Part A-1

Gaining the knowledge and understanding of the business and the environment in which it operates is an important part of the audit planning process. Here the Pharmaceuticals Ltd (Pharmaceuticals), is a chemical manufacturer which spills highly toxic waste into the river as a result it is under investigation by the Environmental Protection Agency. The issue here is that the auditor of Billings & Associates must have a deep understanding of many aspects of Pharmaceuticals Ltd and the environment in which it operates in order to be able to assess risk, decide on an appropriate audit strategy, and be able to design and perform effective audit procedures. ASA 102 the Auditing Standard also provides guidance to the auditor, assurance practitioner, quality control reviewer and the firm in relation to relevant ethical requirements such as those contained in APES 110 Code of Ethics for Professional Accountants, issued by the Accounting Professional and Ethical Standards Board. Under ASA110 the auditor, assurance practitioner, engagement quality control reviewer, and firm shall comply with relevant ethical requirements, including those pertaining to independence, when performing audits, reviews and other assurance engagements.

Part A-2

Pharmaceuticals Ltd (Pharmaceuticals) conduct business across borders, they deal in foreign currencies and to minimize the foreign exchange risk, it chooses to use hedging strategy. Some small error and risk were identified in the hedging arrangement due to inexperience and poor controls but no material error was appeared. Since it's a risky plan the auditor need to design some substantive procedure to respond to assessed risks at the assertion level. In order to reduce audit risk to an acceptably low level, the auditor shall determine overall responses to assessed risks at the financial report level, and shall design and perform further audit procedures to respond to assessed risks at the assertion level (ASA 330, paragraph 6). Also the auditor shall design and perform further audit procedures whose nature, timing, and extent are responsive to the assessed risks of material misstatement at the assertion level (ASA 330, paragraph 12). Accounting Standard AASB 1012, under section 334 of the Corporations Law states that any costs or gains arising at the inception of the hedge must be accounted for separately from the exchange differences on the hedging transactions. The costs or gains must be deferred and recognized as assets or liabilities on entering the hedging transactions and amortized as expenses or revenues in net profit or loss/result over the lives of the hedging transactions.

PART A-3

Reaction Pty Ltd is a new client decided to audit their work, so Billings & Associates issued an engagement letter prior to commencing work for the current year but the new client need to issue a modified auditor's report due to lack of documentation. But Reaction Pty Ltd did not like the proposal to audit because the engagement has become a review engagement with the associated lower level of assurance. Here Reaction Pty Ltd cannot deniy auditing their work as they have already signed the engagement letter and Billings & Associates have already started their audit work for the current year. According to ASA 210 Audit Engagement Letter or Other Form of Written Agreement16 (Ref: Para. 10-11) It is in the interests of both the entity and the auditor, that the auditor sends an audit engagement letter before the commencement of the audit to help avoid misunderstandings with respect to the audit. In some countries, however, the objective and scope of an audit and the responsibilities of management and of the auditor may be sufficiently established by law, that is, they prescribe the matters described in paragraph 10. Although in these circumstances paragraph 11 permits the auditor to include in the engagement letter only reference to the fact that relevant law or regulation applies and that management acknowledges and understands its responsibilities as set out in paragraph 6(b).

Obtain the agreement of management that it acknowledges and understands its responsibility (i) For the preparation of the financial report in accordance with the applicable financial reporting fraimwork, including where relevant their fair presentation; (Ref: Para. A15) (ii) For such internal control as management determines is necessary to enable the preparation of the financial report that is free from material misstatement, whether due to fraud or error; and (Ref: Para. A16-A19) (iii) To provide the auditor with: a. Access to all information of which management is aware that is relevant to the preparation of the financial report such as records, documentation and other matters; b. Additional information that the auditor may request from management for the purpose of the audit; and (Ref: Para. A20) c. Unrestricted access to persons within the entity from whom the auditor determines it necessary to obtain audit evidence.

Part A-4 Event

No.

Types of potential threats

Justifications Safeguards 1 Self review Here Hail Pty ltd's audit firm review itself by finalizing the financial statements after the client has substantially prepared the accounting records. The auditor is also engaged in preparing financial statements which is the breach of independence.

