Auditing Assignment Preparing Audit Procedures For Transactions & Balances

Question

Task: The questions to be answered through this auditing assignment are:
Q1 - Week 6
As the auditor of Komsu Air Limited (KAL) that manufactures and installs large commercial airconditioning systems. KAL typically has two or three large contracts (ranging from $6 million to $10 million each) in progress at any one time. The contracts usually take up to six months to complete, although unexpected on-site difficulties can result in lengthy delays in completion (of up to 12 months). KAL finances its operations with a mixture of equity, long-term debt (secured by fixed assets) and short-term bank loans.

It is now May 2017 and your planning of the audit of KAL for the year ended 30 June 2017 is nearing completion. You have met with the management of KAL and, from those discussions and a review of the preliminary information provided by KAL, you have identified several issues that may have implications for the company’s ability to continue as a going concern. The relevant issues are as follows:

• Competition in the industry is becoming more intense, with some customers now installing their own systems.

• KAL’s bank has requested cash flow forecasts for the coming year to support the short-term loans. It has indicated that it may need to withdraw funding or restructure debt if the forecasts are not adequate. The review of work-in-progress indicates that all the contracts in progress at year end are due for completion within six months of the balance date. There are no new contracts in place for the coming year, although management has indicated that there are orders currently being negotiated. The nature of the business is such that sales will fluctuate considerably from year to year depending on the timing of one or two large contracts.

• Assets consist chiefly of plant and equipment, some of which is specialised to the industry. Debtors are significant, but recoverability is not considered an issue as the ongoing projects are with reputable customers and management is not aware of any problems. Creditor balances are at normal levels, and the company is in a positive working capital position.

• Included in provisions is a large provision for warranty for one of KAL’s jobs completed at a hotel two years ago. It appears that the air-conditioning system is still not working and the hotel is now requesting a substantial refund of the contract price.

Required: Explain whether you believe the area of going concern should be assessed as high risk and mitigating factors for KAL’s audit for the year ended 30 June 2017.

Q2- Week 7
Wares king supplies custom-fitted curtains and blinds to retail customers. It has recently expanded to offer a wide variety of home decorating products through its six stores across the state. After some initial problems with stock control it installed a new automated inventory system in April this year. The system replaced another automated system that had been modified so often over the years that the auditor had advised Wares’s management that they did not regard it as reliable. That is, the auditor was unable to rely on the old system sufficiently to assess control risk for inventory as anything less than high.

Required:
a) Explain the normal process an auditor would expect to find in the client’s systems governing changes to computer programs. Why is an auditor concerned about program changes
b) Wares kings’ financial year-end is 31 December. Does the auditor need to obtain evidence about the performance of the inventory control system from every month in the year or from a sample of months Explain.
c) If the auditor conducts test of the inventory controls at an interim date, is it appropriate to conclude that the controls also relate to the end of period date Why

Q3- Week 8
You are the audit manager at KPMG & Coopers a medium-sized audit firm undertaking the audit for the year ended 30 June 2018 of Vesta Tech Ltd, an electronic component manufacturer located in Sydney. During the planning stage of the audit you discovered that one of Vesta Tech Ltd’s major suppliers went bankrupt one month ago, causing major product shortages. To overcome the problem, Jonathon Marshall, the husband of the finance director, Nimat Marshall provided electronic components to Vesta Tech Ltd through his private company. There is no formal agreement in place with Jonathon Marshall, however, the goods are being provided at competitive prices. You are concerned about the electronic components that Jonathon Marshall’s company is supplying, because his products are new to the market and you have heard some of Vesta Tech Ltd’s staff complaining that they are of poor quality.

The board has informed you that although sales have been strong this year, Vesta Tech Ltd has suffered significant cash flow problems because a major debtor, Mimosa Ltd, is experiencing financial difficulties. As a result, Mimosa Ltd is taking well over 120 days to pay outstanding amounts, despite Mimosa Ltd’s terms of trade being payment within 30 days. Mimosa Ltd makes up 40 per cent of Vesta Tech Ltd’s sales and the board has been reluctant to take any action that might adversely affect those sales. As a result, Vesta Tech Ltd has had to increase its dependency on its line of credit, and this has caused it to temporarily breach the debt to equity ratio required in its loan covenant with WestPac Bank Ltd.

