Auditing Case Study PDF

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MEMO Ref: To: Audit Manager From: Audit Senior – Fabiola Moeljoatmodjo Date: 13/01/2019 Subject: Wine Limited Introduction and Scope: I have just finalized an initial assessment for the planning stage of Wine Limited’s audit. Attached below for your convenience is an outlined report on in the key accounts at risks for Wine Limited which integrates the criteria discussed in ASA 315 “Identifying and Assessing the Risks of Material Misstatements through Understanding the Entity and its Environment.” In addition, I will be suggesting the preferred audit approach based on the criteria outlined in ASA 300 “Planning an Audit of Financial Report”. Risk Assessment: Due to the problems faced by Wine Limited, the three account balances that can be identified and subjected to an increase in audit risk are Accounts Receivable, Accounts Payable and Inventory. This specific audit plan focuses on these accounts mentioned due to possible abuses in these areas. Inherent risk is perceived to be increased due to rigorous checks by Australian customs which caused the delayed wine shipments. This delay infuriated the Chinese customers which led them to threaten to reduce 30% from the amounts owed due to lost production time. This could negatively affect the Accounts Receivable account because of the fact that Wine Limited can lose a portion of the amount owed (Assertion – Accuracy, valuation and allocation). Swan Wines Limited which is Wine Limited’s customer had refused to pay 5 months worth of payment due to their claims of discovering lactic acid contamination in a batch of wine they received. The presence of this bacteria deteriorates the quality of the wine. This specific occurrence impacted the Accounts Receivable and Inventory accounts of Wine Limited and there is a possibility that the amount owed by Swan Wines will be void and uncollectible (Assertion – Accuracy, valuation and allocation). If investigation proved that the wine does not contain lactic acid bacteria, the net realizable value of the inventory would be lowered (Assertion – Accuracy, valuation and allocation). The upgrade to Wine Limited Accounts Payable system and increased regular amount of foreign currency transactions have caused a few setbacks. The newly updated system automatically updates the general ledger when creditor entries (€Euros and $AUD)are inputted. In addition, some €Euros which are incorrectly recorded as $AUD amounts causes the inaccurate creditor balances and therefore increases inherent risk (Assertion – Accuracy, Valuation and Allocation). Furthermore, errors which forces creditor balances to be incorrectly re-set to zero every month causes the need for staffs to manually re-enter the balances. This causes the increase in control risk because staffs are exposed to the risk of entering the wrong amount (Assertion – Accuracy) or accidentally failing to enter the balances overall (Assertion – Completeness).

The Australian dollar falling 3% against $USD and 5% against €Euro suggests that payments to suppliers in the US and Europe are more expensive which affects the Accounts Payable because amounts can be reflected incorrectly (Assertion – Accuracy, valuation and allocation. In addition, the economic downturn in China means that Chinese customers might have difficulties paying which would directly affect the Accounts Receivable account (Assertion – Accuracy, valuation and allocation). Audit Approach: Since both inherent and control risks are perceived to be increased, extensive substantive testing should be integrated. The test of controls and analytical procedure should not be conducted since it is not effective for high levels of control risks. Because of various risks, the predominant substantive approach should be applied for Wine Limited and their main focus should be for investigating fraud or material misstatements at assertion level especially for accounts which includes high-volume transactions (accounts Receivable, Account Payable and Inventory accounts) which are all performed near or at year end under the going concern assumption that the company is a going concern and will further continue its operation for the foreseeable future (ASA 570). Based on ASA 505, the conversion rates for foreign currency transactions should be both applied and updated and a review on outstanding payments and the ability of debtors to fulfil their obligations in the Accounts Receivable must be executed. The recommended method of implementation would be to send out confirmation requests to debtors to request payments. The review of the economic situation in China must be both conducted and evaluated.

The auditor would also need ensuring confirmation of accurate Accounts Payable from their suppliers. They will also need to conduct checks and reviews with documentation from suppliers in the form of invoices (ASA 505). Regular testing should also be conducted to check if manually recorded balances were recorded accurately to ensure tat the amount owed to Accounts Payable are paid off correctly. Lastly, ASA 501 states that regarding the Inventory account, the auditor is suggested to investigate the lactic acid allegations and considers whether adjustments will be required regarding the net realizable value of the residual inventory.

References: Business Communication: A Handbook for Accounting Students and Graduates. Pearson Australia (ISBN: 9781488618772). Chartered Accountants Australia and New Zealand (CAANZ). 2017. Auditing, Assurance and Ethics Handbook. Milton, Queensland, Australia: John Wiley & Sons Australia Ltd (ISBN: 9780730328735). Gay, G. and Simnett, R. (2017). Auditing & Assurance Services in Australia (6th Ed Revised), McGraw-Hill (ISBN: 9781760420901)....