You are the audit senior in charge of the audit of Globus LLC for the year ended 31 March 2020. This is the first year the firm is auditing Globus LLC. Youve got an update from your audit manager that during the reporting year a fraud occurred at the client company. It was revealed that payroll accountant was transferring salaries for fictitious employees to his own bank account. As soon as this fact was revealed, the accountant has left the company, however the concern that there could be additional frauds in the payroll department still existed.

In addition, you have obtained information that due to COVID-19 restrictions, the company was not able to conduct full stock counts at the end of the financial year.

Overall, the company had strong internal controls and proper financial management arrangements, however during the year IFRS reporting specialist that was responsible for preparation of financial statements also quitted the company and his position was vacant.

Preparation of financial statements was now reassigned to Tax accountant, who was not experienced in preparing IFRS financial statements.

You are planning the audit of Globus Limited for the year ended 31 March 2020, and the Following questions need to be resolved.

(1) Why planning stage of the audit is important?

i. It helps the auditor to identify and resolve potential problems on a timely basis.

ii. It helps the auditor to properly organise and manage the audit engagement so that it is performed in an effective and efficient manner

iii. It assists in the selection of engagement team members with appropriate levels of capabilities and competence to respond to anticipated risks and the proper assignment of work to them.

iv. It assists, where applicable, in the coordination of work done by experts.

A. i and ii

B. ii and iii

C. i, ii and iii

D. All of the above statements are correct

(2) This is the first year the firm is auditing Globus LLC. Therefore, there is a lack of cumulative audit knowledge and experience, increasing detection risk. Which of the following is an appropriate auditors response to the increased detection risk?

A. More time and resource will need to be devoted to obtaining an understanding of Veryan Co at the start of the audit.

B. Extended test of controls should be performed.

C. Increase reliance on tests of controls.

D. Consideration should be given to relying on the management of the Company.

(3) What procedures should audit senior consider in relation to increased risk of fraud in payroll?

i. Test payroll transactions during the reporting period by tracing them to labour contracts, bank statements and timesheets.

ii. Review the supporting documentation to confirm the total of the fraudulent payments made and assess the materiality of this misstatement.

iii. Review and test the internal controls surrounding setting up of and payments to new joiners to assess whether further frauds may have occurred

iv. Obtain a written representation from management acknowledging that they have disclosed to the auditors all knowledge of actual and suspected payroll frauds.

A. i and ii

B. ii and iii

C. ii, iii and iv

D. All of the above statements are correct

(4) During trial balance review it was noted that Inventory balance comprises USD 30,000, while total revenue of the Company comprises USD 560,000. Is it necessary to plan substantive audit procedures over Inventory balance?

A. No, as the Inventory balance is immaterial

B. No, as there is limitation of scope due to inability to conduct stock count.

C. Yes, as the Inventory balance is material

D. Yes, substantive audit procedures should be performed regardless of the inability to conduct the inventory stock count.

(5) IFRS Reporting specialist quitted the firm and now Tax accountant is preparing financial statements. Overall materiality level needs to be decreased to respond to increased control risk. True or False? Please, circle the correct answer.

True False

(6) Which of the following you as an auditor will not be able to obtain an understanding of at the planning stage?

A. Laws and regulations applicable to the Globus LLC

B. Events after the reporting period

C. Financing structure of the Globus LLC

D. Accounting policies used by Globus LLC