| Subject Code : | ACCT6006 | Country : | Australia |
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Assignment Task -
Question 1
You are working on the audit for the year ending 30 June 2015 of Best Clothes Ltd (BCL), a publicly listed company that manufactures, wholesales and retails men’s, women’s and children’s clothing across Australia. BCL has approximately 65 per cent of the market in children’s school wear. It offers a full refund to all customers within 90 days of purchase if they are not happy with their purchase.
BCL manufactures all of its clothing lines in Korea, except for the high-end designer women’s outfits, which are imported from France and branded under one of the BCL brands. BCL operates Page 191one corporate-owned store in each state of Australia and distributes its clothing Australia-wide to major department stores and to some independently owned boutiques.
On 7 June 2015 and while completing the field work on the audit of BCL you come across an online newspaper article alleging BCL has been exploiting workers at its Korean factory. The article alleges that employees at BCL’s Korean factory are severely underpaid and are working in very poor conditions. The article suggests that concerned customers should boycott BCL’s products.
Upon further investigation, the CFO reveals that since the article’s publication, large numbers of clothes have been returned by customers, including the department stores. As at 30 June 2015, the CFO estimates that of the clothes sold that are still eligible for a full refund, 35 per cent were expected to be returned.
REQUIRED
A. List the key accounts that are likely to be impacted by this discovery. B. For each of the accounts you listed, state the key assertion at risk and explain your answer
Question 2
Hilltop Ltd (Hilltop) is a leading manufacturer of baby furniture, with its manufacturing operations located in Sydney. Hilltop purchases a combination of parts and raw materials for its products from various Australian suppliers.You are conducting the audit of Hilltop for the year ended 30 June 2015 and have prepared the following summary of the inventory purchasing process:
- Pre-numbered purchase requisitions are prepared by the warehouse or production staff requesting the item and must be approved by the purchasing manager for items up to $10 000 and by both the purchasing manager and the chief financial officer for items over $10 000.
- Pre-numbered purchase orders are prepared from the purchase requisitions by the purchasing clerks and approved by the purchasing manager.
- When goods arrive in the receiving area, the receiving clerk checks the quantity and description of the goods against a copy of the purchase order and the supplier’s delivery
- documentation. A pre-numbered receiving report is then prepared and signed by the receiving clerk.
- When supplier invoices are received by the accounting department, the accounts payable clerk checks the quantity and description of the goods and the prices on the purchase invoices against a copy of the purchase order and the receiving report before processing.
- At month end, the accounts payable clerk reviews receiving reports and purchase order files for any items where a purchase invoice has not been received and the goods have been delivered, in order to identify and record accruals.
- The accounts payable clerk refers to the standard general ledger code file and records a general ledger account code on the purchase invoice before signing it. Coding is reviewed by the financial accountant prior to processing the invoices.
Question 3
You are audit senior at Bernstein and Griffiths and have been assigned to the audit of Stockman Ltd (Stockman) for the current year. Stockman manufactures, wholesales and retails Australian outback clothing for sale both in Australia and overseas. During the planning stage of the audit, you have identified the following three key internal controls over the functioning of Stockman’s online inventory management system.
- Internal control 1—the system will not allow a customer to place an order for an item of inventory that is currently out of stock.
- Internal control 2—all new wholesale customers must undergo a credit approval check, which has to be signed off by Stockman’s credit manager and chief financial officer (CFO), before their credit limits are approved and a debtor account established.
- Internal control 3—each customer is required to enter their unique customer identification number and personal identification number (PIN) before an order can be processed. This is to ensure that unauthorised inventory orders are not placed and only customers who are approved customers are able to order online.
REQUIRED
For each of internal controls 1, 2 and 3 above, describe a test that you would perform to assess whether the control was functioning effectively and Outline the result that you would expect to see if the internal control was functioning effectively.
Question 4
You have been assigned to the audit of Grain Crops Ltd (Grain Crops), a company that produces wheat, flour, yeast and other bakery products. As with many other businesses, Grain Crops has been finding it extremely difficult to recruit and retain skilled factory staff. As a result, Grain Crops decided that staff in the most difficult-to-retain award categories will be rewarded with annual bonuses. These are calculated using a relatively complex formula that takes into account the employee’s length of service, award rate, seniority and estimated contribution to profit.
REQUIRED
A. Identify the key account at risk of misstatement and the two key audit assertions at risk. B. Outline the audit procedures you would perform to gather sufficient appropriate audit evidence on each assertion.
Question 5
Consider the following material and independent situations relating to the audit of several different audit clients for the year ended 30 June 2015.
i. The auditor is appointed as auditor of a client after the client’s annual physical inventory count has been conducted. The accounting records are not sufficiently reliable to enable the auditor to become satisfied as to the year-end inventory balances.
ii. A client holds a note receivable consisting of principal and accrued interest receivable. The note’s maker recently filed a voluntary bankruptcy petition, but the client failed to reduce the recorded value of the note to its net realisable value, which is approximately 10 per cent of its recorded amount.
iii. The auditor hires an actuary to assist in corroborating a client’s complex calculations concerning accrued superannuation liabilities that account for 35 per cent of the client’s total liabilities. The actuary’s findings are reasonably close to the client’s calculations and support the financial report.
iv. Due to significant losses and adverse key financial ratios, the auditor has substantial doubt about a client’s ability to continue as a going concern for a reasonable period of time. The client has adequately disclosed its financial difficulties in a note to its financial report, which does not include any adjustments that might result from the outcome of this uncertainty.
v. A client changes its method of accounting for the cost of inventories from FIFO to weighted average cost. The auditor agrees with the change, although it has a material effect on the financial report and has not been disclosed.
REQUIRED
For each of the above situations, identify the type of auditor’s opinion that you would issue. Justify your answers.
Question 5
i. A qualified auditor’s opinion would be issued as the situation represents an inability to obtain sufficient appropriate audit evidence (a scope limitation). The amount involved is material, but is not likely to be pervasive; therefore, a qualified opinion rather than a disclaimer of opinion will be issued.
ii. A qualified auditor’s opinion would be issued due to a disagreement with those charged with governance about the valuation of the note receivable. The amount involved is material but not pervasive; therefore, a qualified rather than an adverse opinion would be issued.
iii. An unmodified auditor’s opinion would be issued, as the auditor has the right to rely on the work of an expert in such a situation and has therefore, gathered sufficient appropriate audit evidence to support the financial report.
iv. An unmodified auditor’s opinion would be issued with an additional paragraph under the heading ‘Material uncertainty related to going concern’drawing attention to the inherent uncertainty related to going concern that has been adequately disclosed. Adjustments to the financial report are only necessary when the going concern assumption is not appropriate.
v. A qualified auditor’s opinion would be issued because of the disagreement with those charged with governance regarding the lack of disclosure of the change in accounting policy. The amount involved is material but not pervasive; therefore, a qualified rather than an adverse opinion will be issued.
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