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BUACC3741 Auditing|Management of Charles Ltd Auditor

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BUACC3741 Auditing

Question 1:
a)    Explain who are the parties to an assurance engagement.
b)     Explain what is meant by the term audit expectation gap?
c)    Identify the three types of substantive procedures and discuss the effectiveness of each.
d)    Explain what is the difference between sampling risk and non-sampling risk?

Question 2:
ABC Ltd is a furniture manufacturing company. John and his wife Lisa own the majority of shares in the AAA Group which controls ABC Ltd. John is the chairman and the board of directors of both AAA Group and ABC Ltd, and Lisa is a director of both companies as well as the CEO of the ABC Ltd.

In January 20X0, John approached your audit firm, CCC &Co, to carry out the ABC audit for the year ended 30 June 20X0. ABC Ltd 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 25 per cent share of ABC Ltd. You know that one of the partners at CCC &Co went to school with John and has been friends with both John and Lisa for many years.

Required:
1.    Identify and explain the significant threats to independence for CCC &Co in accepting the audit of ABC Ltd.
2.    Explain any safeguards that CCC & Co could implement to reduce the threat to an acceptable level.
3.    Describe what is meant by independence in mind and independence in appearance.

Question 3:
a)    You are the audit partner of CCC &Co audit firm, and audit the work for Melbourne Ltd. You issued an unmodified auditor’s report for the year ended 30 June 2021. Several employees of Melbourne Ltd were charged with systematically and deliberately entering fictitious transactions and embezzling about $5 million in year 2019. 
CCC &Co audit firm has been notified by the legal representatives of Melbourne Ltd. that they are taking legal action against your firm based on the audit for the year ended 30 June 2021. They claim that you and your audit team were negligent in conducting the audit, due to your failure to identify the activities of the employees of Melbourne Ltd.

Required:
1)    What are the legal requirements to successfully sue an auditor for negligence?
2)    Do you think Melbourne Ltd was guilty of negligence? Explain and provide relevant case(s) to support your answer. 

b)    You are the audit partner of CCC &Co audit firm, you are planning for the audit of a Melbourne bedding retail business, XYZ Ltd. Inventory is material, and items range in value from $1 to over $500. The nature of the store means that many items are specially ordered with special branding and promotional packaging. Orders are placed 5 months in advance from overseas suppliers. Large deposits are required to be paid to suppliers when orders are placed.

You believe that the account balance for inventory is-at risk of material misstatement.

Required:
1)    Identify a key assertion at risk in relation to inventory.
2)    For the assertion in part 1, identify a type of evidence that would be persuasive.

Question 4:
a)    The following is sales transaction-related audit objective:

“Recorded sales are stated at the proper amounts.”

Required:
State one test of control and one substantive test of transactions that the auditor can use to verify this audit objective.

b)    Describe the audit risk model and the interrelationships of its components. Which components of the audit risk model can be controlled by the auditor? 

c)    Melbourne Ltd is an electricity distribution company based in a large capital city. Its business is to manage the electricity assets, including poles, wires and other equipment, that are used to deliver electricity to more than 50,000 retail and business customers in the city. Pole, wire and substation maintenance and improvements are a large part of the company’s operations and teams of highly trained technicians are used for both planned work and emergency response activities. Emergency response is required when storms or fires bring down power lines, the power must be turned off at the direction of police, or the electricity supply fails for any reason.

Each team comprises several vehicles (vans and trucks) and uses additional heavy equipment, such as cherry pickers, cranes and diggers, as required. Each vehicle carries a core set of specialised parts and tools and additional items are obtained as required from the stores, located in a large warehouse in the northern suburbs. The warehouse is staffed on a 24-hour basis to assist night maintenance (designed to minimise disruption to business customers) and emergency response.

Required:
1)    State three potential problems that could occur in Melbourne Ltd’s maintenance and improvements program. 
2)    Suggest three ways that good internal control over parts, equipment and labour could help Melbourne Ltd avoid these problems. 

Question 5:
a)    You are the auditor partner on the engagement. You consider the following independent and material situation:

1)    Pine Farms Ltd is an online retailer of body lotions. The company records revenue at the time customer orders are placed on the website, rather than when the goods are shipped, which is usually two days after the odder is placed. The auditor determines that the amount of orders placed but not shipped as of the financial report date is not material.

2)    The controller of City Hotels Ltd will not allow you to confirm the receivable balance from two of its major clients. The amount of the receivable is material in relation to City’s financial statements. You are unable to satisfy yourself as to the receivable balance by alternative procedures.

3)    Charles Ltd has prepared financial statements but has decided to exclude the statement of cash flows. Management of Charles Ltd explains to you that the users of their financial statements find this statement confusing and prefer not to have it included.

Required:
Advise what type of the auditor opinion that you would issue in each of the above independent situation from the following choices. Explain your answer.
1) Unmodified 
(2) Unmodified- emphasis of matter
(3) Qualified 
(4) Disclaimer
(5) Adverse

b)    State the two primary types of subsequent events that are required consideration by management and evaluation by the auditor. Give two examples of each type of subsequent event. 

BUACC3741 Auditing

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