Dear Tutor,

I have attached two documents. One is titled Audit Assignment and the other is titled Audit Self reflection task.

This self refletion task answer should be based on the audit assignment file attached. Thank you.

Running Head: Audit planning and understanding of entity Audit planning and understanding of entity Student name University of Tasmania Audit and Assurance BFA713 Lecture name Date Audit planning and understanding of entity 2 Memorandum FROM: ABC associates TO: Audit committee, Brilliant construction limited SUBJECT: Audit planning and understanding of entity DATE: September 2016 Task 1 This memorandum sets out our proposed strategy for auditing the Brilliant construction limited for the period ended July 31, 2016. Background of the entity Brilliant construction limited was founded by jack Wilson in 1996. The company is a medium sized as it operates in a few states and its business is to bid and win contracts. The management of BCL listed the company on the Australian stock exchange in 2005. Jack Wilson is the company CEO and a part of the seven-member board of directors. Respective responsibilities The management of brilliant construction limited is responsible for preparing and presenting financial statements. In conjunction with the financial statements, the management is obligated to ensure that proper records have been kept and recorded following the generally accepted accounting standards. It should also establish internal control systems, review them regularly and upgrade where necessary. We look forward to confirming your commitment to ensuring that the controls are effective. The audit team is responsible for reviewing the financial statements and providing an opinion with reference to the evidence gathered. The Audit planning and understanding of entity 3 audit team is also tasked with reviewing the internal control as regards to their presence and effectiveness. Objective of the audit The objective of the engagement is to provide an opinion on the financial statements as to whether they provide a true and fair position or not. The opinion will be based on the scope, audit independence, nature of internal controls and compliance with the accounting standards. Risk assessment Based on our assessment of both the external and internal environment, the inherent risks are categorized as either high, low or medium (Brumfield, Elliott & Jacobson, 1983)1. The assessment identified three audit areas. Control environment This is with regards to the management and specifically the executive. Jack Wilson is the founder, the chief executive officer and a member of the director's board. This is categorized as high inherent risks as John can easily use his powers to dictate transactions and even interfere with the audit processes. Internal controls The previous audit working papers indicate that the internal control was effective. However, the strength of the internal is termed as moderate. A moderate rating means that the controls are not sufficient enough to enable for proper accounting records or detect any misstatement or fraud. The internal controls have also not been changed from the last fiscal 1 Inherent risks are risks due to the nature of the business operations and not as a result of lack of controls Audit planning and understanding of entity 4 year. The maintenance of the same controls might be a loophole for fraud or material misstatements and require additional tests of controls to affirm their effectiveness. Related party transactions Brilliant construction limited has a number of branches and such is subject to related party transactions. The area if not properly controlled may attract fraud and misappropriation. The audit procedure will be to identify the related transactions and review whether they have been accounted for properly. Key accounts Revenue accounts Revenue accounts are under the revenue class and are therefore under the cut off assertion. Analytical tests will be done to ensure that the revenue amounts have been recorded in the correct accounting period. The company has various debt arrangements in a bid to finance its operations. Most creditors require a minimum interest coverage ratio of 3:1. The ratio being a factor of earnings before interest and tax and interest expense means that the revenue accounts should be reviewed further. There might be the presence of creative accounts in a bid to show a good performing company in order to safeguard finances from creditors. Creditors The presence of debt covenants indicates that the company has records for creditors. Creditors being a liability balance indicate that the management assertions under review are completeness, existence and rights and obligations. Procedures must be done to ensure that all the debt covenants entered into have been fully reported. The audit has to make sure that Audit planning and understanding of entity 5 the account balances exist and are accurate. The company must also confirm their obligations to the debts. Materiality Based on the type of business the company engages mean advice that revenue and expenses accounts are material and significant enough to affect the accuracy of the financial statements. Audit approach The audit team will follow a risk-based audit approach which is informed by the nature of the management, influence of the external forces and nature of internal controls. Substantive tests will be done on the key areas and accounts (Marden, Ronald & Brackney, 2009)2. Resources and timing The engagement period is planned for five weeks bearing in mind the company has various branches. The audit team will consist of a team leader and six other audit professionals. Key contacts The key contact at the entity is the CEO and the head of accounts and finance. Task 2 Gross profit ratio 2 Risk based audit is a strategy used to focus the timing, scope and nature of audit to areas that have the possibility to cause material misstatements. Audit