QUESTION 1

In February 2012, the Australian Accounting Standards Boards decided at its meeting to propose the withdrawal of AASB 1031 Materiality. There were several reasons for this proposal which includes: there is no International Reporting Standard equivalent and it does not look like there will be, since 2005 there has been the gradual withdrawal of additional Australian guidance from a number of Australian Accounting Standards, and there is now an updated guidance on materiality in the IASB Conceptual Framework.

The major impact of the withdrawal of AASB 1031 is the removal of the specific quantitative guidance for materiality. The withdrawal of AASB 1031 became effective to annual reporting beginning on or after 1 July 2015.

REQUIRED:

1.Summarize the significant changes with AASB 1031 Materiality (issued by the Australian Accounting Standards Boards - AASB) from 1995 to 2015. (8 Marks)

2.Prior to the withdrawal of AASB 1031 and with reference to the AASB 1031 Materiality (issued by the Australian Accounting Standards Boards - AASB) and the ASA 320 Materiality in Planning and Performing an Audit and ASA 450 Evaluation of Misstatements Identified during an Audit (issued by the Auditing and Assurance Standards Board - AUASB), (12 Marks):

a.Define materiality.

b.Outline the qualitative and quantitative guidelines of materiality.

c.How the concepts and constructs of "materiality" influence the auditors' professional judgment on misstatements.

3.Post withdrawal of AASB 1031, would this harmonise/bring uniformity to auditors' assessment of materiality misstatements or would this bring disparity to auditors' assessment of misstatements? What other influence this would bring to the auditors' judgment on misstatements? Discuss your answer and rationale. (Support your answers with the relevant Australian Accounting Standards and Australian Auditing Standards as well as published Peer-reviewed Academic Journals and Articles.) (10 Marks)

NOTE: In answering Question 1, use Harvard referencing style and support your answers with relevant accounting and auditing standards as well as published peer-reviewed academic journals. A minimum of 5 peer-reviewed academic journals is expected. (Hint: this is a great opportunity to utilise the University's Library Services online such as Library Search, Advance Search, eJournals and Databases such as EBSCOhost, etc.)

QUESTION 2

The following are independent situations:

(i)Bob is an audit assistant currently undertaking university studies. While auditing the books of Club Casino, he comes across certain financial information that he believes will assist him in completing one of his university assignments. He copies the information and uses it in his assignment, carefully removing all reference to Club Casino in order to preserve the client's confidentiality.

(ii)Wendy has been the engagement partner on the Ace Limited audit for a number of years. Some time ago, Ace's long-standing company secretary retired and Ace took six months to find a replacement. At Ace's request, Wendy performed company secretarial duties for this period of time.

(iii)Leo is the eldest son of the factory foreman of one of your firm's major audit clients, Precision Machinery Limited. During vacation work, L is assigned to the audit of Precision Machinery. Leo's work comprised testing the internal controls of the cash payments system.

(iv)Chan & Associates are auditors of Classic Reproductions Pty. Limited, a large furniture wholesaler currently experiencing financial difficulties. Classic Reproductions is a significant client of Chan & Associates and have not paid their audit fee for the past three years. The audit partner recently threatened to resign from the audit if the outstanding fees were not paid. To prevent this occurring, Classic Reproductions offered to supply Chan & Associates with new office furniture. The partner accepted this offer in full consideration of the outstanding fees, even though the furniture was only worth 50% of the balance. As a thankyou present, Classic Reproductions gave the partner a 25% shareholding in an unrelated listed company. At present these shares are worth $1,000. Chan & Associates do not act as auditors of this company.

Required:

a)Define actual and perceived independence, and explain the importance of each.

b)For each of the above independent situations list any professional standards and regulatory requirements breached and discuss possible alternative courses of action the auditor should have taken in order to properly discharge their professional responsibilities.

QUESTION 3

Everyday Supplies Pty Ltd is a single-store retailer that sells a variety of tools, garden supplies, lumber, small appliances, and electrical fixtures to the public, although about half of Everyday Supplies' sales are to construction contractors on account.

Retail customers pay for merchandise by cash or credit card at cash registers when merchandise is purchased. A contractor may purchase merchandise on account, if approved by the credit manager based only on the manager's familiarity with the contractor's reputation. After credit is approved, the sales associate files a prenumbered charge form with the accounts receivable supervisor to set up the receivable.

