assurance - Question 7

An auditor planned to place reliance on the client’s internal controls but found that they were ineffective.

What audit strategy should the auditor now pursue?

  1. the lower assessed level of control risk approach.
  2. the predominantly substantive approach.
  3. a combination of the lower assessed level of control risk approach and the predominantly substantive approach.
  4. the analytical procedures approach.

Type your answer here:

a combination of the lower assessed level of control risk approach and the predominantly substantive approach.

Auditing and Assurance - Question 8

For every audit engagement, the specific audit objectives will normally be:

  1. the same for all clients in the same industry.
  2. equal to the number of categories of management’s financial report assertions.
  3. similar for all clients in the same industry.
  4. tailored to fit the individual client.

Type your answer here:

c.similar for all clients in the same industry.

Auditing and Assurance - Question 9

Which of the following audit tests would not be considered to be a substantive test?

  1. Tests of controls.
  2. Tests of details of balances.
  3. Analytical procedures.
  4. Tests of details of transactions.

Type your answer here:

Tests of controls.

Auditing and Assurance - Question 10

External audit relying on the work done by internal audit is:

  1. strictly prohibited by professional standards.
  2. acceptable whenever a client has employed them.
  3. acceptable if the auditor reviews and tests their work.
  4. acceptable if the auditor re-performs all their work.

Type your answer here:

acceptable if the auditor reviews and tests their work.

Auditing and Assurance - Part B

Auditing and Assurance - Question 11

Describe and explain the organisational and functional differences between internal and independent (external) auditors.

Include in your answer detailed commentary on:

  • Who is their employer
  • The type of work they do
  • The scope of their audits
  • Who their primary responsibility is to
  • Their national organisations

Type your answer here:

Points

Internal Auditor

External auditor

· Who is their employer

Internal auditors are employed within the company.

They are hired by the company .

They are company employees

They are employed by an outside audit firm.

They are appointed by shareholders vote.

· The type of work they do

The type of work done by internal auditor includes as below:

They examine and evaluate the internal control structure.

It includes effectiveness test of the internal control environment

The type of work done by external auditor includes:

To provide an independent opinion on financial reports.

Primary work is done to establish that the financial statement is free of material misstatement.

· The scope of their audits

The scope of the audit varies depending upon the size and structure of the entity.

It also depends upon the purpose and requirement of the management.

This is generally done to test the internal control environment.

This is to ensure that risks are identified and minimised.

It does include review of compliance with laws, regulations and other external requirements and with management policies and directives.

The scope of the audit generally includes :

Verification of critical controls that monitors, accompanies financial data work.

Evaluation of financial statements.

Based on their control testing, they need to provide a true and fair view of the organisation’s health.

· Who their primary responsibility is to

• Internal auditors are responsible to the management of the company.

• They are also responsible to provide a perspective to the external auditor on internal control environment and their effectiveness.

They are primarily responsible to shareholders / key stakeholder of the company.

Their national organisations

Institute of internal auditors

Australian Securities and Investment commission

Auditing and Assurance - Question 12

  • Define the concept of materiality as it relates to auditing and explain why it is important. (5 marks)
  • Identify the two levels of materiality that are important in audit planning and indicate the reasons for each level being important. (5 marks)

Type your answer here:

12(a) Concept of materiality:

The concept of materiality is generally defined by the financial reporting framework of the organisation. However, this generally explains as below:

  • Misstatements, including omissions, are considered to be material if they, individually or in the aggregate, could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report;
  • Judgements about materiality are made in light of surrounding circumstances, and are affected by the size or nature of a misstatement, or a combination of both;
  • Materiality relates to both the content of the financial statement and the level and type of testing to be done

Importance of materiality

  • As the auditor cannot test every single transaction of the financial record, so they base their judgement based on the materiality testing.
  • Materiality helps auditor to provide a true and fair material view of the entity.
  • It helps in assessing the quantitative misstatement of the financial report.
  • In auditing materiality means not just the quantified amount but the effect that amount will have in various context , so it helps to form an audit opinion.

12(b) Materiality is used at

  • Planning stage
  • Final stage

This is done at 2 levels as materiality is matter of judgement and it may change as audit progresses.

Purpose at the planning stage include planning the level of testing on each account balance and transaction class. It is calculated as a percentage of relevant base such as net assets. The relative use of the judgments is low since the specific misstatements are not known at the planning stage and only quantitative misstatements are considered.

Purpose at the final stage of the audit include determining whether the financial report is materially misstated. It is calculated as a percentage of a relevant base such as profit. The relative use of the judgements is high since the actual misstatements are now known and qualitative factors must be considered as well as the size of the misstatement.

