Please answer PART C FINAL AUDIT - Question 6 Audit Report, thanks.

Bb Sheet2 X + X C blackboard.aut.ac.nz/bbcswebdav/pid-5229064-dt-content-rid-13205426_4/institution/Papers/ACCT704/Publish/Mini%20Audit%202020%2052%20Cook%20Furnit GA M MINI AUDIT - COOK'S FURNITURE LTD. BACKGROUND INFORMATION BDC, Chartered Accountants is a medium size accounting firm located in Auckland with four audit partners, eight bu less advisory partners and four tax partners. It also has affiliations with other network firms in other countries. The firm has been approached to audit Cook's Furniture Lid. The firm adopts procedures for acceptance and continuan ce of clients following ISA (NZ) 220 and PES 1. To determine whether BDC should accept a new client, an audit partner needs to interview the prospective client to determine what services the client needs and the ability of the firm to provide those services. As the prospective audit manager on the engagement, you accompanied the audit partner Charles Kirby on the interview. The following is a summary of your notes from the interviews with senior management of Cook's Furniture NOTES FROM CLIENT INTERVIEW Cook's Furniture Lid is New Zealand company incorporated in 1985 by Colin Cook who is an experienced carpenter. The company is a manufacturer of furniture and cabinetry for commercial use. The products include desks, chairs, sofas, filing cabinets, bookcases, credenzas and European- style cabinets. The company's manufacturing plant and executive offices are located in a building leased from Colin Cook (the founder of the company), which adjacent to delivery and warehouse facilities. Two adjacent buildings house the corporation which located in Manukau Auckland. company purchases raw materials including coil steel, metal bar stock, hardware, particleboard, timber board, casters, fabric, rubber and plastic products, paint and shipping cartons. Raw materials are delivered to the warehouse by common carriers or by supplier's trucks. Some the raw materials are sourced within New Zealand, others are imported from multiple countries. The company sells both domestically and to Australia. Finished products are shipped FOB from the warehouse or picked up by the customer. Cook's Furniture has five delivery trucks for local orders. The company has 120 employees involved in manufacturing operations (i.e. measure, design and make) and 16 in the offices. The company's work force is stable and highly skilled. Many of the employees have been with the company for more than five years. The company's work environment and solid reputation has allowed it to attract and keep employees in a tight market place. Cook's Furniture offers profit-sharing plans to their employees. The plans have been in place for over 15 years. Unfortunately, due to the lockdown and perceived economic downturn, May 2020. the company had to cut back on its workforce. The company laid off 25 employees from April - Cook's Furniture commits to sustainable practice relating to the use, storage, and transportation. Where possible, they use durable and recycled materials. The company meets the ISO 14001 standards for its manufacturing process, logistics and transport facilities. ISO 14001 is an Environmental Management System that aids companies in minimising adverse impacts on the environment, increasing efficient resp use and complying with environmental legislation and regulations. Cook's Furniture is family owned and not publicly traded; 1,000,000 shares were issued. Major stockholders include the founder, who recently retired as the Chairman of the Board, Colin Cook He holds 30% of the outstanding shares. Colin is 73 years old, and until his retirement, was closely Type here to search O 9 W A 90 ENG 9:01 PM 24/10/2020Bb Sheet2 X + X C blackboard.aut.ac.nz/bbcswebdav/pid-5229064-dt-content-rid-13205426_4/institution/Papers/ACCT704/Publish/Mini%20Audit%202020%2052%20Cook%20Furnit GA M Sheet2 14 / 16 Question 5 Subsequent Event The audit team completed the field work on 22 July 2020. The audit report was signed on 5 August by Charles Kirby. The financial statements were signed by the BoD on the same day, which was subsequently released to shareholders on 12 August 2020. During the review of subsequent events, you noted the following material events: 1) Cook's Furniture Ltd has purchased a property in Adelaide Australia on 20 July 2020 for AUD 3,200,000 and intended to use it as a showroom. The company borrowed AUD 2,000,000 to finance the purchase. The company plans to take the opportunity of the current low interest rate to expand its property acquisitions. 