Question 1     (14 marks)

You are the auditor of Southern-cross Limited, a medium sized listed Australian company. Answer all of the questions below.  Assume each situation is independent of the other situations.

(1) Many of the audit client’s senior managers had to go into self-quarantine during the year and no one performed the internal controls these managers were normally responsible for.

(2) The board told the Chief Executive Officer (CEO) that his employment contract will not be renewed unless the company turns its net loss into a profit this year.

(3) The audit client has been fined a few times for under-reporting profit for tax purposes.

(4) The auditor found from chatting to several employees that the audit client’s cashier has a gambling habit.  The cashier often helps record cash related transactions when the accounting department is short of staff.

Required:

(i)    The three elements of the fraud triangle are: (A) incentives/pressures, (B) opportunities, and (C) attitudes/rationalisation.  For each of the independent situations above, identify  the most relevant element of the fraud triangle (e.g., write “B” if you think the answer    is “opportunities”) and indicate whether the situation results in higher or lower fraud

risk (i.e., write “higher” or “lower”).  No additional explanation is needed.  If fraud risk is not affected, write “N.A.”, i.e., not applicable. (4 marks)

(ii)   Analyse how each situation affects the components of the audit risk model and the   amount of audit evidence required. E.g., whether there is an increase or decrease in  inherent risk and briefly explain why.  Marks are only given if correct explanations are provided. You do NOT need to explain why a situation does NOT affect a particular component of the model. (10 marks)

Question 2      (16 marks)

For each of the following independent situations: (a) identify the most relevant control

activity, (b) identify the most relevant general audit objective(s) for the control activity, (c) design an appropriate test of control for the control activity, (d) choose one of the general   audit objectives identified in (b) and design an appropriate substantive test for it.

Please note: Choose a substantive test that produces reliable evidence.  Do not use analytical procedures unless an accounting estimate is involved.  (16 marks)

(1)  Accounting staff checks the details in sales invoices and shipping documents before recording sales.

(2)  Small and expensive inventory items are displayed in store in locked glass cabinets.

(3)  To write down the value of inventory, approval from the chief accountant is required.

(4)  When the audit client’s computerised accounting system processes a purchase  transaction, it automatically checks whether the supplier matches the approved suppliers in the master file.

Question 3     (16 marks)

Answer all of the following questions.

(1) State whether sample size for substantive testing would increase or decrease in response to the following changes.  No additional explanation is needed. (2 marks)

a)  Audit risk decreased.

b)  Preliminary judgement about materiality increased.

c)   Substantive analytical procedures reveal no unexpected fluctuations.

d)  Results from test of controls show control risk is higher than initial assessment.

(2) Which of the following sample selection methods cannot be used with statistical

sampling in a financial statement audit?  Use A, B, C etc. to answer this question.  (2 marks)

A.  Block sample selection.

B.  Random sample selection.

C.  Directed sample selection.

D.  PPS (Probability proportional to size) sample selection.

(3) The audit client is a listed company with a net profit of $20 million and total assets of $500 million.  Preliminary judgement about materiality is set to 5% and performance  materiality is 50%.  Answer the following questions. (6 marks)

(a) What is the dollar amount of preliminary judgement about materiality?

(b)  What is the dollar amount of performance materiality?

(c) If audit tests show that total unadjusted misstatements is $200,000, what is your

likely conclusion about whether the financial report is materially misstated?

(d) If audit tests show that total unadjusted misstatements is $750,000, what is your

likely conclusion about whether the financial report is materially misstated?

(e) If audit tests show that total unadjusted misstatements is $1.4 million, what is your likely conclusion about whether the financial report is materially misstated?

(4) For the following independent events, assume that each has a material effect on the  financial statements.  The financial year of your audit client Brighton Ltd ended on 31 December.  Your audit report was signed on 23 February 2022 and the financial statements were issued to the shareholders on 3 March 2022.  Listed below are events that were discovered after the end of the financial year.

(a)  11 February 2022:  A major customer of your audit client had gone bankrupt on 5 January 2022 after suffering continuing losses due to the Coronavirus pandemic.

(b) 26 February 2022:  The audit client announced that it will soon close several stores in major cities and focus more on online sales.

Required: For each of the two events above, explain the auditor’sresponsibilities and the correct accounting treatment for the event. (6 marks)

Question 4      (14 marks)

Answer all of the following questions.

(1) Classify the audit actions below by audit stage.  A = Audit planning stage. B = Audit

testing stage.  C = Audit completion stage.  For example, if you think activity (a) below belongs to the audit planning stage, write: (a) A. (4 marks)

a)    Perform tests of details of balances.

b)   Give the audit client the management letter.

c)    Assess the operational effectiveness of the audit client’s internal control system.

d)    Set preliminary judgement about materiality.

e)    Perform a technical review.

f)    Perform substantive analytical procedures.

g)   Assess the design effectiveness of the audit client’s internal control system.

h)   Ask the audit client to sign the engagement letter.

(2) (6 marks) For the following audit procedures,

(a) identify whether it is a (A) test of control, (B) substantive test of transaction, or (C) test of details of balances.  Write your answer as A, B or C instead of the full audit test name.

(b) state the main general audit objective(s) that is (are) being satisfied.  No explanation is required unless you believe there is a need to justify your answer.

(i)     Account for the sequence of purchase orders.

(ii)    Select a sample of land and buildings included in the balance sheet total and check whether there are title deeds or purchase contracts for them.

(iii)   Vouch a sample of cash payments from the accounting records to see if supporting documents are present.

(iv)   Trace a sample of cash receipts from source documents to the accounting records

to see if the date and amount are recorded correctly.

(v)    Use audit software to foot (add) the accounts payable trial balance and compare the balance with the general ledger.

(3) Answer all of the following questions about audit liability. (4 marks)

Indicate whether the following statements are true ( T ) or false ( F ).  For example, if you think the first statement is true, write (A) T.

A.  Existing shareholders of the audit client can sue the auditor using contract law.

B.  Existing creditors of the audit client can sue the auditor using Australian Consumer Act.

C.  The audit client needs to establish a relationship of reliance with the auditor under the tort of negligence.

D.  The case Pacific Acceptance v Forsyth (1970) is the legal authority for the requirement of relationship of reliance.