The accounts receivable supervisor independently verifies the pricing and other details on the charge form by reference to a management-authorised price list, corrects any errors, prepares the invoice, and supervises a part-time employee who mails the invoice to the contractor. The accounts receivable supervisor electronically posts the details of the invoice in the accounts receivable subsidiary ledger; simultaneously, the transaction's details are transmitted to the bookkeeper. The accounts receivable

supervisor also prepares a monthly computer-generated accounts receivable subsidiary ledger without a reconciliation with the accounts receivable control account, and a monthly report of overdue accounts.

The cash receipts functions are performed by the cashier, who also supervises the cash register clerks. The cashier opens the mail, compares each cheque with the enclosed remittance advice, stamps each cheque "for deposit only", and lists cheques for deposit. The cashier then gives the remittance advices to the bookkeeper for recording. The cashier deposits the cheques daily, separate from the daily deposit of cash register receipts. The cashier retains the verified deposit slips to assist in reconciling the monthly bank statements, but forwards to the bookkeeper a copy of the daily cash register summary.

The cashier does not have access to the journals or ledgers.

The bookkeeper receives the details of transactions from the accounts receivable supervisor and the cashier for journalising and positing to the general ledger. After recording the remittance advices received from the cashier, the bookkeeper electronically transmits the remittance information to the accounts receivable supervisor for subsidiary ledger updating. The bookkeeper sends monthly statements to contractors with unpaid balances upon receipt of the monthly report of overdue balances

from the accounts receivable supervisor. The bookkeeper authorises the accounts receivable supervisor to write off accounts as uncollectible when six months have passed since the initial overdue notice was sent. At this time, the credit manager is notified by the bookkeeper not to grant additional credit to that contractor.

Required:

Describe five internal control weaknesses in Everyday Supplies' internal control for the cash receipts and billing functions. Explain why each is a weakness.

QUESTION 4

Retro Pty Ltd is a major manufacturer of industrial machinery. Detailed below is a description of its purchasing and payments system.

(i)When the stores department requires items to be purchased, they issue a three-part pre- numbered purchase requisition that needs to be approved by the store's manager. Copy 1 is sent to the purchasing department, Copy 2 is sent to the accounts payable department and Copy 3 is filed in the stores department.

(ii)On receipt of an approved purchase requisition, the purchasing department issues a five-part pre-numbered purchase order. Copy 1 is sent to the supplier, Copies 2 and 3 are forwarded to the receiving department, Copy 4 is forwarded to the accounts payable department and Copy 5 is filed in the purchasing department.

(iii)When goods are received, the receiving department logs in the shipment by stamping "order received" on its two copies of the purchase order, which then forms its receiving record. One copy of the receiving record is filed in the receiving department and the other is forwarded to the accounts payable department.

(iv)The accounts payable department checks that there is a purchase requisition, purchase order and receiving record for each supplier invoice and then approves it for payment.

(v)The accounts payable department prepares a pre-numbered disbursement voucher and forwards it along with the supplier's invoice, purchase requisition, purchase order and receiving record to the financial accountant.

(vi)The financial accountant prepares a cheque for each supplier, signs the cheque and records it in the cash disbursements journal. The cheque is immediately mailed to the supplier. Supporting documentation is returned to accounts payable for filing.

(vii)At the end of the month, the assistant accountant undertakes a sequence check of all accountable forms. The financial accountant receives the monthly bank statement, prepares a bank reconciliation and investigates any reconciling items.

Required:

Identify seven (7) internal control weaknesses in Retro's internal control concerning the purchases and payments functions. Explain why each is a weakness.

QUESTION 5

You are the audit senior on the MyPet Pty Limited audit. MyPet is a distributor of pet care products including shampoos, lotions and a small range of toys.

MyPet uses an on-line computer system. No goods are manufactured in-house; rather, MyPet maintains a stock of raw materials and sub-contracts the manufacture of its products to third parties.

Approximately 50 suppliers and sub-contractors are used and all have proven to be reliable. You have made the following notes about the inventory system:

Procedures for raw materials

Separate systems, staff and warehouses are maintained for both raw materials and finished goods.

Purchase orders are automatically generated by the computer when stocks of any raw material fall below 70% of the prior month's usage. The purchase orders contain the following details: date;

supplier name and address; raw material needed.

Three copies of the purchase order are produced and distributed as follows: Copy 1to warehouse to enable follow up of late orders.

