ACCT346-18S1 Test - term test PDF

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University of Canterbury

Department of Accounting & Information Systems

ACCT 346-18S1 AUDITING

Term Test:

29 March 2018

Time:

6:30 p.m. – 8:00 p.m.

Time Allowed:

90 minutes

Total Marks:

100

Suggested Time Allocation:

Overleaf

Answer all questions

This is a closed book test

This paper consists of NINE (9) pages including this page

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ACCT346-18S1

TEST

2

ANALYSIS OF QUESTIONS

Question

Part A Multiple Choice

Part B Question 1 Question 2 Question 3 Question 4

Marks

Suggested Time Allocation (Minutes)

20

18

16 24 10 30 ___

14 22 9 27 ___

100 marks ___

90 minutes ___

ACCT346-18S1

TEST

3

Part A – Multiple Choice List numbers 1 to 10 in your answer book. Write your answer to each question next to the corresponding question number in your answer book. All questions are of equal value. 1.

An assurance engagement focusing on the fair presentation of an entity’s sustainability report is an example of which of the following types of professional service engagement? (a) (b) (c) (d)

2.

Which of the following is not a function of New Zealand’s Financial Markets Authority (FMA)? (a) (b) (c) (d)

3.

Setting minimum standards for licensing of auditors. Monitoring accredited professional bodies. Setting minimum standards for registering of audit firms. Issuing NZ auditing standards (i.e., NZ ISAs).

All else being equal, as the level of materiality decreases, the amount of evidence required will: (a) (b) (c) (d)

4.

Direct reporting. Agreed upon procedures. Assertion-based. Compilation.

increase. decrease. remain the same. change in an unpredictable fashion.

Which legal case is associated with a relatively broad interpretation of ‘a duty of care’, such that the auditor could owe a duty of care to a wide class of persons? (a) (b) (c) (d)

Hedley Byrne. Pacific Acceptance. Caparo. Scott Group.

TURN OVER

ACCT346-18S1

5.

All else being equal, if inherent risk and control risk are both assessed as low, detection risk will be: (a) (b) (c) (d)

6.

(b) (c) (d)

Endorsing the audit client at a public event being held to announce the client’s initial public offering of shares. Advising the client on the design of their accounting systems. Concern on the part of the auditor about the possibility of losing the engagement. Pressure to inappropriately reduce the extent of work performed in order to reduce fees.

In auditing inventory, an auditor finds that goods that have been temporarily stored in a third party’s warehouse have been incorrectly excluded from ending inventory. Which of the following account assertions is primarily affected? (a) (b) (c) (d)

8.

high. low. the same as audit risk. medium.

Threats to auditor independence can come from various sources. Which of the following is a self-review threat? (a)

7.

TEST

Valuation and allocation. Rights and obligations. Existence. Completeness.

When the auditor undertakes a physical observation of inventory in a retail jewellery store as part of the audit procedures relating to inventory, the strongest criticism of the reliability of audit evidence is that: (a) (b) (c) (d)

the client may conceal items from the auditor. the cost of conducting physical observations is unjustified in relation to the reliability of the audit evidence. the auditor may not be qualified to evaluate the items being observed. physical observation must occur at a specific time of the year.

4

ACCT346-18S1

9.

5

For a particular audit assertion, control risk is the risk that: (a) (b) (c) (d)

10.

TEST

audit procedures will fail to detect a weak control system. the prescribed control procedures are not cost effective. control procedures will not detect a material misstatement that occurs. a material misstatement will occur in the accounting process.

In testing the audit assertion of ‘rights and obligations’, which of the following would generally be considered the most appropriate form of evidence in relation to property? (a) (b) (c) (d)

Title deeds of property obtained from Land Information New Zealand. The auditor’s visual inspection of new building acquisitions for the current year. A depreciation schedule extracted from the client’s computerised fixed assets system. A copy of title deeds obtained from the client’s solicitor.

TOTAL: 20 MARKS

TURN OVER

ACCT346-18S1

TEST

Part B 1.

FINANCIAL STATEMENT ASSERTIONS

You are the in-charge auditor for the audit of Jetlag-free Airlines Limited (JAL), established to provide commuter flights between Rangiora and Christchurch. The airline commenced operations with a second-hand Piper aircraft three years ago. Due to high demand, the airline has ordered a new, larger Cessna aircraft to increase capacity and comfort. The Cessna aircraft will replace the Piper aircraft, which will be scrapped. JAL has a 31 March 2018 balance date, and prepares its financial statements in terms of IFRS. While undertaking the audit, you identify the following matters. i.

Due to a processing error, sales relating to passenger bookings for 1 and 2 April 2018 have been included in the sales total for the year.

ii.

JAL has a fixed commitment to purchase the new Cessna aircraft at a total cost of US$1.2 million. A deposit of US$200,000 is reported as an asset on the balance sheet, but no further disclosure has been made of the outstanding balance. Delivery of the new aircraft is expected in June 2018.

iii.

Spare parts for the Piper aircraft which JAL is currently flying are recorded at cost in the balance sheet. This aircraft will be replaced by the new Cessna aircraft. Based on management’s estimates, a substantial portion of this inventory will remain on hand after the Piper aircraft has been retired from service, and the remaining parts will only have scrap value. Despite this, management continues to carry all of the Piper’s parts at cost.

iv.