planning and understanding of entity 6 Gross profit ratio is a profitability ratio and is used to measure the amount of profit left after factoring the cost of sales. It also measures the ability of the firm to pay off its expenses. The ratio for brilliant limited has been reducing from 47% in 2014 to 35% in 2016. This means that the company can only reduce their contract prices by 35% only before they start making losses. From the financial statements, it indicates that the cost of sales has increased. The cost of sales= beginning inventory + inventory purchases and expenses ending inventory. From the formula, we can say that the increase in the cost of sales might be a change in the accounting of inventory. In a market that prices are volatile and increasing, last in first in first out results into a higher cost of sales than first in first out method (Dopuch & Pincus, 1988). Aside from the accounting method and estimates, the records might have been inflated to show a wrong accounting balance. Substantive tests should be increased to assess their presence and effectiveness. Additional controls should be established such as authorization, cash reconciliations, and control of checks. Yours sincerely Team leader Audit planning and understanding of entity 7 Reference Brumfield, C. A., Elliott, R. K., & Jacobson, P. D. (1983). Business risk and the audit process. Journal of Accountancy, 155(4), 60-68. Dopuch, N., & Pincus, M. (1988). Evidence on the choice of inventory accounting methods: LIFO versus FIFO. Journal of Accounting Research, 28-59. Marden, R. E., & Brackney, K. S. (2009). Audit risk and IFRS. The CPA Journal, 79(6), 32. Audit planning and understanding of entity 8 BFA713 AUDIT AND ASSURANCE SELF REFLECTION OF THE CASE STUDY ASSIGNMENT Required You need to write a 500 word self-reflection on the case study assignment that you have completed. The self-reflection is to be completed individually, not with your classmates (Refer to the section on Plagiarism for further information). This is an opportunity for you to reflect on; what you have learned, the challenges that you faced, the areas that you have done well and the areas that you can improve in. In your reflection, you need to address the following: What have you learned from the case study assignment? You need to discuss how the case study assignment assisted your personal learning about auditing. You need to be as specific as you can. What are the difficulties or challenges that you faced when completing the assignment? You need to provide specific examples of the difficulties and challenges. Describe the approaches that you have used in dealing with those difficulties or challenges. Explain whether the approaches that you used worked well in the given situations. Identify any relevant self-improvements in terms of auditing knowledge and skills that could have helped you in improving your response to the case study task. In other words, you need to identify the auditing knowledge and skills you believe you should have had, which would help you in providing a better response to the case study. Then, you need to describe how and why the knowledge and skills would have helped, with relevant references. Length Maximum 500 words. Reference list is not included in your word limit. Value The reflection worth a total of 8 marks. This assessment counts for EIGHT (8) per cent of the marks for this unit. Submission The self-reflection is to be submitted to the Turnitin Dropbox in BFA713 MyLO by 3pm on the Friday of Week 12 (Friday, 7 October 2016). The submission must be in \"Word\" format. You need complete the TSBE assignment cover sheet and attached it to your submission. 1 Dear Students, Please make sure you submit the assignment cover sheet together with your assignment. You can download them from the following site: http://www.utas.edu.au/business-andeconomics/student-resources/forms Please ensure that all your submissions are in "Word "format. All the best! Regards Radzi 2 Introduction: Brilliant Construction Limited is a construction company found by Jack Wilson in 1996. He is also the CEO of the company and a member of Board of Directors. In this assignment, we will discuss the learnings from the case study assignment in auditing, difficulties or challenges that I faced while completing this assignment, improvement in knowledge and skills of auditing etc. Learnings from the case study assignment The assignment provided me a very good opportunity to improve my learnings in auditing. Below are the few things that I learnt from this assignment: 1. Importance of auditing internal control: It is very important to test internal control of a Company, whether they are in place and working effectively or not. Because, if the internal controls are not in place or they are not effective, then this may lead to fraud or material misstatements of the financial statements. 2. Control environment: This is a very highly risky area and auditor needs to look into this very carefully. Because, control environment is generally associated with top executives of the Company and they have all the powers to mislead the transaction of the Company and even interfere with the auditors. 3. Related party transactions: All related party transactions should be taken place at arm's length price i.e. there should not be any undue advantage to one of the either party in the transaction. The price decided for the transaction should be a justified price and the relation between the two parties should not affect the transaction price. 4. There are various analytical tests such as ratio analysis etc. which needs to be performed to ensure that the revenue accounts are not materially misstated. Difficulties/ Challenges: Following are the difficulties/ challenges that I faced while completing the assignment: 1. Audit of internal control of the Company as the previous working paper termed strength of internal control as moderate. Also, the internal control has not changed from last fiscal year. Hence, we applied following additional tests to make sure that the interest expenses are not understated, revenues are not overstated to meet the interest coverage ratio of 3:1. 