Auditing and Assurance - Question 13

(a) Who is responsible for minimising the business risk of an organisation? (5 marks)

(b) Describe the auditor’s responsibility with regard to business risk and financial statement assertions. (5 marks)

Type your answer here:

13(a) Risk appetite is the mutual understanding of the management and the board of the company. Minimizing business risk of the organisation is not the sole responsibility of an individual or a department. Senior management is responsible to frame a control environment to minimize the risk incidences in the organisation. They need to ensure involvement of their employees in identifying the risks that they see in their respective departments and train them to handle such risks at their level.

13(b) As per ASA 315, the auditor gets an understanding of the entity. This understanding helps auditor to assess the risk that the financial statements contain material misstatements. In identifying business risks, the auditor can establish the extent to which the financial statements are at risk. When management prepare the financial statements they can be considered to be making a number of assertions about each transaction class, account balance or disclosures as per ASA 500. In order to understand the extent of the risk in the financial statements the auditor must understand the extent to which these assertions are at risk.

Auditing and Assurance - Part C

Auditing and Assurance - Question 14

Audit Objectives, Procedures and Evidence

You are an audit senior and your firm audits Daicos Ltd, a large mining company that operates all over Australia. Consider the following situations that have arisen during the audit.

  1. Daicos owns some highly specialised mining tools and equipment held at various remote regions across the country. Your firm has engaged an expert to carry out a physical audit check of these equipment and tools at each location and to perform an independent valuation of each material asset.
  2. In reviewing the account receivables of Daicos, you realise that the majority of Daicos’s customers are in Indonesia and other parts of remote South-East Asia. Because of communication difficulties, direct confirmation of the accounts receivables’ balances is unlikely to give satisfactory results.
  1. During the audit you also notice that Daicos owns the majority of shares in related, unlisted companies in Australia.

Required

(a) Identify the key assertion(s) at risk in relation to the balances described in each of these three situations. (10 marks – situations 1 and 2 are worth 4 marks each, situation 3 is worth 2 marks)

Type your answer here:

Situation 1. Audit assertions will include

  1. Existence – This will be confirmed by the auditor based on the physical check that the equipment does exist or not.
  2. Valuations – Valuation will include the historical purchase price and the applicable depreciation per the market and industry standard to arrive at the final valuations.
  3. Accuracy – Its appropriately recorded in the financial statements.

Situation 2.

  1. Completeness: Sale transactions are complete and recorded and on sample basis.
  2. Cut off : The date of recording the receivables are taken within the appropriate cut off date of the financial year for which the audit is being conducted.
  3. Accuracy : Invoices are raised at the correct value for the respective debtors and are correctly recorded in the financial records.

Situation 3.

  • Existence
  • Accuracy
  • Valuation
  • Cut off

(b) Describe the audit procedures you would perform to gather sufficient appropriate audit evidence on each of these assertions. (10 marks – situations 1 and 2 are worth 4 marks each, situation 3 is worth 2 marks)

Type your answer here:

Situation 1.

Audit procedure will include as below for physical audit check of equipments.

  1. checking the inventory physically and putting the stamp on the checked inventory to avoid duplicate counting of the inventory.’
  2. Checking the invoices for additions made during the year for the equipments.

Situation2.

  1. Auditor will send a formal email to the respective customers for confirmations of the balances.
  2. Auditor will check the bank statement for the payment received during the year for the material balances in account receivables.
  3. Auditor will check the sale invoices raised and will match with the quantity sold in the inventory register to ensure proper record of sale transaction.

Situation3.

1. Auditor will confirm investment balances with general ledger

2.Inspect period end activity for proper cut off.

3.Vetting investment disclosures with a current disclosure check list.

Auditing and Assurance - Question 15

Audit Evidence

Background

You are about to complete the planning stage of the audit of Seymour Print Ltd and you are considering your approach to several events that have occurred during the year.

Seymour Print Ltd’s revenue for the year is $25 million and profits are $3 million.

Issues

  1. A customer has made a claim against Seymour Print Ltd for breach of contract. They claim that products were not delivered in accordance with the contract and this led to them having to engage other contractors to carry out the work at great expense. The customer is suing Seymour Print Ltd for damages of $1 million. (7 marks)
  2. A major customer has not paid Seymour Print Ltd for three months and the receivable balance at the year-end for this customer is $120,000. The customer is rumoured to be having significant cash flow difficulties; however, Seymour Print Ltd’s directors believe they will be paid as the customer is one of long standing and has always paid in the past. (7 marks)
  3. Seymour Print Ltd recently purchased new equipment for the factory. This replaced old machinery, which is no longer being used, which is included in the balance sheet at a net written down value of $2,250,000. The old equipment has not reached the end of its originally expected useful life and remains on the balance sheet and is being depreciated in line with previous years. (6 marks)

Required

Describe and explain the substantive procedures that would provide sufficient appropriate evidence in relation to the issues outlined above.