The management of CGL is currently reviewing the structure of its audit committee to ensure that it complies with the requirements of the ASX Corporate Governance Principles and Recommendations. However, the board is confused by the reference in the ASX Corporate Governance Principles and Recommendations to both independent directors and non-executive directors, as they thought that they were the same thing. As a result, they have sought your advice concerning the structure of their audit committee.

Required:
a) Identify two key account balances at risk of material misstatement.
b) For each account balance identify the key assertion at risk.
c) Explain why the account balance and assertion are at risk.
d) Describe one (1) substantive test of detail that you would undertake for each account to address the assertion and risk identified.

Q4 - Week 9
a) What are key audit matters How do these affect the format of the audit report
b) Stewart Jones is reviewing the results of the subsequent events audit procedures. Stewart is writing a report for his audit partner based on these results and will be attending a meeting tomorrow with the partner and representatives of the company to discuss them. The issue will be whether the financial report should be amended, or additional notes included for these subsequent events.

Many of the items are not material and Stewart will recommend that no action be taken with respect to these. However, there are several items that Stewart believes are material and should be discussed at the meeting. These are as follows.
(a) The board is planning to issue shares in a private placement on 15 August.
(b) The share issue is to fund the purchase of a 60 per cent stake in another company. The negotiations are in the final stages and although the contract is not yet signed it will be signed by 15 August.
(c) A writ was lodged in the Supreme Court in the week after year-end claiming damages for illness allegedly caused by chemicals used at a subsidiary company’s manufacturing plant in the 1990s. This is the tenth such writ lodged, and the client has denied responsibility in all cases because it was unreasonable to believe at that time that these chemicals had adverse health effects. The claimant has new scientific evidence that counters this defence.
(d) The review of subsequent cash receipts has revealed that several of the trade receivables that were considered doubtful have now been paid. However, the audit procedures have shown that a large debtor that was considered safe at 30 June was unexpectedly declared bankrupt on 20 July.

The year-end for the company is 30 June and the audit report is due to be signed on 20 August.
Required: For each of the items above, explain what type of subsequent event it is and the appropriate treatment of the item in the financial report.

Part A: Like an essay type presentation
Part B:

Q5- Week 10
You are the audit partner at Parkville & Associates, a mid-tier audit firm. You are responsible for the audits of the following four independent entities for the year ended 30 June 2018:
(a) Human Help Ltd is a non-profit entity. You have discovered that it has not kept substantiating vouchers or receipts for more than 55 per cent of its expenses, excluding salaries and allowances
(b) JJ King Ltd is a building contractor with a varying workload. In order to compensate for the irregularity of its contracted building projects, JJ King also purchases large vacant blocks of land that it later subdivides for the construction of houses and units. JJ King then sells these on its own account. Your analysis strongly suggests that the apportionment of costs to houses and units sold has been kept low to boost profits. In your opinion, this has resulted in the overvaluation of the unsold properties. The directors of the company do not agree and hold to their view that the stock of properties is correctly valued
(c) You have completed the audit of Grand Resort Ltd (Grand Resort) for the year ended 30 June 2015. The audit partner suggested that the value of properties on the Gold Coast were overstated by $16 million, a figure which was twice the level of materiality set for the audit. As a result of discussions with the audit committee, the CEO of Grand Resort agreed to revise the valuations downward by $10 million. All other issues were resolved to the satisfaction of the audit partner, resulting in an overall misstatement of the financial report of $6 million. The audit partner is now considering the effect of the misstatement on the auditor’s report.

(d) Grand Event Ltd arranges for popular overseas entertainment artists to perform in Australia. The band Eclipse was booked by Grand Event to play in major cities across the country. Grand Event’s written contract required the company to pay the band in US dollars but, in order to reduce costs, it did not hedge the amounts. Subsequent to year end, the Australian dollar fell against the US dollar and a substantial loss relating to the band’s tour was predicted. The management of Grand Event tried unsuccessfully to renegotiate the band’s contract and has been unable to obtain finance to cover the expected shortfall. Grand Event has now cancelled the tour and expects a substantial claim from Eclipse. It is clear to you, as the auditor, that Grand Event does not have the income, cash or other assets to sustain such a loss.

Required:
Assuming no amendments have been made, identify and explain the type of auditor’s opinion required for each issue outlined above.

