Should be answered like the exemplar file attached

ACCT3000 AUDITING Semester 2, 2017 EXEMPLAR FOR ASSIGNMENT 2 Your firm has just been appointed as the auditor of BNZ Limited (BNZ), a manufacturing company. In the planning phase of the audit engagement you became aware that a new competitor of BNZ entered the market six months before year end and since that time selling prices have fallen significantly. Your inquiries have revealed that the industry expects heavy discounting to continue for the whole of next year. The Managing Director of BNZ told you that the company has already downsized some staff to balance costs. Required 1. For the above situation relating to BNZ Limited, answer the following: (a) Identify and discuss why the above situation represents a risk. (b) By applying auditing knowledge, identify the main account or group of accounts affected by this risk in the audit plan. (c) Identify how the audit plan will be affected by the risks and recommend specific procedures to address these risks. 2. Prepare a memorandum to the Audit Manager, outlining your risk assessment relating to BNZ Limited and your recommendations on the audit approach to be used. Suggested Solution Requirement 1: (a) Inherent risk is high due to the entry of new competitor in the industry. Since selling prices have fallen significantly and the industry expects heavy discounting to continue for the whole of next year, BNZ could potentially be facing a going concern problem. As the competition caused selling prices to fall prior to balance date, this may cause the net realizable value of the stock on hand at year end to be less than cost. This situation may give management the incentive to manipulate a number of the accounts /balances in the financial reports. Further, in order to balance costs if the company undertakes the downsizing approach, it might have to get rid of some of the existing staff, thereby leading to lack of segregation of duties and increased control risk. This can in turn increase fraud risk and adversely impact several account balances and transactions. (b) The impact of reduced selling prices will be on recorded sales, inventory value, and cash flows. In the audit plan, the focus will be on major accounts like sales revenue, accounts receivable, expenses, accounts payable as these accounts may be manipulated to make the net profit look better. There is a possibility of overstatement of sales revenue and associated accounts receivables (assertions - occurrence/existence). The entry of a new competitor could have resulted in slow moving/obsolete inventory and hence, inventory may not have been recorded at the lower of cost and net realizable value (assertion - valuation and allocation). (c) Since both the inherent and control risk appear to be high, detection risk needs to be lowered with extensive substantive testing. Tests of details of transactions and account balances need to primarily be applied. The auditor will need to talk to management regarding the potential going concern issue and their back-up plan to mitigate this problem (ASA 570). As highlighted in part (a), the auditor may also need to carry out investigations in relation to fraud (ASA 240). The auditor also needs to concentrate on selling prices at and after balance date and perform detail testing on the major day to day accounts (sales revenue, inventory etc.) during the year end. Account receivable balances can be verified using confirmation requests (ASA 505). The auditor must attend the physical stock take (ASA 501) and check whether the inventory items have been valued at the lower of costet realizable value. Provisions and estimates must also be thoroughly investigated since such accounts are easily manipulated as these are not based on exact figures and require a high level of subjective judgement. Management representation letter must be obtained documenting management's view on BNZ's expected performance in the near future. Requirement 2: Please refer to pages 154 to 157 of your prescribed text book (an exemplar of the memo expected is provided on page 157): Business Communication: A Handbook for Accounting Students and Graduates: Pearson Australia (ISBN: 9781488618772). Electronic book can be purchased through the Pearson website (http://www.pearson.com.au/9781488618789). Standard Memo Format: Information on recipient and sender and topic Introduction Task Description Recommendations To: From: Date: Subject: Facts and Scope: What is the purpose of this memo? /What are you trying to report? Is the key information you are outlining based on specific criteria/standards? Risk Assessment What key risks have you identified? What key accounts are affected? Recommended Audit Approach: Based on risks identified, what audit approach/key audit procedures do you recommend? References: Business Communication: A Handbook for Accounting Students and Graduates. Pearson Australia (ISBN: 9781488618772). Chartered Accountants Australia and New Zealand (CAANZ). 2017. Auditing, Assurance and Ethics Handbook. Milton, Queensland, Australia: John Wiley & Sons Australia Ltd.(ISBN: 9780730343028). Leung, P., Coram, P., Cooper, B. J., Richardson, P.(2015). Modern Auditing & Assurance Services (6th Ed), Australia: John Wiley & Sons (ISBN: 9781118615249). You are an Audit Senior currently planning the 30 June 2017 audit of Pearl Technology Limited (Pearl), an Australian-owned company that is a manufacturer of computer hardware. You note the following situations relating to Pearl. 1. The old costing system that was developed in-house, could no longer keep up with the complex and detailed manufacturing costing process that provides tender/bid submission costings and the company's comprehensive reporting requirements. As a result, Pearl purchased and installed a popular off the shelf (not customized) costing system to support the highly sophisticated and cost sensitive nature of its product designs. Since this system had been utilised by many other firms in the industry, Pearl have not thoroughly tested the adequacy of the features and controls inherent within the system. At the same time, the staffs are not feeling confident with the new system due to lack of training and supervision. 2. Pearl has been experiencing declining sales over the last 2 years. Cost cutting has proved difficult due to the high level of imported machinery used in Pearl's operations and consequently margins have been falling. Over the last 2 months, warranty claims on Pearl's best-selling product line, M4 has increased- from 1.5% to 4.5% of sales. The average cost of repair has risen by 20% to $200 per claim. While the bankers are presently happy to continue providing Pearl with loan facilities, they do expect to see improved results in the next financial report. 3. A team of internal auditors has been hired 10 months ago by Pearl to improve on its existing internal control, which has been relied on for the past 10 years. Based on your experience, the revamping process should only take about 8 months. It came to your attention that only a short while after the employment of the internal auditors, the CEO of Pearl experienced severe personal financial difficulty. You also find that the process of revamping the internal control has been dragging because the CEO kept on declining the internal auditors' suggestions for improvement. The accountant of Pearl has been notorious for finding gaps in the legislations in order to make its clients' financial statements look presentable as desired by the clients themselves. In the past few years, Pearl has always been required by the Australian Tax Office to provide additional supporting information after the lodgement of its tax returns. Required: 1. For each of the above situations relating to Pearl Technology Limited, answer the following: (a) Identify and discuss why the above situation represents a risk. (b) By applying auditing knowledge, identify the main account or group of accounts affected by this risk in the audit plan. (c) Identify how the audit plan will be affected by the risks and recommend specific procedures to address these risks