CHARLES STURT UNIVERSITY

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Question 1 ( 1)
Liquidity and solvency ratios can be used to interpret company’s financial health and obligations.
Liquidity
Liquidity refers to the company’s ability to meet its short term obligations and liabilities in order
to generate cash through its operating activities (Investopedia). The company, Baker DeYoung’s
operates in highly competitive industry and expects high volume of sales and profits, primarily in
summers. However, the company has been facing difficulties since last 18 months in maintaining
its competitive position in the industry due to the unforeseen circumstances which includes the
recent surge of Covid-19 and drought.
Impact
The issues identified above has negatively impacted the current sales level of the company in the
major operating cities particularly in Queensland and NSW. The COO of the company has been
constantly trying to make arrangements with suppliers and finance providers in order to cope
with the financial crises because the current assets of the company is comparatively less than the
current liabilities of the company.
Solvency
Solvency refers to the company’s ability to cater its long-term obligations in order to continue its
future operations (Investopedia). The company has obtained certain loans, out of which the
major loan is outstanding and is repayable within 2 months of the financial year. In addition, the
company’s request to renew the repayment terms has been disapproved due to the high
fluctuations in business activities.
Impact
The current scenario has drastically impacted the profit levels of the company because of
decrease in sales and operating activities of the company. On the other hand, no renewals has
been accepted for the major loan repayment resulting in breach of covenants. Moreover, the
interest rates variations will highly impact the long-term liabilities of the company.
Question 1 (2)
 Inventory obsolescence
The changing seasons results in fluctuating inventory levels. There is a risk that the
company might have obsolete inventory due to low sales level in the current season.
Audit plan
 Evaluate the procedures of management for managing and recording the
inventory

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  Critical observation of the procedure involved in counting the inventory by
the management
 Inspect inventory to identify the existence and also assess the obsolescence,
damage and inventory ageing.
 Perform test of controls
 Fraudulent financial reporting
The company has placed pre-paid orders for summer range which is impracticable
because of liquidity and solvency issues and there is a risk that company might have
altered the prepayments with respect to the summer inventory.
Audit plan
 Inquire from the management about the extent and nature of misstatements
 The auditors shall make an inquiry from the internal audit function in the
company, if any.
 Test the appropriateness of the journal entries.
 The significant transactions are evaluated.
 Impairment of inventory
The lower level of sales might bring a need to impair the inventory. The risk
associated is that the company might not have taken the impact of impairment in the
financial statements.
Audit plan
 Check whether the inventory is valued at the lower of cost or net-realizable
value.
 Check the identification of cash generating units, if any.
 Whether the recoverable amounts are calculated as per IAS-36.
 The identification of events by the management which may indicate the
necessity of an impairment review.
 In case of impairment loss, whether it has been recorded and accurately
allocated to assets.
(ASA 315 Identifying and Assessing the Risks of Material Misstatement through Understanding
the Entity and Its Environment (Compiled), 2013)

Question 2 (1)
Random sampling is considered most appropriate in the above scenario. While selecting the
sample for audit, Kristin should consider the purpose of audit procedure and the characteristics
of population. The selected sample must be sufficient to reduce the audit risk to an acceptable
level, and also select the sample in way that individual items have equal chance of selection.
Moreover, it is recommended to perform recalculation on the depreciation expense over the
entire population and the sample size should represent the total sample size of $10,325,000.

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Question 2 (2)
(A) Existence
Since the company’s major operations involves PPE, therefore, the auditor needs to
inquire and inspect the acquisition of the new and existing machineries and plants.
(B) Valuation
The actual economic value of the PPE is reflected at the reporting date.
(C) Rights and obligations
Kristen has to check that whether the company has legal ownership of the new and
existing machineries and equipment as represented in the financial statements.
(D) Completeness
The recorded PPE transactions are as per the records maintained by the company.
Question 2 (3)
The audit plan adapted by Kristen involves testing of relevant PPE assertions as identified in part
2 of the question.
Existence of the PPE was identified through random sampling. Agreements might have been
obtained in order to justify the existence of the plants at the reporting date.
The valuation assertion was tested by inspecting and recalculating the depreciation expense of
the company showed the net book value of the PPE as at reporting date. To check whether the
revaluations of assets are performed in accordance with IAS 16.
In order to validate the rights and obligations, Kristen must have obtained the ownership
documents and deeds to check the rights of the company over the acquired machineries.
The completeness assertion needs to be tested by increasing the sample size to reduce the risk
associated with the recording to acceptably low level and whether the depreciation expense has
been accurately calculated and accounted for.

