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UNIT CODE: ACT303 UNIT NAME: PRINCIPLES OF AUDITING

Written Assignment Information

Semester 1 2021 Marks and Weight: 70 marks and to be weighted @ 20%

Length: Maximum 3,000 words Submission Requirements. This assignment may be submitted at or before 11.59pm (ACST) Sunday, 9th May 2021, (Study Week 9) Assignments are to be submitted by one of the following means; · The assignment must be lodged on or before the due date indicated in the assignment details.

· Submit your Assignment as one document, using PDF or Word doc format1

· Ensure your file is named using a file naming convention that allows the lecturer to identify to whom it

belongs. Failure to use an acceptable file naming convention may result in your assignment lodgement

being rejected (For students working in groups, ONLY the group leader will submit the

Assignment – be sure to indicate all the Names and Student Numbers on the front cover/first

page).

· The assignment must conform to the requirements set out in this assignment

· The assignment must be lodged online via the ACT303 Learnline Assignment Lodgement link on the

ACT303 Learnline site.

· DO NOT LODGE VIA EMAIL or FAX – assignments lodged by email or fax will not be

accepted.

KEEP A COPY – Ensure you have a copy of the assignment lodged.

1 Instructions for creating PDF documents and/or combining documents of different formats are provided on the

Learnline site.

Asia Pacific College of Business & Law Semester 1 2021 Page 2 of 10

Online Submission Students will now be required to affirm at the point of submission that the work they are submitting is their original work. This is built into the submission point. The submission text reads as follows: By clicking the SUBMIT button I certify that this assignment is my own work, based on my own personal study and research, and that I have acknowledged all material and sources in the preparation of this assignment, whether they be books, articles reports, lecture notes, images, videos, any other kind of document or personal communication. I also certify that this assignment has not previously been submitted for assessment in any other course or at any other time in the same course (except as a DRAFT submission) and that I have not copied in part or whole or otherwise plagiarised the work of other students and/or persons. I have read Charles Darwin University’s Academic and Scientific Misconduct Policy (pol-001) and Student Breach of Academic Integrity Procedures http://www.cdu.edu.au/governance/procedures/pro-092.pdf and understand its implications.

Format The assignment may be completed manually, or with the use of an electronic spreadsheet, word processing software or with the use of accounting software. Marks may be deducted for illegible or partially illegible papers. If completed using multiple file formats or manually, the document must be combined into one document, in PDF format2. Resubmission As a general rule resubmission of assessment items is NOT possible, however the Lecturer may ask for resubmission if it is deemed appropriate. Details for such resubmission will be made available by the Lecturer if and when the situation occurs.

Oral Test or Viva Voce Lecturers may, at their discretion, ask students to verbally present their assignment submissions or rewrite some selected part/s of their answer in a controlled setting. Lecturers may exercise this discretion where they feel that the assignment was not the student’s own work. University Plagiarism policy! Plagiarism is the unacknowledged use of material written or produced by others or a rework of your own material. All sources of information and ideas used in assignments must be referenced. This applies whether the information is from a book, journal article, the internet, or a previous essay you wrote or the assignment of a friend. Plagiarism policy is available at: http://www.cdu.edu.au/governance/policies/pol-001.pdf and Student Breach of Academic Integrity Procedures http://www.cdu.edu.au/governance/procedures/pro- 092.pdf

2 Instructions for creating PDF documents and/or combining documents of different formats are provided on the

Learnline site.

http://www.cdu.edu.au/governance/policies/pol-001.pdf
http://www.cdu.edu.au/governance/procedures/pro-092.pdf
http://www.cdu.edu.au/governance/policies/pol-001.pdf
http://www.cdu.edu.au/governance/procedures/pro-092.pdf
http://www.cdu.edu.au/governance/procedures/pro-092.pdf
Asia Pacific College of Business & Law Semester 1 2021 Page 3 of 10

Extensions and Late Lodgements LATE ASSIGNMENTS WILL GENERALLY NOT BE ACCEPTED UNLESS AN EXTENSION TO THE DUE DATE HAS BEEN GRANTED BY THE HEAD OF SCHOOL. Exceptions will only be made where assignments are late due to special circumstances that are supported by documentary evidence, and may be subject to a penalty of 5% of assignment marks per day. Partially completed assignments will be accepted with appropriate loss of marks for the incomplete portion. Should students foresee potential difficulties with submission of assessment items, they should contact the lecturer immediately the difficulties come to notice, to discuss suitable arrangements etc for the submission of those assessment times. An Application for Assignment Extension or Special Consideration should be completed and provided to the Head of School, School of Law and Business. This application form, explanation and instructions is available on the ACT303 CDU Learnline course site or direct from http://learnline.cdu.edu.au/units/lb_school_templates/deployed/assignment_extension.docx Please note that it is now Faculty policy that all extension requests must be approved by the Head of School. The lecturer is no longer able to personally approve extension requests. Leaving a request for an extension, special assessment or special consideration until the last moment, based on grounds that students could have reasonably been able to foresee, may result in the application being rejected. Ensure that you maintain suitable backup copies of your assignment during preparation, before completion and after lodgement. Loss of data/assignment due to failure to maintain a suitable backup will not constitute grounds for an extension.

