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Faculty of Higher Education Assignment Cover Sheet Unit Code Unit Name

HI6026

Audit, Assurance and compliance

Your Lecturer

Lucy Ferdous

Assignment Number

Tutorial question

Due Date

26/2/2021

Declaration Complete this and attach as a front cover sheet to your Blackboard submission We certify that: 1. This assignment is my work. We have acknowledged and disclosed any assistance received in its preparation and cited all sources from which data, ideas, words (whether quoted directly or paraphrased) were taken. 2. This assignment was prepared specifically for this unit only. 3. The reference list is truthful and accurate and in Harvard referencing style.

Table of Contents Question 1 Question 2 Question 3 Question 4 Question 5 Question 6 Reference List

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Question 1 (a). Justification about audit demand As per the Corporation Act 301 deals with financial reporting standards and auditing standardsrelated aspects. In these audit guidelines, some important factors are analysed and these are mainly helping auditors to manage a proper auditing guideline in their works. Based on this scenario it is found that the big 4 auditors charged more fees than other auditors. As per the opinion of Grafenauer & Curtain (2018), In this situation, the demand of these four companies usually reduces due to the reason other auditors are offering fewer amounts fees as compared to these companies. However, this increment is primarily occurring due to market recession. This is indicating other auditors are also increasing their fees in future times. In this situation individuals are also showing interest in accrued knowledge about auditing to save money economic recession is influencing individuals to self defend. In COLUMBIA COFFEE & TEA PTY LTD & ANOR v CHURCHILL & ORS t/a NELSON PARKHILL (1992) 29 NSWLR 141 cases is the same as this scenario is noticed (Iknow.cch.com, 2021). (b). Analysis of client’s perspective In this situation, shifting of client’s choice is mainly noticed due to the reason that the big four audit companies have increased their fees. Moreover, the efficiency level of other auditors is playing a crucial role in this situation. In case other auditors are unable to support their clients, those kinds of services are provided by the big four audit companies. Shipment of client’s interest is mainly noticed in this situation, and some companies also want to manage proper plans for connecting with new customers (Muhammad et al. 2018). Additionally, these are the major factors for a company to manage a market-based price for its services. Apart from that, these four audit companies are charged higher prices as compared to other audit companies. As per the economic point of view, the demand will be reduced due to charging high fees. In real life, these companies are able to create their brand names and this is the main reason clients are attracted to these companies.

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Question 2 a. The threat of litigation if Carolina Company Ltd fails Carolina company mainly faces business failure due to a different kind of financial stretching and accounting system associated issues are present under this company. In addition to that, these are the major factors for a company to plan for managing proper expectations under an organization (Mollik et al. 2020). In this scenario, it is clearly noticed that different kinds of factors are present like, accountability associated issues are mainly noticed by these companies under its company. The auditors are not providing proper information and as a result, this Carolina Company is facing different types of issues under its company. It is observed in Woolcock Street Investment Pty Limited v CDG Pty Limited [2004] HCA 16; (2004) 216 CLR 515 for finance and auditing structural stress can be seen (Mondaq.com, 2021). It is seen that during the time of the Carolina Company it is mainly focusing on changing the accounting system on other hand, Godwin Company needs to properly analyse every aspect and then suggest a proper plan that can be implemented in their accounting system (Mondaq.com, 2021). The threat of litigation of Carolina Company is associated with changing of an accounting system and this is the major reason for a company to face this kind of business failure type situation. b. Continuance decision for Carolina Company Ltd for the next financial year In an upcoming financial year, this Carolina Company has to ensure that they are using a new accounting system technique for its organization. This company needs an efficient accountant for its organization and this newly employed accountant is supporting a company to maintain information about accounting. As opined by Wiley et al. (2017), this is a very crucial factor for an accountant to enlist every accounting data in their books. Based on the available data different companies are taking different types of decisions for its company. In an upcoming financial year this Carolina Company Ltd, properly analysed its available data and calculating the actual growth of the downtrend, and then preparing proper plans for overall achievement. In case it is found that this new accounting system is unable to boost their accounting system in this situation this company is mainly working as per their previous accounting system technique which was beneficial for this company. Due to this reason, this company is working in this 4

particular accounting system for several years and they had efficiency in this accounting system. In Wyong Shire Council v Shirt [1980] HCA 12; (1980) 146 CLR 40, Mason the same scenario is noticed. The shirt company was the client of a Wyong Shire Council company, and this audit company suggested the shirt company use a new accounting system for its organization (Mondaq.com, 2021). After using the new accounting system this shirt company is facing different challenges and file a case against Wyong Company.