Question 3 (1)
The internal controls of a company are designed in order to achieve reasonable assurance and is
effected by the management, board of directors and other personnel involved in the management
of the company. The internal control framework of the company consists of risk assessment
procedure, control environment, control activities, monitoring of controls and communication
and information.
The key internal controls to be tested by Josh are:
 Access controls
By access controls, we mean the assurance of no physical access over the valuable
records of the company that is physical controls are used by the company such as badge
systems, locked filing cabinets and locked doors in order to prohibit access to

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 confidential records and data. Also, the assurance needs to be obtained over the controls
of management on encryption of data during the transmission of emails or data theft.
 Application controls
By application controls, we mean the well and guarded implementation of controls to
prevent unnecessary mistakes. The data entry software and applications are designed in a
way which identifies the system’s mistakes and minimize its impact such as the
practicable duplication of entries in the system. Moreover, Josh should also check
whether the software are in compliance with completion checks before submitting the
data.
Question 3 (2)
The auditors will have to adapt different audit procedures in order to test the controls of the new
IT manufacturing costing system.
We as external auditors will need to assess all the components of internal controls in the
company which is mandatory as per our audit plan as defined in part 1 of the question. The
external auditors can rely on the internal control of the company when it has incorporated good
internal controls which will automatically result efficient financial reporting and reliable
financial information. Such as inquiring from the management about the record-keeping
procedures, authorization of duties and verifying the documents for asset’s custody.
However, the internal auditors of the company might rely only on the detective, preventive and
corrective controls. The detective controls helps with the identification of possible mistakes,
preventive controls might prevent the occurrence of errors and the corrective controls will allow
the company to identify the correcting measures and solutions of the problems to get back on
track. Such as the internal auditor of the company might also look for segregation of duties
which will minimize the opportunities for committing fraud and reduce embezzlement. In some
cases, the failure of the corrective and detective controls will need a backup plan to prevent
physical data damage.
Both the auditors will primarily need to make regular backups and disaster recovery plans of the
original data in order to minimize the downtime of systems and system outrages.
(A Checklist of Internal Controls for Treasury, 2015)
Question 4 (1)
Control objectives
In order to meet the control objectives of the revenues and receivables, Kristen and Josh might
need to ensure proper records or orders made by the customers and the returned goods with
allowances and its authorization. Moreover, the company is required to record the revenue
against the delivery of any good or service as shown by the credit memos. The accounts for sales
invoices will allow the auditors to ensure the accuracy of data and its timely recording in the
books of the company. Furthermore, the documents will enable the auditors to check whether the
documents are matched and its arithmetical accuracy. Lastly, the supporting documents will

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allow the auditors to keep a sequence check in order to check the stages of authorization and
check if any control account reconciliations are made in case of any adjustments.
Question 4 (2)
The credit memos for the month of July will need to be examined in order to test the cut-off
assertion, whether the revenues are recorded in the correct accounting period and to check the
percentage of subsequent clearance of receivables after year end.
Question 4 (3)
The auditor himself needs to consider the following steps and perform a walk-through in order to
understand the system controls used by the company;
 The segregation of duties that is the acceptance of orders and invoices for dispatch
 To verify whether the order made by the customer is within the credit limit
 Check the order’s authorization
 Check whether the order form of sales are pre-numbered
 Check the pre-numbering of the dispatch notes and match them with the sales orders.
 Check whether the dispatches are authorized by the relevant authority
 The prompt recording of invoices in the sales ledger and match it with the batch totals
 The sales discounts and returns are checked and authorized.
 The accurate recording of credit notes in the systems
 Check the total of receivables control account with the main ledger and prepare its
reconciliation, if any
 Systematic procedures are followed to collect the debts and if it’s according to the debt
collection policy.
 Bad debts written off are authorized
(ASA 501, Audit evidence – Specific considerations for selected items)

Question 4 (4)
When the internal controls of the company are weak, the auditors needs to opt for other
substantive audit procedures such as;
 A sample for receivables is selected and perform the follow-up procedures.
 Sales invoices are vouched with the shipping documents of the customers
 Inquire, in case of any factoring in receivables
 Confirmations are sent to the receivables in order to confirm the year-end balance, also
includes zero-balance accounts.
 An ageing is obtained and tested for customers.
 Minutes of the meetings are reviewed to identify any discounted or pledged receivables
 The auditor needs to check the arithmetic accuracy of the journal entries in the books.
 Check whether the amounts in the transactions match with the source documents

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(ASA 501, Audit evidence – Specific considerations for selected items)

