homework help 30833

Question 2 (15 marks)

Jerry is an audit partner in a local office of a large regional accounting firm. One of Jerry’s biggest clients is Thunderbolt Ltd. – a company which undertakes major property development projects. Thunderbolt is also a large employer in the local community. Until last year Thunderbolt had been very profitable but the economic downturn has started to have a detrimental impact. Jerry is preparing for the final audit meeting with the client. At this meeting there will be discussions about the main findings and any adjustments which are required to be made to the accounts. One major issue with the audit was lingering doubts over Thunderbolt’s status as a going concern. Thunderbolt was coming close to violating its loan contracts which required it to maintain a current ratio of 1.7:1. This issue has caused Jerry many sleepless nights of late – Jerry likes the people who run Thunderbolt and is well aware of the negative impact that its closure would have on the local community. Jerry is also aware that Thunderbolt’s violation of loan terms would most likely have a negative impact on his own immediate career prospects.

Thunderbolt’s year-end was 30 June but Jerry’s firm carried out most of its work during February. At that time all of the projections looked fine, however recently Jerry noticed that one of Thunderbolt’s major customers, Deciduous Ltd had been placed into administration. At year-end Deciduous owed Thunderbolt $1.8 million. If this amount were to be written off Thunderbolt would be breaching its loan contracts. While Jerry was aware that Deciduous was disputing the amount due (such tactics were common in the property development industry) he fully expected that the vast majority of the sum owed would be paid. This is now all in doubt.

At the meeting with the client, Jerry asks whether any provision had been created in relation to the amount due from Deciduous or whether any updates to the projections originally audited in February had been made. Darryl, Thunderbolt’s Chief Executive, advises Jerry that he does not believe this will be necessary. Darryl informs Jerry that the administrator of Deciduous has advised him that Deciduous will be able to meet all of its outstanding debts. Jerry advises Darryl that he hopes this is will be the case but he will need to obtain assurances from the administrator directly. Darryl asks why this is necessary as he is happy to give Jerry a letter to this effect. Jerry advises Darryl that he has to do his job.

Darryl reacts to this angrily shouting: “Jerry, you have been our auditor for years and at the first sign of trouble you appear willing to help the bank shut our doors, the effect of which will be a disaster for the local community and also for your firm. Many of your neighbours work for this company, what will they think? What will their children think? This will impact on your own children at school. All we are asking for is time – to let us trade out of this situation. As far as I am concerned, the accounts will not be altered. You can do as you wish – however remember what I have told you – local communities need businesses like ours. I will let them know who caused the closure of this business, if that’s what it comes to!”

Required:Use the AAA model to recommend a course of action for Jerry (15 marks) 

Question 3 (35 marks)

Your firm has just been appointed auditor of Gravel Manufacturing Ltd. and you are planning for your first audit – the year ending 30 June 2016. Gravel Manufacturing is a manufacturer of electronic smoke alarms and electronic security systems and is part of the broader electronics industry. Their operations consist of a head office and factory in the Sydney suburb of Alexandria. They have distribution outlets in each major Australian city and sales agents throughout South East Asia, the UK and USA. There has been a large amount of capital expenditure on the Sydney factory over the past two years. Your research shows that the smoke alarm and security industry is highly volatile and competitive, with heavy discounting by competitors and a prevalence of lower quality products. The industry is also affected by changes in technology, government regulations and health and safety legislation in each of the different areas in which the company operates. In discussions with the Sydney productions manager, Mr Ye, you discover he has a difficult job ascertaining production levels in a volatile market and he is often concerned at inventory fluctuations caused by over or under production of alarm and security systems.

Gravel Manufacturing operates a senior management incentive scheme where senior executives are allocated a percentage of net profit after tax. Gravel also has a long term mortgage loan with a foreign bank that requires them to maintain certain financial ratios. Breach of any of the loans will result in the bank calling in the loan within 24 hours. The requirements are that the current asset ratio must be greater that 1.5:1 and the quick asset ratio must be greater than 0.8:1.

Income Statement 

30/6/2016

30/6/2015

30/6/2014

$(000)

$(000)

$(000)

Sales

 27,740

 25,280

 22,936

Less: Cost of goods sold

 20,104

 20,800

 18,200

Gross Profit

 7,636

 4,480

 4,736

Interest expense

 500

 260

 240

Other expenses

 460

 1,580

 2,040

Profit Before Tax

 6,676

 2,640

 2,456

Income tax expense

 1,520

 1,100

 800

Profit After Tax

 5,156

 1,540

 1,656

Balance Sheet 

Current Assets

Cash

100

0

1,600

Receivables

3,890

2,960

1,920

Inventory

3,720

2,680

1,724

Other assets

1,160

0

0

Total Current Assets

8,870

5,640

5,244

Non Current Assets

Property Plant & Equipment

5,780

5,200

3,812

Total Assets

14,650

10,840

9,056

Current Liabilities

Overdraft

0

400

0

Payables

1,910

3,100

3,580

Other Creditors

278

224

100

Provisions

510

1,720

1,520

Total Current Liabilities

2,698

5,444

5,200

Non Current Liabilities

Loans

3,000

1,600

1,600

Total liabilities

5,698

7,044

6,800

Net Assets

8,952

3,796

2,256

Shareholders Equity

Issued capital

200

200

200

Retained profits

3,596

2,056

400

Profit/loss for year

5,156

1,540

1,656

Shareholders equity

8,952

3,796

2,256

Required: 

