ACC707 - AUDITING - Final Exam-ALL ANSWERS CORRECT
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ACC707 - AUDITING - Final Exam
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ACC707 - AUDITING - Final Exam
ACC707 Auditing and Assurance Services
17/06/2019 – MONDAY - 9AM - M101 (MARKET)
- Seat Number 14
DETAILS
20 MCQs = 40% covering all matters covered in the lecture from week 1 - 11
3 short answer questions in the form of case studies from Chapter 9 (substantive procedures); Chapter 11
(sub...
acc707 auditing and assurance services 17062019 – monday 9am m101 market 11600954 seat number 14 details 20 mcqs 40 covering all matters
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ACC707 - AUDITING - Final Exam
ACC707 - AUDITING - Final Exam
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ACC707 Auditing and Assurance Services
17/06/2019 – MONDAY - 9AM - M101 (MARKET)
11600954 - Seat Number 14
DETAILS
20 MCQs = 40% covering all matters covered in the lecture from week 1 - 11
3 short answer questions in the form of case studies from Chapter 9 (substantive procedures); Chapter 11
(subsequent events); Chapter 12 (auditor's opinion) = 60%
Total marks = 100%
Marks will be scaled to 50
EXTRA
Inventory and Property planed Equipment ASI 705
Evidences and Facts Other Matters
Know the Procedures Efficiency Matters
Adjustment event vs ASB110 Unmodified
Material Report Key Matters
ASI 706 Conjunt Liability
CASE STUDIES – 60 %
CHAPTER 9 – SUBSTANTIVE PROCEDURES
9.21 You are a senior on the audit for the year ended 30 June 2018 of Office Supplies Ltd, A Perth-based
manufacturer of customised office furniture. You are carrying out audit checks on cut-off at year end. Office
Supplies maintains details of stock quantities on its computer and conducts a ‘wall-to-wall’ count of inventory
when all operations cease at 30 June, and all inventory is counted in a single stocktake. The bulk of inventory
is held in two adjoining warehouses owned by Office Supplies. However, a material amount of special desk
fittings is held in a separate warehouse in a difference suburb by a third party:
During the planning stage of the audit, you have discovered that the following potential misstatements
may occur or exist:
• Obsolete and damaged furniture fittings may be overlooked in the warehouse
• Some empty containers may have been included in the inventory count due to poor labelling procedures
• The lower of cost or net realisable value method may have been incorrectly applied
Based on your audit procedures completed during the planning stage, you have concluded that there are no
relevant control activities that could prevent these potential misstatements from occurring
Required
(a) Outline the substantive test of detail that will substantiate each of the potential misstatement
(b) For each substantive test of detail that you outlined in (a), indicate the assertion at risk
, Potential misstatement (a) Substantive test of detail (b) Assertion at risk
Obsolete and damaged Select a sample from inventory Accuracy, valuation
furniture fittings may be records and match to physical and allocation
overlooked in the inventory, looking for obsolete or
warehouse damaged furniture components
Some empty containers Select a sample from the inventory Existence
may have been included records and match to physical
in the inventory count, inventory, looking for empty
due to poor labelling containers in the sample count
procedures
The lower of cost or net Check subsequent sales prices and Accuracy, valuation
realisable value may compare with cost to ascertain and allocation
have been incorrectly whether the correct valuation
applied method has been applied
CHAPTER 11 – SUBSEQUENT EVENTS
11.15 You are the audit senior on the audit for the year ended 30 June 2018 of Ultimate Sound Ltd, an Australian
Company that retails audio and other electronic equipment. During the year, Ultimate Sound has expanded
rapidly both locally and overseas, particularly in the UK and Asia. Due to this rapid expansion, its accounts
receivable and inventories have both increased considerably.
Required
Explain the audit procedure you would undertake to obtain the necessary assurance that all subsequent events
have been identified and considered before finalisation and signing of the auditor’s report
The audit procedures used to identify subsequent events would include:
• reading board minutes and enquiring about matters discussed at meetings
• reading the entity’s latest available interim financial report, budgets, cash-flow forecasts and other related
management reports
• enquiring of the entity’s solicitor concerning legal matters
• due to the build-up of receivables, reviewing the level of cash received subsequent to balance date
• due to the build-up of inventory, looking at the sales volume and sales prices of the merchandise
subsequent to balance date
• reviewing technical journals for any recent developments in the high technology equipment they produce
• due to the expansion of the overseas operations, reviewing economic forecasts and articles on the overseas
economies concerned
• reviewing the procedures that management has established to ensure that material after-balance-date
events are identified, and enquiring of management as to whether any such events have occurred that might
affect the financial report being reported on.
,11.16 George Blewett is the engagement partner for the financial report audit of Play Equipment Ltd for the
year ended 30 June 2018. The following material events or transactions have come to George’s attention before
he is schedulred to issue his report on 31 August 2018.
(a) On 14 July 2018, Play Equipment settled and paid a personal injury claim of a former employee as a
result of an accident that occurred in March 2017. The company has not previously recorded a liability for the
claim
(b) On 17 July 2018, Play Equipment agreed to purchase for cash the outstanding shares of Recreation al
Equipment Ltd. This acquisition is likely to double the sales volume of Play Equipment
(c) On 20 July 2018, the directors become aware of broken glass found in their pre-packaged sandpits.
