Question 1(15 marks)

Today the worlds largest companies in all sectors and regions disclose their sustainability performance and impacts to some degree. The KPMG Survey of Corporate Responsibility Reporting 2013 concluded that Almost all of the worlds largest 250 companies report on Corporate Responsibility (CR) and that Reporting is now the norm across all these sectors, with at least 62% of companies in every sector producing a (CR) report

Source: (Global Reporting Initiative, 2015, Sustainability and Reporting Trends in 2025 Preparing for the Future)https://www.globalreporting.org/resourcelibrary/Sustainability-and-Reporting-Trends-in-2025-1.pdf

Required:

Conduct an internet search for one (1) ASX listed company that issues a sustainability report and:

(a) provide a summary of the structure and contents of the companys disclosures, including the guidelines used by the company in preparing their report. (4 marks)

(b) indicate if the report has been audited or reviewed by an auditor and the type of assurance they have provided. (3 marks)

(c) Identify four (4) areas in addition to sustainability reporting where auditors now provide assurance. (4 marks)

(d) Briefly describe two (2) of the areas identified in c) and the auditors role in these areas. Include any issues or difficulties faced by the auditor in your response. (4 marks)

Question 2 (15 marks)

Jerry is an audit partner in a local office of a large regional accounting firm. One of Jerrys biggest clients is Thunderbolt Ltd. - a company which undertakes major property development projects. Thunderbolt is also a large employer in the local community. Until last year Thunderbolt had been very profitable but the economic downturn has started to have a detrimental impact. Jerry is preparing for the final audit meeting with the client. At this meeting there will be discussions about the main findings and any adjustments which are required to be made to the accounts. One major issue with the audit was lingering doubts over Thunderbolts status as a going concern. Thunderbolt was coming close to violating its loan contracts which required it to maintain a current ratio of 1.7:1. This issue has caused Jerry many sleepless nights of late Jerry likes the people who run Thunderbolt and is well aware of the negative impact that its closure would have on the local community. Jerry is also aware that Thunderbolt's violation of loan terms would most likely have a negative impact on his own immediate career prospects.

Thunderbolts year-end was 30 June but Jerrys firm carried out most of its work during February. At that time all of the projections looked fine, however recently Jerry noticed that one of Thunderbolts major customers, Deciduous Ltd had been placed into administration. At year-end Deciduous owed Thunderbolt $1.8 million. If this amount were to be written off Thunderbolt would be breaching its loan contracts. While Jerry was aware that Deciduous was disputing the amount due (such tactics were common in the property development industry) he fully expected that the vast majority of the sum owed would be paid. This is now all in doubt.

At the meeting with the client, Jerry asks whether any provision had been created in relation to the amount due from Deciduous or whether any updates to the projections originally audited in February had been made. Darryl, Thunderbolts Chief Executive, advises Jerry that he does not believe this will be necessary. Darryl informs Jerry that the administrator of Deciduous has advised him that Deciduous will be able to meet all of its outstanding debts. Jerry advises Darryl that he hopes this is will be the case but he will need to obtain assurances from the administrator directly. Darryl asks why this is necessary as he is happy to give Jerry a letter to this effect. Jerry advises Darryl that he has to do his job.

Darryl reacts to this angrily shouting: Jerry, you have been our auditor for years and at the first sign of trouble you appear willing to help the bank shut our doors, the effect of which will be a disaster for the local community and also for your firm. Many of your neighbours work for this company, what will they think? What will their children think? This will impact on your own children at school. All we are asking for is time to let us trade out of this situation. As far as I am concerned, the accounts will not be altered. You can do as you wish however remember what I have told you local communities need businesses like ours. I will let them know who caused the closure of this business, if thats what it comes to!