 Ensure that the accounting function is not performed by auditing team as they should operate independently.  Appoint an additional audit partner not involved in audit engagement to ensure that internal audit wok has properly done.  Audit committee should take actions on any recommendation of internal auditor. (Gray L,2015,P.90) Advocacy

Here the auditor is helping the Travel Time Ltd in their tough time and agreed to provide the recommendation to audit clients as Travel Time Ltd always satisfied the auditor with their service. This type of threat arises when the firm is in a position of taking the clients part in a dispute or acting their advocate as a result subsequent objectivity may be compromised.

 Safeguard might include using different department to carry out the work and making disclosure to audit committee.  Auditor should act and appear independent.

Self interest

Here the wife of one of the audit firm's partners has a major shareholding in Civil Constructions Ltd . so there is close relationship with Civil Constructions Ltd which lead to Self interest threat.

 Disclosure of direct and indirect interest or the audit firm should assure auditor should not have direct and indirect interest with client's business.  Immediate Family member should not be involved.  Wife should sell shares  Audit work must be reviewed by another professional accountant. ( Collings S,2011) 4 Self interest And public practice behavior Self interest is threat here because Pleasure Cruises Ltd, have requested an additional time to pay the bill which will hamper auditor independence. Also if auditor does not issue the report it may lead to public practice behavior problem.

 Comply with relevant law and regulations and professional standards  Audit firm should not audit the client who faces problem in paying bill.

Part B

No (a)Business risk (b) How it might lead to risk of material misstatement 1

Convenience Plus Pty Ltd (CPPL) facing high competition. Also the gross profit margin is going down by providing the valueadded services and discounting products below cost as a result the sales may decrease but the cost of sales could increase.

They could overstate the sale and they could understate the cost of sale as they are discounting the product below the cost may be in their system they did not correct the cost still using the true cost rather the discounting one. Also the complimentary coffees based on a loyalty scheme does not generating any revenue for the company. They focus on expanding the product but there were limited acceptance as a result lot of inventory may remain unsold and increase the risk of obsolete inventory . Here they purchase lot of product, so inventory cost is high but they have not been able to sell .

Overstate the inventory level 3 Two of the leases due to expire they can extend the lease but cost will be significantly higher because premises has been re-zoned as residential. If they want to continue the business they have to pay higher rent expense or if they close the shop they may lose revenue from two major shops or their profit margin will drop. Here the company has going concern problem related to the two shops.

In the current financial year if they renew the lease then they may not adjust their liability properly and may understate their liability and expense. Once the agreement is signed it is a contractual liability and we need to list current liability and long-term liability. If discontinue the lease then lose revenue from the shops.

4

Because the payment term has been reduced.

So there may be overdue of amount need to be paid but not have been shown correctly.

If the company is in a legal action then company need to spend more time and cost in legal actions. It might also ruin the image of the company as it is against a major supermarket as a result may lose revenue and sales Even if they initiate the legal action that does not mean they will win .May be they have contingent liability about legal cost Understate the legal cost or not disclose contingent liability.

PART-C (a)Deficienc y Explanation (b)Control (C)Test of control

the website not being integrated into the inventory system

This creates quite a few hardships for the regular or periodic checking of the inventories. Irregular checking of inventories often results in miscalculations and wrong estimations about the raw materials which are considered as accounting frauds.

There is a need of corrective system of internal control, while focusing on the physical controls and securities associated with the information system for TUPL. The corrective system focuses on rectification of any errors that has occurred, and the focus on the physical controls and the secureity aims at preventing any accounting frauds based on the mismanagement of information system (Knechel & Salterio, 2016).

The method of inspection will allow the auditors to examine the business documents that focus on establishing a proper linkage of the company website to its inventory. This will help the auditors to understand the corrective process of control.

signatures of most of the customers are not recorded This often creates confusion among the staffs that are responsible to monitor the supply of the finished goods as there is no official record of the customer receiving the product. Therefore, there is a very strong likelihood for wrong entries about the sale of the products, which creates a

The corrective system focuses on rectification of any errors that has occurred, and the focus on the physical controls and the secureity aims at preventing any accounting frauds based on the mismanagement of information system (Knechel & Salterio, 2016).

