Question 3 (1,000 words) (10 marks) Meg Lithgow is the engagement partner of the audit of Champion Securities, an investment company. Most of Champions assets and liabilities are financial and their valuation is critical to the assessment of the companys solvency and profitability. Meg has employed two outside experts to value the financial assets and liabilities because they are extremely complex to value, particularly the energy market derivatives and the instruments traded in foreign markets. In addition, the valuations are highly dependent on market conditions and the specific and detailed requirements of the recently revised accounting standards. Throughout this years audit, Meg has had difficulties with the CEO of Champion Securities. He is vehemently opposed to any asset write-downs she has suggested. The CEO has the backing of the chairman of the board and Meg has been unable to get the CEO to listen to her concerns about the valuations of the financial assets and liabilities the company has made. In past years, Meg has had an amicable relationship with both the CEO and the chairman and the audits have run very smoothly. Meg has now realised that this harmonious relationship was mainly due to the boom in the market. It was unlikely that there would be arguments about writing up the value of the companys assets during these good times. Meg, with the help of the experts, has prepared a summary of the relevant items, detailing the revised values for the assets and liabilities and the associated effects on income and retained earnings. The CEO has dismissed this summary and the audit recommendations with the comment, The market has hit the bottom and is recovering. There is no need to show these write-downs because by the time the financial report is published the values will be back to where they were before the market fell. It is all a waste of time. In fact, I think you are just being difficult to deal with. I think we need an auditor who is a bit more realistic. REQUIRED (A) Discuss the ethical issues Meg faces and explain what she needs to do to comply with APES 110. (B) Explain Megs audit report options. (C) Recommend a course of action for Meg.

Question 1 (1,000 words) (10 marks) MaxSecurity Limited (MaxSecurity) has been an audit client of Smith & Associates (S&A) for the past 15 years. MaxSecurity is based in Wollongong, where it manufactures high-tech armour-plated personnel carriers. MaxSecurity often has to go through a competitive market tender process to win large government contracts. Its main product, the small but powerful Terrain Master, is highly specialised and MaxSecurity only does business with nations that have a recognised, democratically elected government. MaxSecurity maintains a highly secure environment, given the sensitive and confidential nature of its vehicle designs and its clients. In September 2015, MaxSecurity installed an off-the-shelf costing system to support the highly sophisticated and cost sensitive nature of its product designs. The new system replaced a system that had been developed in-house as the old system could no longer keep up with the complex and detailed manufacturing costing process that provides tender costings. The old system also had difficulty with the companys broader reporting requirements. The manufacturing costing system uses all of the manufacturing unit inputs to calculate and produce a database of all product costs and recommended sales prices. It also integrates with the general ledger each time there are product inventories movements such as purchases, sales, wastage and damaged stock losses. MaxSecuritys end of financial year is 30 June. REQUIRED (A) Based on the background information, what are the major inherent risks in the MaxSecurity audit? Consider both industry and entity risks in your answer. (B) Discuss the factors to consider when determining preliminary materiality for MaxSecurity.