Required:

Use the AAA model to recommend a course of action for Jerry (15 marks)

Question 3 (35 marks)

Your firm has just been appointed auditor of Gravel Manufacturing Ltd. and you are planning for your first audit the year ending 30 June 2016. Gravel Manufacturing is a manufacturer of electronic smoke alarms and electronic security systems and is part of the broader electronics industry. Their operations consist of a head office and factory in the Sydney suburb of Alexandria. They have distribution outlets in each major Australian city and sales agents throughout South East Asia, the UK and USA. There has been a large amount of capital expenditure on the Sydney factory over the past two years. Your research shows that the smoke alarm and security industry is highly volatile and competitive, with heavy discounting by competitors and a prevalence of lower quality products. The industry is also affected by changes in technology, government regulations and health and safety legislation in each of the different areas in which the company operates. In discussions with the Sydney productions manager, Mr Ye, you discover he has a difficult job ascertaining production levels in a volatile market and he is often concerned at inventory fluctuations caused by over or under production of alarm and security systems.

Gravel Manufacturing operates a senior management incentive scheme where senior executives are allocated a percentage of net profit after tax. Gravel also has a long term mortgage loan with a foreign bank that requires them to maintain certain financial ratios. Breach of any of the loans will result in the bank calling in the loan within 24 hours. The requirements are that the current asset ratio must be greater that 1.5:1 and the quick asset ratio must be greater than 0.8:1.

Income Statement

30/6/201630/6/201530/6/2014$(000)$(000)$(000)Sales27,74025,28022,936Less: Cost of goods sold20,10420,80018,200Gross Profit7,6364,4804,736Interest expense500260240Other expenses4601,5802,040Profit Before Tax6,6762,6402,456Income tax expense1,5201,100800Profit After Tax5,1561,5401,656

Balance Sheet

Current AssetsCash10001,600Receivables3,8902,9601,920Inventory3,7202,6801,724Other assets1,16000Total Current Assets8,8705,6405,244

Non Current AssetsProperty Plant & Equipment5,7805,2003,812Total Assets14,65010,8409,056

Current LiabilitiesOverdraft04000Payables1,9103,1003,580Other Creditors278224100Provisions5101,7201,520Total Current Liabilities2,6985,4445,200

Non Current LiabilitiesLoans3,0001,6001,600Total liabilities5,6987,0446,800

Net Assets8,9523,7962,256

Shareholders EquityIssued capital200200200Retained profits3,5962,056400Profit/loss for year5,1561,5401,656Shareholders equity8,9523,7962,256

Required:

a) Calculate the following ratios for 2016, 2015 and 2014:

Gross profit ratio

Return on total assets

Net profit ratio (before tax)

Inventory turnover

Receivables turnover

Current ratio

Quick ratio

Times interest earned (before tax)

Note: assume inventory and receivables balances for 2013 are the same as for 2014 (12 marks)

(b) Identify and explain any going concern issues you have identified. (2 marks)

(c) Identify the four accounts that you consider most at risk of misstatement. Use the background information, financial statements and analytical results to justify your choices. (12 marks)

(d) For the accounts identified in (c) explain if the accounts are likely to be overstated or understated and identify the key assertions that would be the focal point for the audit. Justify your choice of assertion. (9 marks)

You can using the following format to present the ratios for part (a)

RatioRatio Formula201620152014The following table format can be used to answer parts (c) and (d).

Account at risk of misstatement and justificationOverstated or understatedAssertion(s) at riskJustification

Question 4 (20 marks)

You have been involved with the audit of River Pty Ltd. - a manufacturer of household cleaning chemicals. As part of your interim review you have completed a walk through of the procedures involved with the purchases and payments cycle. The following is a summary of the procedures you have documented on your file:

• The warehouse manager is responsible for placing orders for chemical ingredients. Because of the bulk quantity discounts, he will usually place an order for three months of ingredients when there is one month of ingredients left. He is able to determine how much the company uses in manufacture each month by reviewing the inventory records held at the warehouse.
• To order, the warehouse manager contacts any of the approved suppliers and places an order over the phone. No record is kept of the conversation, nor does the warehouse manager require any approval. To make sure he doesnt reorder in error he ticks the inventory ledger and writes the date of order next to the product number.
• When goods are received the warehouse assistants check the delivery note against the ingredients coming in and then lets the deliverer pump the ingredients into the companys storage tank. At no point do they check the actual quantity received. A warehouse assistant then gives the delivery note to the warehouse manager. The warehouse manager will then post a journal entry to the inventory system by keying the entry into the terminal.
• When the journal is accepted, the computer will generate a journal number. (Note: the journal posted by the system is DR Raw materials inventory; CR Creditors). The warehouse manager writes the journal number onto the delivery note and sends it to the accounts payable clerk at head office. The accounts payable clerk files the note by supplier.
• The accounts payable clerk at head office receives all supplier invoices. On receipt of the invoice the clerk checks the details to the delivery note received from the warehouse. If there are no discrepancies she will prepare a cheque requisition for the mount of the invoice and forward the cheque requisition, with the invoice and delivery note attached, to the financial controller for authorisation. If the payment is over $20,000 the financial controller must forward the requisition to the managing director for authorisation.
• The financial controller and/or managing director signs the cheque requisition to indicate authorisation and forwards the documentation to the banking clerk who keys the payment into the general ledger (the journal posted by the system is DR Creditors; CR Bank). Once the journal is accepted by the system, the system generates a journal number which the banking clerk writes on the cheque requisition. She then files the cheque requisition together with supporting documentation by cheque requisition number.
• All cheques are printed and signed (counter stamped) by the computer. When they have been printed they are returned to the banking clerk who checks the details and sends them to the supplier.

Required:

a)Identify four strengths and two weaknesses in the purchases and payments system and justify your selections. (12 marks)

b)For each strength identified in part a), indicate one test to be performed to test the controls (4 marks)

c)For each weakness identified in part a), identify a test which can be performed to minimise this risk (4 marks)

