Auditing A Practical Approach 3rd Edition Robyn Moroney, Fiona Campbell, Jane Hamilton - Solutions

Chan and Partners Chartered Accountants is a successful mid-tier accounting firm with a large range of clients across Australia. During the 2017 year Chan and Partners gained a new client, Medical Services Holdings Group (MSHG), which owns 100 per cent of the following entities:• Shady Oaks
W&S Partners commenced planning the Cloud 9 audit by gaining an understanding of the client’s structure and its business environment. A major task is to consider the concept of materiality as it applies to the client. The auditor will design procedures in order to identify and correct errors
Adopting an audit strategy that relies heavily on substantive testing:(a) Is appropriate when internal controls are very strong.(b) Requires the auditor to conduct extensive control testing.(c) Means that the auditor will conduct some interim testing and minimal year-end account balance testing.(d)
Listed companies are required to make certain disclosures in their annual reports about the compensation paid to their top executives. One reason for this is to help interested stakeholders assess the performance of executives. It also helps executives and companies set appropriate compensation
Adopting an audit strategy that does not rely heavily on substantive testing:(a) Is appropriate when internal controls are minimal.(b) Requires the auditor to conduct extensive control testing.(c) Means that the auditor will conduct extensive year-end account balance testing.(d) Means that the
Which of the following is a true statement about profitability ratios?(a) All companies have a high inventories turnover ratio.(b) Auditors will be interested in trends in profitability ratios.(c) Profitability ratios should be the same for all divisions of the company.(d) Companies will try to
Common uses of analytical procedures include:(a) Risk identification during the risk assessment stage.(b) Estimating account balances during the risk response stage.(c) Overall assessment of the financial report at the final review stage of the audit.(d) All of the above.
Analytical procedures:(a) Can only be performed on annual data.(b) Are only useful if the client’s variation from budget is low.(c) Are not affected if the client changes its accounting methods.(d) Must take into account seasonal variation in the client’s business.
The relationship between risk and the materiality level set in the risk assessment phase:(a) Is positive.(b) Is inverse.(c) Is irrelevant.(d) Depends on the size of the client.
What is audit risk? What are the components of audit risk?
A client has physical controls over inventories, including a locked warehouse with access restricted to authorised personnel. Testing of these physical controls over inventories shows that they are very effective. Can the auditor conclude that there are likely to be no errors in the valuation of
Consider the following statement: ‘If inherent and control risk are high, the auditor will set detection risk as low to maintain a low audit risk’. Explain what it means to set detection risk as low. What does this mean for the operation of the audit?
Ajax Finance Ltd (Ajax) provides small and medium sized personal, car and business loans to clients.It has been operating for more than 10 years and run throughout this time by Bill Short. Bill has been the public face of the finance company, appearing in most of its television and radio
Biggest Bargains stocks thousands of items that range in value from $1 to $100. The inventories on hand represent a material portion of current assets. The merchandise items change according to the season and the promotional theme adopted by the stores’ management for the year. Merchandise is
One of the clients of MMM Chartered Accountants operates a restaurant. From January of the current year, the business has consistently paid its suppliers late, well in excess of the suppliers’ normal credit terms. This has resulted in some suppliers requesting cash on delivery from the business.
Clear Sky Aviation credits prepayments of air travel to a deferred revenue account until the travel service is provided, at which point it transfers the appropriate amount to the credit of sales revenue. A problem with its control system means that the proper allocation of revenue between ‘sales
Clarence is a new audit junior and is attending training sessions at the audit firm. Clarence is trying to focus on the main points in the training because there will be a test at the end of the week. The topic today is audit strategy, with specific reference to the standard on planning audits.
