You are currently completing your review of the audit work papers prepared by Ashley and Vivienne documenting the results of their audit testing. The following material summarises your review of the work papers and discussions held with the CFO.

During your review of testing performed in relation to the payments’ transaction cycle, the file note by the audit senior notes that in the period 1 June to 31 August 2021 five of the fifty payments tested identified errors. Despite containing errors, the relevant transactions evidenced appropriate authorization. The file note states that the CFO was on long service leave from 15 July to 15 August and the senior financial controller was performing the role in their absence. The audit senior concluded that the errors may have resulted from the senior financial controller “juggling too many responsibilities”. The CFO confirmed that a full review was undertaken following the query raised by the audit senior and no other anomalies were identified. As a result of the errors noted, audit testing was increased, with the remaining errors being within tolerable limits.

The work papers document a discussion in which the group financial controller stated they have reviewed the recoverability of trade receivables. The provision recorded is based on the aging of the debtor’s ledger at the balance date with any balances over 90 days being incorporated in the provision. The audit senior notes that the methodology adopted by the group financial controller is not entirely consistent with the requirements of AASB 9 Financial Instruments (AASB 9), however the file note included in the work paper states that the CFO believes the balance to be materially consistent with the requirements of AASB 9. You note that the accounting policy disclosure in the financial statements is consistent with the requirements of AASB 9.

The working papers confirm the audit senior has matched the amounts recorded in the balance sheet as “fit out” loans to franchisees to the schedule provided by the CFO and vouched the amount recorded in the balance sheet to the amount recorded in the schedule, with no errors noted. The wallpaper states that the CFO believes that whilst a small portion of franchisees are behind in their payments, a provision for the “fit-out” loans provided to franchisees is not required as all stores continue to operate. No further audit work has been undertaken regarding the “fit-out” loan balances outstanding at the balance date.

During the course of the audit, you have had numerous discussions with the CFO regarding the methodology used in the calculations to support the recoverability of goodwill at the balance date. You are concerned that the assumptions are too optimistic and should be amended. The CFO is adamant that given the company is profitable the suggestion that the methodology needs to be amended is not reasonable.

Upon review of the board minutes, you identify that the board is currently seeking to renegotiate the external debt facility. Your review of the debt agreement and related documentation suggests the company breached one of the loan covenants during December 2021. The CFO confirmed they are in discussions with the bank for the bank to waive the breach as the breach is “’ just a technical breach’ resulting from market volatility and is not due to the company deliberately breaching the covenant”. The CFO is confident the bank will provide the waiver. Upon reviewing the financial statements, you note that the total amount of outstanding debt is currently split between current and non-current liabilities in the Statement of Financial Position. The audit work papers identify that the matter was discussed with the CFO who explained that the current portion of the debt reflects the amount the company will pay in the following twelve months. The amounts disclosed are based on the CFO’s belief that the negotiations with the bank to waive the breach will be successful. The CFO is confident the matter will be resolved prior to the release of the financial statements.

Your review of the January 2022 board minutes identifies that three franchisees went into liquidation as they could no longer “ride out” the pandemic. The three franchisees collectively owned ten stores. The total “fit out” loans owed to the company on 31 December 2021 amounted to $1.5 million.

Interview

Prepare for an interview with the Audit Partner (Instructor) in which the following matters are to be discussed. Assuming all client acceptance procedures have been followed and there are no independence impediments to accepting the engagement, based on your review of the material outlined in section A. “Client Acceptance, Risk Assessment and Audit Planning” of the Case Study:

1. Discuss the key risks associated with the audit of Cream Puffs Food Group for the year ended 31 December 2021. Your discussion should link to the case facts and relevant auditing standards.

2. Discuss the auditors’ responsibility for detecting fraud and how the revelations by the CEO might impact the current year audit planning. Your discussion should clearly link to the case facts and relevant auditing standards.

3. Propose the preliminary audit strategy to be adopted in the audit of Cream Puffs Food Group for the year ended 31 December 2021. Your discussion should clearly link to the case facts, assessed audit risk, and relevant auditing standards.

Answer rating: 100% (QA)

1 The key risks associated with the audit of Cream Puffs Food Group for the year ended 31 December 2... View the full answer