Copy 2filed by accounts clerk in date order. Copy 3sent to supplier.

When raw material stocks are received, the bar codes attached to the delivery boxes by the supplier are scanned into the system. A two-part Goods Received Note (GRN) is then produced: Copy 1matched to warehouse copy of purchase order by stores staff.

Copy 2filed by accounts clerk.

The scanning process is aborted if the codes do not match those on the masterfile.

Procedures for finished goods

Production orders are automatically generated when finished goods fall below 60% of the prior month's sales. The production orders contain the following details:

date;

sub-contractor's name; raw materials required; finished goods needed.

Two copies of the production order are produced:

Copy 1to raw materials store for use as a picking slip, then it is packed with goods and sent to the supplier.

Copy 2filed by production controller in date order.

When the finished goods stocks are received, the bar codes attached to the delivery boxes by the supplier are scanned into the system. A two-part GRN is then produced:

Copy 1matched to production controller's copy of production order. Copy 2filed by accounts clerk.

The scanning process is aborted if the codes to not match those on the masterfile.

General notes

The computer automatically selects the supplier of both raw materials and finished goods based on:

the latest price (as per their most recent invoice).

their delivery times (based on the number of days between the date the purchase/ production order is raised and the date the goods are scanned by the warehouse).

Password access is as follows:

Stores staff (raw materials):Purchase order printing for raw materials only.

GRN printing for raw materials. Stores staff (finished goods): GRN printing for finished goods.

Production controller:Production order printing, masterfile amendments. Accounts clerk:Masterfile amendments.

Masterfile amendments

The stock masterfile contains details of:

existing stock items including codes and warehouse location; approved suppliers and sub-contractors.

Orders will only be generated to suppliers and sub-contractors recorded on the masterfile.

Masterfile changes are made by the production controller for both raw materials and finished goods inventory. A masterfile amendment form is completed by the production controller as a record of the changes made.

Required:

(a)Identify six (6) weaknesses in the internal controls described. Discuss the implications of each of the weaknesses you have identified.

(b)Assume your IT audit division is to perform testing of controls for the inventory systems described. Identify two tests that you would recommend they perform.QUESTION 1

In February 2012, the Australian Accounting Standards Boards decided at its meeting to propose the withdrawal of AASB 1031 Materiality. There were several reasons for this proposal which includes: there is no International Reporting Standard equivalent and it does not look like there will be, since 2005 there has been the gradual withdrawal of additional Australian guidance from a number of Australian Accounting Standards, and there is now an updated guidance on materiality in the IASB Conceptual Framework.

The major impact of the withdrawal of AASB 1031 is the removal of the specific quantitative guidance for materiality. The withdrawal of AASB 1031 became effective to annual reporting beginning on or after 1 July 2015.

REQUIRED:

1.Summarize the significant changes with AASB 1031 Materiality (issued by the Australian Accounting Standards Boards - AASB) from 1995 to 2015. (8 Marks)

2.Prior to the withdrawal of AASB 1031 and with reference to the AASB 1031 Materiality (issued by the Australian Accounting Standards Boards - AASB) and the ASA 320 Materiality in Planning and Performing an Audit and ASA 450 Evaluation of Misstatements Identified during an Audit (issued by the Auditing and Assurance Standards Board - AUASB), (12 Marks):

a.Define materiality.

b.Outline the qualitative and quantitative guidelines of materiality.

c.How the concepts and constructs of "materiality" influence the auditors' professional judgment on misstatements.

3.Post withdrawal of AASB 1031, would this harmonise/bring uniformity to auditors' assessment of materiality misstatements or would this bring disparity to auditors' assessment of misstatements? What other influence this would bring to the auditors' judgment on misstatements? Discuss your answer and rationale. (Support your answers with the relevant Australian Accounting Standards and Australian Auditing Standards as well as published Peer-reviewed Academic Journals and Articles.) (10 Marks)

NOTE: In answering Question 1, use Harvard referencing style and support your answers with relevant accounting and auditing standards as well as published peer-reviewed academic journals. A minimum of 5 peer-reviewed academic journals is expected. (Hint: this is a great opportunity to utilise the University's Library Services online such as Library Search, Advance Search, eJournals and Databases such as EBSCOhost, etc.)

