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Planning and Assessing Business Risk

Case 1 (15 marks)

At the planning meeting for the audit of Deep Trawler Ltd for the year ended 30 June 2018, the audit partner, John Paine, presented the chief executive officer (CEO), Robert Goodfellow, with an engagement letter and asked that he sign the letter as acknowledgment of the terms of the engagement. Robert had not seen an engagement letter before and indicated that he did not believe that there was any need for such a letter, as he understood the auditor’s duties and his own duties perfectly.

 

REQUIRED

Discuss whether John should insist that the engagement letter be signed. Give reasons

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Case 2 (30 marks)

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

RATIO                                                            2019       2018             2019        2018

Current ratio                                                    2.51         2.72             2.15         2.55

Net profit ratio                                                 0.08        0.07             0.063       0.05

Gross profit ratio                                             0.24        0.29             0.24         0.21

Inventory turnover ratio                                  3.41         3.52             4.24         4.53

Receivables turnover ratio                              6.02         5.81            6.38         7.17

Return on total assets                                     8.4%        6.0%          15.0%      11.0%

Required

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assessing inherent risk and other specific business risks

 

Case 3 (30 marks)

 

You are the audit manager on Highland Ltd, a property investment company owned by a small number of wealthy investors. Last year the owners brought in new managers, who made substantial changes to the organisational structure of Highland. The new management team acquired a substantial parcel of shares in Highland and has also implemented a bold acquisitions strategy, resulting in a number of new business interests across the Asia–Pacific region.

 

A new staff member of the finance team, Kirsten Roberts, has been given responsibility for liaising with the auditor in respect of related-party transactions. Kirsten is responsible for identifying, recording, summarising and disclosing related-party transactions. This responsibility, along with a long list of other accounting responsibilities, has been delegated to her by the new management team. Kirsten has given you a list of related-party transactions that has not changed from previous years. However, given the changes in the business and the new acquisitions, you believe there is a risk of unidentified related parties. You meet with Kirsten to discuss this and soon realise that Kirsten does not really know much about the related-party framework in AASB 124 (IAS 24). Kirsten informs you of the following information:

 

  • Highland provides management services to a company in Fiji called Sunshine. However, no invoice has yet been processed and Kirsten is unaware of the terms of the arrangement. It is Kirsten’s understanding that Sunshine is owned by members of the new management team.

 

  • During the year Highland sold a property located in Singapore to a company called Clayton, which was set up specifically for the purpose of buying this particular property. Kirsten indicates that Clayton is not related to Highland, as Clayton is owned 100 per cent by a Singaporean bank. However, Kirsten does not understand why there are still property management fees for this property in Highland’s accounts relating to the period after the property was sold.

 

  • Since the new management team has come on board, Highland has done a lot of business with a company called Diamond, in which one of the directors of Highland has a substantial interest. Kirsten tells you that all transactions with Diamond are on normal commercial terms, so she has not included Diamond on her list of related parties.

 

REQUIRED

Based on the information given, list three factors that would increase the risk of a material misstatement occurring due to fraud or error resulting from the entity’s related parties or transactions.

 

 

 

 

 

 

 

 

 

 

Understanding and assessing internal control

Case 4 (Marks 20)

 

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.

 

REQUIRED

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tests of controls

Case 5 (Marks 15+10 = 25)

You are responsible for the audit of the tangible non-current assets of Glub Ltd, a company engaged in the manufacture and supply of soft drinks and other beverages to the retail, catering and leisure industries. From your discussions with the finance director, you find out that a capital expenditure budget is prepared annually.

 

Departmental managers can authorise capital expenditure up to £5,000, as long as it is within their budget. Board approval is required for amounts above this threshold but the managing director, who is also the major shareholder in the company, does not always adhere to this policy. He often commits the company to acquiring assets without considering how they are to be financed, leaving the finance director to arrange the borrowings.

 

Capital expenditure proposal forms are required to be completed but this is not always done, particularly when items are required in an emergency, and there is no formal policy in respect of obtaining quotes for major items of expenditure. There is a tangible non-current asset register which is reconciled to the nominal ledger on a monthly basis. No other checking procedures involving the non-current asset register are undertaken.

 

In July 201X, the company commenced construction of a new packing line. The line was completed in November 201X. Costs recorded in the tangible non-current asset register include materials, own and sub-contract labour, and overheads.

 

The overheads included are simply the overhead recovery rate used when pricing products and include all overheads, both direct and indirect. The company borrowed money to build the packing line and has included the interest on the loan as part of the construction cost.

 

Required:

(a) Identify four controls which should be in place to control the purchase of tangible fixed assets and explain why they are necessary and the consequences to the company if they are not in place

(b) Identify weaknesses in the system described above and, for each weakness, explain the consequences that could result from it.

 

 

 

 

 

 

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