Question 1 (15 marks)“Today the world’slargest companies in all sectors and regions disclose their sustainabilityperformance and impacts to some degree. The KPMG Survey of CorporateResponsibility Reporting 2013 concluded that “Almost all of the world’s largest250 companies report on Corporate Responsibility (CR)†and that “Reporting isnow the norm across all these sectors, with at least 62% of companies in everysector producing a (CR) reportâ€Source: (GlobalReporting Initiative, 2015, Sustainability and Reporting Trends in 2025 –Preparing for the Future).globalreporting.org/resourcelibrary/Sustainability-and-Reporting-Trends-in-2025-1.pdf”>https://www.globalreporting.org/resourcelibrary/Sustainability-and-Reporting-Trends-in-2025-1.pdf
Required:Conduct an internet search for one (1) ASX listed company that issues asustainability report and:(a) provide a summary of the structure and contents of the company’sdisclosures, including the guidelines used by the company in preparing theirreport. (4 marks)(b) indicate if the report has been audited or reviewed by an auditor and thetype of assurance they have provided. (3 marks)(c) Identify four (4) areas in addition to sustainability reporting whereauditors now provide assurance. (4 marks)(d) Briefly describe two (2) of the areas identified in c) and the auditorsrole in these areas. Include any issues or difficulties faced by the auditor inyour response. (4 marks)Question 2 (15 marks)Jerry is an auditpartner in a local office of a large regional accounting firm. One of Jerry’sbiggest clients is Thunderbolt Ltd. – a company which undertakes major propertydevelopment projects. Thunderbolt is also a large employer in the localcommunity. Until last year Thunderbolt had been very profitable but theeconomic downturn has started to have a detrimental impact. Jerry is preparingfor the final audit meeting with the client. At this meeting there will bediscussions about the main findings and any adjustments which are required tobe made to the accounts. One major issue with the audit was lingering doubtsover Thunderbolt’s status as a going concern. Thunderbolt was coming close toviolating its loan contracts which required it to maintain a current ratio of1.7:1. This issue has caused Jerry many sleepless nights of late – Jerry likesthe people who run Thunderbolt and is well aware of the negative impact thatits closure would have on the local community. Jerry is also aware thatThunderbolt’s violation of loan terms would most likely have a negative impacton his own immediate career prospects.Thunderbolt’s year-endwas 30 June but Jerry’s firm carried out most of its work during February. Atthat time all of the projections looked fine, however recently Jerry noticedthat one of Thunderbolt’s major customers, Deciduous Ltd had been placed intoadministration. At year-end Deciduous owed Thunderbolt $1.8 million. If thisamount were to be written off Thunderbolt would be breaching its loancontracts. While Jerry was aware that Deciduous was disputing the amount due(such tactics were common in the property development industry) he fullyexpected that the vast majority of the sum owed would be paid. This is now allin doubt.At the meeting with theclient, Jerry asks whether any provision had been created in relation to theamount due from Deciduous or whether any updates to the projections originallyaudited in February had been made. Darryl, Thunderbolt’s Chief Executive,advises Jerry that he does not believe this will be necessary. Darryl informsJerry that the administrator of Deciduous has advised him that Deciduous willbe able to meet all of its outstanding debts. Jerry advises Darryl that hehopes this is will be the case but he will need to obtain assurances from theadministrator directly. Darryl asks why this is necessary as he is happy togive Jerry a letter to this effect. Jerry advises Darryl that he has to do hisjob.Darryl reacts to thisangrily shouting: “Jerry, you have been our auditor for years and at the firstsign of trouble you appear willing to help the bank shut our doors, the effectof which will be a disaster for the local community and also for your firm.Many of your neighbours work for this company, what will they think? What willtheir children think? This will impact on your own children at school. All weare asking for is time – to let us trade out of this situation. As far as I amconcerned, the accounts will not be altered. You can do as you wish – howeverremember what I have told you – local communities need businesses like ours. Iwill let them know who caused the closure of this business, if that’s what itcomes to!â€Required:Use the AAA model to recommend a course of action for Jerry (15 marks)
Question 3 (35 marks)Your firm has just beenappointed auditor of Gravel Manufacturing Ltd. and you are planning for yourfirst audit – the year ending 30 June 2016. Gravel Manufacturing is amanufacturer of electronic smoke alarms and electronic security systems and ispart of the broader electronics industry. Their operations consist of a headoffice and factory in the Sydney suburb of Alexandria. They have distributionoutlets in each major Australian city and sales agents throughout South EastAsia, the UK and USA. There has been a large amount of capital expenditure onthe Sydney factory over the past two years. Your research shows that the smokealarm and security industry is highly volatile and competitive, with heavydiscounting by competitors and a prevalence of lower quality products. Theindustry is also affected by changes in technology, government regulations andhealth and safety legislation in each of the different areas in which thecompany operates. In discussions with the Sydney productions manager, Mr Ye,you discover he has a difficult job ascertaining production levels in avolatile market and he is often concerned at inventory fluctuations caused byover or under production of alarm and security systems.
