Question 1 (10 marks)

Car Cheap Ltd is a publicly listed company that retails budget-priced car parts and accessories to the public. The company has 45 stores across Australia, and six warehouses, one in each Australian state.

You are part of the audit team for the period ending 30 June 2015. While attending the Adelaide stocktake and performing test counts, you note the following:

a. On three occasions, goods were counted correctly but recorded under the incorrect stock code. In each case, the incorrect stock code used related to a more expensive item than the good actually counted.

b. A large amount of stock was transferred from Adelaide to the Melbourne and Sydney warehouses on the day of the stocktake. The items transferred have been recorded as inventory in Adelaide and also at the locations received.

REQUIRED

For each of the issues above, list the key audit assertion at risk of material misstatement in relation to the inventory account balance. Provide an explanation for each assertion.

Question 2 (10 marks)

Protector Ltd (Protector) is a company that supplies and distributes security screen doors and is an ongoing audit client of your audit firm, Pratt & Associates. You have ascertained the following information from a telephone call to the general manager of Protector, prior to the commencement of this year's audit.

1.Protector has experienced considerable staff turnover in its accounts payable department, including the departure of the accounts payable manager, who resigned early in the year. This has created some delays in the processing of payments.

2.As part of its cost-cutting program, Protector has decided to retrench its internal audit department three months before year end.

3.Protector plans to upgrade its general ledger reporting by acquiring a new software package. The conversion is planned for two months prior to its financial year end.

4.During the year, Protector received a visit from the Australian Taxation Office for a desk audit of its recent income tax returns. As a result of this audit, a number of issues were raised, but to date no assessment has been issued. The company's tax advisers are presently following up these matters.

5.Last year, Protector received adverse comments from some debtors concerning the confirmation letters that they were sent. As a result, Protector's credit manager has asked that you do not send confirmation letters to debtors this year. She has offered you every possible assistance in verifying debtors by other means. You note that last year, 70 per cent of debtors who received a confirmation letter responded.

REQUIRED

Explain how each of the above matters will affect your overall planning in regard to the expected scope and conduct of the audit of Protector for the current year.

Question 3 (10 marks)

You are the audit senior at Walsh & Associates and are conducting the audit of Whirlpool Ltd (Whirlpool) for the year ended 30 June 2015. Whirlpool retails spa pools and has stores across Australia.

The audit assistant, Callum Shaw, has carried out tests of controls over payroll. An extract from his audit working papers is as follows:

The tolerable rate of deviation for this test, as per the audit plan, is5 per cent.

Twenty-four employee pays were selected from the weekly payroll reports (two per month) and tests performed as per the audit plan.

Two immaterial errors were found, all originating in South Australia.

These errors were discussed with the client, who corrected them based on information provided by audit staff.

As the errors were immaterial (less than $25 each) andsubsequently corrected, payroll controls are working satisfactorily and there is sufficient appropriate audit evidence to rely upon them.

REQUIRED

A.Identify three reasons why the audit assistant's conclusion is incorrect.

B.State the correct conclusion the audit assistant should have reached.

Question 4 (10 marks)

Consider each of the following material independent situations:

1.

You are auditing the accounts payable and purchases at XYZ Pty Ltd (XYZ). One of XYZ's major creditors, JKL Ltd (JKL), is very slow in sending invoices for goods delivered. Also, due to a quality control problem at JKL, a large number of goods supplied to XYZ have been deemed faulty and have had to be returned to JKL with a request for credit.

2.You are auditing the accounts receivable and sales of Middle Eastern Traders Ltd (MET). All of MET's customers are in the Middle East. Due to language differences, and the current political situation in many countries, direct confirmation of accounts receivable balances is unlikely to result in satisfactory results.

REQUIRED

A.List the key audit assertion(s) at risk in relation to the balances described in each of the situations above.

B.Outline the audit procedures you would perform in order to gather sufficient, appropriate audit evidence for each of these assertions.

Question 5 (10 marks)

Consider the following material and independent situations found during audit testing of Dynamic Ltd for the year ended 30 June 2015.

1.

The draft chairman's report to go with the financial report states that the profits of a particular segment of the company's operations increased by 60 per cent during the period. On checking the figures, you found that profits increased by only 6 per cent.

2. A large order from an overseas supplier was shipped FOB (free on board) and title passed on 10 June 2015. The order arrived on 25 July 2015. The purchase is not reflected in the 30 June 2015 financial report.

3. Recent industrial action has seen trade unions win a pay increase of 4 per cent for their members. Under the terms of the agreement, the pay increase will be backdated to 1 January 2015. Management has agreed to the pay increase, however, they have not made any corresponding adjustment to the 30 June 2015 financial report.