2) The company applied for Wages Subsidy scheme on 4 April and was granted 70,000. On 7 August, the BoD received a letter from the government requesting the company to pay back the Wages Subsidy with interests citing the reason that the company did not qualify. 3) The company was experiencing delays in its supply chain from overseas suppliers from March to May 2020, which resulted longer lead times in filling customer orders. On 31 July, a customer filed a lawsuit against the company suing for damages of $300, 000. Because of the delay, this customer could not open business on time and suffered income loss. REQUIRED: For each of the above subsequent event: + a) Explain the potential impact on the 2020 financial statements. (6 marks) b) Discuss audit procedures that may verify the potential impact on the 2020 financial statements. (6 marks) Type here to search O W A 9 ENG 9:10 PM 24/10/2020Bb Sheet2 X + X C blackboard.aut.ac.nz/bbcswebdav/pid-5229064-dt-content-rid-13205426_4/institution/Papers/ACCT704/Publish/Mini%20Audit%202020%2052%20Cook%20Furnit GA M Sheet2 15 / 16 Question 6 Audit Report Before the audit report was signed, the audit team encountered the following situation. Treat each situation independently and assume the remaining financial statements are fine. 1) A property owned by Cook's Furniture Lid was sold to Lidia Preston, the wife of Howard Cook in June 2020 (refer to case description in part A). The property has a market value of four million and was sold at 3.2 million. Management did not disclose this in the financial statement because they believed this was a private matter. The disposal of this asset has been appropriately accounted for on the financial statements (e.g. the asset was removed from PPE and the loss of disposal was correctly recognised as an expense). 2) The subsequent selling price of the ready-made furniture range suggests the inventory valuation as at 30 June 2020 should be written down by $48,000 but management only wrote $38,000 off as per the financial statements because they were confident that they can increase the selling price again in 2021 after people settling back to normality. 3) Carl Cook decided to retire in 2021 due to health reasons, Carl is willing to sell his shareholding to the remaining shareholders. However, the BoD decided to explore the potential of selling the business. By the time to sign the 2020 financial statements, the company has not commenced a negotiation with any potential buyer. The BoD said to the auditor that they may not sell the business if they cannot get a good deal. Carl's retirement decision is disclosed on the financial statements, but not the intention to sell the business. REQUIRED: + For each of the above situation: a) Discuss the audit procedure that the auditor needs to perform in relation to each situation. (6 marks) b) Explain which audit opinion is appropriate for each situation. (7 marks) Type here to search O 9 W ?2 A 9 ENG 9:10 PM 24/10/2020Bb Sheet2 X + X C blackboard.aut.ac.nz/bbcswebdav/pid-5229064-dt-content-rid-13205426_4/institution/Papers/ACCT704/Publish/Mini%20Audit%202020%2052%20Cook%20Furnit GA M Sheet2 5 / 16 involved in all major decisions affecting the company. He is very proud of the strong reputation his company has for being ethical and for meeting its commitments and promises. His son, Carl Cook, has worked in the business for the last 20 years, is the current CEO and Chairman of the board, and under his father's guidance during the last 5 years, has assumed the responsibility of overseeing the business's day-to-day operations. Carl is also a 30% owner. Other family members own an additional 30% of the business. The Chief Operating Officer (COO) and Chief Financial Officer (CFO) are the only non-family owners at 5% each. Cook's senior management is comprised of Carl Cook, the CEO and Chairman of the Board; Steven Chen, the COO, and Claire Tuner, the CFO. Chen joined the company two years ago after working for 11 years in the industry for a major office furniture manufacturer. Turner has worked for the company for about 18 months. She was a senior audit manager of BDC prior to joining Cook's Furniture. The Board of Directors (BoD) includes Colin Cook, Carl Cook, a family member with a busine background in the retail residential furniture sector (Howard Cook), another family member trained in architecture and interior design (Catherine Cook), and a lawyer Lisa Greenwood. During the on-site interview, you and Kirby met with Colin Cook for over two hours, then were introduced to and interviewed individually the other members of the senior management team. Each of these interviews extended beyond an hour, and allowed Kirby the opportunity to explore the business goals driving the company. Office furniture