Assignment 2 ? Auditing ACCT 3000 (Sem 1/Tri 1A, 2016)

• Tech Ltd (Tech) runs a chain of superstores in Australia. Tech highly depends on the electronic data interchange system to manage their transaction processes with the suppliers. Each individual store can raise their own inventory requisition without authorisation from the central purchase department and as a result saves them a lot of time. Mr. Abbot is the new CEO, who joined Tech three months ago. He used to work in the fashion industry and hence he is quite confident that Tech?s superstores sales can be increased by introducing clothing labels in the stores.

• Pluto Ltd (Pluto) manufactures generators for domestic users. Seven years ago Pluto manufactured a generator far superior to any of its competitors at half the price. It has therefore dominated the market over the past few years. However, recently one of Pluto?s main competitors introduced a new generator to the market. Based on the new competitor?s latest advertisements, you are aware that the competitor?s generator can produce electricity at twice the amount of Pluto?s generator by spending same amount of fuel and hence is superior to Pluto?s generator. However, Pluto?s CEO is quite optimistic about the whole situation. He told you that a pricing strategy will soon be implemented to fend off the new competitor and make redundant some employees to remain competitive.

• A team of internal auditors has been hired 10 months ago by Saturn Ltd (Saturn) to improve on its existing internal control, which has been relied on for the past 10 years. Based on your experience, the revamping process should only take about 8 months. It came to your attention that only a short while after the employment of the internal auditors, the CEO of Saturn experienced severe personal financial difficulty. You also find that the process of revamping the internal control has been dragging because the CEO kept on declining the internal auditors? suggestions for improvement. The accountant of Saturn has been notorious for finding gaps in the legislations in order to make its clients? financial statements look presentable as desired by the clients themselves. In the past few years, Saturn has always been required by the Australian Tax Office to provide additional supporting information after the lodgement of its tax returns.

Required

For each of the above independent situations, answer the following:

• Identify and discuss why the above situation represents a risk.

• By applying auditing knowledge, identify the main account or group of accounts affected in the audit plan by the risks identified in (a).
• Identify how the audit plan will be affected by the risks and recommend specific audit procedures to address these risks.

EXEMPLAR FOR ASSIGNMENT 2 Chemmart Pty Ltd (Chemmart) is a family-owned company operating chemist shops in Perth. A large proportion of the sales transactions are conducted in cash. Chemmart claims on having strong control policies and procedures in place to monitor the employees handling cash transactions and safeguarding the cash. However, the proper implementation of those policies had been questioned by the previous auditor. As Chemmart is planning to expand to Mandurah and Busselton, it is applying for a bank loan to obtain additional funding for the expansion. Before approving the loan, the bank requires Chemmart to provide them with an audited financial statement. Required (a) Identify and discuss why the above situation represents a risk. (b) By applying auditing knowledge, identify the main account or group of accounts affected in the audit plan by the risks identified in (a). (c) Identify how the audit plan will be affected by the risks and recommend specific audit procedures to address these risks. Suggested Solution (a) Both inherent risk and control risk would be adversely impacted. As a large percentage of the sales transactions are done in cash, the risk of misstatements would be high. Not only could there be errors in the volume of sales, but also on the amount recorded. It is also highly susceptible to theft or fraud. Additionally, Chemmart needs loan from the bank for their expansion and needs to demonstrate the bank that their financial position is strong. This may motivate the management to manipulate key accounts to make their financial report look better to obtain the loan resulting in higher inherent risk. The implementation of the control policies and procedures over cash transactions had been questioned by the previous auditor; hence control risk might also be high. (b) The key accounts like sales, cash and inventories which are likely to be misstated, shall be the focus of the work performed by the auditors. (Other accounts may be affected too. In order to score high marks, students are expected to drill into the specific accounts, explain why the chosen accounts may be affected and indicate the assertions that may be at risk for those accounts). (c) Audit plan - As the client's internal control system cannot be relied upon and trusted and inherent risk is high due to large volume of cash transactions; the auditor shall adopt a predominantly substantive approach. The auditor should perform extensive work to check for the reconciliation of cash balances to ensure that cash is not being misappropriated i.e. the existence of regular bank reconciliations and bank confirmation at year end. The auditor should take particular care to ensure that accruals have been completely recorded. (In order to get high marks, link audit procedures to the accounts/assertions identified in part (b))