Part 1

You have been assigned as audit senior to the audit of Universal Magazines Pty Ltd (Universal).Your firm has recently been appointed as auditors and this is the first time you have been on the audit. Your engagement partner and the assistant auditor conducted an interim audit five months before this year end. There were no major issues at the interim audit and the assistant informs you that she thinks that the results of the audit are applicable for the full year.

The owners (i.e. shareholders) of the magazine are a private equity firm and have specified that audits should be undertaken. The company commenced business on day one of the current financial year when it purchased the business from its former owners. They have plans to merge the company with other publishing interests and list the merged entity on the Australian Stock Exchange in two or three years time. As an incentive to perform, the editor and senior staff have been given the right to take up shares in the new entity at a highly discounted price when it is listed subject to meeting their KPIs (key performance indicators) each year until the listing.

The magazine is a monthly giveaway and it is distributed in six areas of Melbourne. Its revenueconsists of advertising by local businesses. The sales director and her staff actively pursue sales opportunities in each area.

Articles written by locals largely consist of reports on upcoming community events.

The Managing Director (MD) generally attempts to convince the local writers that the resultant publicity for their community event means that the article should be written for free. Most of the time he is successful, and only about half the magazines articles are paid for. Prior to the equity partners taking over the magazine, any paid articles or photographs were treated as expenses to be written off as they were accrued or paid.

After the private equity firm took over the magazine, the firm insisted that all paid articles provided by external writers for upcoming issues would be considered as inventory until used in the magazine and that they be valued at cost. If an article cannot be used after purchase (i.e. the restaurant for which a review was written has closed), then it is considered to be impaired and its value is written down.

The MD accumulates articles so that he always has a bank of articles available for the next edition.

Advertising is mostly sold in three or six edition bundles. Occasionally there are a few one-off monthly advertisements, especially from seasonal businesses.

The magazine offers a discount to advertisers if they place orders early and the discount increases the earlier the order is placed (i.e. a bigger discount is offered if an advertiser wants an ad in next years magazine than if they want an ad in next months magazine).

Responsibility for invoicing the advertiser and recording the details lies with whichever member of the sales team lands the advertiser.

The company has an experienced bookkeeper who has been with the company for five years.

The financial director of the private equity firm, who is also a director of the company, regularly visits the company and conducts a few compliance procedures of his own. He has no formal audit programs for this work but he has made his reports available to your audit team. He has told your engagement partner that he expects your firm to ensure that the year-end closing is accurate and complete.

Required: (a) Provide two (2) account balances and assertions at risk in this scenario. (b) Explain whether you should accept the advice of your assistant auditor to accept the results of the interim audit as applicable for the whole year.

Part 2

In relation to the above background, your enquiries about the purchase of articles and photographs for the magazine have met with the following responses from the MD of Universal:

1. Articles are submitted to the magazine and he evaluates each article and decides which would be suitable for publication.

2. He uses an order book specially allocated to him to prepare orders for writers who get paid for their work. They are mailed out to the writers. He drafts and sends out a letter of thanks to the writers who are not selected.

3. He and the art director select the photographs to be used. Notes are not kept of the result of their discussions. Photographers are freelancers who are paid for every photo published. He writes out the orders and they are mailed out to the photographers.

4. Invoices are received from the writers and photographers and matched to the orders.A rubber stamp is used by the bookkeeper to put the date of receipt on the invoice, as well as providing for the checking of the invoice details for accuracy and classification (allocation to a general ledger account). Prices and calculations on the invoices are checked by the bookkeeper and she puts her initials onto the relevant sections of the stamp.

5. The invoices then go to the MD for approval for payment and the bookkeeper enters them into the accounts payable system.

6. Electronic funds transfers to creditors take place on the due date for payment, which is usually 30 days after the end of the previous month (writers and photographers do not send out statements).

Assume you have decided it is appropriate to test internal controls over the relevant transactions:

(a) (i) Identify and describe two (2) control weaknesses in the background scenario. (ii) In relation to each control weakness identified in (a)(i) above, describe one (1) action management could take to improve the control environment at Universal.

(b) Describe the nature, timing and extent of four (4) audit procedures you would use to obtain sufficient appropriate evidence over the purchases of articles and photographs.

You may wish to answer part (b) in the form of a table as follows. I have provided one procedure as a guide. You should provide an additional four (4) procedures. Please note that your procedures in this activity are not expected to be detailed enough to be acceptable for assessment items. You are simply expected to give a broad overview of the nature of procedures.In assessment items, you are expected to give sufficient detail in your procedures so that a non-auditorcould follow what needs to be done. Procedures are also expected to be directed towards a specific assertion unless otherwise noted.

Nature	Timing	Extent
Inspection of purchase orders and suppliers invoices for evidence of occurrence, accuracy, cut-off and classification	In the remaining period since the interim audit	Sample size determined using formula