Question 1 (15 marks) â??Today the worldâ??s largest companies in all sectors and regions disclose t
Question 1 (15 marks)
“Today the world’s
largest companies in all sectors and regions disclose their sustainability
performance and impacts to some degree. The KPMG Survey of Corporate
Responsibility Reporting 2013 concluded that “Almost all of the world’s largest
250 companies report on Corporate Responsibility (CR)†and that “Reporting is
now the norm across all these sectors, with at least 62% of companies in every
sector producing a (CR) reportâ€
Source: (Global
Reporting Initiative, 2015, Sustainability and Reporting Trends in 2025 –
Preparing for the Future).globalreporting.org/resourcelibrary/Sustainability-and-Reporting-Trends-in-2025-1.pdf”>https://www.globalreporting.org/resourcelibrary/Sustainability-and-Reporting-Trends-in-2025-1.pdf
Required:
Conduct an internet search for one (1) ASX listed company that issues a
sustainability report and:
(a) provide a summary of the structure and contents of the company’s
disclosures, including the guidelines used by the company in preparing their
report. (4 marks)
(b) indicate if the report has been audited or reviewed by an auditor and the
type of assurance they have provided. (3 marks)
(c) Identify four (4) areas in addition to sustainability reporting where
auditors now provide assurance. (4 marks)
(d) Briefly describe two (2) of the areas identified in c) and the auditors
role in these areas. Include any issues or difficulties faced by the auditor in
your response. (4 marks)
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!â€
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.