a) Calculate the following ratios for 2016, 2015 and 2014:• Gross profit ratio• Return on total assets• Net profit ratio (before tax)• Inventory turnover• Receivables turnover• Current ratio• Quick ratio• Times interest earned (before tax)

Note: assume inventory and receivables balances for 2013 are the same as for 2014 (12 marks) 

(b) Identify and explain any going concern issues you have identified. (2 marks)(c) Identify the four accounts that you consider most at risk of misstatement. Use the background information, financial statements and analytical results to justify your choices. (12 marks)(d) For the accounts identified in (c) explain if the accounts are likely to be overstated or understated and identify the key assertions that would be the focal point for the audit. Justify your choice of assertion. (9 marks)

You can using the following format to present the ratios for part (a)

Ratio

Ratio Formula

2016

2015

2014

The following table format can be used to answer parts (c) and (d). 

Account at risk of misstatement and justification

Overstated or understated

Assertion(s) at risk

Justification

Question 4 (20 marks)

You have been involved with the audit of River Pty Ltd. – a manufacturer of household cleaning chemicals. As part of your interim review you have completed a ‘walk through’ of the procedures involved with the purchases and payments cycle. The following is a summary of the procedures you have documented on your file: 

• The warehouse manager is responsible for placing orders for chemical ‘ingredients’. Because of the bulk quantity discounts, he will usually place an order for three months of ingredients when there is one month of ingredients left. He is able to determine how much the company uses in manufacture each month by reviewing the inventory records held at the warehouse.
• To order, the warehouse manager contacts any of the approved suppliers and places an order over the phone. No record is kept of the conversation, nor does the warehouse manager require any approval. To make sure he doesn’t reorder in error he ‘ticks’ the inventory ledger and writes the date of order next to the product number.
• When goods are received the warehouse assistants check the delivery note against the ingredients coming in and then lets the deliverer pump the ingredients into the company’s storage tank. At no point do they check the actual quantity received. A warehouse assistant then gives the delivery note to the warehouse manager. The warehouse manager will then post a journal entry to the inventory system by keying the entry into the terminal.
• When the journal is accepted, the computer will generate a journal number. (Note: the journal posted by the system is DR Raw materials inventory; CR Creditors). The warehouse manager writes the journal number onto the delivery note and sends it to the accounts payable clerk at head office. The accounts payable clerk files the note by supplier.
• The accounts payable clerk at head office receives all supplier invoices. On receipt of the invoice the clerk checks the details to the delivery note received from the warehouse. If there are no discrepancies she will prepare a cheque requisition for the mount of the invoice and forward the cheque requisition, with the invoice and delivery note attached, to the financial controller for authorisation. If the payment is over $20,000 the financial controller must forward the requisition to the managing director for authorisation.
• The financial controller and/or managing director signs the cheque requisition to indicate authorisation and forwards the documentation to the banking clerk who keys the payment into the general ledger (the journal posted by the system is DR Creditors; CR Bank). Once the journal is accepted by the system, the system generates a journal number which the banking clerk writes on the cheque requisition. She then files the cheque requisition together with supporting documentation by cheque requisition number.
• All cheques are printed and signed (counter stamped) by the computer. When they have been printed they are returned to the banking clerk who checks the details and sends them to the supplier.

Required:

a) Identify four strengths and two weaknesses in the purchases and payments system and justify your selections. (12 marks)

b) For each strength identified in part a), indicate one test to be performed to test the controls (4 marks)

c) For each weakness identified in part a), identify a test which can be performed to minimise this risk (4 marks)

Rationale

Covering material from topics 1 to 5, this assessment has been designed to develop your abilities to:

• explain the role of assurance services and providers;
• identify and evaluate the influences on the audit processes, including the Corporations Act, Common Law, Australian and International professional standards, professional bodies and public expectations within a global market;
• appraise the client’s business environment and apply the risk model;
• explain, select and apply procedures involved in the audit process; and
• appraise the expanding scope of auditing in the current international business environment.

Marking criteria

Criteria

High Distinction

Distinction

Credit

Pass

Q1. Appraisal of the expanded role of auditors into providing assurance for sustainability statements (LO1, LO5) (15 marks)

The components of the sustainability statements for the selected Australian company separately identified and succinctly summarised with a very clear articulation of concepts and link to relative guidelines used by the company in preparing the report. The type of audit opinion provided is correctly identified. Four additional areas where auditors provide assurance correctly identified. Description of roles and identification of issues indicates insightful understanding of the expanding nature of assurance services.   