QUESTION 2

The following are independent situations:

(i)Bob is an audit assistant currently undertaking university studies. While auditing the books of Club Casino, he comes across certain financial information that he believes will assist him in completing one of his university assignments. He copies the information and uses it in his assignment, carefully removing all reference to Club Casino in order to preserve the client's confidentiality.

(ii)Wendy has been the engagement partner on the Ace Limited audit for a number of years. Some time ago, Ace's long-standing company secretary retired and Ace took six months to find a replacement. At Ace's request, Wendy performed company secretarial duties for this period of time.

(iii)Leo is the eldest son of the factory foreman of one of your firm's major audit clients, Precision Machinery Limited. During vacation work, L is assigned to the audit of Precision Machinery. Leo's work comprised testing the internal controls of the cash payments system.

(iv)Chan & Associates are auditors of Classic Reproductions Pty. Limited, a large furniture wholesaler currently experiencing financial difficulties. Classic Reproductions is a significant client of Chan & Associates and have not paid their audit fee for the past three years. The audit partner recently threatened to resign from the audit if the outstanding fees were not paid. To prevent this occurring, Classic Reproductions offered to supply Chan & Associates with new office furniture. The partner accepted this offer in full consideration of the outstanding fees, even though the furniture was only worth 50% of the balance. As a thankyou present, Classic Reproductions gave the partner a 25% shareholding in an unrelated listed company. At present these shares are worth $1,000. Chan & Associates do not act as auditors of this company.

Required:

a)Define actual and perceived independence, and explain the importance of each.

b)For each of the above independent situations list any professional standards and regulatory requirements breached and discuss possible alternative courses of action the auditor should have taken in order to properly discharge their professional responsibilities.

QUESTION 3

Everyday Supplies Pty Ltd is a single-store retailer that sells a variety of tools, garden supplies, lumber, small appliances, and electrical fixtures to the public, although about half of Everyday Supplies' sales are to construction contractors on account.

Retail customers pay for merchandise by cash or credit card at cash registers when merchandise is purchased. A contractor may purchase merchandise on account, if approved by the credit manager based only on the manager's familiarity with the contractor's reputation. After credit is approved, the sales associate files a prenumbered charge form with the accounts receivable supervisor to set up the receivable.

The accounts receivable supervisor independently verifies the pricing and other details on the charge form by reference to a management-authorised price list, corrects any errors, prepares the invoice, and supervises a part-time employee who mails the invoice to the contractor. The accounts receivable supervisor electronically posts the details of the invoice in the accounts receivable subsidiary ledger; simultaneously, the transaction's details are transmitted to the bookkeeper. The accounts receivable

supervisor also prepares a monthly computer-generated accounts receivable subsidiary ledger without a reconciliation with the accounts receivable control account, and a monthly report of overdue accounts.

The cash receipts functions are performed by the cashier, who also supervises the cash register clerks. The cashier opens the mail, compares each cheque with the enclosed remittance advice, stamps each cheque "for deposit only", and lists cheques for deposit. The cashier then gives the remittance advices to the bookkeeper for recording. The cashier deposits the cheques daily, separate from the daily deposit of cash register receipts. The cashier retains the verified deposit slips to assist in reconciling the monthly bank statements, but forwards to the bookkeeper a copy of the daily cash register summary.

The cashier does not have access to the journals or ledgers.

The bookkeeper receives the details of transactions from the accounts receivable supervisor and the cashier for journalising and positing to the general ledger. After recording the remittance advices received from the cashier, the bookkeeper electronically transmits the remittance information to the accounts receivable supervisor for subsidiary ledger updating. The bookkeeper sends monthly statements to contractors with unpaid balances upon receipt of the monthly report of overdue balances

from the accounts receivable supervisor. The bookkeeper authorises the accounts receivable supervisor to write off accounts as uncollectible when six months have passed since the initial overdue notice was sent. At this time, the credit manager is notified by the bookkeeper not to grant additional credit to that contractor.

Required:

Describe five internal control weaknesses in Everyday Supplies' internal control for the cash receipts and billing functions. Explain why each is a weakness.

QUESTION 4

Retro Pty Ltd is a major manufacturer of industrial machinery. Detailed below is a description of its purchasing and payments system.

(i)When the stores department requires items to be purchased, they issue a three-part pre- numbered purchase requisition that needs to be approved by the store's manager. Copy 1 is sent to the purchasing department, Copy 2 is sent to the accounts payable department and Copy 3 is filed in the stores department.

