ANSWER ALL FOUR (4) QUESTIONS

[Total Marks = 60 Marks]

QUESTION 1

(15 Marks)

You are the external auditor for ABCM Pty Ltd, a merchandising company. You have performed the following audit procedures:

(a) A random sample of creditors was selected from the invoices and reconciliations

(where appropriate) and agreed to the accounts payable ledger.                       (3 Marks)

(b)  Developed  a  simple  spreadsheet  model  to  enable  the  recalculation  of wages expenses.

(3 Marks)

(c) Attended each monthly stock-take, selecting a sample of 130 items from the stock- sheets and agreeing them to the physical stock in the warehouse.                     (3 Marks)

(d) Gathered external confirmation from the financial controllers of two debtors of   ABCM Pty Ltd, regarding a total outstanding amount of $60,000 at balance date.

(3 Marks) (e) Asked one of your assistants to vouch the legal title documents pertaining to ABCM

Pty Ltd’s machineries in the factory.                                                                 (3 Marks)

Identify the key assertion that you are most likely testing with each of the above procedures and provide an explanation for your answer.

QUESTION 2

(15 Marks)

The head office of Bright Lights Ltd, wholesalers of electrical equipment, has asked you to review the system of control over cash collection at the Victorian branch because it suspects that irregularities are taking place. The branch is the largest single outlet of the company and has substantial annual sales invoiced by the branch.

Enquiries reveal the following procedures for invoicing sales and collecting cash. (Cash refers to currency and cheques).

1.   There are two invoice sets that are used for cash sales and credit sales respectively.

2.   When payment for cash sales is received by the cashier, one copy ofthe invoice is stamped as paid and filed alphabetically, and the other is given to the customer.

3.   Credit sales invoices are sent to the customers.

4.   Mail is opened by the secretary to the credit controller, who passes any cheques to the credit controller for his review, without recording the amounts received.

5.   The credit controller gives the cheques to the cashier by depositing them in a tray on the cashier’s desk.

6.   The cashier then makes a listing of the cheques, which is used by the credit controller for posting to the accounts receivable ledger.

7.   The cheques from credit customers and receipts from cash sales are banked daily by the cashier, except for once a week when sufficient money is retained to reimburse petty cash.

8.   The credit controller posts remittances to accounts receivable using a computerised accounting system and verifies the cash discount allowable.

9.   The credit controller obtains approval from head office to write off bad debts. Any subsequent  remittances  received  in  respect  of these  accounts  are  credited  to ‘sundry income’ .

Required

(a) Describe control weaknesses in the accounting for cash receipts.           (7 Marks)

(b) Suggest improvements in internal control to prevent irregularities in the

collection of cash.                                                                                     (8 Marks)

(Total 15 Marks)

QUESTION 3

(15 Marks)

Consider each of the following independent and material situations. In each c a s e , assume that the financial report has been prepared and audited for the year ended 30 June 2010.

(a) Range Ltd, (Range) holds several parcels of land in suburban Sydney that are currently  zoned non-residential. Range has valued land  on a fair value  basis under AASB 116 Property, Plant and Equipment. This year,  however,  Range revalued the land by adopting a registered valuer's estimate of the market value of the land. This estimate included a substantial increase in value based on the general community expectation that the land will soon be rezoned for residential use.

(b) A part  of Prize  Ltd.'s operations  are in  South America.  Recent  government changes have  made  it  impossible  for  you  to  verify  the  key  accounts  of inventory, property, plant and equipment and cash and related income statement balances.

(c) Stonehouse  Ltd.'s  annual report includes  a detailed  graph  showing  sales and profit figures  for the past 10 years.  However,  there  are some inconsistencies between the graph and the figures in the audited financial report. Management does not want to change the graph because it would involve increased printing costs.

(d) Connect    Ltd.    (Connect)    is   a    subsidiary    of   a   Hong-Kong-based telecommunications  company,  Link  Ltd.  (Link).  Connect  has  suffered significant losses during its five years of operation. In previous years this did not pose a problem from an audit point of view, as  Link  pledged sufficient cash each year to cover Connect's annual reporting costs. However, Link is only able to pledge cash to cover three months of Connect's 2010  operating costs. Connect has no realistic prospect of obtaining finance from any other source. However, the directors are still hopeful of finding a financier and so have not mentioned the problem in the financial report.

(e) The audit of Jones Ltd. Was extremely difficult, as the client did not maintain appropriate books and records during the year. Although the statutory registers were maintained,  the accounting  records were not updated  for the first nine months  of the year,  as the  company  was  without an accountant  during  this period.  An  accountant was  employed  in April  and  has tried  to reconstruct records  from the details of receipts  and  payments  available. However,  the accountant  has been  unable  to reconcile  the bank  account  and you  are not satisfied that all transactions that occurred during the year are reflected in the

financial report.

Required:

Assume that no adjustments are made. For each situation, identify the type of audit opinion required and explain the basis of your answers. (Total Marks: 5 X 3 Marks = 15 Marks)

QUESTION 4

(15 Marks)

Your client is Queenscorp Ltd, a diversified business operating throughout Australia. Year-   end was 30 June 2011, the auditor’s report was signed on 31 July 2011 and the financial  statements were mailed to shareholders on 14 August 2011.

During your subsequent events review you noted the following independent and material  items:

1.   Queenscorp has been  involved  in  a  legal  dispute  with  a  competitor  for  a number of  years.  The  dispute  relates  to  alleged breaches  of copyright by Queenscorp. On 27th  July you discovered that Queenscorp had settled legal action out of court on terms  more favourable than expected.

2.   On 10th  July one of Queenscorp’s major product lines developed a fault that rendered  the product unusable. Queenscorp became aware of the fault on 30 July. Although the   fault posed no  safety risks  to  consumers,  Queenscorp decided to launch a full product  recall on the following day.

3.   Queenscorp  has  invested  significant  funds  in  developing  a  new  type  of cholesterol- reducing margarine. On 7th July Queenscorp applied for a patent for the margarine,  only to discover that the competitor has lodged a similar application previously.  The   granting of Queenscorp’s application is now in doubt.

4.   Queenscorp’s bank loan is conditional upon certain ratios being maintained at  all   times.  On  20th August  you  discovered  that  one  of the  ratios  was breached for a 24- hour period on 18th August.

5.   In early June, one of Queenscorp’s largest debtors informed Queenscorp that it was  experiencing serious financial difficulties. On 5 July, Queenscorp was informed that   the  debtor  had  gone  into  receivership.  Preliminary  reports suggest Queenscorp will  recover only 10 cents in the dollar ofthe outstanding debt.

Required

(1) Describe your obligations as the auditor to each of the above subsequent events.    (5 X 1 Mark = 5 Marks)