Gravel Manufacturing operates a senior management incentive scheme where seniorexecutives are allocated a percentage of net profit after tax. Gravel also hasa long term mortgage loan with a foreign bank that requires them to maintaincertain financial ratios. Breach of any of the loans will result in the bankcalling in the loan within 24 hours. The requirements are that the currentasset ratio must be greater that 1.5:1 and the quick asset ratio must begreater than 0.8:1.Income Statement
30/6/2016
30/6/2015
30/6/2014
$(000)
$(000)
$(000)
Sales
27,740
25,280
22,936
Less: Cost of goods sold
20,104
20,800
18,200
Gross Profit
7,636
4,480
4,736
Interest expense
500
260
240
Other expenses
460
1,580
2,040
Profit Before Tax
6,676
2,640
2,456
Income tax expense
1,520
1,100
800
Profit After Tax
5,156
1,540
1,656
Balance Sheet
CurrentAssets
Cash
100
0
1,600
Receivables
3,890
2,960
1,920
Inventory
3,720
2,680
1,724
Other assets
1,160
0
0
Total Current Assets
8,870
5,640
5,244
NonCurrent Assets
Property Plant & Equipment
5,780
5,200
3,812
Total Assets
14,650
10,840
9,056
CurrentLiabilities
Overdraft
0
400
0
Payables
1,910
3,100
3,580
Other Creditors
278
224
100
Provisions
510
1,720
1,520
Total Current Liabilities
2,698
5,444
5,200
NonCurrent Liabilities
Loans
3,000
1,600
1,600
Total liabilities
5,698
7,044
6,800
NetAssets
8,952
3,796
2,256
ShareholdersEquity
Issued capital
200
200
200
Retained profits
3,596
2,056
400
Profit/loss for year
5,156
1,540
1,656
Shareholders equity
8,952
3,796
2,256
Required:a) Calculate thefollowing ratios for 2016, 2015 and 2014:• Gross profit ratio• Return on total assets• Net profit ratio (before tax)• Inventory turnover• Receivables turnover• Current ratio• Quick ratio• Times interest earned (before tax)Note: assume inventoryand receivables balances for 2013 are the same as for 2014 (12 marks)
(b) Identify and explainany going concern issues you have identified. (2 marks)(c) Identify the four accounts that you consider most at risk of misstatement.Use the background information, financial statements and analytical results tojustify your choices. (12 marks)(d) For the accounts identified in (c) explain if the accounts are likely to beoverstated or understated and identify the key assertions that would be thefocal point for the audit. Justify your choice of assertion. (9 marks)You can using thefollowing format to present the ratios for part (a)
Ratio
RatioFormula
2016
2015
2014
The following tableformat can be used to answer parts (c) and (d).
