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BBAC601 Auditing and Assurance PART QUESTION POSSIBLE ACTUAL PART B 1- 3 45 TOTAL 45 SPECIAL INSTRUCTIONS TO STUDENTS: · This is an ONLINE CLOSED BOOK exam. Any unauthorised materials/notes should be removed from your room prior to exam start. There should be no sticky notes on your computer or on the floor. There should be no handwriting on your body. · This paper consists of 3 questions. Students should read the questions carefully. · There are blank spaces for each question. Answers must be typed in the space provided. Tables/Templates are inserted in the blank space to assist you in answering questions faster. · You are required to submit your answer before the finishing time. To submit your answer, click on “Finish Attempt” on the bottom right corner in your Moodle site, and then Submit ALL and Finish. If you do not submit your work, Moodle is set up to automatically submit your work at the finishing time. · You are not allowed to speak once the exam starts. If you have any questions, please raise your hand. · You should stay in sight of the webcam for the duration of the exam. · You are not allowed to leave the room without seeking permission from the exam invigilator. Toilet breaks are permitted but permission must be sought from the invigilator. 2 Question 1: 1.1. The following are independent and material situations: a) An auditor hires an actuary to assist in corroborating a client’s complex superannuation calculations concerning accrued superannuation liabilities that account for 35 percent of the client’s total liabilities. The actuary’s findings are reasonably close to the client’s calculations and support the financial report. b) An auditor is engaged to audit a client’s financial report after the annual physical inventory count. The accounting records are not sufficiently reliable to enable the auditor to become satisfied as to the year-end inventory balances. ( marks) Required: For each of the above situations, indicate the appropriate type of audit opinion you would issue, as well as the reasons for issuing the particular audit opinion. 1.2. In the audit of Seaholm Corporation (Seaholm), the auditor has collected the Aged Trial Balance (ATB) containing a list of customers and their corresponding amount they were owing to Seaholm at the end of the financial year under the audit (all amounts are in $). The auditor has sent confirmation letters to selected customers and the amount confirmed by each customer is shown in the Table. Account number Customer Balance as per ATB (30/6/2015) Balance confirmed by customer Difference 10111 Alan Co 500,000 500,000 0 11987 Chels Ltd 100,000 100,000 0 12678 Fictional Publisher Ltd 23,705 0 23,705 (*) 26598 Brown and White Co. Ltd 2,000,000 2,000,000 0 30012 Crist Enterprise 620,000 620,000 0 44451 Meay Co.Ltd 20,000 20,000 0 48967 Hiace Co.Ltd 15,000 NA NA 50982 Swin Co.Ltd 0 NA NA 51234 Melb Co, Ltd 21,295 NA NA 62358 Blockbuster Publisher Ltd 0 NA NA 68123 Nature Lovers Pty Ltd 13,309 NA NA 75263 Serenity 0 NA NA 91112 Home Press Pty Ltd 0 NA NA 99882 Balarat Copany 2,000,000 2,000,000 0 Total 5,313,309 5,289,604 23,705 NA: confirmation letters were not sent to these customers. (*) Note: I (i.e. The auditor) have discussed with client and the client admitted that Fictional Publisher Ltd paid the whole amount of $23,705 before the year end, but client forgot to record the transaction. Required: (a) You are asked to review the audit findings and suggest the types of auditor’s opinion in this circumstance. State action (if any) and the auditor’s opinion if your auditor-in- charge has set a materiality level of $27,000 for the accounts receivable account, given that there is no other misstatement discovered?(marks) (b) Would your decision in (a) change if the set materiality was $22,000(marks) (Total 15 marks) Question 2: Following is the extracted description of sales and cash receipts for Baby’s Shop, a store dealing in expensive babies’ clothes. Sales are for credit only, using the store’s own credit system rather than credit cards. Customer orders are received and checked by an order clerk to make sure all the information is correct and goods is in hand. Orders that satisfy all criteria result in the production of a sales order that lists the goods ordered. The sales order is then forwarded to the credit supervisor, who approves credit sale based on an approved list of criteria and notes his approval on the sales order. The approved sales order will be sent to the sales department. In the sales department, each sales clerk has their own sales book. Sales clerks prepare the sales invoices in four copies, which are not pre-numbered. The original copy is sent to customer, the second one is given to James, the accountant, and the third one is given to the supervisor. The fourth copy is retained by the sales clerk in the sales book. Each clerk summarises their sales each day on a daily summary form, which is used