4. The entire Victorian operations of the company are under investigation by the ATO for alleged failure to pay the appropriate amount of Pay As You Go tax. Your preliminary investigations reveal that the ATO has a strong case against the company. No mention of the dispute has been made in the 30 June 2015 financial report.

REQUIRED

Assuming no amendments have been made, identify and explain the type of auditor's opinion required for each issue outlined above.

Question 6 (10 marks)

Matters that need to be considered by the auditor as part of audit planning include:

(a) Staff turnover: The high staff turnover rate and the increased pressure to process payments promptly to reduce delays might result in additional errors being made. Tests of control may need to be increased in the accounts payable area, to ensure that they are operating effectively; otherwise a substantive approach would need to be adopted. New staff might not be fully competent and aware of required procedures. This could increase the auditor's inherent risk assessment.

(b) Retrenchment of internal audit department: The impact on the audit plan will depend on the auditor's use of the work of the internal audit department. The removal of internal audit means the removal of a control function and so is likely to increase control risk. It might also reflect a poor attitude to controls by management and result in an increase in both control risk and inherent risk.

(c) Conversion to the new software package: The auditor should consider the possibility of errors being made in the conversion process. The auditor will need to obtain an understanding of the internal controls in the new software package and make a new assessment of control risk. The auditor will need to determine if the same or similar information and reports will be available from the new ledger for use.

(d) Tax: The auditor needs to pay special attention to the provision for tax and related accounts. The auditor should examine all documentation and might need to use an expert to ensure the provision for tax is fairly stated.

(e) Accounts receivable confirmation letters: Additional work would need to be performed regarding debtors' confirmations to determine whether the use of external confirmations is necessary to obtain sufficient appropriate audit evidence in relation to receivables or whether receivables can be verified by other procedures, such as subsequent cash receipts. It would also be necessary to determine how, if at all, the client's offer of assistance could be utilised.

Question 7 (10 marks)

(a)The audit assistant's conclusion is incorrect because:

Whether or not the errors resulting from control breaches are immaterial in amount is irrelevant; the issue is that the breaches occurred.

The tolerable rate of deviation of 5% was ignored when evaluating the test results. The actual rate of deviation of 8.3 % (2 of 24) for the test is greater than the tolerable rate, indicating that the controls are not operating effectively.

The fact that the client corrected the error based on information provided by audit staff is irrelevant; the issue is that the breaches occurred.

(b)The audit assistant should have concluded that there is not sufficient appropriate audit evidence to rely on controls over payroll.

Question 4 (10 marks)

The following sets out the key audit assertions, followed by a procedure that could be used to address each assertion.

Situation (i) Accounts payable and purchases

Completeness:

Examine any unmatched receiving reports and ensure appropriate accruals have been made.

Examine cash payments after balance date andunpaid invoice files to ensure there are no unrecorded liabilities in relation to accounts payable.

Accuracy, valuation and allocation/accuracy:

Examine reconciliation of accounts payable statements, ensuring any reconciling items are appropriately accounted for. Ensure any claims for credit as a result of the returns are appropriately supported and that all such claims have been included.

Situation (ii) Accounts receivable and sales

Existence/Occurrence:

Select a sample of accounts receivable and trace amounts to subsequent receipts. Any amounts not paid should be traced to invoices and delivery dockets.

Accuracy, valuation and allocation/accuracy:

Tracing amounts to subsequent receipts is also an appropriate procedure for the accuracy, valuation and allocation assertion. For outstanding balances that are not subsequently received, select a sample of long-outstanding and doubtful accounts and review collectibility by reference to correspondence files and discussions with client staff.

Question 8 (10 marks)

A. Given that this issue is material, the chairman's report will be materially incorrect, but the financial report itself is correct. The chairman's report is other information, and a material misstatement in this other information will result in an unmodified opinion on the financial report, but the inclusion of an Other Matter paragraph in the auditor's report.

B. Given that this issue is material, failure to reflect the purchase that occurred before year-end will result in a material misstatement in the financial report, and therefore a qualified auditor's opinion is appropriate. Both purchases (inventory) and liabilities will be incomplete if this shipment is not included.

C. Given that this issue is material, failure to adjust for the pay increase will result in a material misstatement in the financial report, and therefore a qualified auditor's opinion is appropriate. Both expenses and liabilities will be incomplete if the payroll accrual is not picked up.

D. Given that this issue is material, as the client has not disclosed material information required to be disclosed, this will give rise to a qualified opinion in the auditor's report.