Red Ltd is a media services company. It has radio, television and magazine divisions and operates in all states. Each division manager has a remuneration package that includes a base salary and short-term and long-term incentive payments based on a range of indicators. The CEO and other senior
Unifactor provides equipment to the construction industry. The following is an extract of its unaudited 2019 financial report in relation to the property, plant and equipment (PPE) account:The auditor was appointed in November 2015. The new auditor is aware that there were major repairs conducted
Blue Ltd is in the computer sales business. Blue’s auditor has conducted an analysis of the unaudited figures in preparation for setting the audit strategy. The calculations reveal that inventories turnover is lower this year than last, even more than the auditor expected given the additional
Identify the audit risks associated with the installation of the new IT system for patient revenue.Chan and Partners Chartered Accountants is a successful mid-tier accounting firm with a large range of clients across Australia. During the 2017 year Chan and Partners gained a new client, Medical
Comment on the audit strategy likely to be adopted for the audit of patient revenue for Gardens Nursing Home.Chan and Partners Chartered Accountants is a successful mid-tier accounting firm with a large range of clients across Australia. During the 2017 year Chan and Partners gained a new client,
In chapter 3, you were required to research the key market forces, as they relate to Cloud 9’s operations. The topics you researched included the general and industry-specific economic trends and conditions; the competitive environment; product, customer and supplier information; technological
Obtain the latest annual report of a large, multinational Australian company (for example, one of the large banks or mining companies).Required(a) What information is given in the annual report about the use of any component auditors, other than the Australian audit firm issuing the audit report
Which is generally the most persuasive form of evidence?(a) Internally generated evidence.(b) All types of evidence are equally persuasive.(c) Externally generated evidence held by the client.(d) Externally generated evidence sent directly to the auditor.
If an expert is engaged to assist with the audit:(a) ASIC must be contacted and permission obtained before the expert starts work.(b) it means the auditor should not have taken on the audit because they are not qualified.(c) it means the auditor does not have the requisite skill and knowledge to
A client has a material balance in property, plant and equipment. The discussions with management indicate that there is a risk the client will capitalise all repair costs to minimise the impact on profits. Repairs are likely to be material this year because of flooding at the city premises.
The auditor is planning for the audit of a car accessories retail business. Inventory is material, and items range in value from $1 to over $500. The nature of the store means that many items are specially ordered with special branding and promotional packaging. Orders are placed six months in
Dinitha is working on the audit of a client’s accounts receivable. During the last few weeks she has conducted interviews with the accounts receivable manager, the chief financial officer and staff working in the accounts receivable department. She has also overseen the external confirmations of
The audit team is preparing for audit of accounts payable at a continuing client, Springs Ltd. Springs has grown rapidly this year and introduced new products into its business. The new products are purchased from overseas suppliers. Finn is new to the audit team and keen to make an impression.
Ali is responsible for preparing bank reconciliation statements at Broad Ltd. Broad Ltd has many bank accounts, including separate accounts for each major branch, imprest accounts for salaries and dividends, and accounts kept in foreign currency for overseas divisions. Ali maintains records
Conversations between the board of directors of Binny Ltd and the engagement partner of the financial audit, Seppe Del Santo, have revealed that Binny uses three legal firms. Ball and Partners performs all legal work related to property transfers, mortgages and planning applications. Brown and
The audit partner for Kumar Ltd is assessing the resources required to complete the audit. The partner is aware that Kumar Ltd has a material balance in specialised machinery and decides that an expert will be needed to provide evidence for the valuation assertion for the machinery.RequiredExplain
Yellow Aviation is an existing client of PPP Partners. The auditors are aware that the impacts on airlines of the recent terrorist attacks and the global recession have been severe, with predictions of a prolonged downturn. Also, the entry of new competitors in the domestic and international
Sunny Days is a start-up company in the renewable energy sector. The founder of Sunny Days, Fritz Herzberg, has developed cutting-edge technology to convert the energy in the sun’s rays to electricity via a novel system of mirrors designed to focus the sun’s rays onto tubes containing a
Max Crowe is a junior auditor who has just started with the team conducting the audit of a new client in the construction industry. Susan Wong is trying to teach Max about the benefits of getting to know the client. Susan is also trying to help Max develop experience in picking up subtle signals
MaxSecurity Limited (MaxSecurity) has been an audit client of Smith & Associates (S&A) for the past 15 years. MaxSecurity is based in Wollongong, where it manufactures high-tech armour-plated personnel carriers. MaxSecurity often has to go through a competitive market tender process to win large
Discuss the strength and weaknesses of debtor confirmations as audit evidence for MSHG.Chan and Partners Chartered Accountants are a successful mid-tier accounting firm with a large range of clients across Australia. During the 2017 year, Chan and Partners gained a new client, Medical Services
Answer the following questions based on the information presented for Cloud 9 in the appendix to this text and the current and earlier chapters. You should also consider your answers to the case study questions in earlier chapters. Sharon Gallagher and Josh Thomas have assessed the internal
Is it possible for Chan and Partners to use debtor confirmations only as audit evidence?Chan and Partners Chartered Accountants are a successful mid-tier accounting firm with a large range of clients across Australia. During the 2017 year, Chan and Partners gained a new client, Medical Services
Recent reports have warned of climate change impacts on Australian coasts, including a rise in sea levels, more frequent storms, flooding and coastal erosion.9 Assume you are a member of senior management at a large property development company.RequiredWrite a report identifying the main risks to
Auditors are interested in an entity’s information systems:(a) Only if they are not purely manual systems.(b) Because they affect managers’ ability to maintain accountability for related assets, liabilities and equity.(c) Because management’s ability to make appropriate decisions and prepare
Segregation of incompatible duties:(a) Is a guarantee that fraud cannot occur.(b) Is the same as performance review by a supervisor.(c) Usually increases the risk of fraud unless a supervisor is subject to a performance review.(d) Occurs when different people authorise transactions, record
A management letter:(a) is written by management to the auditor at the start of the audit.(b) lists only the material weaknesses discovered during the audit.(c) contains recommendations for improving internal control and discusses other issues discovered during the course of the audit.(d) all of
Explain each of the seven generally accepted objectives of internal control activities.
Explain the importance of segregation of incompatible duties. What sort of duties would be segregated within the sales process? Why?
Several approaches to internal control documentation are discussed in the chapter. Assess the advantages and disadvantages of each. How would documentation assist the auditor to identify strengths and weaknesses of an entity’s system of internal controls?
Abbott & Partners audit firm has audited Pretty Valley Shire council for two years, performing both a statutory audit of the financial reports and a compliance audit for the government department in charge of local councils’ landfill waste disposal sites. In all previous control testing, no
Elecnet is an electricity distribution company based in a large capital city. Its business is to manage the electricity assets, including poles, wires and other equipment, that are used to deliver electricity to more than 500 000 retail and business customers in the city. Pole, wire and substation
Cheetah Airways became a client of an audit firm for the first time this year. Soon after taking the engagement in September last year, Cheetah Airways was under investigation by the Australian Competition and Consumer Commission (ACCC) for allegedly fixing prices on some routes in collusion with
Bear Transport’s accounting policy for maintenance on its fleet of cargo planes is to capitalise the cost of major airframe and engine maintenance checks and depreciate over the shorter of the scheduled usage period to the next major inspection or the remaining life of the aircraft. The latest
North State Computers has premises in the main street of a large regional city. The business is owned by Bob and Mary Winters, who purchased it three years ago. Mary has an extensive background in IT and has a talent for diagnosing and solving problems with computers that are brought in for repair.
Red Minerals is being audited by your firm for the first time in 2015. In 2010, Red Minerals invested in a mining joint venture in Bangaloo, a country which recently experienced significant currency devaluation. In December 2013, there was a large chemical spill in the area surrounding the main
Leopard Airways is a new client of your audit firm. Its accounting policy for revenue is to credit to revenue received in advance, and subsequently transfer to revenue in the income statement when passengers or freight are uplifted, or when tours and travel air tickets and land content are
Donna MacIntosh runs Emerald Spa, a business providing women-only hairdressing, beauty, relaxation massage and counselling services in a small tourist town. Ninety per cent of the clients using the beauty and massage services at Emerald Spa are weekend visitors to the town, but 80 per cent of the
Lisa Curtis is documenting the purchasing and cash payments processes at Hardies Wholesaling. Hardies Wholesaling imports garden and landscaping items such as pots, furniture, fountains, mirrors and sculpture from suppliers in South-East Asia. All items are non-perishable and made from materials
(a) Explain how the internal control components are usually adjusted to meet the needs of small entities.What advantages and disadvantages does this bring?(b) Assess the internal controls at Dolphin. What changes would you recommend?Dolphin Surf & Leisure Holidays Pty Ltd (Dolphin) is a resort
Write a management letter to Justin and Sarah Morris.Dolphin Surf & Leisure Holidays Pty Ltd (Dolphin) is a resort company based on the Great Barrier Reef. Its operations include boating, surfing, diving and other leisure activities, a backpackers’ hostel, a family hotel and a five-star resort.
MaxSecurity Limited (MaxSecurity) has been an audit client of Smith & Associates (S&A) for the past 15 years. MaxSecurity is based in Wollongong, where it manufactures high-tech armour-plated personnel carriers. MaxSecurity often has to go through a competitive market tender process to win large
Discuss the implications of the sales bonus system for the control environment within MSHG. What special factors would management have to have to consider?
With reference to the ‘control activities’ component of internal control, formulate one question that each of internal audit and external audit will ask regarding the switch-over of the patient revenue systems by Gardens Nursing Home.
