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MAA705 – Corporate Auditing – Individual Assignment Brief description of assessment task: This assignment task presents a number of complex questions which will help you to consolidate your understanding of some of the key concepts covered in this unit. Detail of student output: Maximum 3,000 words, including references, appendices, and everything. ATTENTION: Any word above the limit of 3,000 will be penalised by 1 mark for each additional word, thus 3.010 words has a 10 marks penalty, 3,020 words has a 20 marks penalty, and henceforth. Weight (% total mark for unit): This assignment is worth 30% of your final grade. Unit Learning Outcomes assessed: • ULO1: Demonstrate knowledge of theories and regulation regarding audit and assurance services of both a financial and non-financial nature. • ULO3: Evaluate appropriate audit and assurance procedures and responses that should be applied to different contemporary business scenarios. • ULO4: Use professional and ethical judgement in applying relevant legal and professional pronouncements to all stages of a given assurance engagement. Deakin Graduate Learning Outcomes assessed: • DGLO1: Discipline-specific knowledge and capabilities. • DGLO5: Problem solving. • DGLO8: Global citizenship. What early feedback will student get, how and when? Feedback will be provided via CloudDeakin in week 10. Due date and form of submission: Online submission via CloudDeakin until week 7 on Microsoft Word or Portable Document Format only. ATTENTION: Assignments submitted late without an extension being granted will not be marked. These will be held until final grading and may be taken into consideration in a pass/fail situation. Turnitin: You should answer questions using your own words. If you use material or ideas from a third party source you have to cite the reference in text and include the full details of the source in a reference list. Check Academic Integrity for more information regarding plagiarism and collusion. ATTENTION: Assignments submitted with 50% or more on similarity index (orange or red colour) will not be marked. Rubric Criteria Unsatisfactory Less than satisfactory Satisfactory Good Very good Excellent DGLO1: Independence (12%) 0 3 7 8 9 12 Demonstrates no understanding of independence. Demonstrates limited understanding of independence. Demonstrates a satisfactory understanding of independence. Demonstrates reasonable understanding of independence. Demonstrates very good understanding of independence. Demonstrates excellent understanding of independence. DGLO8: Independence (10%) 0 3 6 7 8 10 Demonstrates no understanding of independence. Demonstrates limited understanding of independence. Demonstrates a satisfactory understanding of independence. Demonstrates reasonable understanding of independence. Demonstrates very good understanding of independence. Demonstrates excellent understanding of independence. DGLO8: Ethics (10%) 0 3 6 7 8 10 Demonstrates no understanding of ethics. Demonstrates limited understanding of ethics. Demonstrates a satisfactory understanding of ethics. Demonstrates reasonable understanding of ethics. Demonstrates very good understanding of ethics. Demonstrates excellent understanding of ethics. DGLO1: Audit expectationperformance gap (6%) 0 2 3 4 5 6 Demonstrates no understanding of audit expectation-performance gap. Demonstrates limited understanding of audit expectation-performance gap. Demonstrates a satisfactory understanding of audit expectation-performance gap. Demonstrates reasonable understanding of audit expectation-performance gap. Demonstrates very good understanding of audit expectation-performance gap. Demonstrates excellent understanding of audit expectation-performance gap. DGLO5: Analytical procedures - Solvency (9%) 0 2 5 6 7 9 Demonstrates no understanding of analytical procedures - solvency. Demonstrates limited understanding of analytical procedures - solvency. Demonstrates a satisfactory understanding of analytical procedures - solvency. Demonstrates reasonable understanding of analytical procedures - solvency. Demonstrates very good understanding of analytical procedures - solvency. Demonstrates excellent understanding of analytical procedures - solvency. Deakin University CRICOS Provider Cod Criteria Unsatisfactory Less than satisfactory Satisfactory Good Very good Excellent DGLO5: Analytical procedures - Efficiency (9%) 0 2 5 6 7 9 Demonstrates no understanding of analytical procedures - efficiency. Demonstrates limited understanding of analytical procedures - efficiency. Demonstrates a satisfactory understanding of analytical procedures - efficiency. Demonstrates reasonable understanding of analytical procedures - efficiency. Demonstrates very good understanding of analytical procedures - efficiency. Demonstrates excellent understanding of analytical procedures - efficiency. DGLO5: Analytical procedures - Profitability (9%) 0 2 5 6 7 9 Demonstrates no understanding of analytical procedures - profitability. Demonstrates limited understanding of analytical procedures - profitability. Demonstrates a satisfactory understanding of analytical procedures - profitability. Demonstrates reasonable understanding of analytical procedures - profitability. Demonstrates very good understanding of analytical procedures - profitability. Demonstrates excellent understanding of analytical procedures - profitability. DGLO8: Auditor’s independence (6%) 0 2 3 4 5 6 Demonstrates no understanding of auditor’s independence. Demonstrates limited understanding of auditor’s independence. Demonstrates a satisfactory understanding of auditor’s independence. Demonstrates reasonable understanding of auditor’s independence. Demonstrates very good understanding of auditor’s independence. Demonstrates excellent understanding of auditor’s independence. DGLO5: Auditor’s liability (12%) 0 3 7 8 9 12 Demonstrates no understanding of auditor’s liability. Demonstrates limited understanding of auditor’s liability. Demonstrates a satisfactory understanding of auditor’s liability. Demonstrates reasonable understanding of auditor’s liability. Demonstrates very good understanding of auditor’s liability. Demonstrates excellent understanding of auditor’s liability. DGLO5: Audit planning (11%) 0 3 6 7 8 11 Demonstrates no understanding of audit planning. Demonstrates limited understanding of audit planning. Demonstrates a satisfactory understanding of audit planning. Demonstrates reasonable understanding of audit planning. Demonstrates very good understanding of audit planning. Demonstrates excellent understanding of audit planning. DGLO1: Audit assertions (6%) 0 2 3 4 5 6 Demonstrates no understanding of audit assertions. Demonstrates limited understanding of audit assertions. Demonstrates a satisfactory understanding of audit assertions. Demonstrates reasonable understanding of audit assertions. Demonstrates very good understanding of audit assertions. Demonstrates excellent understanding of audit assertions. Total 0 27 56 67 78 100 Zero Below 50% 50 - 59% 60 - 69% 70 - 79% 80% and over Deakin University CRICOS Provider Cod Questions Question 1 – The annual report and independence (total 23 marks) Find the latest annual report of your company1 in http://www.asx.com.au/prices/companyinformation.htm: (a) What is the name of the company and the company’s financial year end? (1 mark) Information regarding audit committee and independence: (b) What is the size of the audit and risk committee? (1 mark) (c) Is the audit and risk committee independent? (1 mark) (d) Why does the ASX recommend audit committees be independent? (5 marks) (e) Does the non-audit service fee exceed 10% of the annual external audit engagement fee? (1 mark) (f) Does the audit committee discuss the auditor’s provision of non-audit service? If yes, provide details of their discussion. (5 marks) (g) Explain the problems that are perceived to arise when non-audit service fees are high relative to audit engagement fees. (5 marks) Information regarding external auditor: (h) Which firm provided the external audit service? (1 mark) (i) Who signed the Auditor``s Independence Declaration and Auditor’s Report? (1 mark) (j) What date were the Auditor``s Independence Declaration and Auditor’s Report signed? (1 mark) (k) Which standards and regulations does the external auditor refer to in the Auditor’s Report? (1 mark) 1 See appendix to find out which is your company. Deakin Business School Faculty of Business and Law Melbourne Burwood Campus, 221 Burwood Highway, Burwood, VIC 3125 Question 2 – Ethics and audit expectation-performance gap (total 16 marks) The Barings Bank was one of the world``s oldest merchant bank and had problems with rogue trading in the middle of the 1990s. Nick Leeson was floor manager for trades in Singapore as well as head of settlement operations, thus he was able to settle his own trades, bypassing the bank’s own internal controls. Whilst trading, Nick Leeson supposedly made $10 million profit in one week for the bank. This humongous profit caught the attention of other staff members in the bank. For instance, Mike Killian, who was the head of Global Futures and Options Sales, knew that the whole of Barings bank was making about GBP 200 million a year. If Nick Leeson carried on making such profit throughout the year it would be half a billion dollars a year profit! Accordingly to some sources Mike said that if Nick is doing that amount of business for that amount of profit, then they should shut down the rest of the bank because they were just overheads. Due to Nick’s rogue trading the bank went bankrupt in 1995. (a) Mike Killian was cynical that one person alone was making more money than all the rest of Barings Bank staff. Questioning the reliability of information and being alert to conditions that may indicate possible fraud is an attitude expected