Questions and Answers of Auditing A Practical Approach

Jenny has been asked to join the team responsible for designing the audit program for a new client, Sangekar Industries Ltd (Sangekar), a manufacturing and wholesaling firm. Sangekar recently went
Boris Johnson suggests the following audit procedure should be included in the audit program to gather evidence on the cut-off assertion for the revenue account:Select a sample of sales from the
Boris Johnson has another suggestion for the audit program for the revenue account. This time he suggests:Select a sample of sales from the sales journal and agree the details in the journal to the
Seb Coe and Boris Johnson are discussing the audit program for the revenue account. Seb and Boris disagree about whether they should use procedure A or B below to test the occurrence assertion for
Peter has the task of designing the audit program for the payroll area. There have been no recent changes to the payroll system, or its interface with the general ledger. Among other tests, Peter is
Brian has the task of reviewing the evidence from analytical procedures conducted by the audit assistants on the audit of Smalley Services Ltd. The audit assistants have reported the results of these
Melissa is the recently appointed engagement partner of the audit of Brumby Ltd. Melissa has just taken over the audit from Ken Leo, who rotated off the audit after a five-year period as the
(a) Identify two key account balances likely to be affected by The above information.(b) For each account balance identified in (a) above, identify and explain the key assertions most at risk.(c) For
Your assurance services manager has requested you use substantive analytical procedures to calculateShady Oaks’ estimated revenue for patients staying in the hospital, excluding medical procedures
Inventory of various medical supplies and drugs is a material account on the Shady Oaks Hospital audit engagement. You are planning to adopt a combined audit approach for existence of inventory and
Answer the following questions based on the information presented for Cloud 9 in the appendix to this text and the current and earlier chapters. You should also consider your answers to the case
Review your answers to the previous questions. Comment on the persuasiveness of evidence from each test. Explain any factors that would affect your assessment.Chan & Partners Chartered Accountants is
Management applies accounting standards in the preparation of financial reports and auditors assess the fair application of those accounting standards. During 2008 and 2009, several changes were made
Why does an auditor compare remittance advices or lists of cash receipts with entries in the cash receipts transaction file and compare entries in the cash receipts transaction file with the
A debtor’s positive confirmation:(a) Is not as useful as a negative confirmation.(b) Provides evidence that the debt will be collected.(c) Provides evidence about the existence of the debt.(d)
Auditing payables usually focuses most heavily on:(a) Existence.(b) Rights and obligations.(c) Existence, and rights and obligations.(d) Completeness, and valuation and allocation.
Why is an auditor interested in the repairs and maintenance expense account when auditing the PPE asset account? Explain your answer with reference to the assertions at risk.
Explain why completeness is a more critical assertion for liabilities than for assets. What procedures are primarily designed to address the completeness assertion for payables?
Jackie is designing the audit program for cash for her client, Dexican Services Ltd (Dexican). Dexican is a property management services company. It deals with six major clients and several smaller
Metalinc NL is a mining company based in Western Australia. Metalinc has 10 open-cut mines, most of which primarily extract iron ore. When the iron ore is extracted a small amount of other minerals
Mighty Tools Hardware runs a network of small hardware retail outlets across the state. All sales are made for cash or on credit card and processed through electronic tills. A wide range of goods are
MaxSecurity Limited (MaxSecurity) has been an audit client of Smith & Associates (S&A) for the past 15 years. MaxSecurity is based in Wollongong, where it manufactures high-tech armour-plated
Flinders Ltd has been a client of MRG Partners for many years. You are an audit senior and have been assigned to the Flinders audit for the first time for the financial year end 30 June 2017. During
Albert Enterprises (Albert) is a large importer of goods from China. Albert deals with thousands of suppliers in China and sells the goods to discount stores in Australia. The discount stores include
Victoria is managing the performance of audit procedures on the trade receivables transaction file. Her main focus is the posting of entries for sales and sales returns to the control account and the
MaxSecurity Limited (MaxSecurity) has been an audit client of Smith & Associates (S&A) for the past 15 years. MaxSecurity is based in Wollongong, where it manufactures high-tech armour-plated
You are a graduate working for W&S Partners, an Australian accounting firm with offices located in each of the major cities. W&S Partners has just won the 31 December 2016 statutory audit for Cloud 9
When gaining an understanding of the client at the industry level the auditor will:(a) use information about the client’s industry.(b) not consider government taxes on the industry because they are
An attitude of professional scepticism means:(a) Any indicator of fraud is properly investigated.(b) The auditor can rely on management assertions.(c) The auditor can rely on past experience to
An example of an incentive or pressure that increases the risk of fraud is:(a) The client operates in a stable industry.(b) The client has a history of making losses.(c) Management remuneration
The auditor must consider whether it is appropriate to assume that the client will remain as a going concern:(a) If there are mitigating circumstances.(b) Only if the client is listed on a stock
Melinda has drafted an audit plan for a new client. The client is Jimmy’s Cakes, a café and catering business. Jimmy’s Cakes earns 60 per cent of its revenue from the café (food and beverage
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
Ajax Ltd is a listed company and a new client of Delaware Partners, a medium sized audit firm. Jeffrey Rush is the engagement partner on the audit and has asked the members of the audit team to
Celebrity Land is a theme park operated by an audit client of Best Partners. It is located on the Gold Coast and, due to its proximity to the ocean, the rides are prone to rust and corrosion. During
Abacus Ltd sells office equipment and supplies. In recent years, it has faced increasing competition from a chain of office supplies stores which is owned by one of the major supermarkets. The
Expansion Aviation has installed a new payroll module to its existing accounting system which integrates with the general ledger application. The new payroll application was purchased from the
An airline company has been adversely affected by a slump in business travel during the last two years.In addition to lower overall demand, the airline company faces increased competition from other
The ASX Corporate Governance Council’s Corporate governance principles and recommendations are designed to help companies:(a) Improve performance.(b) Improve their corporate structure.(c) Enhance
(a) Using your knowledge of APES 110, identify and explain the potential type of threat to Chan and Partners’ independence in situations (1) and (2) above.(b) What action should Chan and Partners
Explain why Tania should have reservations about accepting the engagement in respect of the linear accelerators. Make appropriate reference to fundamental ethical principles in your answer.
