Question 3

You are the audit manager at Uzi & Uzi, a medium-sized audit firm undertaking the audit for the year ended 30 June 2020 of Whiskey Holdings Ltd, a distillery located in the midlands of Tasmania. Whiskey Holdings Ltd distil and sell 200-L barrels of Whiskey to customers which they 'age' on site for periods up to 20 years. Customers are required to pay for the product on the date at which the barrel was sealed, with additional payments after every 5 years of aging. During the planning stage of the audit, you became aware of an article in the local newspaper that one of Whiskey Holdings Ltd's major customers had difficulty in collecting a 10-year old barrel of whiskey and subsequently claimed it was only 5 years old. You are concerned about similar concerns other customers may hold and how this may impact on the potential for legal disputes. You are also concerned on how such disputes may have impacted on legal fees.

In following up the impact of article with the chairperson of the audit committee of Whiskey Holdings Ltd, you were advised that the company has indeed incurred substantial, unrecorded legal costs because of similar, as yet unreported disputes with other customers. The audit committee has instructed the internal auditor of the company to investigate the validity of customer complaints. In an initial, highly confidential report, the internal auditor reports that they found it extremely difficult to distinguish company-owned barrels from customer-owned barrels. The customer-owned barrels were mostly not labelled, and they observed some instances of what appeared to be barrels with broken seals.

Required

Using Table 3 below, answer the following:

a.Analyse the business and audit risk and assess which three key account balances are most at risk of material misstatement.

[3 marks]

b.For each account balance assess which key assertion is most at risk.

[3 marks]

c.Evaluate the audit evidence and explain why the account balance and assertion are at risk.

[3 marks]

d.Design one (1) substantive test of detail that you will carry out for each account to address the assertion and risk identified.

[3 marks]

e.Evaluate the evidence to explain two key going concern factors that place the going concern assumption at risk in relation to Whiskey Holdings Ltd's financial report for the year ended 30 June 2020. Refer to the audit standards

[4 marks]

f.Design two (2) substantive tests of detail that you will undertake to respond to the going concern risk. Refer to the audit standards.

[4 marks]

g.You are very concerned about your potential liability to 3^rd parties because your audit procedures for the year ended 30 June 2019 did not discover any material misstatements. There now appears to be a likelihood that the financial statements were fraudulently prepared. Interpret how the Corporation- and common law may impact on your potential liability. Refer to the Esanda case in your response.

[5 marks]