is a competitive, multibillion-dollar annual market in Australasian. Its growth depends on building and renovation of commercial spaces. With a strong economy the market had a grown about 8% per year over the last two years prior to the COVID-19 pandemic. However, industry experts expect this growth to slow down in the years ahead. Cook's does not have significant market share, and competes with a number of nationally recognized companies. Cook's primary advantages are smart design, competitively pricing, consistently high-quality products and NZ made. Its low profit margins are part of a pricing strategy to build market share by undercutting the competition. The company underwent major retooling from August to October 2019, which approximated 85% of the capital expenditures that year. The retooling was financed with significant long-term debt. The improvements enabled the company to manufacture customised ready-to-install cabinets. This is a unique product line; it offers a custom-built-in look not readily available from other manufacturers. Demand is steadily growing. Customers include hotels, hair saloon, gyms, schools and corporate offices etc. The customised office cabinetry grants the company a wider profit margin and sales growth potential. The company plans on expanding its marketing in this niche. The COO, Steven Chen would like to see this product line grow to a total of $ 60 million in sales in the next three to five years. The company also has developed award-winning new designs in office furniture that stress the efficient and ergonomic use of technology such as tables, workbays (see picture below), phone booth. All products have a ten-year warranty. The modern workplace demands office furniture that caters to a technology-based work environment. The new designs offer functional and comfortable furniture which maximises the use of office space and give a spacious feel. The new designs are expected to boost the sales of the existing product line. + Management estimates that the maintenance of the current physical plant is between $350,000 and $500,000 per year, which can support its production capacity up to $50 million in sales without significant additions of manufacturing and distribution capacity. Cook's Furniture has a show room and design space in Parnell Auckland to meet with potential customers and discuss their needs. Cook's Furniture has recently worked on major banks and accounting firm offices. Carl heard from his niece Heather who works as an audit senior at BDC that the office premises of BDC Type here to search O 9 W A 90 ENG 9:03 PM 24/10/2020Bb Sheet2 X + X C blackboard.aut.ac.nz/bbcswebdav/pid-5229064-dt-content-rid-13205426_4/institution/Papers/ACCT704/Publish/Mini%20Audit%202020%2052%20Cook%20Furnit GA M will be relocated in 2021. Carl offers 30% discount on customised office cabinetry and furniture to Charles Kirby. Workbays Colin and Carl Cook have been the driving force behind the company's success over its history. They made it clear they know and understand the industry. In their view, succeeding in the increasingly competitive office furniture market place necessitates that the company focus its resources on taking calculated risks to increase its market share and name recognition. They also believe the company must specialize its product lines. They see the customised office cabinetry niche as one the company can develop more fully so that this product line is capable of catering to the growing preference for a customized office work environment at a reasonable cost. They are confident the company has assembled a management team capable of improving profitability and sales. The company distributes its products through a network of approximately 10 office furniture dealers in major Australasian cities and towns. Recently, the company placed its products with the Warehouse-club chains. Most of the sales growth over the last two years is attributed to this new distribution channel; it made up 20% of the 2020 income year sales. This marketing channel competes on price and stock availability. The company also has a website where orders can be placed online. Individuals customers (which currently comprise about 5% of total sales) can order directly from Cook's Furniture's website. Customers may also place orders in the showroom. When asked about the change in accounting firms, Carl Cook informed Kirby that the prior auditor was very skilled at completing the audit to meet debt covenants, but the company needed Chartered Accounting firm capable of helping Cook's Furniture move beyond the present. This included assistance with financial planning, developing better performance measures for