Dolphin Surf & Leisure Holidays Pty Ltd (Dolphin) is a resort company based on the Great Barrier Reef. Its operations include boating, surfing, diving and other leisure activities, a backpackers’
Godwin, Key & Associates is a small, but rapidly growing, audit firm. Its success is largely due to the growth of several clients that have been with the firm for more than five years. One of these
Theobald Ltd has an internal audit department that primarily focuses on audits of the efficiency and effectiveness of its production departments. The other main role of the internal audit department
Linda is the managing partner of Moss and Associates, a small audit firm. Linda’s role includes managing the business affairs of the firm, and she is very worried about the amount of fees
Elise Dallimore is the partner in charge of the audit of Hertenstein Ltd, a large listed public company. Elise took over the audit from Marjorie Platt, who has recently retired from the audit firm.
Bumpa Shopping Centres has borrowed heavily in recent years. The pressures of rapid expansion have been felt within its finance department, and the chief financial officer (CFO) has begun to make
You are part of the audit team at DDD Partners, tendering for the audit of Water Fun for the 2015 financial year. During your review of an Australian Securities and Investments Commission (ASIC)
Kerry is a senior auditor and a member of the team auditing a long-standing client, the listed public company Darcy Industries Ltd. Darcy Industries has just announced a takeover bid for Blacklight
CCC Partners is negotiating with its audit client, Muir Industries, for the audit fees for the coming year. The partner in charge of the Muir Industries’ audit offers the company a discounted audit
Dhoni and Kholi are the senior partners in a mid-size audit firm. They have both acted as the lead audit partner at different times with a long-standing audit client, Ibis Industries Ltd. The new CEO
Super Software Ltd is a client of FFF Partners. Super Software’s bank has asked it for an audited financial report for the six months ended 31 December 2016. The bank’s request is made in
Starc and Partners Chartered Accounting firm has built up its audit work over the last five years. It has obtained new clients each year and many of its existing clients have grown in size. It has
McGrath and Partners Chartered Accounting firm is tendering for the audit of Harris Ltd for the next financial year. During the tender preparation, the manager of the audit team discovers that a
Charles is at a neighbourhood Christmas party with several of his flatmates. Over a few beers, Charles gets into a conversation with a neighbour, William, about mutual acquaintances. Charles is a
Sharon Gallagher, Josh Thomas and Jo Wadley are members of the audit firm W&S Partners. Sharon is the audit manager and Josh is the audit senior assisting the partner, Jo Wadley, evaluate the
Chan and Partners Chartered Accountants is a successful mid-tier accounting firm with a large range of clients across Australia. During the 2017 year, Chan and Partners gained a new client, Medical
You are a trainee auditor working for a small audit firm. You completed your accounting degree at the end of last year and although you have not yet had much experience, you are concerned at some of
You have recently graduated from your university course and start work with an audit firm. You meet an old school friend, Nga, for dinner — you haven’t seen each other for several years. Nga is
MaxSecurity Limited (MaxSecurity) has been an audit client of Smith & Associates (S&A) for the past 15 years. MaxSecurity is based in Wollongong, where it manufactures high-tech armour-plated CHAPTER
Climate Balance Pty Ltd is a consulting firm specialising in sustainability and climate change issues. It offers sustainability report assurance services to a variety of organisations, including
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
Most audit firms maintain a website that explains the services offered by the firm and provides resources their clients and other interested parties. The services offered by most firms include both
Explain the ‘audit expectation gap’. What causes the gap?
Explain the difference between the IAASB and the AUASB.
Compare the financial report users and their needs for a large listed public company with those of a sporting club (for example, a football club). Are the users’ needs the same in each case?
What steps can an organisation take to increase the independence of its internal auditors?