Asia Pacific College of Business & Law Semester 1 2021 Page 4 of 10

Assignment Details

QUESTION 1 (20 MARKS)

Case 1

During the financial year 2020/2021, you are one of the audit partners with Summit and Associates CAs, a large

and experienced audit firm.

You have been approached to accept the audit of Chem Safe Ltd (Chem Safe), a medium-sized chemical

manufacturer. The manufacture of the chemicals results in highly toxic waste and Chem Safe is currently under

investigation by the Environmental Protection Agency for a significant spill of toxic chemicals into a nearby river.

The media have reported that senior employees were allegedly involved in trying to cover up the spill.

Required:

Identify and explain the key ethical matter regarding Chem Safe and its management that you should consider

before making the decision to accept the engagement. (2 Marks)

Case 2

Chem Safe Ltd (Chem Safe) imports a number of pharmaceutical products. In order to hedge its foreign

currency transactions, Chem Safe entered into a number of forward rate agreements this year. Prior to this time

Chem Safe had had little exposure to derivative instruments, but a series of bad experiences resulting from

fluctuating exchange rates convinced the company that a hedging strategy was necessary. During planning for

the audit of Chem Safe, the company’s hedging arrangements were identified as inherently risky and increased

testing was carried out in this area. A number of small errors were noted in accounting for hedge transactions,

but there did not appear to be any material errors and as such no adjustments were made. A review of the audit

file suggests that the errors noted were a result of inexperience and poor controls in the area. While all of the

errors were brought to the attention of the treasurer, who is responsible for the company’s hedging strategy, no

further action has been taken to date.

Required:

Outline what further action the auditor should take in response to the errors and control weaknesses identified.

Justify your response. (2 Marks)

Asia Pacific College of Business & Law Semester 1 2021 Page 5 of 10

Case 3

Summit and Associates CAs has agreed to take on a new audit client, Reaction Pty Ltd, a small garage door

manufacturer that has never previously been audited. Summit and Associates CAs has issued an engagement

letter prior to commencing work for the current year. While conducting the audit, the audit team is unable to gain

sufficient appropriate audit evidence around accounts receivable due to a lack of documentation. You have

informed client management that you need to issue a modified auditor’s report due to the scope limitation. In

response, management has requested that the engagement become a review engagement with the associated

lower level of assurance, as they are not required to have an audit.

Required:

Outline the appropriate response to this situation. Provide reasons to support your response. (4 Marks)

Case 4

Consider the following independent situations:

  1. You are the auditor of Hail Pty Ltd a medium sized furniture manufacturer. Your audit firm has finalised the

financial statements after the client has substantially prepared the accounting records. However, the client

admits to having limited knowledge of identifying and calculating impairment and has asked for your

assistance. You have proposed a number of adjustments to account for the impairment of assets.

  1. You are the auditor of Travel Time Ltd, a large travel agent that also handles all your audit firms travel

arrangements on normal commercial rates and provides excellent service. The managing director of Travel

Time has indicated that the company is having a tough time of it due to the lack of consumer confidence in

the economy at the moment and has asked if you could help by recommending their services to your other

audit clients. He has said that he will understand if you are not able to do so. You happily agree to provide

the recommendation, as you have always been satisfied with their service.

  1. Your audit firm has been approached by a new client, Civil Constructions Ltd, to conduct the audit for the

coming year. As part of your client acceptance procedures, you identify that the wife of one of the audit

firm’s partners has a substantial shareholding in Civil Constructions Ltd.

  1. Your audit client, Pleasure Cruises Ltd, is having cash flow problems and has not paid any of the current

year’s fee by the time the auditor’s report is due to be issued. They expect business to pick up in the coming

year and have requested an additional time to pay the bill.

Required:

For each of the independent situations above:

a) Identify the type of potential threat to independence. Justify your answer. (8 marks)

b) Describe a safeguard, if any, which could be implemented to reduce each of the independence threats. (4

marks)

[2 + 2 + 4 + 8 + 4 = 20 marks]

Asia Pacific College of Business & Law Semester 1 2021 Page 6 of 10

QUESTION 2 (10 MARKS)

Case Background

You are the audit senior on the audit of Best Furniture Manufacturers Pty Ltd (Best). Your firm has recently been

appointed as the first auditors of the company.

