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Principles of Auditing Assignment

Question 1 (20 Marks)

Case Background

In February 2012, the Australian Accounting Standards Board decided at its meeting to propose the withdrawal of AASB 1031 Materiality. There were several reasons for this proposal which includes: there is no International Reporting Standard equivalent and it does not look like there will be, since 2005 there has been the gradual withdrawal of additional Australian guidance from a number of Australian Accounting Standards, and there is now an updated guidance on materiality in the IASB Conceptual Framework.

The major impact of the withdrawal of AASB 1031 is the removal of the specific quantitative guidance for materiality. The withdrawal of AASB 1031 became effective to annual reporting beginning on or after 1 July 2015.

REQUIRED:

1. Before the withdrawal of AASB 1031 and with reference to the AASB 1031 Materiality (issued by the Australian Accounting Standards Board, i.e. AASB issued by AASB) and the ASA 240 The Auditor’s Responsibility to Consider Fraud in an Audit of Financial Report, ASA315 Identifying and Assessing the Risks of Material Misstatements through Understanding the Entity and its Environment, ASA 320 Materiality in Planning and Performing an Audit and ASA 450 Evaluation of Misstatements Identified during an Audit (issued by the Auditing and Assurance Standards Board, i.e. ASA issued by AUASB):
   1. What is materiality as per the Accounting Standards (AASB) and Auditing Standards (ASA)? (2 marks)
   2. Outline the qualitative and quantitative guidelines of materiality as per the Accounting Standards (AASB) and Auditing Standards (ASA). (4 marks)
   3. How do the standards and guidelines of “materiality” influence the auditors’ judgment on materiality level and material misstatements? Provide examples. (4 marks)
   4. Do you agree with the Australian Accounting Standards Board’s decision to withdraw the AASB 1031 Materiality Standard? Why or why not? Discuss your answer. (10 marks)

NOTE: In answering this Question, use APA referencing style and support your answers with relevant accounting and auditing standards as well as published peer-reviewed academic journals. A minimum of 5 peer-reviewed academic journals is expected. (Hint: this is a great opportunity to utilise the University’s Library Services online such as Library Search, Advance Search, eJournals and Databases such as EBSCOhost, etc.) You are expected to support your answers with the relevant Australian Accounting Standards and Australian Auditing Standards and with authorised/published Peer-reviewed Academic Journals and Articles.

Question 2 (20 Marks)

Part A

You are an audit partner with David, David & Associates, a large and experienced audit firm.

You have been approached to accept the audit of MedTech Ltd (MedTech), a medium-sized chemical manufacturer. The manufacture of the chemicals results in highly toxic waste and MedTech is currently under investigation by the Environmental Protection Agency for a significant spill of toxic chemicals into a nearby river. The media have reported that senior employees were allegedly involved in trying to cover up the spill.

REQUIRED:

What are the key ethical matters regarding MedTech and its management that you should consider before making the decision to accept the engagement? (2 Marks)

Part B

MedTech Ltd (MedTech) imports a number of pharmaceutical products. In order to hedge its foreign currency transactions, MedTech entered into a number of forward rate agreements this year. Prior to this time MedTech had had little exposure to derivative instruments, but a series of bad experiences resulting from fluctuating exchange rates convinced the company that a hedging strategy was necessary. During planning for the audit of MedTech, the company’s hedging arrangements were identified as inherently risky and increased testing was carried out in this area. A number of small errors were noted in accounting for hedge transactions, but there did not appear to be any material errors and as such no adjustments were made. A review of the audit file suggests that the errors noted were a result of inexperience and poor controls in the area. While all of the errors were brought to the attention of the treasurer, who is responsible for the company’s hedging strategy, no further action has been taken to date.

REQUIRED:

What further action should the auditor take in response to the errors and control weaknesses identified? Justify your response. (2 Marks)

Part C

David, David & Associates has agreed to take on a new audit client, Reaction Pty Ltd, a small garage door manufacturer that has never previously been audited. David, David & Associates has issued an engagement letter prior to commencing work for the current year. While conducting the audit, the audit team is unable to gain sufficient appropriate audit evidence around accounts receivable due to a lack of documentation. You have informed client management that you need to issue a modified auditor’s report due to the scope limitation. In response, management has requested that the engagement become a review engagement with the associated lower level of assurance, as they are not required to have an audit.

REQUIRED:

Discuss and outline the appropriate response to this situation. Provide reasons to support your response. (4 Marks)

Part D

Consider the following independent situations:

1. You are the auditor of Creatives Pty Ltd a medium-sized furniture manufacturer. Your audit firm has finalised the financial statements after the client has substantially prepared the accounting records. However, the client admits to having limited knowledge of identifying and calculating impairment and has asked for your assistance. You have proposed a number of adjustments to account for the impairment of assets.
2. You are the auditor of Tours & Travel (T&T) Ltd, a large travel agent that also handles all your audit firm’s travel arrangements on normal commercial rates and provides excellent service. The managing director of T&T has indicated that the company is having a tough time of it due to the lack of consumer confidence in the economy at the moment and has asked if you could help by recommending their services to your other audit clients. He has said that he will understand if you are not able to do so. You happily agree to provide the recommendation, as you have always been satisfied with their service.
3. Your audit firm has been approached by a new client, Apex Constructions Ltd, to conduct the audit for the coming year. As part of your client acceptance procedures, you identify that the wife of one of the audit firm’s partners has a substantial shareholding in Apex Constructions Ltd.
4. Your audit client, Guinee Cruises Ltd (Guinee), is having cash flow problems and has not paid any of the current year’s fee by the time the auditor’s report is due to be issued. They expect business to pick up in the coming year and have requested additional time to pay the bill.

REQUIRED:

For each of the independent situations above:

1. Describe the type of potential threat to independence. Justify your answer. (8 marks)
2. For each threat, describe a safeguard, if any, which could be implemented to reduce each of the independence threats to an acceptable level. (4 marks)

Question 3 (20 MARKS)

Part A

You are the audit senior on the audit of FitClub Pty Limited, a large manufacturer of shoes. FitClub Pty Limited’s main market lies with 18 to 25 year olds. This is the first year in which your firm has performed the audit. As part of the planning work, you have performed analytical procedures on an annualised basis and compared the results to industry averages and last year’s audited financial information. The results are given below: