Examination Cover Page Examination Period: 2019 HE Term 3 Academic Institution: Central Queensland University Academic Group: Higher Education Division Academic Career: Postgraduate Examination Type: 2019 HE Term 3 Standard Affix Student ID Sticker here I have read and understood the penalties involved if I do not abide by the rules outlined on the back of this examination paper. Student Signature: _______________________________________ Student ID Number: Unit: Auditing and Ethics Subject Area: ACCT Catalog Number: 20075 Paper Number: 1 Component: ALL Components Duration 180 minutes Exam Conditions Closed Book Perusal Time 15 minutes First Contact Vivek Chopra Contact Number 0424579039 Second Contact Sally Chaplin Contact Number (07) 3023 4236 Office Use: Release examination paper via the CQ University Past Exams website two weeks after the DE/SE examination period? Yes Instructor Authorised/Allowed Materials No calculators permitted Dictionary - non-electronic, concise, direct translation only (dictionary must not contain any notes or comments). Special Instructions to Students: Please see instruction sheet on first page of the examination paper. Examination Office Supplied Materials 1 x Rough Paper Questions Answered Marks Questions Answered Marks Number of examination answer booklets used: Number of separate sheets attached (Do not include rough paper): This examination paper is not to be released to the student at the conclusion of the examination. Central Queensland University considers improper conduct in examinations to be a serious offence. Penalties for cheating are exclusion from the University and cancellation with academic penalty from the unit concerned. Term 3 Standard Examination 2019 Auditing and Ethics ACCT20075 Page 1 of 8 Instructions Sheet 1. Write all answers in the spaces provided on this examination paper. 2. This examination paper comprises five (5) questions. 3. Marks for each question are as indicated. This examination is marked out of 60 marks. 4. Length of answers are guided by the space provided on this examination paper. Please write within the space provided. Term 3 Standard Examination 2019 Auditing and Ethics ACCT20075 Page 2 of 8 TOTAL 60 MARKS Question 1 - Audit risk 12 Marks List and briefly explain six (6) key factors that the auditor would consider during preliminary risk assessment. (i) _________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ (ii)_________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ (iii)_________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ (iv)_________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ (v)_________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ (vi)_________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ Term 3 Standard Examination 2019 Auditing and Ethics ACCT20075 Page 3 of 8 Question 2 - Substantive testing - Balance Sheet 12 Marks Your firm is auditing Colour Paints Ltd, a large manufacturer of painting products. You have been assigned the audit of property, plant and equipment (PPE) for the year-ended 30 June 2019. Colour Paints Ltd maintains a computerised fixed assets register. The company has three main classes of PPE: (1) Freehold Land & Buildings, (2) Manufacturing Machinery, Plant & Equipment, and (3) Motor Vehicles. You are concerned that the depreciation rates for Motor Vehicles may be inadequate. You are also concerned that the recent revaluation of Freehold Land and Buildings by 20% is too high in the current economic climate. Required: For each management assertion listed in the table below, provide substantive audit procedures specifically in relation to the above PPE accounts that would be used to gather sufficient appropriate audit evidence. Management Assertion Audit Procedure Existence Recorded PPE assets represent productive assets in use at the end of the reporting period Example Physical inspection of a sample of PPE items on the fixed assets register Examine supporting documentation for a sample of PPE additions Send confirmations for a sample of PPE items stored offsite Completeness PPE includes all applicable assets used in operations at year-end Valuation & Allocation PPE are stated at cost or a valuation less accumulated depreciation Classification & Understandability PPE is properly classified in the financial statements Rights & Obligations The entity owns or has rights to all recorded PPE assets at the end of the reporting period Term 3 Standard Examination 2019 Auditing and Ethics ACCT20075 Page 4 of 8 Question 3 - Audit Reports 12 Marks The following are three independent situations. For each case, state the type of audit opinion that should be expressed and provide a brief explanation to justify your choice: 1. The auditors of Purple Ltd were refused access to six months of the minutes of the directors' meetings (held monthly) because they contained discussions of a highly confidential matter. No alternative procedures could be performed. ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ (4 marks) 2. Due to the recent downturn in the Australian economy, Orange Ltd has made substantial losses for the last three quarters and now has a negative working capital balance. The auditor of Orange Ltd has concerns over the entity's ability to continue as a going concern in the short to medium term. Management of the company believe that the company is fully solvent and have not disclosed these matters in the financial statements. ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ (4 marks) 3. Pink Ltd has reported a net profit after tax of $5m, which represents an increase of 25% over the previous year. However, the Directors' Report states the increase in net profit from the prior year is more than 40%. As the annual report has been printed, the directors are not prepared to correct the error. ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ (4 marks) Term 3 Standard Examination 2019 Auditing and Ethics ACCT20075 Page 5 of 8 Question 4 - Audit Planning 12 Marks Part A (6 marks) You are engaged as an audit senior in the public accounting firm of Millie and Partners. As part of the planning process for the audit of Maxie Ltd for the financial year ended 30 June 2019, you requested the minutes of the Board of Directors meetings for the financial year and noted the following: Date of Meeting Extract from Board of Directors Meetings for the year 2018-19 1/9/2018 The board agreed that in order to attract new customers and therefore increase sales, any new customers from 1/9/2018 would receive three months credit before their debt becomes overdue, rather than the one month credit previously allowed. 1/11/2018 The board agreed that a new 'bonus scheme' would be implemented from 1/11/2018, which would provide directors with a 5% bonus on profits if they could exceed last year's profit by 20%. 1/6/2019 The board agreed to revalue land and buildings upwards by 50% in the financial statements at 30/6/2019, in accordance with a property valuation undertaken at the company's request. Required: Discuss the potential risk of each of the above items from the board of directors meetings and the impact each would have on your audit plan for 30 June 2019. 1. 1/9/2018 ___________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ (2 marks) 2. 1/11/2018 __________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ (2 marks) Question 4 Part A continued over next page Term 3 Standard Examination 2019 Auditing and Ethics ACCT20075 Page 6 of 8 Question 4 Part A continued 3. 1/6/2019 __________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ (2 marks) Part B (6 marks) Preliminary analytical procedures are also performed as part of the planning process to assist the auditor in gaining an understanding of the entity and its environment (ASA 315 'Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and its Environment'). Required: From the three rows of data shown below for Major Mitchell Manufacturing Pty Ltd: (a) what conclusions would you draw from the ratio analysis (i.e. interpret any movement in the ratio and discuss the audit risks that could be present); and (b) what areas would you then emphasise in conducting the audit in relation to the risks identified in your conclusions. Major Mitchell Manufacturing Pty Ltd 2019 2018 2017 2016 Industry 2019 1. Inventory Turnover 2.40 2.21 3.66 4.64 3.88 2. Current Ratio 1.85 1.89 2.28 2.51 2.20 3. Days Sales in Receivables 109 96 100 72 70 Question 4 Part B continued over next page Term 3 Standard Examination 2019 Auditing and Ethics ACCT20075 Page 7 of 8 Question 4 Part B continued 1. Inventory Turnover Conclusions: ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ Audit Emphasis: ___________________________________________________________________ ___________________________________________________________________ (2 marks) 2. Current Ratio Conclusions: ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ Audit Emphasis: ___________________________________________________________________ ___________________________________________________________________ (2 marks) 3. Days Sales in Receivables Conclusions: ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ Audit Emphasis: ___________________________________________________________________ ___________________________________________________________________ (2 marks) Term 3 Standard Examination 2019 Auditing and Ethics ACCT20075 Page 8 of 8 Question 5 - Audit assertion 12 Marks For each internal control procedure listed below: a. Indicate the category of control activity applicable to each procedure. b. Indicate an assertion to which the procedure applies. Internal Control Procedure Control Activity Assertion 1.Two signatories are required on every cheque. 2. Overtime work must be approved by the employees' supervisor. 3. All vendor invoices must be stamped 'Paid' on payment. 4. Sales ledger personnel make postings to only the sales ledger. 5. Only warehouse personnel are allowed in the computer room. 6. Pre-numbered sales invoices are used in invoicing End of paper