1.Auditing Payroll

The review of the payroll system has indicated that when an employee is hired or terminated, the payroll clerk immediately prepares the paperwork and enters the information into the master file of the payroll computer system. In addition, the payroll department at the head office processes payroll on a weekly basis. All timesheets that are submitted by factory workers are signed off by the factory manager. The timesheets are input into the computer by the factory manager and payment is then made by the payroll department.

Susan Leung, a junior audit associate in your engagement team, has approached you to inquire the implication of the above-mentioned information on the audit of the payroll system.

Q: Noting to Susan in relation to the internal control and tests of Controls in auditing payroll. The note should cover:

an introduction of the COSO internal control framework.

Describe how the matter in the case could lead to a material misstatement in the financial report, suggest the appropriate control activities, and design appropriate tests of controls.

Explain to Susan how you have considered nature, timing and extent in your design of tests of controls.

2.Auditing Accounts Payable

In your audit of ABC Organics for the year ended 30 June 2020, you have identified that accounts payable is at risk of material misstatement.

ABC Organics produces canned fruits. To achieve the best quality, ABC Organics has always selected the best quality Australian grown organic fruit. This has helped ABC Organics establish a strong brand name, a large and diverse customer base, which includes major retail chains, grocery shops, and social clubs. This also contributes to its consistently strong profitability and positive cash flows.

There has been an extended drought in Queensland since last year. ABC Organics has not been able to obtain the required quantity and regular supply of organic fruits. In February 2020, ABC Organics signed renewable supply agreements with overseas fruit growers. ABC Organics is bound to purchase a minimum quantity of specified fruits, with the agreements being renewed every two years. The current agreements expire on 31 December 2022. All shipments to ABC Organics are invoiced and require settlement in US dollars. Overseas suppliers now represent 37% of trade payables. Local and overseas suppliers are maintained separately within the accounting system. ABC Organics is required to pay for freight and insurance costs. The insurance covers the period from the day the goods are loaded onto the ship until the day they arrive in ABC Organics' warehouses. All shipments arrive in Australia within 15 days after loading onto a ship. All overseas suppliers accounts are settled 28 days after shipment. Overseas suppliers now represent 37% of trade payables. Local and overseas suppliers are maintained separately within the accounting system.

Andrew Morrison, a junior audit associate in your engagement team, has approached you to inquire the implication of the above-mentioned information on the audit of the accounts payable account.

Q: Noting to Andrew in relation to the audit of accounts payable account on ABC Organics' audit. The note should cover:

The reasons why the accounts payable balance is at risk of material misstatement,

Note and justify the assertions at risk, if any, and

Outline the sufficient appropriate substantive tests of details that are responsive to the identified risk of material misstatement.

3.Audit Completion & Subsequent Event

Today is 10 August 2020 and your audit team has completed the fieldwork on the audit of ABC Organics. The audit opinion is due to be signed on 14 August 2020. ABC Organics will release the financial report on 18 August 2020. In completing the audit fieldwork, the following material event comes to your attention.

On 1 July 2020, there was an accident in the local area, which had the effect of turning off all electricity, including the fridge and freezer facilities at ABC Organics' warehouse. The energy providers were unable to restore power for 48 hours, which resulted in all the frozen and fresh food on hand at the warehouse being ruined. The financial controller estimates that total inventory lost was worth $1 million, with 80% of it having been on hand at year end.

In the follow-up process, Susan approaches you to ask the appropriate treatment of this event in ABC Organics' financial report for the year ending 30 June 2020.

Q: Noting to Susan suggesting the correct treatment of this subsequent event. The note should cover:

Whether it is an adjusting or non-adjusting event, and why.

The proper treatment Susan should follow in addressing this event in the audit.