YOUR COMPLETED WORK MUST BE SUBMITTED WITHIN THE SPECIFIED DURATION OUTLINED ABOVE TO PREVENT PENALTIES

SECTION A

Instruction: Complete ALL questions from this section.

Case Study

You are an audit assistant in a small audit firm, Prudential Partners, where the seniors saw it as important for the juniors to be an integral part of engaging and auditing the client. Prudential Partners is engaging a new client called Gizmo Ltd, which is operating in the technology industry for many years; however, this is the first time that Prudential Partners is working with a client from this industry, hence no prior experience. The audit team is intrigued by this new audit. Talks were finalised and the partners accepted the engagement without doing any background information on the client. You noticed this and began your own individual investigation in the firm and the industry it operates in. during the audit, the team have noticed the following trends.

Company

Industry

2011

2012

2011

2012

Current ratio

3

6

3.1

3.5

Debt Ratio

40%

41%

30%

29%

Acid Test Ratio

2

5

2

2.5

Table 1.

Gizmo Ltd has not been producing any new devices and as such revenue has declined by 10% and performing below industry level, there were no sale of fixed asset during the financial year. It was discovered that one of Gizmo Ltd, major competitor has filed a patent for an improved version of the current product selling on the market, which could prove to be a game changer for the competitors position in the industry. It was also observed at Gizmo that the same person who collects the cash post the entries in the journal, no vault is there to store cash overnight hence cash are kept in the registers. Journal entries are not authorised by management before posting it to the relevant books and ledgers. Audit schedules of the account that were requested are not being submitted to the auditors on time; cheques are only authorised by one person, which is the financial controller. While perusing the accounts, you have found that suppliers accounts have not being updated frequently; the same is for bank reconciliation. During the investigation it was revealed that there was an unusual amount of intangible assets that are unusual to the industry that the client operated in, no proper fixed asset registry was kept and as such, the auditor notices a machinery that represent 45% of the balance sheet of the client. While assessing the control environment, auditors noticed that management overrides controls easily and that there is no internal audit department for a company that had multiple branches.

Required:

A. Define Analytical procedures and use this to qualitatively assess the clients business risk in terms of threat to the business. (5 marks)

B. Identify FOUR (4) weaknesses outline in the case study. (8 marks)

C. Outline FOUR (4) audit procedures (substantive procedures) to test the areas of weaknesses identified above. (8 marks)

D. Define the test of control and evaluate the effectiveness of internal control using evidence from the case study. (9 marks)