from auditors. What is the name of this professional attitude and what is its use of it in the role of auditors? (4 marks) (b) Nick Leeson was floor manager for trades as well as head of settlement operations. This means that he was able to settle his own trades, bypassing the bank’s own internal controls. Considering the Code of Ethics for Professional Accountants, which kind of threat to independence does this relate to? Describe this threat and suggest a safeguard to eliminate or reduce this threat. (6 marks) (c) Before going bankrupt in 1995 Barings bank had an unqualified audit report. What does that mean regarding audit expectation-performance gap? How does an unqualified audit report relate to the bank going bankrupt? (6 marks) Question 3 – Analytical procedures (total 27 marks) You are audit partner of a retailer which has a financial year end of 30 June 2015. The audit senior has completed the calculation of a number of ratios as the first stage of the analytical procedures. You have managed to secure some industry benchmarking data for comparative purposes: Solvency Year 2014 Var Year 2015 Benchmark 2015 Quick ratio 5.02 132% 11.66 10.00 Current ratio 18.66 0% 18.64 15.00 Debt to equity 0.11 173% 0.30 0.20 Times interest earned 18.50 -49% 9.44 20.00 Efficiency Year 2014 Var Year 2015 Benchmark 2015 Accounts receivable turnover 11.50 -79% 2.40 10.00 Inventory turnover 2.00 34% 2.67 2.00 Asset turnover 0.21 -14% 0.18 0.20 Profitability Year 2014 Var Year 2015 Benchmark 2015 Return on sales 48.0% 48% 71.0% 50.0% Return on assets 10.0% 30% 13.0% 12.0% Return on shareholder``s equity 8.0% 50% 12.0% 9.0% Discuss the impact of the analytical procedures calculated above on your audit plan for June 2015: Solvency (a) Provide a brief analysis of the client’s solvency. (3 marks) (b) Based on your findings, name three accounts which should be investigated throughout the audit and provide justification for your choices. (3 marks) (c) Which further information would you request from your client in order to improve your understanding of your client’s solvency? (3 marks) Efficiency (d) Provide a brief analysis of the client’s efficiency. (3 marks) (e) Based on your findings, name three accounts which should be investigated throughout the audit and provide justification for your choices. (3 marks) (f) Which further information would you request from your client in order to improve your understanding of your client’s efficiency? (3 marks) Profitability (g) Provide a brief analysis of the client’s profitability. (3 marks) (h) Based on your findings, name three accounts which should be investigated throughout the audit and provide justification for your choices. (3 marks) (i) Which further information would you request from your client in order to improve your understanding of your client’s profitability? (3 marks) Question 4 – Auditor’s independence and liability (total 18 marks) Eraser Limited (Eraser) traded from 1995 until it was taken over in early 2015 by Pencil Limited (Pencil), a local bank, which paid a price equivalent to the net asset backing of Eraser as disclosed in the 2014 financial report. A large portion of Eraser’s business was issuing loans for investment properties in prime locations. While the 2014 financial report of Eraser was being prepared, Pencil sent a privity letter request to Eraser’s auditors, notifying them of their reliance on the 2014 audited financial report, and the reason of their reliance. They received a response from Eraser’s auditors that ‘no duty of care’ was owed by the auditors to Pencil. During 2015, a segment of the investment property market in prime locations collapsed, causing substantial losses to be realised on the investment property portfolio. It was recognised that insufficient security in relation to these properties had been taken out. On additional investigations it was found that Eraser’s accountants provided internal and external auditing services to the company. The auditors, as part of their internal audit duties, reviewed the internal control system regarding property investment and had determined in their report that the system was working in accordance with the company’s guidelines. It was also concluded that these guidelines might need to be reassessed as they were very lenient and exposed the company to substantial and unnecessary financial risks in comparison to other lending institutions. The internal audit report was dated after year end 2014, but before the external audit report was signed. It had also been considered and minuted at a meeting of the audit committee, which was held before the external audit report was signed. However, any decision was deferred to the next meeting of the audit committee. This next meeting was held after the external audit report had been signed. The external audit partner denied any knowledge of this internal audit report. The losses on investment property have caused significant