Question 1 (15 marks) \"Today the world's largest companies in all sectors and regions disclose their sustainability performance and impacts to some degree. The KPMG Survey of Corporate Responsibility Reporting 2013 concluded that \"Almost all of the world's largest 250 companies report on Corporate Responsibility (CR)\" and that \"Reporting is now the norm across all these sectors, with at least 62% of companies in every sector producing a (CR) report\" Source: (Global Reporting Initiative, 2015, Sustainability and Reporting Trends in 2025 - Preparing for the Future) https://www.globalreporting.org/resourcelibrary/Sustainability-and-Reporting-Trends-in2025-1.pdf Required: Conduct an internet search for one (1) ASX listed company that issues a sustainability report and: (a) provide a summary of the structure and contents of the company's disclosures, including the guidelines used by the company in preparing their report. (4 marks) (b) indicate if the report has been audited or reviewed by an auditor and the type of assurance they have provided. (3 marks) (c) Identify four (4) areas in addition to sustainability reporting where auditors now provide assurance. (4 marks) (d) Briefly describe two (2) of the areas identified in c) and the auditors role in these areas. Include any issues or difficulties faced by the auditor in your response. (4 marks) Question 2 (15 marks) Jerry is an audit partner in a local office of a large regional accounting firm. One of Jerry's biggest clients is Thunderbolt Ltd. - a company which undertakes major property development projects. Thunderbolt is also a large employer in the local community. Until last year Thunderbolt had been very profitable but the economic downturn has started to have a detrimental impact. Jerry is preparing for the final audit meeting with the client. At this meeting there will be discussions about the main findings and any adjustments which are required to be made to the accounts. One major issue with the audit was lingering doubts over Thunderbolt's status as a going concern. Thunderbolt was coming close to violating its loan contracts which required it to maintain a current ratio of 1.7:1. This issue has caused Jerry many sleepless nights of late - Jerry likes the people who run Thunderbolt and is well aware of the negative impact that its closure would have on the local community. Jerry is also aware that Thunderbolt's violation of loan terms would most likely have a negative impact on his own immediate career prospects. Thunderbolt's year-end was 30 June but Jerry's firm carried out most of its work during February. At that time all of the projections looked fine, however recently Jerry noticed that one of Thunderbolt's major customers, Deciduous Ltd had been placed into administration. At year-end Deciduous owed Thunderbolt $1.8 million. If this amount were to be written off Thunderbolt would be breaching its loan contracts. While Jerry was aware that Deciduous was disputing the amount due (such tactics were common in the property development industry) he fully expected that the vast majority of the sum owed would be paid. This is now all in doubt. At the meeting with the client, Jerry asks whether any provision had been created in relation to the amount due from Deciduous or whether any updates to the projections originally audited in February had been made. Darryl, Thunderbolt's Chief Executive, advises Jerry that he does not believe this will be necessary. Darryl informs Jerry that the administrator of Deciduous has advised him that Deciduous will be able to meet all of its outstanding debts. Jerry advises Darryl that he hopes this is will be the case but he will need to obtain assurances from the administrator directly. Darryl asks why this is necessary as he is happy to give Jerry a letter to this effect. Jerry advises Darryl that he has to do his job. Darryl reacts to this angrily shouting: \"Jerry, you have been our auditor for years and at the first sign of trouble you appear willing to help the bank shut our doors, the effect of which will be a disaster for the local community and also for your firm. Many of your neighbours work for this company, what will they think? What will their children think? This will impact on your own children at school. All we are asking for is time - to let us trade out of this situation. As far as I am concerned, the accounts will not be altered. You can do as you wish - however remember what I have told you - local communities need businesses like ours. I will let them know who caused the closure of this business, if that's what it comes to!\" Required: Use the AAA model to recommend a course of action for Jerry (15 marks) Question 3 (35 marks) Your firm has just been appointed auditor of Gravel Manufacturing Ltd. and you are planning for your first audit - the year ending 30 June 2016. Gravel Manufacturing is a manufacturer of electronic smoke alarms and electronic security systems and is part of the broader electronics industry. Their operations consist of a head office and factory in the Sydney suburb of Alexandria. They have distribution outlets in each major Australian city and sales agents throughout South East Asia, the UK and USA. There has been a large amount of capital expenditure on the Sydney factory over the past two years. Your research shows that the smoke alarm and security industry is highly volatile and competitive, with heavy discounting by competitors and a prevalence of lower quality products. The industry is also affected by changes in technology, government regulations and health and safety legislation in each of the different areas in which the company operates. In discussions with the Sydney productions manager, Mr Ye, you discover he has a difficult job ascertaining production levels in a volatile market and he is often concerned at inventory fluctuations caused by over or under production of alarm and security systems. Gravel Manufacturing operates a senior management