Question 3 a. Test table Test

Type of test

Examine the financial report to determine

An “audit substantive test” needs to be

whether all related party loans are properly conducted here to investigate the financial presented

reports and justify the supporting documents.

Recalculate depreciation figure

“Audit Substantive tests” will be required to match the actual fixed assets value to the recorded fixed assets value in the balance sheet (Istrate et al. 2020).

Trace sales recorded in the sales journal to An “audit substantive test” needs to be shipping documents

conducted here to justify the correctness of the sales records. “Dual purpose test” can also be applicable here.

Examine sales invoices for initials to indicate “Dual purpose test” will be appropriate for a that prices and extensions have been checked

deep analysis of sales invoices.

Check cost of closing inventory to subsequent “Risk assessment test” needs to be conducted sales prices

here to cross-check the closing inventory value (Istrate et al. 2020).

Confirm institutions

loan

balances

with

financial A “test of detailed balance” will have to be conducted to analyse the “money value correctness”.

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Table 1: Types of tests (Source: created by learner)

Figure 1: Types of audit tests (Source: Study.com, 2021) b. Decision making (i) Trena firstly noted that a large amount of return took place in the month of July from XLP. However it represented only 1% of the sales for that year. According to the “accounting standards”, irrespective of the size, each and every transaction needs to be considered and recorded properly to avoid the chances of fraud and misstatements. This being said at the end of the financial year, Trena announced that “1%” sales value was “immortal” and this is the reason that it needs no further adjustments. However, in a double entry system, every transaction has to impact two sides of the financial statements (Godina et al. 2020). Trena treated that 1% sales value as immortal money (immortal money refers to the value which is no longer important) and neglected the further adjustments for the year. Additionally, there was no audit evidence that Trena could present in terms of calling that 1% sales value immortal. This can lead the organization to face difficulties later at the time of internal audit. (ii) In this case the sales clerk genuinely forgot to tick the checkboxes which was one of his major duties. However, he checked the authorized price list carefully and handed it over to the higher authority. The only mistake he made here was leaving the three checkboxes empty. Trena, the junior audit assistant understood the plot well and approved that the test control of the organization was satisfactory. However, she did not think it was necessary to investigate that

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sales clerk to reach the depth of that error. Thus the conclusion she made was a little unsatisfactory as she did not collect any evidence for the sales clerk.

Question 4 a. Controls of inventory movement Inventory management is a very important term in accounting and audit as it reflects the liquidity condition of a firm (McMaster et al. 2020). Mighty Tools Hardware deals with a large number of suppliers and this is the reason that it has to manage its inventories well to avoid difficulties. Mighty tools use the “perpetual stock system” which is a method of inventory management used for recording real time transactions. It is clear from the case study that the company has no central warehouse which can be a major reason for inconvenience. The suppliers directly deliver the parcels to the local stores but all the payments are made by the central office. This is suggested to Mighty tools hardware to implement barcode inventory” at the local stores so that tracking of daily parcels is easier and accurate. Errors in the data entry system in the local stores can also be mitigated by this type of control. However, the head office should continue with the “perpetual inventory system” and “periodic inventory system”. b. Explanation of stock takes auditing In order to audit the stock take of Mighty tools hardware, several audit procedures have to be followed. Stock take is the total amount of stocks that a business organization holds (Prime, 2020). There are certain processes that Mighty tools hardware has to go through for the auditing for stock take. These are as follows: Cut off analysis: in this phase the auditor will be analysing if there is any need to hold an extra receivable amount at the time of “physical inventory count” to ascertain the fact that “extraneous inventory items” are excluded from the counting. Physical inventory count: here, the auditor needs to get familiar with the procedure that the organization follows to keep the inventory managed. Thus the counting procedures need to be s\discussed with the auditor to have better understanding. Examining the inventory count is one of the major steps in this stage (Wang et al. 2020). Reconciling the inventory count: This stage is composed of tracing the valuation which was compiled from the physical inventory counting. General ledger and other accounting records will be reviewed in this stage. 4

