THE AUSTRALIAN NATIONAL UNIVERSITY

Research School of Accounting

College of Business and Economics

First Semester Final Take-home Examination 2020

[BUSN7054] [AUDITING & ASSURANCE SERVICES]

Student Number:

NOTE: Please make sure that you write your student numbers in the space provided
above.

Reading period: 0 minute duration

Writing period: 3 Hours duration
Permitted materials: All materials except for electronic devices

This paper accounts for 40% of the overall course mark

Total marks on paper: 80 marks

INSTRUCTIONS

You must attempt to answer all questions.

Your answers must be typed in the space provided in this exam paper.
Late submission will not be accepted.

QUESTION NUMBER MARKS AVAILABLE STUDENT’S SCORE

1 20
2 20
3 12
4 9
5 14
6 5
TOTAL 80

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• The duration of the exam is 3 hours including time for you to download the exam paper and
to upload your completed exam paper with your answers. Please make sure you allow for
this.
• Remember to frequently save the document you are working on and allow yourself
sufficient time to upload your document.
• During exam time, Lingwei will be contactable on lingwei.li@anu.edu.au (Lingwei will stay
online during the exam time to make sure your email will be replied asap) for you to clarify
any question.

ANU Academic Misconduct Rule

You are expected to have read and understood the ANU's Academic Misconduct Rules. Instances of
alleged misconduct will be investigated and, where misconduct is found to have been committed,
penalties will be imposed to the full extent of the Rule.

Students required to submit a take-home exam, an assignment, or a timed Wattle exam work do so
under a declaration that the work is their own.

As a further academic integrity control, students may be selected for a 15-minute individual oral
examination of their final exam submission.

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QUESTION 1 (20 MARKS)

Your firm is the auditor of Crux Limited who has been manufacturing household products
such as microwave ovens for the Australian market. Below are some extracted notes from
your working papers and some relevant information you may use to assess inherent risk and
plan your audit accordingly.

Due to increased competitive pressures, Crux Limited has recently moved the manufacture of
some of its products out of Melbourne into regional areas. While Crux Limited saves around
20% in costs, the manufacturing process takes longer and, on several occasions, late delivery
has resulted in lost sales.

Over the last 2 months, warranty claims on the M4 have increased from 1.5% to 4.5% of
sales. The problem appears to relate to the glass turntable for one of the best-selling ovens,
which shatters if the oven is constantly used. The average cost of repair has risen by 20% per
claim.

As part of your planning, you have performed the ratio analysis. Three of the ratios are shown
in the table below.

Actual results Previous year Industry average

(1) Receivables turnover ratio 5.5 6.5 6.6

(2) Inventory turnover ratio 6.5 5.2 5.1

(3) Current ratio 2.1 2.5 2.2

REQUIRED:

Using the above information for Crux Limited, complete the table in the following pages (4-
5) detailing FOUR (4) issues that would impact on your assessment of inherent risk. Explain
how each issue would increase inherent risk. Assuming other things unchanged, how would
the issue impact on your audit plan?

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Issues identified Explain how the issue Impact on audit plan
would increase
inherent risk (2 marks each)

(1 mark each) (2 marks each)

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 Issues identified Explain how the issue Impact on audit plan
would increase
inherent risk (2 marks each)

(1 mark each) (2 marks each)

QUESTION 2 (20 MARKS)

You are the audit manager for the audit of Big Blue Marina Pty Ltd (BBM) for the year
ending 30 June 2019. BBM owns and operates a marina business that offers berthing services
for privately owned luxury yachts. In addition to berthing services, BBM also offers its
customers cleaning, refuelling and catering services. You are currently planning the audit for
the financial year and have the following information, among others:

For the purchase cycle, an acquisition form needs to be lodged for any purpose of a major
asset and approved by the designated manager. When goods are delivered to its warehouse, a
goods received note (GRN) is prepared and signed by the warehouse foreman. The GRN is dated the
day the goods are received and includes details of the type and number of goods received. A signed
copy of the GRN is then sent together with the supplier’s invoice to its accounts payable department.
The accounts payable clerk matches each GRN to the original purchase order and then immediately
enters the GRN details into the purchasing system, which updates the inventory records and the
accounts payable records. The date the GRN is entered into the system by the accounts department is
the posting date for the transaction. For the sales cycle, any credit sales that exceed $300 must
be approved by the supervisor from an approved credit list after the salesclerk prepares the

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three-part pre-numbered sales order. For the expense cycle, only authorised personnel are
able to access the payroll data in the accounting system and any additional payroll expense
that is not pre-set in the routine system and exceeds $100 needs to be approved by the payroll
manager.

REQUIRED:

Using the table on the following pages (pages 7-8):

(a) identify FOUR (4) specific controls. (4 marks)

(b) for each identified control, state one account and one audit assertion addressed by the
control. (8 marks)

(c) for each identified control, specify one test of control to test its effectiveness.

(4 marks)

(d) state one substantive audit procedure you would perform to gather audit evidence in
relation to the assertion for the account you identified in (ii). (4 marks)

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a) Identify FOUR controls b) One account and one audit c) Test of the control d) One substantive test you would
assertion addressed by the identified in i) perform in relation to the
(1 mark per control) control assertion for the account
(1 mark per test of control) identified in part ii)
(1 mark per account and 1 mark
per assertion) (1 mark per procedure)

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a) Identify FOUR controls b) One account and one audit c) Test of the control d) One substantive test you would
assertion addressed by the identified in i) perform in relation to the
(1 mark per control) control assertion for the account
(1 mark per test of control) identified in part ii)
(1 mark per account and 1 mark
per assertion) (1 mark per procedure)

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QUESTION 3 (12 MARKS)

Trendy Accessories Ltd is a producer of fashion sunglasses. The audit report for the year
ended 30 June 2019 was signed on 5 August 2019 and, along with the financial report, was
mailed to shareholders on 10 August 2019.

