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HI6026 Audit and Assurance and Compliance

Faculty of Higher Education

Assignment Cover Sheet

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Unit Code

HI6026

Unit Name

Audit, Assurance and Compliance

Your campus and class/tutorial number

(e.g. M2)

Assignment: Tutorial Questions Assignment (Individual)

Is this a Group or Individual Assignment?

If Group, state your assignment group number _________

Question 1:

Section 301 of the Corporations Act requires companies to have their financial reports audited. Academic research suggests that Big-4 auditors charge higher fees than other auditors and their audit reports are more credible than those issued by other auditors.

1(a):

According to Section 301, the audit is necessary and it will impact the demand for the audit. In the times of economic recession the demands for the audit will increase be as it will affect client’s need for audit and consultancy services , the level of perceived audit risks and the degree of market competition. And also the financial information of the business will be manipulated for showing higher/low profit and loss and hence the reliability and relevance on the audited financial information will become more important (Loewenstein, 2017). The regulatory bodies will also make it necessary for audited information to save the interest of investors.

1(b):

Clients to shift from large (Big-4) auditors to smaller auditors or from smaller auditors to Big4 auditors – As during the time of recession, companies will be suffering to maintain financial stability so they will shift from big auditors to small auditors as big-4 auditors will charge big amount of audit fees as compared to small auditors who will charge very less amount of audit fees as compared to Big-4 auditors and hence to maintain the financial position of the businesses, companies will shift towards small auditors as compared to large/Big-4 auditors to save money (Pham, Duong, Pham, & Ho, 2017).

Question 2:

2(a):

Guidance to Rebecca about the steps she can take to avoid the threat of litigation if Carolina Company Ltd fails:

Auditors can be responsible for the fall of the companies because it will raise questions to the creditability of the audit reports issued by the auditors and litigation threats by following steps:

  • Complete separate engagement letters for each service offered any given client, from audit, review, and compilation to tax, consulting, and other services. For example, while bookkeeping is less complex than other assignments and may be one of two or three services you provide to a client, it is important to be clear about the scope of bookkeeping services, especially when bank reconciliation is involved.
  • Define limitations of services from day one and enforce them; clients often try to expand the scope after a problem is discovered.
  • An engagement letter is a must. Failure to create this document can lead to broad interpretation of scope of services actually performed and lead to misunderstandings and unrealistic expectations (Amoah, Anderson, Bonaparte, & Meyer, 2018).
  • Make sure invoices match the scope of the engagement; embellishment could result in fraud risks.
  • Don't overpromise. It's important that proposals align with the promise to deliver specific services, experience in accomplishing the services as well as the accountants' availability and resources.

2(b):

Rebecca should consider following things before making client continuation decision:

  • ASX is now listed company
  • It is financially strectched
  • Its accounting system are struggling
  • the audit firm may be liable in case of the financial situation of the client may get worsen and fails the client.

The decision to continue or terminate a professional relationship is similar to the decision to accept a client, but the sources of information for the decisions differ. After completing an engagement, the accounting firm has more information upon which to base its decision. This suggests that external sources of information, such as business or legal references, are less important when the firm has extensive first-hand information (Vincent, & Wilkins, 2020). The key issues that auditors consider when deciding to continue a professional relationship are:

  • Changes in client circumstances that are related to issues considered during the acceptance analysis
  • Audit results and status of client relations
  • Actual profitability
  • Periodically running and reading background checks on client and its management

Question 3:

3(a):

Audit tests include tests of controls and substantive procedures. Substantive procedures can be divided into substantive analytical procedures, tests of balances, tests of transactions and tests of disclosures.

Test

Type of test

1

Examine the financial report to determine whether all related party loans are properly presented

Test of disclosures

2

Recalculate depreciation figure

Analytical procedures

3

Trace sales recorded in the sales journal to shipping documents

Test of transactions

4

Examine sales invoices for initials to indicate that prices and extensions have been checked

Test of transactions

5

Check cost of closing inventory to subsequent sales prices

Analytical procedures

6

Confirm loan balances with financial institutions

Test of balances

(Appelbaum, Kogan, & Vasarhelyi, 2017)

3(b):

i) As the sales were made in June and returns were in July it will show cutoff issues as at the year end the clerk can manipulate sales figure to increase profit or for commission on targeted sales figures. Hence auditor should check additionally for sales invoices, their delivery challan, confirmation from debtors and also verify sales return and the reason to verify the same (Mentz, Barac, & Odendaal, 2018). Although it represents only 1% of sales for the year but it is crucial to perform cut off procedures to prevent any fraud.