the company, and improving the incentive compensation plan for key employees. Beginning this year, the company put a bonus plan in place for key executives based on sales growth. They saw no reason for any scope limitations and expect BDC to offer suggestions to facilitate the firm's desire to expand their sales. They also said that they would contact their previous auditor and grant them permission to talk candidly with BDC about the potential change in auditors. Cook' banker and attorney separately recommended BDC as a firm capable of understanding the forces driving business success, and capable of forming a mutually beneficial working relationship. Type here to search O gi 9 W A 90 ENG 9:04 PM 24/10/2020Bb Sheet2 X + X C blackboard.aut.ac.nz/bbcswebdav/pid-5229064-dt-content-rid-13205426_4/institution/Papers/ACCT704/Publish/Mini%20Audit%202020%2052%20Cook%20Furnito * GA M Sheet2 7 / 16 The interview with the other senior management team members added details to the company's business position. Steven Chen, the COO, explained that the current production management systems have been stressed by the company's growth over the past three years. Significant technology improvements are in process. The timeline for completing the implementation of a new production management system indicates that it should be fully operational in the second quarter of year 2021. The company expects to spend between $700,000 and $800,000 in 2021 to complete the project. Claire Turner, the CFO, is concerned about improving cash flow from operations and speeding up the operating cycle, changes which could involve reassessing Cook's credit and payment terms. However, Steven is worried that tightening credit terms would hinder sales growth. Carl is adamant about maintaining sufficient inventory to make sure orders can be shipped with minimal backorders. Claire commented that the major reason for the audit is to satisfy a debt covenant of the lender and explained the company's debt maturities are accelerating, hampering cash flows available for investing to expand sales. In expanding capacity to grow sales, she suggests that the company consider venture capital to grow the company until it is ready for an Initial Public Offering (IPO). In the past, the major lender has been the primary banks along with several creditors, but the CFO plans on showing the financial statements and in-house projections to potential venture capitalists as well. OTHER INFORMATION After the interview, Kirby contacted the prior auditor, Will Dunn, CA, regarding the potential change in auditor. Dunn was not surprised that Cook's Furniture was considering a change in auditor. He had been Colin Cook' auditor for nearly 20 years. In recent years, Carl had taken more responsibility and had been more aggressive about growing the company. Dunn expressed no concern about the integrity of management. Several years ago, Dunn said that Carl Cook had raised several questions about revenue recognition on some possible "bill and hold" sales in advance of negotiating a sales agreement with a national office supply and furniture chain. No problems were noted in the subsequent audit. Dunn expressed concern about the current accounting system that is expected to be replaced in 2021. Audit adjustments in the last few years resulted from cut-off problems, from an adjustment due to an error in counting inventory, and from discussions over allowance of bad debt. Finally, he noted that if Kirby's firm was selected as auditor, he would cooperate by allowing Kirby to review his working papers to the extent needed to prepare for the upcoming audit. + FINANCIAL INFORMATION The audited financial results for 2019 along with the un-audited financial information for 2020 are included in the related exhibits filed in Excel file posted on the Blackboard under assessment tab. Type here to search O 9 A 9 ENG 9:05 PM 24/10/2020Bb Sheet2 X + X C blackboard.aut.ac.nz/bbcswebdav/pid-5229064-dt-content-rid-13205426_4/institution/Papers/ACCT704/Publish/Mini%20Audit%202020%2052%20Cook%20Furnit GA M Sheet2 8 / 16 PART A PROFESSIONAL ETHICS AND AUDIT PLANNING (44 Marks) Question 1. Professional Ethics: (14 marks) When considering accept a new client, auditors need to comply with ethical requirements of the professional standards. Referring to the information given: a) Identify four situations that may impose ethical threats to the auditors and the audit firm. b) For each situation, explain potential threats to professional ethical requirements. c) Discuss possible safeguards to address each threat (refer to the relevant PES standards in your answer). Question 2. Audit Planning Assuming all potential threats can be