You interview the managing director of the company to obtain background information on Best and to

understand its business operations, its environment and system of internal control. You noted and documented

the following:

• Best was founded 30 years ago and makes ‘grandfather’ clocks (freestanding, weight driven, pendulum

clocks).

• The clocks are made in one factory (situated in the Alice Springs) and are distributed through boutique

homeware and antique furniture stores.

• The clocks are advertised mainly in local newspapers and through pamphlet drops.

• In order to promote longer production runs and minimise finished goods stocks, Best’s retail distributors are

offered stock on a ‘sale or return’ basis. This means that the homeware and antique furniture stores are

invoiced immediately, subject to a 90-day term of payment, but are allowed to return the stock up to 30 days

before payment is due. Only the marketing manager has been given the authority to make these offers.

• All of Best’s timber is obtained from offshore sources. Timber prices, which are denominated in US dollars,

have risen substantially over the past two years and the recent drop in the value of the Australian dollar has

caused them to rise even further.

• Timber purchases are secured by providing Best’s suppliers with letters of credit which become due when

the container shipment of timber arrives in Australia.

• Labour costs are high due to the craftsmanship and quality required for the production of the grandfather

clocks. Skilled labour is not easy to obtain and wage rates have recently risen.

• Best has found it difficult to pass on these timber and labour price increases to customers.

An analysis of costs indicates that there have been material negative purchase price variances in purchases of

timber over the course of the year. You have compiled the following information from Best’s financials:

➢ the current ratio as at 30 June 2020 is 1.24

➢ the shareholders’ funds to total assets ratio is 30%

➢ gross profit margins and net profit margins for the year ended 30 June 2020 have dropped to the

level where losses are being incurred.

NB: An excerpt of Best’s Financial Reports is attached.

Asia Pacific College of Business & Law Semester 1 2021 Page 7 of 10

Best Furniture Manufacturers Pty Ltd (Best)

Balance Sheet 2020 2019 2018

Current assets Debtors 748,681 774,469 665,939 Sale or return debtors 483,020 499,657 429,638 Inventory 300,035 305,013 256,376

1,531,737 1,579,140 1,351,953

Non-current assets Property, plant and machinery 1,967,404 1,993,058 1,867,593

Total assets 3,499,141 3,572,198 3,219,546

Current liabilities Trade and other creditors 395,019 343,545 289,049 Bills payable 509,494 517,947 435,355 Bank overdraft 135,576 13,337 55,672 Current portion of bank loans 200,000 200,000 200,000

1,240,090 1,074,830 980,076

Non-current liabilities Bank loans 1,200,000 1,400,000 1,600,000

Equity Share capital 500,000 500,000 500,000 Retained earnings 559,051 597,368 139,470

1,059,051 1,097,368 639,470

3,499,141 3,572,198 3,219,546

Profit and Loss Account

Gross sales 6,077,296 6,233,124 5,350,321 Returns 200,551 – 153,958 – 123,057 – Net sales 5,876,745 6,079,166 5,227,264

Cost of sales Materials 2,066,281 2,100,563 1,765,606 Labour 1,397,778 1,153,128 963,058 Other 516,570 506,130 438,726

3,980,629 3,759,820 3,167,390

Standard Cost Variances Purchase price (121,546) (49,865) (16,051) Labour cost (182,319) (62,331) (26,136)

(303,865) (112,196) (42,187)

Operating profit 1,592,252 2,207,149 2,017,686

Expenses Administration 791,918 754,208 600,841 Sales and marketing 663,198 642,012 524,331 Financing 175,452 156,789 123,457

1,630,569 1,553,009 1,248,630

Net profit (loss) (38,317) 654,140 769,057 Tax 0 196,242 230,717 Net profit after tax (loss) (38,317) 457,898 538,340

Asia Pacific College of Business & Law Semester 1 2021 Page 8 of 10

Best’s bank finances the company’s timber purchases using bills of exchange drawn at 90 days from the date of

payment of the shipment. It has also extended loan finance to Best. The bank covenant, which is due for review

shortly, requires Best to:

➢ maintain a current ratio of 1.2

➢ maintain a shareholders’ funds to total assets ratio of at least 30%

➢ maintain net sales of a minimum of $100,000 per quarter

➢ prepare a general purpose financial report for the year ended 30 June 2020 and have it audited

according to Australian Auditing Standards. Note that this is a requirement of the bank covenant as Best

is not required to produce a general purpose financial report under the Corporations Act.

