2020 Nov 16 ACCY962 T3, 2020 Page 1 of 6
Faculty of Business
Sydney Business School
| Student to complete: |
| Family name |
| Other names |
| Student number |
ACCY962
Professional Practice – Auditing & Risk Assurance
Final Examination Paper
Trimester 3, 2020
| Exam duration | Take home exam |
| Items permitted by examiner | Nil |
| Aids supplied | Nil |
| Directions to students | 5 questions to be answered. Five questions are marked over 100. Total weight of the paper is 50% of overall. Answer questions in the answer booklet. |
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Question One Total: 14 marks
The audit partner has just advised you that he has been approached to accept the appointment of auditor to
Vial-tek Limited. Vial-tek Limited is a manufacturer of gaming machines and has been named in a recent anticorruption enquiry as having offered incentives to state government members to support a proposed bill which
would allow an increased number of gaming machines in licensed premises. No charges have yet been laid
against Vial-tek Limited or any of its employees. The audit partner explains to you that Vial-tek Limited’s
auditors were re-appointed for the current financial year at the Annual General Meeting held two months ago.
However, Vial-tek Limited’s managing director is unhappy with the existing auditing firm as the audit partner
assigned to Vial-tek Limited has been changed.
Required:
The audit partner is unsure whether he should accept the appointment and has asked you to outline any ethical,
legal and other factors to be considered in his decision about whether to accept the appointment for the current
year, and to indicate the steps that need to be taken prior to the appointment.
[14 MARKS]
Question Two Total: 20 marks
Parts A, B are NOT related.
PART A
The audit work papers contain the following narrative description of the cash sales procedures of a retail
clothing store.
All sales are for cash; no credit cards are accepted. Each individual sale is rung up by the sales clerk on a cash
register that ejects a sales slip. The sales slip is given to the customer, and a copy of the sales slip is made by
the cash register on a continuous tape locked inside the machine. At the end of the day, the sales clerk presses
a total key and the machine prints the total sales for the day on the continuous tape. The clerk then unlocks the
cash register, removes the day’s tape, makes an entry in the cash receipts book, counts the cash in the drawer,
retains a change fund of $100, and turns the rest of the cash over to the cashier. The sales clerk then files the
cash register tape and is ready for the next day.
Required:
Provide four recommendations to improve controls over cash sales.
[8 MARKS]
PART B – Part B is NOT related to Part A.
The following are situations that an auditor might encounter as a result of applying year end substantive tests
to accounts receivable as at 30 June 2020.
a) Balances in selected individual customer accounts do not reconcile with supporting documentation.
b) Sales totalling $25,000 were shipped on 2 July 2020 and recorded on 30 June 2020.
c) The aged trial balance prepared by the client includes a customer account within the 30- to 60-day
category that is actually 120 days old.
2020 Nov 16 ACCY962 T3, 2020 Page 3 of 6
d) Not all sales transactions are recorded.
e) Actual write-offs during 2020 of receivables arising from 2019/2020 sales were greater than the 30 June
2020 allowance for doubtful accounts.
f) Positive confirmations were not returned by 30 of 100 mailed receivables confirmations.
Required:
For each of the items above indicate the (1) an audit procedure that would address the situation and (2) the key
financial report assertion addressed by the audit procedure.
[12 MARKS]
Question Three Total: 26 marks
Kieko Co. Ltd imports, sells and services mobile telephones to retailers. You have been provided with the
following information for the 30 June 2019 audit of Kieko Co. Ltd
| |
Kieko Co. Ltd sells to retailers in both Australia and New Zealand Inventory is usually provided to retailers on a sale or return (consignment) basis Kieko Co. Ltd has an employee bonus scheme based on sales There has recently been a large increase in the number of faulty phones being returned by retailers. The reason for the fault has not yet been determined by Kieko Co. Ltd Perpetual inventory records are maintained for all inventory using a well-known computer inventory package Physical inventory is counted monthly, reconciled to the perpetual records and appropriate adjustments made The technology in the telephone industry changes very quickly and new models are released regularly The managing director plays golf with your brother-in-law The following information has been extracted from the financial records of Kieko Co. Ltd: |
| | |
| | |
| | |
| |
| 2019 | 2018 | |
| Unaudited $000 16,500 |
Audited $000 15,600 |
Sales revenue |
| Inventory | 3,600 | 2,200 |
| Accounts receivable | 5,450 | 4,100 |
Required:
a) You are planning the audit of Kieko Co. Ltd for the year ended 30 June 2019 and are concerned
about the risks associated with accounts receivable and inventory. Identify three (3) factors for each
of accounts receivable and inventory that increase audit risk. Discuss why these factors increase
audit risk with reference to financial report assertions.
[18 MARKS]
b) You believe that computer assisted audit techniques may be able to assist you in the audit of Kieko
Co. Ltd for the year ended 30 June 2019. For each of accounts receivable and inventory, specify four
(4) ways in which audit software could be used to assist in the audit of the key assertion at risk as
identified in Part A.