Testing high value items and testing error prone items: the “unusual” high values will be considered here to correct the financial recordings. Inventory in transit: Here transfer documentation will be reviewed by the auditor for mitigating the transition risks (Mahenthiran et al. 2020). Testing of costs: Here, “items cost”, “freight cost” and “market cost” of the inventories will be analysed by the auditor Direct labour and overhead analysis: cost of inventory needs to be adjusted against labour value and overheads. WIP testing: Work in progress is a special kind of inventory that needs to be considered here by the auditor. Inventory allowance, ownership and layers: Here, the amount for obsolete inventory, purchase records and FIFO-LIFO will be analysed by the auditor.

Figure 2: FIFO method (Source: Double-entry-bookkeeping.com, 2020)

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Figure 3: LIFO method (Source: Double-entry-bookkeeping.com, 2020)

Question 5 1. Justification for negotiation The negotiation agreement looks good even though there are no chances to incur an extra amount of profit. The new stores in a locality catches the eyes of the audiences for obvious reasons, thus signing an agreement with a newly launched store would certainly boost the business of OPSM Opticians. In case the eye wears that are supplied by OPSM opticians are liked by the customers of JDS, OPSM will get more orders. 2. Evaluation of Trendy Accessories’ application It has been more than two weeks that the other party has lodged the same patent request for the unbreakable lens. Now the point is to identify whether the patent request lodged by OPSM opticians will be granted or not. The authority has invested a lot in this project thus; the company should be trying to present their need for the patent to the authority who grants licenses. This can be done by displaying the future scenario of sales that would be increased after this launch. 3. Confidential investigation spanning 4

Senior staff should be highly responsible as they are associated with the organization for a longer period of time. However, in this case, the two senior staff of OPSM has broken the trust of the higher authority as they have found performing unethical activities in the organization. The immediate action that OPSM can take is to fire those two staff after having an investigation of the financial records and detailed conversation with them. 4. Analysis of accounts receivable balance Insurance plans are very much important for securing the life of a business (Lannen et al. 2021). In this case, the major customer of OPSM had not taken any plan and unfortunately suffered fire. Thus, no insurance coverage will be served to Leisure Pty Ltd. However, to retain the major client (Leisure Pty Ltd), OPSM should lend a helping hand by supplying those 500 free eye wears. 5. Analysis of OPSM Opticians shares The market price of OPSM has fallen down and this is the reason that no investor is getting attracted to this organization. Thus, the company should come up with innovative ideas for launching innovative products. Additionally, OPSM needs to search for scopes as this field has enough p\opportunities to grow. For instance, blue computer lenses are highly in demand and they can include this in their product list.

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Question 6 1. Note to the financial report Based on the scenario it is noticed that on 5th July Blue ply Ltd, a major customer of Greenfield Ltd and this company was placed for liquidation. On this due date, Blue Ply Company wrote off or provided for the balance due to Greenfield ltd as of balance date. This is indicating that the Greenfield Company is working as per auditing ethics however; Blue Ply Company wants to manipulate data or information (Grafenauer & Curtain, 2018). However, the financial report of Blue Ply Company needs to show this company as an accrued fee. In a balance sheet, this company needs to place itself properly as a liability of this Blue ply company. 2. Justification of any change to the financial report Greenfield Ltd entered a new business to supply wine to other companies, in this situation this company launched a new product by name Wine Taster for the South Australian region. This is also indicating that this company needs to change their financial report due to them contacting a new client. In case this company is not changing its financial report different kinds of factors are analysed properly. 3. Justification of any change to the financial report This Greenfield Company is mainly focusing on a new developing process and this is associated with developing a financial reporting standard. This standard is mainly helping this company to manage proper plans for overall improvement. Based on this case study is developing their bottles and this indicates a cost-increasing factor for a company (Mollik et al. 2020). However, cost controlling and cost monitoring factor is present under this company. However, in case any kind of business associated challenges are occurring different types of business barriers. 4. Changes to the annual report Greenfield Company has drawn an agreement with its rival companies; the main aim of this agreement is to manage proper plans for connecting with a customer. This agreement is also able