Required:

Based on the background information above and your use of preliminary analytical procedures, answer the

following questions:

a) Identify and explain two (2) asset accounts at risk of material misstatement (4 marks).

b) Describe one (1) issue regarding the prior year’s figures and explain why (2 marks).

c) Describe two factors that may bring into question the going concern assumption for Best. (2 marks)

d) Disregarding the evaluation of management’s assessment of the going concern assumption, briefly describe

the effect of the facts on your audit planning (2 marks).

[4 + 2 + 2 + 2= 10 marks]

Asia Pacific College of Business & Law Semester 1 2021 Page 9 of 10

QUESTION 3 (10 MARKS)

Background

Safe Net is the wealth management division of Security Bank (Security) and provides investment,

superannuation, insurance and private wealth solutions to corporate and institutional customers. The following is

a list of the auditor’s planning file notes in relation to fraud detection for the audit of the Safe Net unit.

  1. Ensure all material fraud instances are detected.
  2. The auditor is responsible for maintaining professional scepticism throughout the audit, considering the

potential for management override of controls and recognising the fact that audit procedures that are

effective for detecting error may not be effective in detecting fraud.

  1. Respond appropriately to fraud or suspected fraud identified during the audit.
  2. A discussion among all of the audit firm’s staff on how and where the entity’s financial statements may

be susceptible to material misstatements due to fraud, including how fraud might occur.

  1. Make enquiries of management, and others within the entity as appropriate, to determine whether they

have knowledge of any actual, suspected or alleged fraud affecting the entity.

  1. Obtain sufficient appropriate audit evidence to confirm all potential fraud instances have been

uncovered and their impacts considered.

  1. Test the appropriateness of journal entries recorded in the general ledger and other adjustments made

in the preparation of the financial statements.

  1. Determine whether management has sufficient skills to prevent and detect fraud (e.g. through proof of

attendance at appropriate industry seminars and workshops, or past experience with fraud).

  1. Obtain a copy of the client’s code of ethics document, and ensure employees have access to it.
  2. Evaluate whether the accounting policies selected by the entity may be indicative of fraud.

REQUIRED:

Identify the activities that are part and the activities that are not part of the auditor’s responsibilities relating to

fraud under ASA 240.

[10 marks]

Asia Pacific College of Business & Law Semester 1 2021 Page 10 of 10

QUESTION 4 (30 MARKS)

NOTE: In answering this Question, use APA referencing style and support your answers with relevant

accounting and auditing standards as well as published peer-reviewed academic journals. A minimum of 5

peer-reviewed academic journals is expected. (Hint: this is a great opportunity to utilise the University’s

Library Services online such as Library Search, Advance Search, eJournals and Databases such as

EBSCOhost, etc.)

You are expected to support your answers with the relevant Australian Accounting Standards and

Australian Auditing Standards and with authorised/published Peer-reviewed Academic Journals and

Articles.

Case Background

In February 2012, the Australian Accounting Standards Boards decided at its meeting to propose the withdrawal

of AASB 1031 Materiality. There were several reasons for this proposal which includes: there is no International

Reporting Standard equivalent and it does not look like there will be, since 2005 there has been the gradual

withdrawal of additional Australian guidance from a number of Australian Accounting Standards, and there is

now an updated guidance on materiality in the IASB Conceptual Framework.

The major impact of the withdrawal of AASB 1031 is the removal of the specific quantitative guidance for

materiality. The withdrawal of AASB 1031 became effective to annual reporting beginning on or after 1 July

2015.

Required: A. Prior to the withdrawal of AASB 1031 and with reference to the AASB 1031 Materiality (issued by the

Australian Accounting Standards Boards – AASB) and the ASA 320 Materiality in Planning and

Performing an Audit and ASA 450 Evaluation of Misstatements Identified during an Audit (issued by

the Auditing and Assurance Standards Board – AUASB):

a) What is materiality as per the Accounting Standards and Auditing Standards? (3 marks)

b) Outline the qualitative and quantitative guidelines of materiality as per the Accounting Standards and

Auditing Standards. (6 marks)

c) Before the removal of AASB 1031, how do the standards and guidelines of “materiality” influence the

auditors’ judgment on materiality level and material misstatements? Provide examples. (6 marks)

B. Post withdrawal of AASB 1031, and with supporting academic research articles in accounting/auditing

research in materiality, would the removal of AASB1031 Materiality Standards:

a) harmonise/bring uniformity/homogeneity to auditors’ assessment of materiality misstatements or would

this bring disparity/heterogeneity to auditors’ assessment of misstatements? Explain your answer. (6

marks)

b) What other factors or influences, if any, the removal of AASB 1031 would impact the auditors’ judgment

on materiality? Explain your answer. (4 marks)

c) What are the implications this would have on the usefulness of financial reports? Discuss your answer

and rationale. (5 marks)

[15 + 15 = 30 marks]

* End of Assignment*

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