Consider the following independent events. Assume that each event is material.

a) Trendy Accessories has invested significant funds in developing a new type of

unbreakable sunglass lens and half of the development costs have been capitalised. On
8 July 2019, Trendy Accessories applied for a patent for the lens, and discovered that a
competitor had lodged a similar application on 20 June 2019. The granting of Trendy
Accessories’ application is now in serious doubt.

b) On 16 August 2019, the court ruled in favour of Trendy Accessories in relation to

deductions claimed on its previous year’s tax return. Trendy Accessories had provided
for the full amount of the potential disallowances in accrued taxes payable. The
Commissioner of Taxation has advised that he will not appeal the court’s ruling.

c) One of Trendy Accessories’ large warehouses suffered a fire on 20 July 2019 and the
inventory was destroyed. The warehouse content was not insured.

REQUIRED:

For each of the above events or transactions, suggest one (1) procedure for auditors to
discover the event/transaction (1 mark each), indicate and justify the action required in the
financial report (2 marks each), and provide one (1) additional procedure you would perform
in relation to each of the events to ensure that the above information was correct (1 mark
each).

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Case One procedure to discover the event Action required and justify Additional procedure to verify the event

(1 mark each) (2 marks each) (1 mark each)

a)

b)

c)

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QUESTION 4 (9 MARKS)

Consider each of the following independent and material situations. Assume that each client is a reporting entity and that a general purpose
financial report has been prepared for the period ended 30 June 2019. Using the table provided, determine the type of audit opinion to be
issued in each situation (1 mark each) and justify the opinion issued with reference to the specific issue on which the opinion is issued
(specifying assertion/account where applicable) (2 marks each):

Independent Situation Audit Opinion (1 mark each) Justification (2 marks each)

(a) Your New Zealand branch office disclaimed

responsibility for the inventory figures for CD Ltd’s New
Zealand division. This is because sudden flooding
prevented the auditors from attending the stocktake and
destroyed documentation that would have enabled them to
substantiate inventory by other means. The New Zealand
division represents about 10% of CD Ltd’s operations.

(b) Spinner Ltd’s accounts receivable balance at 30 June

2019 amounted to $2,540,000. Your testing revealed that
the accountant used an incorrect exchange rate to translate
overseas debtors at 30 June 2019. As a result, the balance
of the accounts receivable account is overstated by
$75,650. Management has indicated that it does not intend
to adjust the financial report in relation to this issue.

(c) Nick Building Ltd discloses in the note to the financial

report the existence of a contingent liability of an amount
of $1.2 million. The directors believe the allegations are
without merit. No provision for the contingent liability has
been made in the current period. The solicitor agrees with
the directors.

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QUESTION 5 (14 MARKS)

5 (a) (5 MARKS)

Aquila Ltd is taking legal action against Crew & Associates (Crew) over the audit of Poultry
Ltd, which went into liquidation owing almost $10 million to its creditors, including $5
million to Aquila. Aquila claimed that the profits recorded were significantly overstated and
inventory were also materially misstated in the financial report of Poultry. Crew has denied
that they were negligent and has argued that they relied heavily on information provided by
Poultry’s management.

REQUIRED:

(i) Do you believe that Crew owes Aquila a duty of care? Provide reasons for your judgment,
citing relevant case law where appropriate. (2 marks)

(ii) Discuss the validity of Crew’s defence, citing relevant case law where appropriate. (3
marks)

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5 (b) (9 MARKS)
You are the audit senior on the audit of Harmony Pty Ltd, a large manufacturing company, for
the year ended 30 June 2019. It is now 25 August 2019 and you are reviewing the audit working
papers prepared by the audit assistant, Susan Meyer, and notice the following matters:

(i) Susan attended the stocktake on 30 June and observed that the client followed the stocktake
instructions. She selected numerous items for test counting from the client’s inventory sheets
and all were found to be correct. Cut-off details were checked and found to be correctly
treated. Susan concluded that inventory is fairly stated.

(ii) To test unrecorded liabilities, Susan tested a random sample of 20 payments made after 30
June 2019 and found 3 instances of cheques that related to services provided in June, which
had not been accrued. However, as the total of the 3 cheques was immaterial, she concluded
that there is no significant concern over unrecorded liabilities and the completeness of
accounts payable is satisfactory.

(iii) Susan selected 20 invoices to test the control that the sales clerk checks that the prices agree
with the authorised price list (tolerable deviation rate is 6%). She found 2 instances where the
sales clerk had not signed the “price checked” box on the invoice. As the prices on all the
invoices agreed with the authorised price list, Susan concluded that the control was operating
satisfactorily.

REQUIRED:
For each of the three (3) scenarios presented above, indicate whether you believe that sufficient
appropriate audit evidence has been obtained to support the conclusions reached and give
reasons for your decision (3 marks each).

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QUESTION 6 (5 MARKS)
The Public Company Accounting Oversight Board sanctioned four auditors for, among other
things, providing bookkeeping to the same client. The Board also sanctioned another auditor
for failing to appropriately plan and perform the audit of a client.
Succinctly comment on the reason for above sanctions, with reference to related course
materials on audit quality. (roughly around 80 words)

____________________________

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