Answer

Answer-1
Yes, it is stated herein auditing assignment that the going concern should be considered as an area of high risk while planning the audit in case of Komsu Air Limited (KAL). As per AASB 101, it is the management’s responsibility to assess and declare its ability and certainty of running the business as a going concern (AASB 101 2015). Following are indicators of doubtfulness of going-concern and the mitigating factors for these problems:

Answer 2
(a) The normal procedure governing the changes in the client's system is as follows:
i) The new system should be parallel used along with the existing system.
ii) The auditor and the management should satisfy and test the system on its accuracy and reliability by punching some dummy entries.
iii) The new system should be approved and tested again and again in light of various transactions before implementation.
The auditor is worried because he has to comment on the usability and the effectiveness of the controls placed by the management. If the auditor has not satisfied himself with the changes in any program/controls, how can he comment on its accuracy and effectiveness

(b) Yes, the auditor will require pieces of evidence about the performance of the inventory system every month. The new system has been implemented in April which is also not yet approved by him. The auditor can't rely on the results produced by the old system which was in use for the first three months of the year. He has to check the roll-over of transactions from the old to the new system. His major concerns shall be whether entire data has been reliably captured by the new system, whether the new system is error-free and whether the new system is better than the previous inventory system.
(c) No, checking of controls at an interim date can't be treated as checking of controls at year-end because as the old system was useless. The auditor has to check the working of the system at suitable dates. It is the most important aspect of booking revenue in the company. The efficiency of the inventory control system is most important for the correct booking of expenses and income. More the accuracy better will be the results for management (Hoffelder 2012). It is important to mention that the auditor can't check 100% results produced by the inventory system. However, a month-end review of the new system placed is necessary before forming any opinion. The auditor should fully satisfy himself before making any opinion. In case there is any deficiency in the new inventory system, it can be plugged at an early date by verification and thorough checking of the system (Hoffelder 2012).

Answer 3

Answer-4
Part-a
Key Audit matters are those matters which bear the highest degree of significance in the financial report according to auditor's judgement in the period of audit that could have a major impact on decision making of investors if they remain undisclosed in the audit report. KAMs are to be disclosed by the auditor only after obtaining sufficient audit evidence (Geoffrey et al 2016). Such key audit matters are selected from the matters that have been communicated with ‘those charged with governance’.

Key audit matters affect the format of the audit report as these are to be disclosed separately in the audit report at the end. The KAMs disclose the significant matters and all the substantive procedures adopted by the auditors to conclude these matters as significant (Matthew 2015). Also, the relevant disclosures that the company has made with regard to such matters are referred to by the auditor in KAMs in audit report so that the readers can understand the reasonability behind the KAMs mentioned. The KAMs increase the usability and authenticity of the format of the audit report as the readers of such report can get a detailed understanding of what were the matters of utmost importance to be considered in the company accounts and take their decisions accordingly (Matthew 2015).

Part-b

Answer-5
As per ASA-700 "Forming an Opinion & Reporting on a Financial Report", the following are the types of opinions to be given in the cases mentioned:

References
AASB 101, Presentation of financial statements, viewed 18 June 2020, https://www.aasb.gov.au/admin/file/content105/c9/AASB101_07-15.pdf AASB 110, Events after the Reporting Period, viewed 18 June 2020, https://www.aasb.gov.au/admin/file/content105/c9/AASB110_07-04_COMPjan15_07-15.pdf

Gay, G., & Simnett, R 2018, Auditing and Assurance Service in Australia, McGraw-Hill Education (Australia)

Geoffrey D. B, Joleen K, K. Kelli S. and David A. W 2016, Attracting Applicants for In-House and Outsourced Internal Audit Positions: Views from External Auditors. Auditing assignment Accounting Horizons vol. 30, no. 1, pp. 143-156

Grayston, C 2019, Audit quality: is it time for a different approach viewed 18 June 2020, https://www.intheblack.com/articles/2019/02/01/audit-quality-time-for-new-approach Hoffelder, K 2012, New Audit Standard Encourages More Talking, Harvard Press.

Livne, G 2015, Threats to Auditor Independence and Possible Remedies, viewed 18 June 2020, http://www.financepractitioner.com/auditing-best-practice/threats-to-auditor-independence-and-possible-remediesfull

Matthew, S. E 2015, Does Internal Audit Function Quality Deter Management Misconduct. The Accounting Review vol. 90, no. 2, pp. 495-527

National Audit Group 2020, Latest News On Audit Inquiry – 8 Key Recommendations, viewed 18 June 2020, https://www.audits.com.au/2020/03/02/latest-news-on-audit-enquiry-8-key-recommendations/