This product had only been on sale for two weeks and had been purchased directly from the manufacturer,
Sandpit Ltd, an unrelated company in Thailand, one week prior to being introduced to the public
(d) On 3 August 2018, a plant owned by Play Equipment was damaged in a flood, resulting in an uninsured
loss of inventory
Required
For each of the above events or transactions, identify audit procedures that should have brought the
item to the auditor’s attention, and determine the treatment required in the financial report for the year ended
30 June 2018
(a) The audit procedures that would have identified this are a solicitor’s letter or a review of payment details.
The event that gives rise to the liability (that is, the accident) occurred before balance date and so the payout
relates to this financial year. Therefore, the financial report should be adjusted.
(b) The audit procedures that would have identified this are a review of the minutes, enquiries of the client or
a solicitor’s letter. The agreement to purchase the shares occurred after balance date, but will have a significant
effect on the coming year and affect users’ decisions. Therefore, the event is a non-adjusting event and should be
disclosed in the notes to the financial report.
(c) The audit procedures that would have identified this are a review of the director’s minutes and enquiries
of management. The event has taken place in the next financial year; that is, the purchase of the product from
overseas, its subsequent sale and fault all occurred after 30 June 2018, so this is a non-adjusting event after the
reporting date. Therefore, the event should be disclosed in the notes to the financial report.
(d) The audit procedures that would have identified this are enquiries of the client, client correspondence,
newspaper reports or a visit to the client. The flood occurred after balance date, but because the inventory was
uninsured it will have a significant effect in the coming year and affect users’ decisions. Therefore, the event is a
non-adjusting event and should be disclosed in the notes to the financial report.
CHAPTER 12 – AUDITOR’S OPINION
12.19 You are the auditor of Bricks & Mortar Ltd (BML)for the year ended 30 June 2018. You have identified a
material misstatement of the property, plant and equipment account. BML has not changed its depreciation
rates for the past four years. However, recent technological changes in the industry have convinced you that
the useful lives of BML’s assets need to be adjusted downwards, resulting in an increased depreciation charge.
BML’s directors have refused to make any change to the depreciation rates, despite you explaining that this
will put them in breach of the requirements regarding impairment tests contained in Australian accounting
standards
Required
, Explain the auditor’s opinion you would issue for BML for the year ended 30 June 2018
The impact of the situation on the auditor’s opinion is as follows:
• There is a disagreement with management regarding the application of an accounting standard.
• A qualified opinion should be issued as the disagreement is material, but not pervasive, as it affects only
property, plant and equipment. The auditor’s opinion should cite the accounting standard and quantify the
financial effects of the disagreement.
12.20 You are the auditor of Northern Forest Ltd for the year ended 30 June 2018. The audit of Northern Forest
was extremely difficult this year, as the company did not keep appropriate books and records. As the accounting
department was chronically understaffed, transactions were not entered promptly and reconciliations not
performed. In an attempt to sort out the mess, a temporary accountant was employed; however, she was
unable to even reconcile the bank account at the year end. You are not satisfied all transactions that occurred
during the year are reflected in the financial report
Required
Assuming the mater remains unresolved, explain the auditor’s opinion that should be issued for Northern
Forest for the year ended 30 June 2018
The impact of the situation on the auditor’s opinion is as follows:
• There is an inability to obtain sufficient appropriate audit evidence (scope limitation) on which to base the
auditor’s opinion. No year-end balances can be verified (not even the bank account could be reconciled), so it is
reasonable to assume that the possible effects of the adjustments are so pervasive that the financial report as a
whole is potentially misleading.
• Therefore, a disclaimer of opinion should be issued.
12.21 You are undertaking the audit for the year ended 30 June 2018 of Durable Drums Ltd, a manufacturer
and retailer of steel drums. As in previous years, Durable Drums has accounted for inventory on a last in, first
out (LIFO) basis. Durable Drums also uses a ‘just-in-time’ inventory management system and therefore the
effect of this departure from Australian accounting standards was previously not material. In the current year,
however, the company has a large stockpile of inventory at year end, due to an unexpected cancellation of a
major order en route to its destination. In order to cut freight costs, Durable Drums stored the foods temporarily
in Thailand, hoping for an order from another South-east Asian customer.
Unfortunately, you were not told of this problem until after balance date and did not conduct a stocktake of
the inventory. You have also been told that some of the inventory has since been shipped to a number of
different customers to fill outstanding orders. The available audit procedures have been unable to validate the
existence of this inventory at balance date. The relevant inventory is currently recorded at $2,500,000. Audit
procedures have indicated that, had inventory been accounted for on a first in, first out (FIFO) basis, it would
have been record at $3,500,000. Materiality for the audit has been set at $1,000,000
Required
What is the most appropriate auditor’s opinion for Durable Drums for the year ended 30 June 2018?
In this case there is both a disagreement with management over non-application of an accounting standard (the
accuracy, valuation and allocation assertion), as LIFO is not an acceptable accounting method in Australia under
the accounting standards, and an inability to obtain sufficient appropriate audit evidence (scope limitation)
regarding the existence of inventory.
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