Auditing and Assurance Services in Australia ACCT704

Running head: AUDITING
AUDITING
Name of the Student
Name of the University
Author Note
1
AUDITING
Table of Contents
S …

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Running head: AUDITING
AUDITING
Name of the Student
Name of the University
Author Note
1
AUDITING
Table of Contents
Solution to Part A ………………………….. ………………………….. ………………………….. ………………….. 2
Question 1 ………………………….. ………………………….. ………………………….. ………………………… 2
Solution to Part B ………………………….. ………………………….. ………………………….. ………………….. 7
Question 3 (a) ………………………….. ………………………….. ………………………….. ……………………. 7
Question 3 (b) ………………………….. ………………………….. ………………………….. …………………… 8
References and bibliography ………………………….. ………………………….. ………………………….. …. 11
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Solution to Part A
Question 1
Situation Identify a situation
that may impose
ethical threats (a)
Evaluate and explain
the ethical threats
identified (b)
Discuss safeguards (c)
1 Present CFO of Cubit,
“Rosie Finley” was the
senior audit manager at
HFK prior to her joining
at the Cubit.
The” Familiarity ” threat
arises here because
Rosie is known to the
HFK which would be
auditing Cub it.
The only safeguard here
would be not allowing
any known person of
Rosie to be selected
amongst the audit team
from the HFK
designated to be
auditing Cubit.
2 Offering of 30%
discount by Glenn on
office furniture and
Cabinetry to “Henry
Foster” for HFK office
furnishing post its
relocation.
The ethical threats
include the “Self –
Interest” threat where
the HFK being the
potential audit firm of
the Cubit is offere d a
30% discount ion
customised office
furniture by the present
CEO of the audit client.
Henry Foster
representing HFK
should not accept the
30% discount on office
furniture being the
prospective audit firm
of the client, the “Cubit
Commercial Furniture.”
3 Need for other non -audit
services from the same
Here, the “Advocacy”
threat arises if the HFK
The HFK shoukd not
accept the non -audit
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audit firm to be auditing
the client such as
financial planning,
developing better KPI’s
and improving the
present incentive
compensation plan for
the key staff or
employees.
accepts the audit client
and also accepts the
other non Jaudit services
for some extra
compensation and if yes
then the “Self Jinterest”
threat also arises.
services contract other
than the audit se rvices
otherwise HFK would
be seen as promoting
the client and its
business along with
being its auditor.
No proper internal control (No corporate governance)K
Question 2
Identify the risk factor
(a)
Potential impact on the
financial statements or the
audit (b)
Audit strategies or
procedures to address the
risk of material
misstatements (c)
1 Control risk in CEO
duality.
It is to be noted that the
present CEO, Glenn Gall is
also the Chairman of the
Board and this raises issue
of CEO duality wherein the
material misstatements may
be committed and
effectively shielded because
the CEO in this case is the
A thorough validation of
the internal control is to be
done may be through
Inspection, Observation and
Inquiry.
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Chairman of the Board who
is responsible for keeping an
or appraising the CEO and
the management.
2 Error in inventory
counting.
The previous auditor has
express ed his concern
regarding the inventory
counting. In the present case
the Inventory has been seen
to be reduced by a massive
17%. So, the inventory
account may be understated
where the Completeness
assertion may be at risk.
Re -stock take along with
Inspection of inventory
movement documentation.
3 Inherent risk in Reserves The Reserves can be seen as
massive falling over the
years by 70% which points
towards presence of
material misstatement in the
Reserves account.
Traci ng the amount of
Reserves on the balance
sheet to that of the line
items of “Reserve and
Surplus” Account ledger.
4 New accounting system The previous auditor
expressed his concern
concerning the accounting
system in motion within the
audit client which is going
The accounti ng records are
to be properly verified
against proper
documentation. Such as the
sales transactions recorded
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to be replaced in 2023
which causes the cut -off
problems. Hence, the
assertion at risk here is
“Cut Joff.”
in the system can b e
validated against the sales
invoices or bills of lading
or delivery documents.
R New production
management system
The present system is
running short of the excess
pressure and the new system
will be ready by the second
quarter of 2023 thereby
probing towards
mismanagement of
production data and cost
related data thereby
affecting the financial
statements may be eithe r
raising or decreasing costs
or finished goods data. So,
the existence and
completeness are at risk.
Inspection of relevant
production related
documentation and
recalculation.
S New financing through
venture capital
The assets may be
manipulated by th e
management by talking in
additional capital. The legal
risk for the audit firm or the
Checking the minutes of the
Board meetings and
analytical review to check
whether there is
requirement for future
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auditor may be enhanced as
the auditor is legally liable
to the shareholders if he
cannot discover such
unethical strategies of the
management.
funding and by how much.
7 New employee incentive
compensation plan
In order to achieve the new
incentive compensation, the
employees mat resort to
fraud may be b y inflating
sales just in order to draw
more compensation. Hence,
occurrence of sales may be
at risk.
The transactions are to
cross checked against
proper documentation.
Such as the sales
transactions are to be
checked against the sales
invoices.
8 Inhe rent risk in foreign
exchange
The company sales its goods
within New Zealand and
also in Australia and hence
is susceptible to forex risk.
Foreign exchange
transaction account ned to
be checked. The financial
assets accounts are also to
be Inspected in d etails.
9 Inherent risk in the
Accounts Receivable
This fell by massive 52%
when the sales fell by only