Therefore no sufficient appropriate audit evidence was obtained to support the conclusions and should perform substantive audit procedures.

ii)As an auditor, you cannot check whole lot of invoices, you can check few samples based on your sampling technique. 3 out of 20 invoices are found where sales clerk had not signed the “prices checked” box on the invoice and the prices on all the invoices agreed with the authorised price list. Hence, this is an effective control and these are the sufficient and appropriate audit evidence to support the conclusions

Question 4:

4(a):

The following controls should exist for inventory movements at the local store and the central office are:

  • Seperation of duties
  • Accounting system access controls
  • Physical audits of assets
  • Standardisation of financial documentation
  • Daily or weekly trial balance to ensure books are balanced
  • Periodic reconciliations in accounting system
  • Approval authority requirements

4(b):

The stocktake for Mighty Tools Hardware should be audited by following audit processes:

  • Cutoff analysis
  • Observe the physical count
  • Reconcile the inventory count to the general ledger
  • Test high value items
  • Test error prone items
  • Test inventory in transit
  • Review freight costs
  • Finished goods cost analysis
  • Direct Labor analysis
  • Overhead analysis
  • Work-in-progress testing

(Yerpude, & Singhal, 2018)

Question 5:

5(a):

As the net contract to supply eyewears to JDS has no adverse impact on OPSM and the contract was similar in nature to other contracts previously negotiated hence no need to issue an unqualified audit opinion.

5(b):

Auditor should issue unqualified opinion because the management should provide disclosure in the notes to accounts related to a patent for the lens and the adverse impact on th company due to the legal application

5(c ):

Auditor should issue unqualified opinion because on examination of financial impact of the fraud on the company and actions taken by the management, If the impact on financial statements is material then there will be loss which is to be booked in the financial statements and made provision for the same.

5(d):

Auditor should issue an unqualified opinion. But the management need to incorporate disclosure in the financial statement and the auditor should assess the impact of bad debts on financials. As in this case the transaction occurs after the end of the accounting period due to an accident (Mitrović, & Radovanović, 2018).

5(e):

On the basis of professional scepticism auditor’s opinion cannot change on the basis of information of a well known financial planner, but auditor should get appropriate and sufficient audit evidence that supports going concern of the business and on the basis of audit evidence and analytical procedure, Auditor can issue unqualified opinion.

Question 6:

While completing your audit work for the 30 June 2019 audit of Greenfield Ltd, you become aware of the following material matters:

6(a):

Unqualified report as the debtor has not become bad debts at the year end and the management has disclosed the information as notes to accounts in financial statements

6(b):

Unqualified report as the new contract has no adverse impact on the company and it was similar in nature to other contracts previously negotiated with other wine stores.

6(c):

Unqualified report but auditor should issue matter of paragraph as the transactions are material and may have a legal obligation on the company. The auditor should take management representation of the impact of the patent application related to financial and legal obligations.

6(d):

Qualified report because company has not provided the information with the intention to hide the information and not disclosed the information of sale of Bursa Valley Pty Ltd in the next few months which has against the interest of investors (Shalimova, & Klymenko, 2020).

References:

Amoah, N. Y., Anderson, A., Bonaparte, I., & Meyer, K. (2018). Auditor Litigation and the Penalties on US Client Firms after the Private Securities Litigation Reform Act. Journal of Accounting, Business and Management (JABM)25(1), 62-72.

Appelbaum, D., Kogan, A., & Vasarhelyi, M. A. (2017). Big Data and analytics in the modern audit engagement: Research needs. Auditing: A Journal of Practice & Theory36(4), 1-27.

Loewenstein, M. J. (2017). Benefit Corporation Law. U. Cin. L. Rev.85, 381.

Mentz, M., Barac, K., & Odendaal, E. (2018). An audit evidence planning model for the public sector. Journal of Economic and Financial Sciences11(1), 14.

Mitrović, A., & Radovanović, A. (2018). Audit Reports on Serbian Hospitality Companies: Expressed Opinions and Lexical Borrowings. Economic Insights–Trend and Challenges, 33-40.

Pham, N. K., Duong, H. N., Pham, T. Q., & Ho, N. T. T. (2017). Audit firm size, audit fee, audit reputation and audit quality: The case of listed companies in Vietnam. Asian Journal of Finance & Accounting, 9(1), 429-447.

Shalimova, N., & Klymenko, Y. (2020). SPECIFIC TYPES OF RELATED PARTIES AND TRANSACTIONS WITH THEM IN INTERNATIONAL STANDARD ON AUDITING 550: IMPACT ON THE ASSESSMENT OF RISK OF MATERIAL MISSTATEMENT AND ESTABLISHING THE ENTITY’S ACCOUNTING POLICY. Three Seas Economic Journal1(3), 89-95.

Vincent, N. E., & Wilkins, A. M. (2020). Challenges when auditing cryptocurrencies. Current Issues in Auditing14(1), A46-A58.

Yerpude, S., & Singhal, T. K. (2018). Smart warehouse with Internet of Things supported inventory management system. International Journal of Pure and Applied Mathematics118(24), 1-15.

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