mitigated and Kirby has accepted Cook's Furniture as an audit client. He has asked you to plan for the audit of Cook's Furniture Lid for the 2020 financial year. You need to produce the audit planning workpaper outlining potential risks in this audit. Your audit planning workpaper must cover the following: (30 marks) a) Identify ten risk factors (conditions) that indicates that the financial statement might be misstated. b) Determine the potential impact of each risk factor on the financial statements or the audit (e.g. which account and assertions might be misstated) c) Determine the audit strategies or procedures that may address the risk of material misstatement. Use the following format to present your answer. Identify the risk Potential impact on the Audit strategies or procedures to factor (a) financial statements or the address the risk of material + audit. (b) misstatement (c) etc Type here to search O W A 9 ENG 9:06 PM 24/10/2020Bb Sheet2 X + X C blackboard.aut.ac.nz/bbcswebdav/pid-5229064-dt-content-rid-13205426_4/institution/Papers/ACCT704/Publish/Mini%20Audit%202020%2052%20Cook%20Furnit GA M Sheet2 9 / 16 Part B: Assessing control risks Cook's Furniture uses a cloud-based enterprise management system (EMS). It has different functions such as procurement, finance, HR, sales, production, warehouse etc. Different employees are given access to the area they are responsible for. Carl is given access to all area of the system. The access is controlled by personal login and passwords. Cook's Furniture Purchase and Cash Disbursement Cycle Cook's Furniture sources raw materials domestically as much as possible, but it also has multiple suppliers in different locations globally. Customised products range is made to order and the lead time for manufacturing process is 10-12 weeks when an order is placed. Other products (e.g. office chairs, ottomans) are made based on anticipated level of sales. As part of interim audit, Jane Owen the audit senior on this engagement has completed a 'walk-through' of the procedures for the inventory purchases and cash disbursement cycle. The following is a summary of the procedures she documented on the audit file: 1) Rowan Jones, the factory manager is responsible for initiating orders for raw materials by using the production and warehouse management functions within the EMS. EMS system holds information of inventory item name, item code, quantities and costs. When an order for the customised products range is placed, Rowan assesses and calculates what the raw materials needed to manufacture the order. He checks EMS for the availability of raw material because some materials they may already have. If the raw materials are insufficient, Rowan generates a purchase order using the EMS. The EMS automatically assigns a reference number to the purchase order. For the ready-made range of products, Rowan usually re-orders when there is one month of products left in the warehouse. Given that Carl wants to maintain sufficient level of inventory to minimise backorders, Rowan normally generates a purchase order for three months' production needs. 2) The purchase orders completed by Rowan are sent to Thomas Chapman (the account + payable clerk) via emails generated by the EMS at end of each working day. Thomas contacts any of the approved suppliers by phone or email regarding the availabilities of the materials they wanted. After he confirms with a supplier, he forwards the purchase order to the supplier and updates EMS to show the order is sent. No record is kept of the phone conversation with a supplier, nor does the purchase order needs to be approved before sending to a supplier. Type here to search O 9 ? A 9 ENG 9:07 PM 24/10/2020Bb Sheet2 X + X C blackboard.aut.ac.nz/bbcswebdav/pid-5229064-dt-content-rid-13205426_4/institution/Papers/ACCT704/Publish/Mini%20Audit%202020%2052%20Cook%20Furnit GA M Sheet2 9 / 16 3) If a purchase order cannot be fulfilled by any of the approved suppliers, Thomas may look for a new supplier. When he obtains a quote from a new supplier, he passes the quote and the new supplier's information to Claire, the CFO for approval. Once approved, Claire adds the new supplier into the approved supplier list. 4) When goods are received in the warehouse, Tony Young, the warehouse assistant, checks the supplier's delivery note against the physical stock coming in. Once it is confirmed that the materials agree to the delivery note, Tony initials and dates the delivery note and then passes it to Craig Tukiri the warehouse manager. Craig will then login to the inventory function within the EMS system to update the received materials. Once the inventory records are updated, the system updates Rowan that the orders have been received. Craig makes a copy of the supplier's delivery note, files the original copy of the delivery note and forwards a copy of the delivery note to the accounting department. 