The components of sustainability statements for the selected Australian company separately identified and succinctly summarised with a clear articulation of concepts and link to relative guidelines used for preparing the report. The type of audit opinion provided is correctly identified. Four additional areas where auditors provide assurance correctly identified. Description of roles and identification of issues indicates clear understanding of the expanding nature of assurance services.

The components of sustainability statements for selected the Australian company separately identified and summarised with a clear articulation of concepts and link to the relative guidelines used for preparing the report. The type of audit opinion provided is correctly identified. Four additional areas where auditors provide assurance correctly identified. Description of roles and identification of issues indicates an appropriate understanding of the expanding nature of assurance services.

The components of sustainability statements for selected the Australian company separately identified and used appropriately. The guidelines used for preparation of the report and/or type of audit opinion while identified may not be correct. Four additional areas where auditors provide assurance identified but some are more relevant than others. Description of roles and identification of issues indicates a tentative understanding of the expanding nature of assurance services.

Q2. Identification and evaluation of the ethical influences on the audit process (LO2) (15 marks)

Provides a comprehensive synthesis and critical evaluation of the ethical issues in the scenario, using the AAA model.

Provides an advanced synthesis and critical evaluation of the ethical issues in the scenario using the AAA model.

Provides a competent synthesis and critical evaluation of the ethical issues in the scenario, using the AAA model.

Provides a basic evaluation of the ethical issues in the scenario. Some aspects of the AAA model overlooked or not well utilised.

Q3. Appraisal of the client’s business environment and application to the audit risk model (LO3) (35 marks)

All analytical calculations completed without flaws. Well supported and coherent explanation regarding going concern and for the identification of four (4) accounts at risk of misstatement. Response demonstrates an insightful understanding of the relationship between analytical procedures, areas of risk and key assertions.

All analytical calculations completed, with only minor errors. Well constructed explanation regarding going concern and for the choice of four (4) accounts at risk of misstatement. Response demonstrates a clear understanding of the relationship between analytical procedures, areas of risk and key assertions.

All analytical calculations completed, with only minor errors. Competent explanation regarding going concern and for the choice of four (4) accounts at risk of misstatement. Response demonstrates an understanding of the relationship between analytical procedures, areas of risk and key assertions.

One or two analytical calculations overlooked, all other calculations are correct or contain only minor errors. Basic explanation regarding going concern and for the choice of four (4) accounts at risk of misstatement. Response demonstrates a limited understanding of the relationship between analytical procedures areas of risk and key assertions.

Q4. Appraisal of the client’s internal control environment and application to the audit risk model (LO3). Explanation for the selection of tests of control in the audit process. (LO4)  (20 marks)

Well supported and coherent explanation for the choice of four (4) strong internal controls and tests of control. Well supported and coherent explanation for the choice of two (2) control weaknesses that most significantly threaten the client’s business risk in relation to purchases and payments of inventory. Likely impact on risk and tests minimising risk thoroughly articulated.

Well constructed explanation for the choice of four (4) strong internal controls and tests of control. Well constructed explanation for the choice of two (2) control weaknesses that most significantly threaten the client’s business risk environment in relation to purchases and payments of inventory. Likely impact on risk and tests minimising risk well articulated.

Competent explanation for the choice of four (4) strong internal controls and tests of control. Competent explanation for the choice of two (2) control weaknesses that may threaten the client’s business risk environment in relation to purchases and payments of inventory. Likely impact on risk and tests minimising risk clearly articulated.

Basic explanation for the choice of four (4) strong internal controls and tests of control. Basic explanation for the choice of two (2) control weaknesses that may threaten the client’s business risk environment in relation to purchases and payments of inventory. Articulation of likely impact on risk and tests minimising risk lacking some clarity.

Professional communication in accordance with APA 6th edition style. (15 marks)

Excellent written expression with very clear articulation of ideas and concepts. Superior grammar and spelling skills. References presented show evidence of significant research and are used accurately in accordance with APA (6th ed.) requirements. 

Consistently clear and concise expression of ideas. No spelling errors and only minor grammatical errors. References presented show evidence of significant research and are used accurately in accordance with APA (6th ed.) requirements.

Expression of concepts is clear and concise. Very few spelling and/or grammatical errors. References presented show evidence of reading outside the subject resources and are used accurately in accordance with APA (6th ed.) requirements.

Some inconsistency in sentence structure. Clarity of expression could be enhanced by some revision. Some spelling errors and/or poor grammar. At least two references included and mostly used in accordance with APA (6th ed.) requirements.

Your assignment will be marked out of 100 which will then be converted to a mark out of 30.