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Final Examination
Prepared by: Mellisa Lewis Semester 2, 2011

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Question 1 (10 marks) The Black Group is an international business, comprising many subsidiaries and a head office in the United Kingdom. You are undertaking the Group audit, but there are separate auditors for the Red subsidiary in the US, Blue in Australia and Green in Columbia. You are aware of the following information: (1) Green is a loss-making subsidiary, with losses at the current year end totalling $2.7m. There are significant control problems, high levels of bad debts and 25% staff turnover. The local auditors have already stated their intention to provide a qualified opinion for the year just ended because of the material issues found. (2) Red is operating to a different financial year to that of the Group as a whole, being October 2010 rather than December 2010. (3) Shortly after year-end, in January 2011, the Black Group announced the sale of Blue for $25m and this disposal is currently under way. (4) The Black Group is guaranteeing loans of approximately $10m for four of its stores. Required: (a) Explain how you would approach the audit of the Black Group, in particular how you would plan and control the audit. (2 marks) (b) Describe the impact of each of the issues shown on the audit of the Group, explaining any further checks required. (8 marks)

Question 2 (10 marks) Discuss the role of management and the role of the auditor in the prevention and detection of fraud and error. (10 marks)

Question 3 (15 marks) Discuss the threats to independence in each of the following situations and recommend an appropriate safeguard to reduce the threat to an acceptable level. i) ii) iii) The audit team selling other services to clients. (5 marks) The audit team giving the clients gifts at Christmas time (5 marks) IT services that the auditor can offer to clients. (5 marks)

Question 4 (15 marks) You are the manager responsible for the audit of Madison Co. The companys principal activity is wholesaling frozen food. The draft consolidated financial statements for the year ended 31 December 2009 show revenue of $33.5 million (2008 $31.15 million), profit before taxation of $5.95 million (2008 $7.1 million) and total assets of $24.0 million (2008 $18.2 million). The following issues arising during the final audit have been noted on a schedule of points for your attention: a) In early 2009 a chemical leakage from refrigeration units owned by Madison caused contamination of some of its property. Madison has incurred $150,000 in clean-up costs, $300,000 in modernisation of the units to prevent future leakage and a $15,000 fine to a regulatory agency. Apart from the fine, which has been expensed, these costs have been capitalised as improvements. (5 marks) b) While the refrigeration units were undergoing modernisation Madison outsourced all its cold storage requirements to Elric Warehousing Services. At 31 December 2009 it was not possible to physically inspect Madisons inventory held by Elric due to health and safety requirements preventing unauthorised access to cold storage areas. Madisons management has provided written representation that inventory held at 31 December 2009 was $5.05 million (2008 $3.35 million). This amount has been agreed to a costing of Elrics monthly return of quantities held at 31 December 2009. (5 marks) c) Madison owns a residential apartment above its head office. Until 31 December 2008 it was let for $1,500 a month. Since 1 January 2009 it has been occupied rent-free by the senior sales executive. (5 marks) Required: For each of the above issues: i) Comment on the matters that you should consider ii) State the audit evidence that you should expect to find in undertaking your review of the audit working papers and financial statements of Madison Co for the year ended 31 December 2009.