Scenario One: (500 Words)
You have been asked by your audit client, Bolts Ltd (Bolts), to prepare a report that analyses the potential acquisition of Steel Pty Ltd (Steel). Prior to conducting your analysis, you decide to verify the accuracy and completeness of the cash flow statement provided by Steel for the year ended 30 June 2012. After reviewing a draft of your analysis, the chief financial officer (CFO) of Bolts has asked you to focus your attention on the sales and profitability of Steel and to avoid the distraction of cash flow reporting. He suggests that the acquisition will provide substantial future financial benefits to Bolts and that confusing the board with cash flow issues would not be helpful to the acquisition
or to the likelihood of your being asked to undertake similar engagements in the future.
List two threats to compliance with the fundamental principles that may exist resulting from your discussion with the CFO, and identify the fundamental principles at risk of being breached.
Scenario Two: (1000 Words)
Luke and Zane are two audit seniors working for the same Big Four accounting firm. Both started employment with the firm around the same time. They have mutual respect for each other; however, they have been highly competitive since they commenced work together. Luke has recently married and he and his wife are paying off their mortgage. Zane is single with a reputation in the firm for playing hard but working hard too. They have both been seniors for almost 18 months and are looking for promotion to audit supervisor. They are both aware that there is only one supervisor position available. Luke recently replaced Zane on a particular job, and the reason given to both Luke and
Zane was that another assignment had arisen with a long-time client of Zane’s. Once Luke had replaced Zane on that particular job, he realised that the client had called the audit manager to say that they were not impressed with Zane, as he had missed a number of issues within the audit and was arriving at work late. The audit manager had not discussed these comments with either Luke or Zane. After going through the work that Zane had completed, Luke realised that Zane had performed an excellent job, identifying a number of issues that he thought he might possibly have missed. Furthermore, Luke suspects that Zane and the client had a personality conflict, and that the client has misled the audit manager.
Luke realises that he can finish off the audit, resolve the issues and obtain a good review from this assignment, which would help him in the promotion stakes. He also knows that the audit manager is unlikely to bring the client’s unsupported allegations to Zane’s attention.
(a) Work through this scenario using the American Accounting Association decisionmaking model, and decide what action Luke should take.
(b) Would your decision be any different if you used the Mary Guy decision-making model?
Scenario Three: (1000 Words)
The Peak Sawmill Limited (Peak) operates a timber sawmill in a large regional town. It sources its raw material (pine logs) from a number of local growers and from its own plantations. Logs are transported on large trucks that are weighed in on the company’s weighbridge and weighed out after dropping their loads in the storage area. Logs are thendebarked and sawn to size in the cutting area of the mill. The various logs are then sent to other areas of the sawmill depending on what they will be used for. You are a senior on the audit. In the planning stage of the audit, you perform analytical procedures. In the current audit period, the average number of days to pay creditors has declined significantly from the average recorded over the past three financial years. Your investigation reveals that log suppliers represent more than 90 per cent of the value of accounts payable. As an internal control, details of the goods received notes are matched against the supplier’s invoice. The accuracy of the invoice is checked, after which the invoice is authorised for payment by the mill accountant. Any discrepancy between what the supplier’s invoice amount should be and the actual amount charged by the supplier is communicated to the supplier by way of a pre-numbered ‘request for credit’ form. This form provides reasons for the differences and the amount requested to be credited to the company by the supplier.
The correct amount of the invoice is entered into the accounts payable accounting system and the supplier’s monthly statement is reconciled to the accounts payable balance per the creditors’ ledger at month end. The differences are mostly attributable to:
unprocessed invoices due to pricing differences
timing differences in the recorded date of a payment made
amounts requested for credit
settlement discounts disallowed.
Cathy Vernon, the company’s financial controller, informs you that due to the increase in the price of timber, new contracts with suppliers have been negotiated over the past year. The accounts payable personnel have complained that management is too slow in informing them about the effective dates of the implementation of the contracts and the revised prices.
A brief inspection of the accounts payable reconciliations for five of the biggest suppliers indicates that many invoices are being held back due to the lack of correct pricing.
(a) List two key assertions at risk in relation to accounts payable.
(b) Provide your justification for each assertion.
(c) For each assertion, outline one substantive test of detail to obtain sufficient appropriate audit evidence.