[8 MARKS]
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Question Four Total: 20 marks
Zenos Limited is a large private company that manufactures special reinforced concrete and other products
used in the construction of airport runways and heavy use motor vehicle freeways. During the course of the
audit for the year ended 30 June 2020 the government announces it intends to scrap its proposed third runway
project. You know that Zenos Limited’s projections include a major share of the work expected to flow from
this project.
The company has been experiencing some cash flow difficulties, although this is not unusual in the industry.
Management has recently fully extended their overdraft facility in order to pay day to day expenses such as
wages and salaries. The partner is concerned that the company may be facing going concern problems, but the
managing director maintains that future capital expenditure can be cut back to alleviate the going concern
issue. In addition, surplus assets can be sold to the growing Asian market, and long-term debt rescheduled if
necessary.
Required:
| a) | Give examples of three other possible mitigating factors that have not yet been mentioned. [6 MARKS] |
b) What evidence should you obtain with respect to management’s representation about the various
mitigating factors presented in the problem and identified in part (a) above?
[6 MARKS]
c) Assume that the engagement partner has decided to qualify the accounts on the basis of uncertainty as
to going concern. However, the managing director argues that, as the company is privately held and all
the shareholders are involved in the business, going concern problems should not be viewed as seriously
as if it were a publicly listed company and therefore an unqualified report should be signed. How would
you respond to the managing director’s comments? [3 MARKS]
d) What would be the impact on the audit if there was a letter of comfort from a related company promising
to provide financial support in the event that Zenos Limited was unable to meet its debt commitments?
[5 MARKS]
Question Five Total: 20 marks
Parts A, B and part C are NOT related.
Part A
The following are independent material situations:
| i) | Solomon Pty Ltd is a large manufacturing company with a year-end of 30 June 2020. In August 2020, the directors signed a contract to sell a segment of the company’s operations that had made a loss. The audit report is to be signed in early September. Tiger Limited is a manufacturer of sports shoes with a year-end of 30 June 2020. On 3 July 2020, legal |
| ii) |
action was brought against the company by a group of customers as a result of injuries sustained while
wearing the company’s sports shoes. It is claimed that there is a design fault in the sports shoe that
directly contributed to the injuries. Initial discussions with Tiger Ltd’s management indicate they are
confident of disproving the claims, but you are aware from publicity about the case that the other side
is also confident of winning.
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iii) Dey Limited is a small manufacturing company whose year-end is 30 June 2020. The accounts were
completed and audited by 15 August 2020 and the directors’ declaration was signed on the same day.
The directors then mailed the signed accounts to the auditors who received them on 18 August. On 20
August there was a fire in the company’s warehouse that destroyed a material amount of stock. This
stock was not insured. On 20 August the audit report had still not been signed. The directors informed
the auditors of the fire on the same day that it occurred.
Required:
For each of these situations, indicate what action the auditor should take regarding their treatment in the
financial report. Give reasons for your decision.
[6 MARKS]
Part B
You are the auditor of Martin Pty Ltd, which supplies sporting equipment and apparel. The manager of Martin
Pty Ltd has asked that you perform a review of the internal controls within the cash payments area. From your
discussions with management and staff you determine the following facts:
| | The accounts payable clerk receives all supplier invoices. The clerk then checks the invoices to relevant delivery notes. If a discrepancy is found, the clerk telephones the supplier to rectify the problem. No |
payment is made until the clerk is satisfied the problem has been rectified. Often, no documentation is kept
by the clerk to indicate how problems are resolved.
If there are no discrepancies between the supplier invoice and the delivery note, the clerk prepares a cheque
requisition for the amount indicated on the supplier invoice and signs the cheque requisition as evidence
of matching the invoice to the delivery notes. She then files the supplier invoice with the relevant delivery
note. The only markings made on the invoice are a series of ‘ticks’ (√) indicating the invoice has been
matched to the delivery note.
| | The completed cheque requisition is forwarded to the banking clerk, who prepares a manual cheque and posts an appropriate journal entry. |
| | Once completed, the banking clerk forwards the cheque requisition and unsigned cheque to the managing director, who signs the cheque. All signed cheques are returned to the banking clerk for mailing. |
Required:
Identify four weaknesses in Martin Pty Ltd’s internal control for the cash payments area. Give reasons.
[8 MARKS]
Part C
For the following independent material situations, assume that you are the audit partner on the engagement:
i. You are auditing Maulack Company Ltd for the first time. Maulack Company Ltd has been in business
for several years but has never had an audit before. After the audit is completed, you conclude that the
current year balance sheet is presented fairly. The client did not authorise you to do work on the
previous year’s balance sheet.
| ii. | Due to losses and adverse key financial ratios, an auditor has substantial doubt about a client’s ability to continue as a going concern for a reasonable period of time. The client has adequately disclosed its |
2020 Nov 16 ACCY962 T3, 2020 Page 6 of 6
financial difficulties in a note to its financial report, which do not include any adjustments that might
result from the outcome of this uncertainty.
iii. An auditor hires an actuary to assist in corroborating a client’s complex superannuation calculations
concerning accrued superannuation liabilities that account for 35 percent of the client’s total liabilities.
The actuary’s findings are reasonably close to the client’s calculations and support the financial report.
Required:
Identify the type of audit opinion report that you should provide. Give reasons.
[6 MARKS]
End of Paper