Assignment Task
Questions
You are an audit manager at Smark & Associates, who have been approached to conduct the audit of Gong Games Ltd (GGL), a manufacturer of interactive computer games, for the year ended 30 June 2021.
Smark & Associates has not previously audited GGL’s financial report, although it has undertaken other types of engagements for GGL. Last year GGL hired Smark & Associates to assist in the redesign of GGL’s accounting software to ensure that internal controls over internet sales were adequate to ensure the confidentiality of customer data and accuracy of recording. The new software was implemented at the beginning of the current year and appears to be working satisfactorily. As part of this year’s audit, you expect to review the internal controls at GGL, including the controls within the IT systems.
As part of GGL’s financing arrangements with its bank, Easymoney Ltd, it has a loan covenant that stipulates that the quick asset ratio cannot be less than 1:1 or Easymoney Ltd has the right to withdraw all funding. The board has advised you that GGL’s quick asset ratio is currently at 0.9:1 due to industrial action holding up the sale of goods imported from overseas. The board has asked you to ignore this temporary breach of the loan covenant, explaining that GGL is a stable and financially sound company, and that the ratio will return to a positive level on resolution of the industrial dispute. The board has indicated that unnecessarily disclosing this within the audit report would force it to reconsider its plans to use your audit firm for other engagements.
As a result of GGL’s current cash flow difficulties, the board has requested that Smark & Associate’s audit fee for 2021 be paid in GGL shares. The board has indicated that the market value of the shares will equate to the value of the audit fee charged by Smark & Associates.
The management of GGL is currently reviewing the structure of its audit committee to ensure that it complies with the requirements of the ASX Corporate Governance Principles and Recommendations. However, the board is confused by the reference in the ASX Corporate Governance Principles and Recommendations to both independent directors and non-executive directors, as they thought that they were the same thing. As a result, they have sought your advice concerning the structure of their audit committee.
Required:
- Identify and explain three separate key threats to Smark & Associates’ independence that may arise under APES 110.
- For each independence threat identified in (a) above, describe the course of action Smark & Associates needs to take to ensure compliance with APES 110.
- Explain to the directors the difference between an independent and a non-executive director under the ASX Corporate Governance Principles and Recommendations.
- Provide four characteristics of the structure of an audit committee for it to comply with the ASX Corporate Governance Principles and Recommendations.
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