Accountat risk of misstatement and justification
Overstatedor understated
Assertion(s)at risk
Justification
Question 4 (20 marks)You have been involvedwith the audit of River Pty Ltd. – a manufacturer of household cleaning chemicals.As part of your interim review you have completed a ‘walk through’ of theprocedures involved with the purchases and payments cycle. The following is asummary of the procedures you have documented on your file:
The warehouse manager isresponsible for placing orders for chemical ‘ingredients’. Because of thebulk quantity discounts, he will usually place an order for three monthsof ingredients when there is one month of ingredients left. He is able todetermine how much the company uses in manufacture each month by reviewingthe inventory records held at the warehouse.To order, the warehouse managercontacts any of the approved suppliers and places an order over the phone.No record is kept of the conversation, nor does the warehouse manager requireany approval. To make sure he doesn’t reorder in error he ‘ticks’ theinventory ledger and writes the date of order next to the product number.When goods are received thewarehouse assistants check the delivery note against the ingredientscoming in and then lets the deliverer pump the ingredients into thecompany’s storage tank. At no point do they check the actual quantityreceived. A warehouse assistant then gives the delivery note to thewarehouse manager. The warehouse manager will then post a journal entry tothe inventory system by keying the entry into the terminal.When the journal is accepted,the computer will generate a journal number. (Note: the journal posted bythe system is DR Raw materials inventory; CR Creditors). The warehousemanager writes the journal number onto the delivery note and sends it tothe accounts payable clerk at head office. The accounts payable clerkfiles the note by supplier.The accounts payable clerk athead office receives all supplier invoices. On receipt of the invoice theclerk checks the details to the delivery note received from the warehouse.If there are no discrepancies she will prepare a cheque requisition forthe mount of the invoice and forward the cheque requisition, with theinvoice and delivery note attached, to the financial controller forauthorisation. If the payment is over $20,000 the financial controllermust forward the requisition to the managing director for authorisation.The financial controller and/ormanaging director signs the cheque requisition to indicate authorisationand forwards the documentation to the banking clerk who keys the paymentinto the general ledger (the journal posted by the system is DR Creditors;CR Bank). Once the journal is accepted by the system, the system generatesa journal number which the banking clerk writes on the cheque requisition.She then files the cheque requisition together with supportingdocumentation by cheque requisition number.All cheques are printed andsigned (counter stamped) by the computer. When they have been printed theyare returned to the banking clerk who checks the details and sends them tothe supplier.
Required:a)Identify four strengths and two weaknesses inthe purchases and payments system and justify your selections. (12 marks)b)For each strength identified in part a),indicate one test to be performed to test the controls (4 marks)c)For each weakness identified in part a),identify a test which can be performed to minimise this risk (4 marks)
RationaleCovering material fromtopics 1 to 5, this assessment has been designed to develop your abilities to:
explain the role of assuranceservices and providers;identify and evaluate theinfluences on the audit processes, including the Corporations Act, CommonLaw, Australian and International professional standards, professionalbodies and public expectations within a global market;appraise the client’s businessenvironment and apply the risk model;explain, select and applyprocedures involved in the audit process; andappraise the expanding scope ofauditing in the current international business environment.
Marking criteria
Criteria
High Distinction
Distinction
Credit
Pass
Q1. Appraisal of the expanded roleof auditors into providing assurance for sustainability statements (LO1, LO5)(15 marks)
The components of thesustainability statements for the selected Australian company separatelyidentified and succinctly summarised with a very clear articulation ofconcepts and link to relative guidelines used by the company in preparing thereport. The type of audit opinion provided is correctly identified. Fouradditional areas where auditors provide assurance correctly identified.Description of roles and identification of issues indicates insightfulunderstanding of the expanding nature of assurance services.
The components of sustainabilitystatements for the selected Australian company separately identified andsuccinctly summarised with a clear articulation of concepts and link torelative guidelines used for preparing the report. The type of audit opinionprovided is correctly identified. Four additional areas where auditorsprovide assurance correctly identified. Description of roles andidentification of issues indicates clear understanding of the expandingnature of assurance services.
The components of sustainabilitystatements for selected the Australian company separately identified andsummarised with a clear articulation of concepts and link to the relativeguidelines used for preparing the report. The type of audit opinion providedis correctly identified. Four additional areas where auditors provideassurance correctly identified. Description of roles and identification ofissues indicates an appropriate understanding of the expanding nature ofassurance services.