2. Challenge in verifying that all debt covenants have been fully reported. Checking their completeness. I had asked for a comprehensive list of all contracts entered into by the Company to verify the completeness of debt reporting. 3. Challenge in auditing related party transactions as the area was not properly controlled. There was every possibility that these are materially misstated. The same was verified from the register of contracts maintained for recording related party transactions. Further, the transactions were verified from certified reports obtained from experts/ professionals. Further, all the tests mentioned above which were applied to deal with the difficulties, are based on the risk based audit approach. Risk based audit approach is nothing but is a risk analysis methodology that focuses on understanding of client's management information system, financial results and internal control and performing audit accordingly. Self-improvement areas in terms of audit knowledge and skills: Following are the skills/ knowledge that could have helped in providing a better response to the case study: 1. Ratio analysis: Knowledge of ratio analysis would have helped in the audit of revenue accounts for computation of interest coverage ratio. Further, various other ratios such as GP ratio, current ratio, quick ratio would also have helped in performing the audit in a better way. Conclusion: The case study was challenging and was full of learning. I learnt so many things such as importance of internal control auditing, related party transactions auditing etc. The various challenges faced were verifying the completeness and accuracy of debt covenants. There were various improvement opportunities such as ratio analysis etc. were also identified. Introduction: Brilliant Construction Limited is a construction company found by Jack Wilson in 1996. He is also the CEO of the company and a member of Board of Directors. In this assignment, we will discuss the learnings from the case study assignment in auditing, difficulties or challenges that I faced while completing this assignment, improvement in knowledge and skills of auditing etc. Learnings from the case study assignment The assignment provided me a very good opportunity to improve my learnings in auditing. Below are the few things that I learnt from this assignment: 1. Importance of auditing internal control: It is very important to test internal control of a Company, whether they are in place and working effectively or not. Because, if the internal controls are not in place or they are not effective, then this may lead to fraud or material misstatements of the financial statements. 2. Control environment: This is a very highly risky area and auditor needs to look into this very carefully. Because, control environment is generally associated with top executives of the Company and they have all the powers to mislead the transaction of the Company and even interfere with the auditors. 3. Related party transactions: All related party transactions should be taken place at arm's length price i.e. there should not be any undue advantage to one of the either party in the transaction. The price decided for the transaction should be a justified price and the relation between the two parties should not affect the transaction price. 4. There are various analytical tests such as ratio analysis etc. which needs to be performed to ensure that the revenue accounts are not materially misstated. Difficulties/ Challenges: Following are the difficulties/ challenges that I faced while completing the assignment: 1. Audit of internal control of the Company as the previous working paper termed strength of internal control as moderate. Also, the internal control has not changed from last fiscal year. Hence, we applied following additional tests to make sure that the interest expenses are not understated, revenues are not overstated to meet the interest coverage ratio of 3:1. 2. Challenge in verifying that all debt covenants have been fully reported. Checking their completeness. I had asked for a comprehensive list of all contracts entered into by the Company to verify the completeness of debt reporting. 3. Challenge in auditing related party transactions as the area was not properly controlled. There was every possibility that these are materially misstated. The same was verified from the register of contracts maintained for recording related party transactions. Further, the transactions were verified from certified reports obtained from experts/ professionals. Further, all the tests mentioned above which were applied to deal with the difficulties, are based on the risk based audit approach. Risk based audit approach is nothing but is a risk analysis methodology that focuses on understanding of client's management information system, financial results and internal control and performing audit accordingly. Self-improvement areas in terms of audit knowledge and skills: Following are the skills/ knowledge that could have helped in providing a better response to the case study: 1. Ratio analysis: Knowledge of ratio analysis would have helped in the audit of revenue accounts for computation of interest coverage ratio. Further, various other ratios such as GP ratio, current ratio, quick ratio would also have helped in performing the audit in a better way. Conclusion: The case study was challenging and was full of learning. I learnt so many things such as importance of internal control auditing, related party transactions auditing etc. The various challenges faced were verifying the completeness and accuracy of debt covenants. There were various improvement opportunities such as ratio analysis etc. were also identified