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to maintain a clear image in its market. These planning and monitoring factors help a company to create a proper and clear image when dealing with proper financial reports. Plans for expanding Bursa Vally Pty Ltd have too prepared a proper outline for a company and this is indicating a proper managing plan for its company (Grafenauer & Curtain, 2018). In case of any kind of business, associated issues are present to managing a proper impact in business. In upcoming years this company will be prepared a proper budget for its upcoming years, in this situation this budget is helping to get an idea about future cost. This is offering a monitoring process properly and this company is able to understand the actual growth of its company. Some important factors like future cost and area need to develop like decisions are taken by using these pieces of information. The DSE (Holdings) Pty Limited v Intertan Inc & anor - Federal Court 3011 of 2002 (decided 9 September 2004) case similar scenario is noticed (Mondaq.com, 2021). The reference regarding Bursa Valley Pty Ltd is they need to identify their area and this is offering a company to manage a proper plan for getting market success.

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Reference List Double-entry-bookkeeping.com,

2020.

FIFO

vs

LIFO

Comparison.

Available

at:

https://www.double-entry-bookkeeping.com/inventory/fifo-vs-lifo/ [Accessed on: 18.02.21] Godina, R., Ribeiro, I., Matos, F., Ferreira, B. T., Carvalho, H., & Peças, P. 2020. Impact assessment of additive manufacturing on sustainable business models in industry 4.0 context. Sustainability, 12(17), 7066. doi:http://dx.doi.org/10.3390/su12177066 Grafenauer, S. & Curtain, F. 2018, "An Audit of Australian Bread with a Focus on Loaf Breads and

Whole

Grain",

Nutrients,

vol.

10,

no.

8,

pp.

1106.

Available

at:

https://www.proquest.com/scholarly-journals/audit-australian-bread-with-focus-on-loafbreads/docview/2108585626/se-2?accountid=201395 Iknow.cch.com, 2021. COLUMBIA COFFEE & TEA PTY LTD & ANOR v CHURCHILL & ORS t/a NELSON PARKHILL; SAUNDERS v DONYOKE PTY LTD & ORS, Supreme Court of New South

Wales,

05

November

1992.

Available

at:

https://iknow.cch.com.au/document/atagUio383937sl10506863/columbia-coffee-tea-pty-ltdanor-v-churchill-ors-t-a-nelson-parkhill-saunders-v-donyoke-pty-ltd-ors [Accessed on: 18th , February 2021] Istrate, C., PhD., Bunget, O.C., PhD. & Popa, I.E., PhD. 2020, "Justifications for the Modified Opinions and for Other Observations in the Audit Reports", Audit Financiar, vol. 18, no. 4, pp. 785-800.

Available

at:

https://www.proquest.com/docview/2467632792/535E9235310946E1PQ/1?accountid=188056 [Accessed on: 18.02.21] Lannen, P., Sand, H., Sticca, F., Ruiz Gallego, I., Bombach, C., Simoni, H., Wehrle, F.M. & Jenni, O.G. 2021, "Development and Health of Adults Formerly Placed in Infant Care Institutions – Study Protocol of the LifeStories Project", Frontiers in Human Neuroscience, . Available

at:

https://www.proquest.com/docview/2479182398/AC26C4E6A4847DAPQ/1?

accountid=188056 [Accessed on: 18.02.21] ...