The components of sustainabilitystatements for selected the Australian company separately identified and usedappropriately. The guidelines used for preparation of the report and/or typeof audit opinion while identified may not be correct. Four additional areaswhere auditors provide assurance identified but some are more relevant thanothers. Description of roles and identification of issues indicates atentative understanding of the expanding nature of assurance services.
Q2. Identification and evaluationof the ethical influences on the audit process (LO2) (15 marks)
Provides a comprehensive synthesisand critical evaluation of the ethical issues in the scenario, using the AAAmodel.
Provides an advanced synthesis andcritical evaluation of the ethical issues in the scenario using the AAAmodel.
Provides a competent synthesis andcritical evaluation of the ethical issues in the scenario, using the AAAmodel.
Provides a basic evaluation of theethical issues in the scenario. Some aspects of the AAA model overlooked ornot well utilised.
Q3. Appraisal of the client’sbusiness environment and application to the audit risk model (LO3) (35 marks)
All analytical calculationscompleted without flaws. Well supported and coherent explanation regardinggoing concern and for the identification of four (4) accounts at risk ofmisstatement. Response demonstrates an insightful understanding of therelationship between analytical procedures, areas of risk and key assertions.
All analytical calculationscompleted, with only minor errors. Well constructed explanationregarding going concern and for the choice of four (4) accounts at risk ofmisstatement. Response demonstrates a clear understanding of the relationshipbetween analytical procedures, areas of risk and key assertions.
All analytical calculationscompleted, with only minor errors. Competent explanation regarding goingconcern and for the choice of four (4) accounts at risk of misstatement.Response demonstrates an understanding of the relationship between analyticalprocedures, areas of risk and key assertions.
One or two analytical calculationsoverlooked, all other calculations are correct or contain only minor errors.Basic explanation regarding going concern and for the choice of four (4)accounts at risk of misstatement. Response demonstrates a limitedunderstanding of the relationship between analytical procedures areas of riskand key assertions.
Q4. Appraisal of the client’sinternal control environment and application to the audit risk model (LO3).Explanation for the selection of tests of control in the audit process. (LO4) (20 marks)
Well supported and coherentexplanation for the choice of four (4) strong internal controls and tests ofcontrol. Well supported and coherent explanation for the choice of two (2)control weaknesses that most significantly threaten the client’s business riskin relation to purchases and payments of inventory. Likely impact on risk andtests minimising risk thoroughly articulated.
Well constructed explanation forthe choice of four (4) strong internal controls and tests of control. Wellconstructed explanation for the choice of two (2) control weaknesses thatmost significantly threaten the client’s business risk environment inrelation to purchases and payments of inventory. Likely impact on risk andtests minimising risk well articulated.
Competent explanation for thechoice of four (4) strong internal controls and tests of control. Competentexplanation for the choice of two (2) control weaknesses that may threatenthe client’s business risk environment in relation to purchases and paymentsof inventory. Likely impact on risk and tests minimising risk clearlyarticulated.
Basic explanation for the choiceof four (4) strong internal controls and tests of control. Basic explanationfor the choice of two (2) control weaknesses that may threaten the client’sbusiness risk environment in relation to purchases and payments ofinventory. Articulation of likely impact on risk and tests minimising risklacking some clarity.
Professional communication inaccordance with APA 6th edition style. (15 marks)
Excellent written expression withvery clear articulation of ideas and concepts. Superior grammar and spellingskills. References presented show evidence of significant research and areused accurately in accordance with APA (6th ed.) requirements.
Consistently clear and conciseexpression of ideas. No spelling errors and only minor grammatical errors.References presented show evidence of significant research and are usedaccurately in accordance with APA (6th ed.) requirements.
Expression of concepts is clearand concise. Very few spelling and/or grammatical errors. Referencespresented show evidence of reading outside the subject resources and are usedaccurately in accordance with APA (6th ed.) requirements.
Some inconsistency in sentencestructure. Clarity of expression could be enhanced by some revision. Somespelling errors and/or poor grammar. At least two references included andmostly used in accordance with APA (6th ed.) requirements.
Your assignment will be marked out of 100 which will then beconverted to a mark out of 30.
