Question 1

Kangaroo Vacations Pty Ltd (Kangaroo) is a resort company based on the Great Barrier Reef. Its operations include boating, surfing, diving and other leisure activities, a five-star resort that provides luxurious beachside water sports and a very high standard seafood catering service.

James and Sandy Morris own the majority of the shares in the Morris Group, which controls Kangaroo. James is the chairman of the board of directors of both Kangaroo and the Morris Group. Sandy is a director of both companies as well as the CFO of Kangaroo.

In July 2021, James Morris approached your audit firm, Edwin accounting firm, to carry out the Kangaroo audit for the year ended 31 December 2021. Morris has not been audited before but this year the audit has been requested by the company’s bank and a new private equity investor group, which has just acquired a 30 per cent share of Kangaroo. You know that one of the partners at Edwin accounting firm went to school with James and has been friends with both James and Sandy for many years.

Morris  group  wants  to  set  up  an  audit  committee  for  the purpose  of a  good  corporate governance. The audit committee meets semi-annually. It is chaired by a retired CFO David Johns who knows the company well because he had served as CFO of Morris Group. The other two are the chamber members of commerce. One is the president of a local manufacturing firm and the other is a retired partner at a local accounting firm.

Kangaroo  employs  30  full-time  staffs.  These  workers  are  employed  in  administration, accounting, catering, cleaning and hotel/restaurant duties. During peak periods, Kangaroo also uses part-time and casual workers. These workers tend to be travelers visiting the Great Barrier Reef who are looking for short-term work to help pay their travelling expenses.

James and Sandy have a fairly laid back management style. They trust their workers to work

hard for the company and reward them well. James tells you that some accounts staff enjoy their jobs so much they have never taken any annual leave, and hardly any workers ever take sick leave.

Morris group’s management is considering international expansion in the coming year and purchased one land in Thailand at a cost of $100 Million. There are no further plans for developing the location due to political instability. Recently unfortunately there were some problems with the quality of some of the seafood served in the restaurants’ boating festival week, which caused customers being taken ill and a report in a local newspaper.

The effects of global warming on the Great Barrier Reef have been investigated by a Royal Commission. The Royal Commission’s report reveals that climate change is likely to cause increasing damage to the coral reefs and devastating tropical storms over the next 10 years.

Required:

1.    Identify ALL significant threats to independence for Edwin accounting firm in accepting the audit of Kangaroo, given that one partner in the accounting firm was the schoolmate of James and has been friends with James and Sandy for many years.                  (2 marks)

A) Self-interest threats

B) Familiarity threat

C) Intimidation threats

D) All of the above

2.    Which of following safeguards could Edwin accounting firm implement to reduce the above threat(s).       (2 marks)

A) Having an appropriate reviewer review the relevant audit work performed

B) Structuring the partner’s responsibilities to reduce any potential influence over the audit engagement

C) Documenting the policies that relate to this type of threat to independence

D) All of the above

3.    Which of the following is an indicator of good corporate governance in setting up an audit committee of Morris Group.  (2 marks)

A) Meeting twice a year for all members of audit committee

B) A retired CFO of Morris Group in audit committee

C) A president of a local manufacturing firm

D) A retired partner at a local accounting firm

4.    For an audit, the auditors from Edwin accounting firm can control:                        (2 marks)

A) Inherent risk.

B) Control risk.

C) Financial risk.

D) Detection risk

5.    Internal control for Morris Group is a process that is not:                                      (2 marks)

A) The responsibility of those charged with governance.

B) Designed and approved by external auditors after consultation with the internal auditors.

C) Designed and implemented to address identified business risks that threaten the achievement of the entity’s objectives.

D) Designed to provide reasonable assurance about the achievement of the entity’s. objectives with regard to reliability of financial reporting, effectiveness and efficiency of operations and compliance with applicable laws and regulations.

6.    Using the above information regarding Kangaroo’s operation and its environment, evaluate the business risks facing the Kangaroo.                          (5 marks * 8=40 marks)

Question 2

Hollywood & Co (Hollywood) is an international Chartered Accounting firm with branches in many  countries  and which provides  a range of audit  and  assurance  service to its  client. Hollywood has built up its audit work over the last five years. It has obtained new clients each year and many of its existing clients have grown in size. It has clients in many industries, but none of its clients are in the mining industry. At this month’s planning meeting, the audit partners will consider whether they will tender for audit work for a potential new client that has several divisions including oil and gas, gold mining and steel fabrication.

The company name of the new client is BaoSteel & Mining manufacturing company (B&M). This is a family owned company funded and managed by Kampani Family. The chief executive officer of the company, Mr Nimesh Kampani approached Hollywood’s engagement team and you are the engagement manager to meet up with Nimesh. Nimesh mentioned that he is looking for a firm of auditors who will provide a competitive audit fee and hoping that the fee will be quite low. In previous years a small local accounting firm did assurance review on B&M. Now Nimesh wants to change to a global assurance firm to fit for future business strategy. At the same time, Nimesh mentioned the company is growing rapidly and needs strategy advice that will be paid in an additional service fee not relating to the audit fee. The audit fee is linked to company’s success in expanding oversea as a result of the audit firm advice.

Mr Nimesh Kampani is a dominant CEO and doesn’t allow the employees to object to his opinion. The son of Nimesh is going to an American private school in the coming year and you found there are several large money remittances from B&M to a private US account since March of this year. The cash in B&M is very tight. You have been made aware through various conversations with employees that there is now  an extreme focus on maximising profits through boosting sales and cutting costs. The attitude towards compliance with accounting regulations has changed, with greater emphasis on pleasing the CEO than taking care to avoid breaching either internal policies or external regulations. The company is going to make a loan from a local bank for further expanding operation and would like to have an audit report within three months of the year end.