5) When inventory is updated in the prior step, EMS accounting function automatically generates a journal entry to update the accounting records. (Note: the journal suggested by the system is Dr Raw materials inventory; Cr Creditor). The system rejects the journal if the inventory item code or the name of supplier is not recognised. When the journal is accepted, the computer will generate a journal number. Thomas then writes the journal number onto the delivery note forwarded by the warehouse. Thomas files the delivery note by supplier names. + 6) Thomas the payable clerk receives all supplier invoices. On receipt of an invoice, he checks the details against the delivery note received from the warehouse. If there are no discrepancies, he prepares a payment requisition for the invoiced amount and forward the payment requisition together with the invoice and a copy of the corresponding delivery note to Claire for authorisation. Claire forwards to Carl the CEO for further authorisation any payments of over $30 000 for a single transaction. Type here to search O A 9 ENG 9:08 PM 24/10/2020Bb Sheet2 X + X C blackboard.aut.ac.nz/bbcswebdav/pid-5229064-dt-content-rid-13205426_4/institution/Papers/ACCT704/Publish/Mini%20Audit%202020%2052%20Cook%20Furnit GA M Sheet2 10 / 16 7) Claire and/or Carl signs the payment requisition to confirm authorisation and forwards the documentation to Kumar Singh, the banking clerk, who keys each payment into the accounting system (the journal posted by the system is Dr Creditor; Cr Bank). Once the journal is accepted by the system, the system generates a journal number which the banking clerk writes on the payment requisition. Kumar then files the payment requisition together with supporting documentations by the payment requisition number. 3) The banking clerk then loads the payments on the online banking facility with reference to the payment requisition number. Both Claire and Carl must approve and release the payments. The banking system automatically sends electronic transfer records to Claire who subsequently forwards them to Thomas. Thomas then checks it against supplier invoices and then sends a remittance advice to individual suppliers. Question 3 Assessing control risk in the purchase and cash disbursement cycle (38 Marks) a. Identify five control weaknesses in the purchase and cash disbursement cycle. Explain how each control weakness may affect the financial statements (i.e. which accounts and assertions are at risk) and identify the audit procedures to test the account(s) and assertion(s) that are at risk. (20 marks) You are required to present your answers according to this format: Identify a control How the weakness may affect Audit procedures to test the weakness financial statements account(s) and assertion(s) that are at risk 1 2 3 + etc b. Identify six control strengths in the purchase and cash disbursement cycle and explain why each control is a strength (i.e. which accounts and assertions does it strengthen). For each Type here to search O 9 ? A 9 ENG 9:08 PM 24/10/2020Bb Sheet2 X + X C blackboard.aut.ac.nz/bbcswebdav/pid-5229064-dt-content-rid-13205426_4/institution/Papers/ACCT704/Publish/Mini%20Audit%202020%2052%20Cook%20Furnit GA M Sheet2 11 / 16 control strength, identify audit procedures to test the effectiveness of control. (18 marks) You are required to present your answers according to this format: Identify a control strength Why it is a strength Audit Procedures to test the control 2 3 et Question 4: Substantive Procedures and Audit Documentation (18 Marks) After the end of the financial year, Jane Owen performed transaction tests of the inventory purchases and cash disbursement. She summarised the audit procedures she performed in the following workpaper (reference N-2). To ensure audit quality, BDC has a review policy which helps to ensure that each audit document provides a clear and complete indication of the procedures that were performed and that adequate evidence has been collected. For this audit, you must review and approve all audit workpapers. If you find any unclarity or issues in a workpaper, the workpaper is returned to the appropriate staff auditor for necessary and appropriate revision. + REQUIRED: Review the audit work papers below. Prepare Jane a list of the concerns that are present in her work papers. For each point raised, give explanations why the documentation is not appropriate. Type here to search O 9 m ? A 9 ENG 9:09 PM 24/10/2020