incentive scheme where senior executives are allocated a percentage of net profit after tax. Gravel also has a long term mortgage loan with a foreign bank that requires them to maintain certain financial ratios. Breach of any of the loans will result in the bank calling in the loan within 24 hours. The requirements are that the current asset ratio must be greater that 1.5:1 and the quick asset ratio must be greater than 0.8:1. Income Statement 30/6/2016 30/6/2015 30/6/2014 $(000) $(000) $(000) Sales 27,740 25,280 22,936 Less: Cost of goods sold 20,104 20,800 18,200 Gross Profit 7,636 4,480 4,736 Interest expense 500 260 240 Other expenses 460 1,580 2,040 Profit Before Tax 6,676 2,640 2,456 Income tax expense 1,520 1,100 800 Profit After Tax 5,156 1,540 1,656 Balance Sheet Current Assets Cash 100 0 1,600 Receivables 3,890 2,960 1,920 Inventory 3,720 2,680 1,724 Other assets 1,160 0 0 Total Current Assets 8,870 5,640 5,244 Property Plant & Equipment 5,780 5,200 3,812 Total Assets 14,650 10,840 9,056 Overdraft 0 400 0 Payables 1,910 3,100 3,580 Other Creditors 278 224 100 Provisions 510 1,720 1,520 Total Current Liabilities 2,698 5,444 5,200 Loans 3,000 1,600 1,600 Total liabilities 5,698 7,044 6,800 Net Assets 8,952 3,796 2,256 Issued capital 200 200 200 Retained profits 3,596 2,056 400 Profit/loss for year 5,156 1,540 1,656 Shareholders equity 8,952 3,796 2,256 Non Current Assets Current Liabilities Non Current Liabilities Shareholders Equity Required: a) Calculate the following ratios for 2016, 2015 and 2014: Gross profit ratio Return on total assets Net profit ratio (before tax) Inventory turnover Receivables turnover Current ratio Quick ratio Times interest earned (before tax) Note: assume inventory and receivables balances for 2013 are the same as for 2014 (12 marks) (b) Identify and explain any going concern issues you have identified. (2 marks) (c) Identify the four accounts that you consider most at risk of misstatement. Use the background information, financial statements and analytical results to justify your choices. (12 marks) (d) For the accounts identified in (c) explain if the accounts are likely to be overstated or understated and identify the key assertions that would be the focal point for the audit. Justify your choice of assertion. (9 marks) You can using the following format to present the ratios for part (a) Ratio Ratio Formula 2016 2015 The following table format can be used to answer parts (c) and (d). 2014 Account at risk of misstatement and justification Overstated or understated Assertion(s) at Justification risk Question 4 (20 marks) You have been involved with the audit of River Pty Ltd. - a manufacturer of household cleaning chemicals. As part of your interim review you have completed a 'walk through' of the procedures involved with the purchases and payments cycle. The following is a summary of the procedures you have documented on your file: The warehouse manager is responsible for placing orders for chemical 'ingredients'. Because of the bulk quantity discounts, he will usually place an order for three months of ingredients when there is one month of ingredients left. He is able to determine how much the company uses in manufacture each month by reviewing the inventory records held at the warehouse. To order, the warehouse manager contacts any of the approved suppliers and places an order over the phone. No record is kept of the conversation, nor does the warehouse manager require any approval. To make sure he doesn't reorder in error he 'ticks' the inventory ledger and writes the date of order next to the product number. When goods are received the warehouse assistants check the delivery note against the ingredients coming in and then lets the deliverer pump the ingredients into the company's storage tank. At no point do they check the actual quantity received. A warehouse assistant then gives the delivery note to the warehouse manager. The warehouse manager will then post a journal entry to the inventory system by keying the entry into the terminal. When the journal is accepted, the computer will generate a journal number. (Note: the journal posted by the system is DR Raw materials inventory; CR Creditors). The warehouse manager writes the journal number onto the delivery note and sends it to the accounts payable clerk at head office. The accounts payable clerk files the note by supplier. The accounts payable clerk at head office receives all supplier invoices. On receipt of the invoice the clerk checks the details to the delivery note received from the warehouse. If there are no discrepancies she will prepare a cheque requisition for the mount of the invoice and forward the cheque requisition, with the invoice and delivery note attached, to the financial controller for authorisation. If the payment is over $20,000 the financial controller must forward the requisition to the managing director for authorisation. The financial controller and/or managing director signs the cheque requisition to indicate authorisation and forwards the documentation to the banking clerk who keys the payment into the general ledger (the journal posted by the system is DR Creditors; CR Bank). Once the journal is accepted by the system, the system generates a journal number which the banking clerk writes on the cheque requisition. She then files the cheque requisition together with supporting documentation by cheque requisition number. All cheques are printed and signed (counter stamped) by the computer. When they have been printed they are returned to the banking clerk who checks the details and sends them to the supplier. Required: a) Identify four strengths and two weaknesses in the purchases and payments system and justify your selections. (12 marks) b) For each strength identified in part a), indicate one test to be performed to test the controls (4 marks) c) For each weakness identified in part a), identify a test which can be performed to minimise this risk (4 marks)