financial distress to Pencil, which has approached you to act as their legal counsel for advice. You have talked to the firm which audited Eraser prior to 2015 and established the following facts: • The auditor received many privity letter requests prior to 2015 and had a standard company policy of refusing to acknowledge a duty of care in all instances. • The audit firm’s audit manual acknowledged responsibilities to interested parties who ‘…read and rely upon our reports, and this extends beyond the persons who employ us in the first instance or those to whom the report is addressed initially”. Your tasks are: a) Outline issues to consider whether a public accounting firm should or should not provide both internal and external auditing services. (6 marks) b) What issues need to be considered in order to determine whether or not a case for negligence against Eraser’s auditors would proceed? (6 marks) c) Assume Eraser’s auditors were negligent. To be successful in this case against the auditors which issues need to be established? (6 marks) You should include reference to ethical standards, case law, and auditing standards where appropriate. Question 5 – Audit planning and assertions (total 16 marks) You are the audit senior on Tables Limited (Tables) audit and have started planning for the 2016 audit. You have been able to get the following information about various sectors of the business. 1 – Property, plant and equipment (PPE) There are generally few fixed asset transactions. Asset registers are maintained, and staff are generally competent. The transactions are often not complex but an element of risk can be introduced when management has to make decisions concerning whether to capitalise or expense items. PPE, being less liquid than other assets, are generally not subject to theft. In recent years a number of PPE items have been manufactured in-house. You have noticed as a result of your analytical procedures that repairs and maintenance expense has dropped considerably in the last two years. 2 – Inventory balances and purchase transactions Although fairly voluminous, purchases transactions at Tables are not complex. Inventories are tightly controlled so that overstocking and obsolescence are normally not a problem. Inventory, although not as liquid as cash, is subject to theft. At Tables, finished package products are shipped immediately to customer, although large quantities of purchased merchandise are maintained on hand. The personnel handling purchases and inventory transactions are, in general, competent. Access to the warehouse is unrestricted. 3 – Trades payables transactions and balances Although not complex, the amount of trade payables transactions is quite high. A significant risk with trade payables is that employees may fail to record them in books. The reason is because the company has applied to the bank for an increase in its overdraft and wants to impress the bank with a strong current ratio. At Tables a request form is first prepared for all items that are to be paid through the cash disbursements system. The previous trade payables clerk, who had been with the company for eight years, left in December 2015. A new clerk was hired but is not yet thoroughly familiar with the procedure. 4 – Trade receivables and credit sales system Transactions of trade receivables and credit sales are not particularly complex at Tables, nor is there any degree of estimation involved (except for the allowance of doubtful debts account). The persons processing revenue and trade receivables transactions are thoroughly familiar with the procedures and are generally competent. Sales transactions processing does, however, entail the completion of many transactions. Competition from overseas is becoming an issue, and because of the poor general economic conditions some customers have requested extensions of time to pay. For each of the above account balances and classes of transactions: a) Determine any significant audit risks with reference to each relevant facts (6 marks); b) Identify the key assertion at risk (as per ASA 315) to each significant audit risk (5 marks); and c) Outline the internal controls relevant to the audit (5 marks). Provide justifications in each case. Appendix Your company (Question 1) You are assigned to the company accordingly to the last number of your student identification number: # CODE COMPANY 1 BHP BHP Billiton Limited 2 BXB Brambles Limited 3 CBA Commonwealth Bank of Australia 4 NAB National Australia Bank Limited 5 SCG Scentre Group 6 TCL Transurban Group 7 WBC Westpac Banking Corporation 8 WES Wesfarmers Limited 9 WOW Woolworths Limited 0 WPL Woodside Petroleum Limited For example, if you student identification number is 215049776 your company is TCL – Transurban Group Stapled. Do not confuse the Australian annual report you need to check with the US Form 20-F.

Question Set #594

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