The draft financial statements include a total for ‘Cash and Bank’ of $150,000. This total comprises five separate bank accounts. However, the audit confirmation certificate received from the bank only discloses four of those bank accounts. The missing bank account has a general ledger balance of $6,000, but the bank account itself was closed two years ago.

v.

JAL has a banking covenant that requires certain financial ratios to be met at all times. During the past year, JAL breached this requirement on three occasions. After some frank discussions with the bank, the bank agreed to take no action, but has advised JAL in writing that any future breach of these covenants will result in the bank taking action to protect its interests, which may include appointing a receiver. None of this has been disclosed in JAL’s draft financial statements.

6

ACCT346-18S1

TEST

7

REQUIRED: a)

What do you understand by the phrase, “management’s financial statement assertions”, and how do they relate to the role of the auditor? (6 Marks)

b)

For each of the matters listed above (i.e., i. to v.), identify the specific financial statement assertion involved. Then briefly describe the action that you, as auditor, would recommend that JAL should take. (10 Marks) TOTAL: 16 MARKS

2.

RISK AND INDEPENDENCE

a)

Provide and discuss the audit risk model. Then illustrate each of the elements of this model with reference to the audit of Air New Zealand. (10 marks)

b)

It has been said that: “If the auditors are not independent, both in mind and in appearance, the auditor’s opinion adds nothing to the financial statements.” Do you agree with this statement? Justify your answer. (8 marks)

c)

In the video, “Auditing Case Study” which you watched in class, Preston, the Engagement Partner of the Beekman audit, advises Gayle that he and the Managing Director of the audit client had “ironed the whole thing out”, and “came to a reasonable compromise” over outstanding issues in the audit. Identify three possible threats to independence which Preston faced in reaching this “reasonable compromise”. (6 Marks) TOTAL: 24 MARKS

TURN OVER

ACCT346-18S1

3.

TEST

8

EVIDENCE

You are undertaking the preliminary review of the audit file of Overland Submarines Limited (OSL). You are particularly concerned to ensure that sufficient appropriate audit evidence has been obtained for all material assertions. As you review the file, you note that reliance has been placed on the following evidence in auditing management’s assertions: i.

Term Loans: A confirmation letter provided by the lender, and sent, in the first instance, to OSL.

ii.

Inventory Valuation: Comparison with the latest wholesale price list provided by OSL’s three suppliers.

iii.

Accounts Payable: Supplier statements, received by OSL, and reconciled to OSL’s creditor ledger balances.

iv.

Repairs and Maintenance: A letter, signed by the Managing Director of OSL, confirming that all repairs and maintenance had been appropriately expensed and any capital expenditure had been appropriately capitalised.

v.

GST Payable: confirmed by reference to the year-end GST return, and subsequent statement from the IRD.

REQUIRED: For each of the examples given above (i.e., i. to v.), comment on the quality of the audit evidence provided. Where you consider the evidence to be deficient, suggest how the quality of audit evidence might be improved. TOTAL: 10 MARKS

4.

AUDITOR LIABILITY

In performing the 2018 audit of Vandelay Industries Ltd, a Christchurch-based import/export company, Jerry (the audit senior) found a number of significant deficiencies in the internal controls surrounding the company’s treasury function. This function is responsible for managing the short and long-term liquidity of the company. This concerned Jerry as he knew that treasury-related transactions were generally a high risk area for many companies. Jerry reported these deficiencies to the partner of the engagement, George Costanza. George agreed that the matter was one of utmost importance and decided to report it to Vandelay Industry Ltd’s Treasury Department manager, Elaine Benes. Elaine agreed with the conclusions of the auditors concerning the poor controls over treasury activities. She assured George that the problem would be fully addressed before the next audit. George was convinced that Elaine understood the significance of the problem and would act promptly. He decided not to report the matter to Vandelay Industry Ltd’s board of directors.

ACCT346-18S1

TEST

9

Six months later, George received information that Vandelay Industries Ltd was about to go into liquidation. It appeared that the company had invested all of its cash reserves in a local cryptocurrency, Kiwibeanz. The exchange that handled the company’s investment in Kiwibeanz was hacked and all coins were stolen. The exchange is now in liquidation. The holding of Kiwibeanz was a breach of the company’s policies and should not have occurred if the controls in the treasury function were operating effectively. Elaine had not implemented any of the recommendations for improvements to controls over the treasury function. George Costanza was also notified that he was being sued by one of the existing shareholders. REQUIRED Answer all of the following questions. Where applicable, support your discussion with reference to relevant case law. a)

Discuss whether George Costanza was negligent. (10 Marks)

b)

Discuss whether a duty of care is owed to the shareholder who is bringing a case against George Costanza. (10 Marks)

c)

Discuss whether you believe the shareholder will be successful in their legal action against George Costanza. Justify your answer. (5 Marks)

d)

If the legal action was successful, discuss whether George would have to bear the full responsibility. (5 Marks) TOTAL: 30 MARKS

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