For each of the following statements, indicate whether the statement is TRUE or FALSE, and provide a REASON for your answer. (4 marks each, NO mark if no reason supplied).

(1) An effective audit committee facilitates the independence of the internal and external auditors.

(2) For large audit clients, the auditor should always try to rely mainly on substantive procedures.

QUESTION 2 (16 Marks)

Audit Procedures

1. Perform an accounts receivable circularisation.

2. Review a sample of repairs and maintenance expenditure for the year to ensure that it does not include any items that are capital in nature.

3. Predict interest paid on the bank loan is correct by multiplying the interest rate by the outstanding principal for each month of the year and compare to recorded      interest paid.

4. Send a letter to the bank to confirm a loan taken out by the company during the year.

5. Attend the year-end stocktake and perform test counts on a sample of stock items.

6. Read the solicitors representation letter and ensure that all contingent liabilities have been included in the notes to the accounts.

7. Test all invoices received for one month after the year-end to ensure that they do not relate to the current year.

8 Calculate the accounts receivable turnover and compare with previous year’s turnover.

Required

a) For each test, indicate what category of audit procedure to which it relates (per ASA 500).

b) Give one assertion to which each test relates.

QUESTION 3 (20 Marks)

For each of the following situations identified for your audit client, determine the: (a) nature of the risk

(b) level of the risk

(c) the relevant account at risk of misstatement and associated assertions (Note: present your response in tabular format)

1. The client recently entered a new line of business, selling product lines not sold before.

2. Inventory related to this new line is manufactured and imported from Indonesia, with payments made in USD.

3. Base remuneration for management is below industry average, however the bonus scheme based on company profit far exceeds industry average.

4. During the year the company sold a number of its warehouses, but is leasing them back from the new owners

QUESTION 4 (15 marks)

Prior to the appointment of Burberry Partners as the auditor of WeCare for the 2019 financial year, some preliminary analysis has identified that Burberry was previously engaged by WeCare to value its intellectual property. The consolidated balance sheet as at 30 June 2019 included intangible assets of $30 million, which were valued by Burberry on  1 March 2019 following WeCare’s acquisition of HealthyGlow. The intangibles are considered material to WeCare.

a) Discuss the primary concern that Burberry Partners would need to consider prior to accepting the engagement? (5 marks)