to calculate and record employees’ sales commissions. James, who also receives payment from customers, records the sales transactions into the firm’s computerised accounting system based on the copy of invoice that he is given. The accounting provides a complete printout of all input and summaries. The accounting summary includes sales by sales clerk and total sales. Jenny compares this output with the supervisor’s and sales clerks’ summaries and reconciles all differences. The computer also updates accounts receivable master file on a daily basis. Required: Based on the information available above: (a) Critically evaluate the strength of the client’s internal control over the sales and collection cycle by identifying and explaining THREE (3) internal control activities present in the system.(marks) (b) For each internal control listed in (a), identify a financial report assertion that the control addresses.( marks) (c) Critically evaluate the weaknesses of client’s internal control through the identification and explanation of one (1) weakness in the sales system at Baby’s Shop.( marks) (Total 15 Marks) Question 3: 3.1. In the audit of Reliable Printers Ltd. (RPL), you have collected the extracted financial statements as below: Statement of financial position (extracted) Current assets 2014 $2015 unaudited $ Accounts receivable 4 320 000 5 073 309 Gross value 4 530 000 5 313 309 Allowance for doubtful debts (210 000) (240 000) Income statement (extracted) Revenue from operations 2014 $2015 unaudited 37 699 500 43 459 500 Cost of sales 31 620 000 36 855 000 Gross profit 6 079 500 6 604 500 (Adapted from Auditing and Assurance Services in Australia 6e by Gay & Simnett © McGraw- Hill Education (Australia) 2015) Assume you are a new auditor in this field and are asked by the auditor-in-charge to suggest the suitable substantive tests for various accounts. Required: 1. In relation to sales account:(marks) a. The auditor-in-charge has indicated to you that your team needs to focus on ensuring that “There are no fictitious sales transactions recorded in the year so that the sales is not overstated”. Which management assertion is addressed and which is an appropriate substantive test to confirm this. b. The auditor-in-charge has indicated to you that your team also needs to focus on ensuring that “All sales transactions are recorded so that the sales is not understated”. Which management assertion is addressed and which is an appropriate substantive test to confirm this. c. The auditor-in-charge has indicated to you that your team also needs to focus on ensuring that “The recorded sales only consist of the sales occurring in the 2015 financial year and sales transactions occurring in 2016 financial year are recorded in the 2016 financial year”. Which management assertion is addressed and which is an appropriate substantive test to confirm this. d. The auditor-in-charge has indicated to you that your team also needs to focus on ensuring that “The amount of sales transactions is recorded correctly”. Which management assertion is addressed and which is an appropriate substantive test to confirm this. 2. In relation to account receivable account:(marks) a. The auditor-in-charge has indicated to you that your team needs to focus on ensuring that “The amount listed on the account receivable trial balance at the year-end is the actual amount that customers were owing to the client”. Which management assertion is addressed and which is an appropriate substantive test to confirm this. b. The auditor-in-charge has indicated to you that your team needs to focus on ensuring that “Account receivable is stated at the net realisable value in accordance with accounting standards”. Which management assertion is addressed and which is an appropriate substantive test to confirm this. 3.2 You have been approached by your client Natural Oils Ltd to undertake the following engagements: The Australian Government has introduced the Competition and Consumer (Industry Codes— Natural Cosmetics) Act 2017 (the Act), which is effective for the year ended 30 June 2018. The Act introduces a code covering the relationship between retailers and their direct suppliers. As a cosmetics retailer, Natural Oils is required to comply with this Act. Under the Act, the cosmetics retailer must enter into a supply agreement. The agreement must be in writing and be retained by the retailer. In addition, the retailer must submit a report to the Australian Consumer and Competition Commission (ACCC) detailing its compliance with the code. The Act states that the report must be reviewed by an assurance practitioner. Required: With reference to auditing and assurance standards, write a letter addressing the Board of Director of Natural Oils advising them of the appropriate type of assurance engagement that you should undertake for each of the situations above and the level of assurance provided, the benchmark that the auditor should use.(marks) (Total 15 marks) END OF EXAM