14% especially in the
pandemic induced time.
Hence, the completeness
and accuracy are at risk.
The accounts receivable
reports are to be traced to
the general ledger along
with Inspection of cash
receipts. Inspection of sales
invoices as well to check
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the payment methods.
10 Short -term borrowings The short -term borrowings
fell by a massive 47% whe n
the long -tern borrowing
enhanced by 21% especially
in times of decreasing sales
and profitability. Hence, the
accuracy and completeness
are at risk.
The loan covenants are to
be inspected along with an
Inspection of short -term
repayment documentation.
Solution to Part B
Question 3 (a)
Identify a control
weakness
How the weakness may
affect financial statements
Audit procedures to test
the accounts and assertion
that are at risk
1 No proper procedure
for approval or
authorisation needed
for the purchase order.
The COGS may be inflated
by additional purchases there
is no authorisation. So,
occurrence and accuracy
maty be at risk.
To inspect the EMS
purchase records and
purchase orders.
2 Faulty journal entry
for recognition of
payment.
The journal should have been
(Dr. Accounts Payable; Cr.
Bank) thereby affecting the
financials.
Inspection of the journal
entries.
3 The accounts payable The accounts payable clerk Inspection of the appro ved
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clerk contacts the
suppliers which
should not be exact
responsibility of their
accounts payable
cler k.
may contact his favourable
supplier where his self –
interest may be existent
thereby affecting the future
financials of the company.
The cost may be inflated
owing to selection of
favourable suppliers.
supplier list and taking
confirmation from other
suppliers regarding their
quotation of the same raw
material.
4 Mistake in journal
entry for receipt of
raw materials by the
EMS.
The journal should have been
(Dr. Raw materials inventory;
Cr. Accoun ts Payable.)
thereby affecting the
financials .
Inspection of the journal
entries.
Question 3 (b)
Identify a control
strength
Why it is a strength Audit procedures to test the
control
1 Good access
control
The specific access is granted
to the employees with
specific tasks and
responsibilities which too can
only eb accessed using
separate and unique login
credentials.
Observation.
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2 Proper
authorisation for
payments.
Rosie is sent the payment
requisitio n along with copy of
the delivery note and the
invoice for payment
authorisation who in turn
sends to the CEO if the
payment for a single supplier
is above $30,000 so that the
fraudulent transactions can be
stopped at the first place.
Observation of the process in
action and reperformance if
necessary.
3 Separation of
duties
The factory manager has a
different responsibility to that
of the accounts payable clerk
and warehouse personnel and
with others.
Observation.
4 Proper approval
procedure for new
suppliers.
Rosie, the CFO approves the
new suppliers before placing
and order with them.
Observation of the process in
action and reperformance if
necessary.
5 Proper inspection
of materials before
receiving it and
before re cording it
in the EMS system.
The warehouse assistant
inspects the goods upon the
supplier’s delivery at the
warehouse with that of the
contents of the delivery note
before signing and dating it
and sending it to be entered
Observa tion of the process in
action and reperformance if
necessary.
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within the EMS system.
6 Good input
controls
The EMS system
automatically rejects the
journal if the supplier or the
inventory item code is not
recognised thereby restricting
mistakes or fraudulent
transactions. Abo ve all there
is an auto generation of
journal number which is also
good input control.
Observation and
reperformance to test the
validity of the system with
dummy cases or transactions
containing fake suppliers.
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References and bibliography
Alabdullah , T. T., & Maryanti, E. (2021). Internal Control Mechanisms in Accounting,
Management, and Economy: A review of the Literature and Suggestions of New
Investigations. International Journal of Business and Management Invention , 10 (9).
Albaqali, Q., & Kukreja , G. (2017). The factors influencing auditor independence: The
perceptions of auditors in Bahrain. Corporate ownership and Control , 14 (2), 369 -382.
Fakhfakh, I., & Jarboui, A. (2022). Research on the Relationship between Audit Risk
Assessment and Risk Governance: Evidence from Tunisia. Journal of African
Business , 1 -16.
Ji, X. D., Lu, W., & Qu, W. (2018). Internal control risk and audit fees: Evidence from
China. Journal of Contemporary Accounting & Economics , 14 (3), 266 -287.
Johari, R. J., Mohd‐Sanusi, Z., & Chong, V. K. (2017). Effects of auditors’ ethical orientation
and self‐interest independence threat on the mediating role of moral intensity and
ethical decision‐making process. International Journal of Auditing , 21 (1), 38 -58.
PES 1. (2022). PES 1 » XRB. Retrieved 16 May 2022, from
https://www.xrb.govt.nz/standards/assurance -standards/professiona l-and -ethical –
standards -2/professional -and -ethical -standards/pes -1-revised/
Roy, M. N., & Saha, S. S. (2016). Statutory Auditors’ Independence in India: An Empirical
Analysis from the Stakeholders’ Interest Perspective. Vikalpa , 41 (1), 28 -50.
Tarasova, V., Mezdrykov, Y., Efimova, S., Fedotova, E., Dudenkov, D., & Skachkova, R.
(2018). Methodological provision for the assessment of audit risk during the audit of
tax reporting. Entrepreneurship and Sustainability Issues , 6(1), 371 -397.
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Tobi, B. A., Osasrere, A. O., & Emmanuel, U. (2016). Auditor’s independence and audit
quality: A study of selected deposit money banks in Nigeria. International Journal of
Finance and Accounting , 5(1), 13 -21.
Zhang, Y., Hay, D., & Holm, C. (2016). Non -audit services and auditor independence:
Norwegian evidence. Cogent Business & Management , 3(1), 1215223.

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