Who are the three parties relevant to an assurance engagement in the financial reporting context? Explain why each party is interested in the result of an audit.
Explain the difference between a financial report audit and an assurance engagement.
Those charged with governance have a responsibility to ensure that the information in financial report is:(a) True and fair.(b) Relevant and reliable.(c) Comparable and understandable.(d) All of the
An auditor disclaims responsibility when:(a) The users cannot rely on the financial report.(b) The audit opinion is unqualified and unmodified.(c) The auditor is unable to obtain sufficient evidence
Performance audits are useful because they:(a) Include a comprehensive audit.(b) Allow the auditor to demonstrate how well they are performing.(c) Are concerned with the economy, efficiency, and
When performing an audit required under section 301 of the Corporations Act the auditor has a responsibility to:(a) Form an opinion on the subject criteria.(b) Form an opinion on the independence of
Ron McLellan established his business, McLellan’s Shoes, in 1980. Since then he has run his business as a sole trader. Ron keeps records and his wife helps him prepare basic accounting records. As
Explain the difference between the two types of sampling risk for substantive testing: the risk that the auditor concludes that a material misstatement does not exist when it does and the risk that
(a) Explain how you would select the sample of debtors for confirmation.(b) Only one in four of the debtors’ confirmations are returned. Explain the additional audit procedures you could carry out
Assume that you are completing field work on payables for Shady Oaks. The payables relate to purchases of medical and catering supplies, employee related provisions, other accruals, and loans from
Searching for unrecorded liabilities:(a) is a rarely performed audit procedure.(b) is always performed by confirming accounts payable.(c) can be done by examining subsequent payments or unmatched
When testing payroll, the auditor:(a) Does not examine overtime records as these are always insubstantial.(b) Reviews that the hours on timecards are recorded in the payroll transaction file in the
Which assertions are violated if a client includes labour expense related to manufacturing processes as a general expense instead of as cost of inventory?
Jurgen is the engagement partner on the audit of Lynch Brothers, a listed company selling small kitchen appliances. The appliances are made in China and imported and sold to retail outlets by Lynch
Curtley Robinson Friends (CRF) is an internet-based dating agency. Its business model is that anyone can search its website and review for free the profiles of people looking for friends or partners,
James is seeking your advice on the selection of substantive procedures for the audit of his client, Rock Ltd. Rock Ltd is a specialist outdoor clothing and equipment retailer and has experienced
Advance Pharma Ltd is developing a new drug for diabetes. The expenditure does not meet the requirements for deferral as an asset and must be expensed in the current period. The amounts involved are
The human resources department at Countrywide Logistics is responsible for selecting and appointing employees, approving pay rates and promotions, and processing employee terminations. The payroll
Chris Farnon is a veterinary surgeon, specialising in pigs. His customers are pig farmers, large and small, throughout the state. To support his practice he also operates All Creatures Veterinary
(a) What are the principal audit objectives and assertions for MaxSecurity’s cost of sales? Explain.(b) Identify the relevant substantive tests of details that would be appropriate to gather
Discuss how substantive testing of MaxSecurity’s cost of sales expense would relate to substantive testing of the inventory account on its balance sheet.MaxSecurity Limited (MaxSecurity) has been
Design the tests of details for purchases that you would use to supplement the analytical procedures. Relate each test to the relevant assertion for purchases.Chan and Partners Chartered Accountants
Describe all the key information required to estimate Shady Oaks’ revenue for patients staying in the hospital.Chan and Partners Chartered Accountants is a successful mid-tier accounting firm with
ASA 560 Subsequent Events requires the auditor to consider material events they may discover after the end of the financial period and up to (and including) the date the auditor’s report is signed.
During the Global Financial Crisis (GFC) of the late 2000s several banks failed and other companies were adversely affected. It is possible that shareholders and lenders of failed companies could
If an auditor becomes aware of a fact that may materially affect the financial report after the date of the auditor’s report but before the financial report is issued, the auditor should:(a)
Which is an example of the type of event that provides evidence with respect to conditions that developed subsequent to year-end?(a) Loss of plant as a result of fire or flood after year-end(b) An
Emphasis of matter is used without an accompanying qualification of the audit report when:(a) An extreme limitation of the scope of the engagement exists.(b) A significant uncertainty exists that
Discuss the auditor’s responsibility for detecting subsequent events(a) Prior to the completion of field work,(b) Prior to signing the audit report,(c) Between the date of the audit report and the
What is the difference between current-year misstatements and prior-year misstatements?
Steve Smith is reviewing the results of the review of subsequent cash receipts. There are several receipts listed from customers that were considered doubtful at the end of the year (30 June). Steve
Martin Stanaway is the partner in charge of the audit for a new client, Western Wonderland (WW). The client engaged Martin’s audit firm in November 2017, in preparation for the 2018 audit. From 30
Springsteen Ltd is a new audit client for the 2015–16 financial year. Springsteen’s financial report for the 2016–17 year, the last with the previous auditor, was prepared on the assumption of

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