(ii)On receipt of an approved purchase requisition, the purchasing department issues a five-part pre-numbered purchase order. Copy 1 is sent to the supplier, Copies 2 and 3 are forwarded to the receiving department, Copy 4 is forwarded to the accounts payable department and Copy 5 is filed in the purchasing department.

(iii)When goods are received, the receiving department logs in the shipment by stamping "order received" on its two copies of the purchase order, which then forms its receiving record. One copy of the receiving record is filed in the receiving department and the other is forwarded to the accounts payable department.

(iv)The accounts payable department checks that there is a purchase requisition, purchase order and receiving record for each supplier invoice and then approves it for payment.

(v)The accounts payable department prepares a pre-numbered disbursement voucher and forwards it along with the supplier's invoice, purchase requisition, purchase order and receiving record to the financial accountant.

(vi)The financial accountant prepares a cheque for each supplier, signs the cheque and records it in the cash disbursements journal. The cheque is immediately mailed to the supplier. Supporting documentation is returned to accounts payable for filing.

(vii)At the end of the month, the assistant accountant undertakes a sequence check of all accountable forms. The financial accountant receives the monthly bank statement, prepares a bank reconciliation and investigates any reconciling items.

Required:

Identify seven (7) internal control weaknesses in Retro's internal control concerning the purchases and payments functions. Explain why each is a weakness.

QUESTION 5

You are the audit senior on the MyPet Pty Limited audit. MyPet is a distributor of pet care products including shampoos, lotions and a small range of toys.

MyPet uses an on-line computer system. No goods are manufactured in-house; rather, MyPet maintains a stock of raw materials and sub-contracts the manufacture of its products to third parties.

Approximately 50 suppliers and sub-contractors are used and all have proven to be reliable. You have made the following notes about the inventory system:

Procedures for raw materials

Separate systems, staff and warehouses are maintained for both raw materials and finished goods.

Purchase orders are automatically generated by the computer when stocks of any raw material fall below 70% of the prior month's usage. The purchase orders contain the following details: date;

supplier name and address; raw material needed.

Three copies of the purchase order are produced and distributed as follows: Copy 1to warehouse to enable follow up of late orders.

Copy 2filed by accounts clerk in date order. Copy 3sent to supplier.

When raw material stocks are received, the bar codes attached to the delivery boxes by the supplier are scanned into the system. A two-part Goods Received Note (GRN) is then produced: Copy 1matched to warehouse copy of purchase order by stores staff.

Copy 2filed by accounts clerk.

The scanning process is aborted if the codes do not match those on the masterfile.

Procedures for finished goods

Production orders are automatically generated when finished goods fall below 60% of the prior month's sales. The production orders contain the following details:

date;

sub-contractor's name; raw materials required; finished goods needed.

Two copies of the production order are produced:

Copy 1to raw materials store for use as a picking slip, then it is packed with goods and sent to the supplier.

Copy 2filed by production controller in date order.

When the finished goods stocks are received, the bar codes attached to the delivery boxes by the supplier are scanned into the system. A two-part GRN is then produced:

Copy 1matched to production controller's copy of production order. Copy 2filed by accounts clerk.

The scanning process is aborted if the codes to not match those on the masterfile.

General notes

The computer automatically selects the supplier of both raw materials and finished goods based on:

the latest price (as per their most recent invoice).

their delivery times (based on the number of days between the date the purchase/ production order is raised and the date the goods are scanned by the warehouse).

Password access is as follows:

Stores staff (raw materials):Purchase order printing for raw materials only.

GRN printing for raw materials. Stores staff (finished goods): GRN printing for finished goods.

Production controller:Production order printing, masterfile amendments. Accounts clerk:Masterfile amendments.

Masterfile amendments

The stock masterfile contains details of:

existing stock items including codes and warehouse location; approved suppliers and sub-contractors.

Orders will only be generated to suppliers and sub-contractors recorded on the masterfile.

Masterfile changes are made by the production controller for both raw materials and finished goods inventory. A masterfile amendment form is completed by the production controller as a record of the changes made.

Required:

(a)Identify six (6) weaknesses in the internal controls described. Discuss the implications of each of the weaknesses you have identified.

(b)Assume your IT audit division is to perform testing of controls for the inventory systems described. Identify two tests that you would recommend they perform.