QUESTION 2

1. Each multiple choice is worth two (2) marks with one mark for the correct answer and one mark for the explanation for your answer. Explanations must include Auditing standard references to get full marks.

   You are conducting the audit of ABC Ltd which operates a large retail chain across Australia. In your discussions with management, you identify that they have had a lot of transport issues this year which has meant that they could not get as much stock as they normally would delivered and that their stock has often been held up on trucks and ships. Which of the following is true in relation to the audit.

   a) The overall audit risk would need to increase due to the danger that stock is incorrectly counted and recorded at year end.

   b) Control risk will increase which will mean that detection risk will need to decrease in the audit.

   c) The level of materiality will need to increase because there is more change of errors.

   d) A more substantive audit strategy on the stock would be required due to a lower detection risk approach required.

2. You are completing the audit for ABC Ltd which has a year end of 30 June 2020. You are due to sign the audit report on the 21st August 2020 and the company will release the accounts on the 28th August 2020. On the 25th August 2020, you hear on the news that the companys largest customer, which represents 80% of its income has gone into liquidation. There was no provision for doubtful debts recognised in the financial statements. What is your responsibility as the auditor?

   a) Discuss the matter with management and determine if the accounts need to be amended. Perform additional testing if they are.

   b) No responsibility. You have completed all your audit procedures and signed the report. Your job is done.

   c) Notify ASIC of a potential going concern risk.

   d) Perform additional audit testing to determine if the accounts need to be adjusted or not as a type one subsequent event.