Question 5 (1)
The case above is manufacturing custom-designed tools in the mining industry for special
purposes.
The term audit program means an audit plan designed to follow the audit procedures in
compliance and conformance with the regulations followed by the organization. The audit
program framework should explain the scope, timeline and audit objectives. Different
organizations adapt standardized, compliance and tailored audit programs. The standardized
audit program refers to defined audit plan which was initially decided and cannot be changed
during the audit term. Compliance audit programs refers to the adherence of the organization to
the regulatory requirements. The requirements vary with the nature of the audit objectives and
the company, such as private or public and lastly, tailored audit programs targets to cater the
needs of the specific industry and perform specific business procedures in order to identify the
lapse in compliance and offset potential vulnerabilities.
To test the internal controls and design a sample in tailored audit programs, the auditor needs to
follow eight steps;
 The objective or purpose of the audit and check whether it is operating effectively in
particular circumstances.
 The procedure or control activity used by the management in order to assess the material
misstatements.
 Appropriate sampling unit is decided to define the population.
 The completeness of the population is tested.
 The controls are tested in case of any deviation from the agreed conditions
 Determination of the planned level of risk assessment and control risk involved with the
nature of transactions
 An appropriate sample size needs to be selected
 Appropriate methods to be selected for sampling and invoice testing. For example,
attribute sampling is recommended in the current scenario.
Question 5 (2)
CAAT have multiple advantages which can be used by the auditors such as;
The computer software itself tests the accuracy and completeness of the outputs and inputs
through electronic processing. Moreover, a large number of transactions can be tested in a
relatively short period of time and lastly, effectiveness of the audit controls can be tested through
computer software.
Question 6 (1)
With reference to APES 110

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 A) THREAT TO INDEPENDENCE
AUDITOR OF THE COMPANY (Valuation services to audit client):
Diligence charted Accountant is the auditor of IDE and CEO of Hockey resort has
requested DCA to perform valuation services for Port Douglas resort for the purpose of
investment of its finance. However, there is risk of independence of DCA because IDE
has controlling interest in Hockey Resort and amount of valuation will appear in financial
statements of IDE to be audited by DCA and they shall not accept such valuation service
if:
1. The matter is significant to financial statement and also
2. High degree of subjectivity is involved in case of valuation of services.

FEE CHARGING AS GOODWILL:

As stated in the scenario CEO has suggested to charge fee as a gesture of goodwill which is also
a potential Self- interest threat to independence because fee is charged on the basis of work
quantum and market norms.

SHARES OF HOCKEY RESORT (Financial Interest):

Josh McDowell is the audit team member of IDE and has informed the that he directly
holds shares of Hockey Resorts gifted by his uncle on his 18th Birthday. This represents
the self interest threat to independence because audit team member shall not hold any
financial interest in its audit client, IDE or an entity controlled by it that is Hockey
Resort.

Question 6 (B)

SAFEGAUARDS:

Financial Interest:
1. Audit team shall dispose of its interest immediately
2. Reduce the interest to the level that it becomes immaterial or is no longer material to
the audit client.
3. Remove the individual holding the financial interest that is Josh McDowell holding
share of Hockey Resort, from the audit team of the audit client IDE holding interest in
Hockey Resort.
4. In future if the level if the similar risk of impendence appears auditor shall
communicate the matter to those charged governance and also consider whether it is
appropriate to withdraw from the audit if the interest is material.

FEE BASED ON GOODWILL:

Fee to be charged as a gesture of goodwill represent high level of threats to independence
because it will impact the objectivity of valuer in performance of its valuation services.

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 There also arises self- interest threat to independence. Fees must be charged on the basis
of the experience of person performing the services and also the time spent on the work.
Auditor shall not accept such services at inception and shall discuss the matter with High
level management.
VALUATION SERVICE TO AUDIT CLIENT:
1. They shall make sure that client owns the responsibility of the results of audit work
performed by DCA firm.
2. Re-perform the valuation services by the valuer who was not involved in the audit of IDE
and has no relation to the audit.
3. Client determines the methodologies and circumstance sand also approves them before
the performance of valuation services.
4. Audit team members involved in the audit of IDE shall not perform or be a part of
valuation services of Hockey Resort.
(Professional code of ethics, Australia)

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References
1. 2013. ASA 315 Identifying and Assessing the Risks of Material Misstatement through
Understanding the Entity and Its Environment (Compiled). 1st ed. [ebook] Australian
Government. Available at:
<http://www.auasb.gov.au/admin/file/content102/c3/Nov13_Compiled_Auditing_Standar
d_ASA_315.pdf> [Accessed 1 October 2015].
2. 2015. A Checklist of Internal Controls for Treasury. 1st ed. [ebook] Melourne: CPA
Australia. Available at:
<http://www.cpaaustralia.com.au/~/media/corporate/allfiles/document/professional-
resources/business/internal-controls-for-treasury.pdf?la=en> [Accessed 1 October 2015].
3. Moroney, R., Campbell, F. and Hamilton, J., 2014. Auditing. Milton, Qld.: John Wiley
and Sons Australia.

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