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Swayne Johnson has been assigned as the audit senior for the audit of Sports Entertainment Limited (SEL) for the year ended 31^st December 2020. He has been assigned the role of audit senior due to his previous experience as a financial accountant in a major accounting firm and has significant experience in the preparation of financial reports. Swayne joined the auditing firm at the beginning of 2020 and had been working as part of the audit team engaged by a number of audit clients offering his accounting insight and expertise to the audit team(s).

SEL was opened in 2012 specialising in the organising of major international sporting events involving local and international sporting celebrities who participate in fund raising events throughout Australia. SEL also manufactures and sells merchandise to raise funds. The celebrities are paid a commission rate negotiated between the celebritys agents and the CEO of SEL, Vince M^cMahon.

SEL is based in Australia and does not provide any services overseas. In late November 2020, the CEO of SEL approached Swayne to undertake the audit of SEL. The previous auditors were unable to continue the audit of SEL due to ongoing disagreement regarding legal matters existing between SEL and a number of SELs clients. As a result of these disagreements with the previous auditors, Vince terminated the services of the audit firm in early October 2020 citing a breach of contract.

The legal staff employed by SEL were also discharged by the CEO in late September 2020 as the CEO disagreed with their assessment of a number of critical legal cases which were being argued in court. The legal staff felt it was unlikely SEL would succeed in their defence and it was strongly suggested to Vince to settle out of court. During a discussion over dinner in late October, Vince offered the audit of SEL to Swayne and offered to pay Swayne double the audit fee paid to the previous audit firm.

After some persuasion from Vince, Swayne agreed to the audit and began the audit of SEL in late December 2020, employing 5 staff to assist, including two recent graduates. The other three staff members have a combined experience of over 30 years in the auditing environment. Swyane and his audit team took a break from the audit from the 23^rd of December until the 6^th of January and returned back to the premises of SEL to continue the audit.

The previous audit firm had been the auditor for SEL for the preceding four years. Over those four years, the audits of SEL uncovered minimal misstatements and any misstatements identified by the auditors were quickly adjusted by management to ensure the release of unmodified audited financial reports. In 2020 SEL estimated a reported loss of $2 million down from a profit of $12 million in 2019 and a profit of $8 million in 2018.

In early 2021, a number of key personnel employed by SEL resigned and went to work for a competitor. These personnel were employed to manage the international sporting celebrities and to identify new celebrities to be used by SEL in their events. SEL is in the process of starting legal action against the employees who resigned and is suing them for breach of contract. SEL alleges that the personnel are engaging in inappropriate conduct to convince clients currently with SEL to leave SEL and agree to work for the competitors.

Swayne used the work of the previous auditors as the basis of collecting evidence for the audit for the year ending 31^st December 2020. The working papers were the key reason allowing Swayne to complete the audit on time. The working papers also indicated strong controls were operating in SEL for the last 4 years. A risk assessment (including a discussion with Vince, a business risk and inherent risk assessment) was undertaken by 2 of the senior audit staff which did not identify any issues of significance in the financial reports.

A list of the celebrities and the commission rates paid was provided to Swayne. The list was signed by Vince to verify the information contained within the list was accurate. The list was used as the basis to verify the commission expense paid during the reporting period.

The audit of SEL was completed in late January by Swayne and although a number of misstatements were identified in relation to the collection and recording of income and the payment and recording of commission to celebrities, an unqualified audit opinion was given by Swaynes audit team.

Subsequent to the release of the financial reports, an investigation by the Australian Taxation Office (ATO) identified significant issues in the reporting of income by SEL. It was identified by the ATO that approximately 30% of the funds received by SEL had not been recorded in the financial reports. It was estimated that SEL owed approximately $24 million in taxes for the period 2016 2020.

Required:

Identify five (5) deficiencies in the auditors approach to collecting sufficient appropriate evidence to form an opinion. (Do not identify whether Swayne is liable if you do this you have not answered the question.)

You are expected to identify appropriate accounting standards in your answer but you are not required to identify specific paragraphs from the standards. For example, you can identify ASA500 and indicate that the auditor did not collect sufficient appropriate evidence. You do not need to identify specific paragraphs such 4 or 6 from ASA500 to substantiate your answer. However, you must use the facts of the case to illustrate the audit deficiencies you have identified. Simply stating that the auditor didnt collect sufficient evidence as per ASA500 is not enough you will need to substantiate this statement by using the information in the case study to explain why the auditor didnt collect sufficient evidence as per ASA500.