Type your answer here:

15(a) Auditor will do the detailed transaction check. He will check the details of the invoice and check the debit entry of the transactions. Auditor will check if the claim of the customer is valid or not. To confirm, he will verify the documents produced by Seymour Print Ltd. to confirm if the delivery of the product was done appropriately or not. Auditor will check in the inventory movement register to see if the product moved out of the inventory on the date of invoice or not. Auditor will also check the delivery document to confirm if the delivery was carried out at the customer location or not. Based on the above, the auditor will form an opinion on the appropriateness of the customer for the claim.
15 (b) Auditor will apply the test of details balances to confirm the balances of the customer . He will also apply the analytical procedure to confirm the trend of the customer payment. Auditor will check the payment practice in the past of the same customer. Was there any long due in the past by the customer. Based on the payment testing in the past and the amount dues in the past, auditor will form an opinion whether the amount will be receivable or does it need to be provided for in the financial statements.

15 (c) Auditor will apply the reasonableness to determine the depreciation rates in line with the useful life of the equipment or not based on the historical useful life of the equipment.

He needs to ensure that depreciation rates consistent to the prioryears. However, if there have been substantial loss in the past compared to the depreciated value to the realisable value, then the auditor needs to adjust the depreciation in practice with the past for the new equipment.

Auditing and Assurance - Question 16

You are the audit partner at Arthur Dunger & Associates, a mid-tier audit firm. You are responsible for the audits of the following three independent entities for the year ended 30 June 20X8:

(a) Kids In Crisis Ltd is a non-profit entity.

You have discovered that it has not kept substantiating vouchers or receipts for more than 65 per cent of its expenses, excluding salaries and allowances. (6 marks)

(b) High Rise Ltd is a building contractor with a varying workload.

In order to compensate for the irregularity of its contracted building projects, High Rise also purchases large vacant blocks of land that it later subdivides for the construction of houses and units. High Rise then sells these on its own account.

Your analysis strongly suggests that the apportionment of costs to houses and units sold has been kept low in order to boost profits.

In your opinion, this has resulted in the overvaluation of the unsold properties.

The directors of the company do not agree, and hold to their view that the stock of properties is correctly valued. (7 marks)

(c) Major Promotions Ltd arranges for popular overseas entertainment artists to perform in Australia.

The band Eclipse was booked by Major Promotions to play in major cities across the country.

Major Promotions’s written contract required the company to pay the band in US dollars but, in order to reduce costs; it did not hedge the amounts.

Subsequent to year end, the Australian dollar fell against the US dollar and a substantial loss relating to the band’s tour was predicted.

The management of Major Promotions tried unsuccessfully to renegotiate the band’s contract and has been unable to obtain finance to cover the expected shortfall.

Major Promotions has now cancelled the tour and expects a substantial claim from Eclipse.

It is clear to you, as the auditor, that Major Promotions does not have the income, cash or other assets to sustain such a loss. (7 marks)

Required:

Assuming that all amounts involved are material, identify and discuss the most likely auditor’s opinion that you would issue on each financial report for the year ending 30 June 20X8.

Include in your answer an explanation as to how you came to your decision.

Type your answer here:

16(a) The auditor's report is the medium through which he expresses his opinion or, if circumstances require, disclaims an opinion. In either case, he states whether his audit has been made in accordance with generally accepted auditing standards.

If the auditor becomes aware of information concerning an instance of noncompliance or suspected noncompliance with laws and regulations, the auditor should 1. obtain an understanding of the nature and circumstances of the act. 2. Additional information should be obtained to evaluate the possible effect on the financial statements. 3. The auditor should also discuss the matter with management at a level above those involved with the suspected non compliance, and when appropriate those charge with governance. 4. If management or those charged with governance are unable to provide sufficient information that supports that the entity...consider obtaining legal advice.

5. Evaluate effects of non compliance on other aspects of the audit.

Auditor will provide a qualified opinion on Kids in crisis ltd.

16(b) When a business misrepresents its ending inventory, the company carries forward that mistake through to the following accounting period because the ending inventory amount of the current year is the beginning inventory amount for the next year.

An adjustment entry for overstated inventory will add the omitted stock, increasing the amount of closing stock and reduces the COGS

Auditor will need a representation from the High rise limited on the valuations of the inventories and will put a qualified opinion with his views on the inventory.

16(c) This is a business loss and the auditor . The transaction in the foreign exchange were incidental to Major Promotions ltd. Regular course of business and the loss was not a speculative transaction and is allowable as a business loss. So the auditor should be give the opinion based on the transaction testing.

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

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