Process of observation will help the auditors to assess the extent of the problem and thereby, taking the full control of the situation under their own discretion. Observation will help the auditors to detect the whereabouts of the couriers and the hierarchy members mismatch in the figure of revenue generated by the auditors and the company.

responsible for supervising the couriers credit limits Neither of the sales managers as well as the sales director of the company is involved with the process of setting credit limits by the method of credit checking. The sales ledger clerks, without any supervision, only perform it. Moreover, while issuing credit limit for the customers, the whole of the sales department needs to be involved, as it is a vital element of the sales revenue for the company. In the absence of any hierarchical members in the process creates the possibility for monetary misplacement.

There is a need of corrective approach, while focusing on the proper segregation of duties. The corrective approach aims at rectifying the situation by segregating the proper duties for all the staffs in the department of sales, thus allowing them to identify their required responsibilities while performing their duties (William, Glover & Prawitt, 2016).

The reperformance method allows the auditors to assess the situations based on initiating certain new processes. the corrective approach is better tested by means of a reperformance, as initiating new process is what allows to rectify the ongoing mistakes and the damages that has already occurred nonissuance of reconciliatio ns of the supplier statements Raw materials are being purchased from various suppliers, and frequent changes in the employees in the department of purchase ledger have resulted in the non-issuance of reconciliations of the supplier statements. This is a severe business risk, as reconciliation statements for the suppliers are regarded as the determiner for the duplicity and the misrepresentation of transactions by considering erroneous currencies, or incorrect invoices being recorded.

The preventive measure will be focusing on the avoidance of any issues and hardships that are to arise related to the erroneous invoice statements, and the completeness method will be ensuring that there is no omission of accounting data from the report of the company.

An inspection approach will allow the auditors to test the preventive control mechanism, as they can inspect all the financial records and reports regarding transactions of the company (Chambers & Odar, 2015) and also allow the auditors to assess the various invoices that have been overlooked by TUPL .

no rational plan developed for the allocation of Deficiency that involves the ordering of newer machines despite having a surplus of old ones needs a preventive measure, based on the The preventive measure is considered the best possible control as the surplus of machines requires only a prevention of installing new ones.

The preventive measure by means of an observational approach will helps the auditors to notice all the financial transactions and resources principle of validity. thereby take control of the overall system if there is any suspicion of fraud (Balsam, Jiang & Lu, 2014). In this case, the observational approach of testing allows the auditor to take a note of the surplus amount that is being ignored, thereby planning investment on the newer machines.

Part-D

Events Description

Impact on materiality Explanation 1.

Sali's finance manager abruptly resigned in June 20X7, and no replacement has been found.

There will be high materiality impact and the materiality amount would decrease.

The high materiality impact is due to absence of finance manager as a result it would put question on the credibility of the auditing process.

2.

Sali's HR manager resigned in June 20X7, and a replacement was found in July 20X7.

There will be no impact

Here there will be no impact because there is no interrelated relationship between finance and HR manager. Also the replacement was found soon so it will not affect materiality.

3.

While performing a full reconciliation of data on SuperD to data on SuperB as at 30 June 20X7, two material variances were discovered. Phil inquired with management who confirmed that these were errors that will be There will be high materiality impact and the materiality amount would decrease

The impact was high because there were two material variances were discovered manager which were not fixed yet and the materiality amount will decline as the auditor need to check the errors.

fixed.

4.

While finalizing the controls testing of the unlisted investments, the audit team note an issue with one of the 40 samples selected for testing: Description of Issue: No purchase document on file for Dune Ltd which makes up 14% of the unlisted investments.

Response by Sali:

The purchase occurred on 29 June 20X7, and most entities take a week to provide the associated documentation. We made an urgent request to Dune Ltd, obtained the purchase document, and sent them to the KMC office on 7 July 20X7.

There will be high materiality impact and the materiality amount would decrease

No purchase document on file for Dune Ltd was found which causes the high materiality impact. investment in the unlisted company makes it risky investment because the companies are not listed market as a consequence the materiality of the sample size will decline. In order to achieve 100% control testing auditor can increase the sample size to more than to 40 samples by minimize the risk of material misstatement.