Answer the following questions based on the information for Cloud 9 presented in the appendix to this text and the current and earlier chapters. You should also consider your answers to the case study questions in earlier chapters.RequiredConsider the effects on Cloud 9’s accounts and business of
The difference between statistical and non-statistical sampling is that:(a) Non-statistical sampling leads to non-sampling risk and statistical sampling does not.(b) Non-statistical sampling is when the sample is used for control testing not for substantive testing.(c) Statistical samples are
When an auditor selects items for a sample on the basis of the auditor’s belief that they should be included, this is an example of which selection method?(a) Block(b) Random(c) Systematic(d) Judgemental
Discuss the appropriate method of sampling PPE for the planned tests of depreciation. Define the population. What assertions are most at risk?Fabrication Holdings Ltd (FH) has been a client of K&F for many years. You are an audit senior and have been assigned to the FH audit for the first time for
What conclusion would you draw about ‘valuation and allocation’ of PPE from the above information? Justify your conclusion.Fabrication Holdings Ltd (FH) has been a client of K&F for many years. You are an audit senior and have been assigned to the FH audit for the first time for the financial
For each of the test results for Gardens Nursing Home:(a) Identify whether this is a test of controls or a substantive test of detail.(b) Determine the key assertion addressed by the test procedure.(c) Explain why the conclusion reached is appropriate or inappropriate.(d) Outline the key additional
(a) Identify the key account balance at risk because of the sales team remuneration at Shady Oaks. Also identify and explain the key assertion at risk.(b) Identify the key account balance and key assertion being tested with the substantive procedure. Given the bonus structure in place for the sales
Tolerable error:(a) Relates only to control testing.(b) Is positively related to sample size.(c) Is an amount prescribed by ASA 530.(d) Is the maximum error an auditor is willing to accept within the population.
The working papers for a client contain both a permanent and a current file. The difference between the two files is that:(a) The permanent file must be sent to ASIC and the current file is not.(b) The permanent file is kept by the audit partner in charge and cannot be altered after the first audit
Explain the difference between the two types of sampling risk for controls: the risk that the auditor concludes that the client’s system of internal controls is effective when it is ineffective and the risk that the auditor concludes that the client’s system of internal controls is ineffective
What action does an auditor take if the rate of deviation found when testing internal controls is greater than the tolerable rate of deviation?
Explain the difference between tests of controls and substantive procedures.
How are the results of tests of controls related to decisions about the nature, timing and extent of substantive procedures?
Thanh is working on the plan for an audit of a manufacturing firm and is considering the section of the plan relating to substantive testing of purchase invoices. Thanh has to decide how to select the sample.RequiredDescribe the population(s) that would be relevant to Thanh’s sample selection.
Julie is a junior auditor on the audit team for Wonderful Wildlife Parks Ltd (WWP). The same audit firm has been WWP’s auditor for the past two years. During this time, the auditors have completed both the financial audit and the compliance audit for the Department of Tourism, stating that the
Jenny Sharp has been appointed as senior audit manager of the accounts receivable area in the statutory audit of Holiday Cruises, a company operating leisure cruises from ports on the eastern seaboard of Australia. Holiday Cruises sells cruises to individuals (via its website) and to travel agents
CFMUU is a regional credit union with 10 branches across the state. CFMUU leases its premises and buys furniture, such as waiting-area chairs and back-office desks, through a central asset purchasing department. All computer assets are acquired on finance leases. The furniture in the waiting area
Frank Brown is auditing cash payments for Woldi, a large supermarket. Woldi deals with several very large corporate suppliers who expect payment by electronic funds transfer within three business days of delivery. Other large suppliers will accept cheques or electronic funds transfer on terms of 14
Alice Pang is planning the control testing of the accounts payable function in the hardware retailer Koch and Gilbert. Alice is attempting to determine the appropriate sample size for her tests and is writing a report to the engagement partner of the audit justifying her choices. She has had the
Jennifer Jones is reading the documents prepared by the members of the team working on the audit of receivables for a large client. Jennifer is the senior manager assisting the engagement partner, Ruby Rogers. Jennifer and Ruby have worked together on many audits and Jennifer knows the types of
Which of the following is not a factor that the auditor considers when deciding which controls to test?(a) The type of control(b) The risk of detection(c) The frequency of the control being performed(d) The level of assurance the auditor wishes to gain
Answer the following questions based on the information presented for Cloud 9 in the appendix to this text and the current and earlier chapters. You should also consider your answers to the case study questions in earlier chapters.Effective internal controls at the transaction level are designed to
Explain the differences between an audit of internal controls as required by section 404 of the US Sarbanes–Oxley Act 2002 and the testing of internal controls for the purposes of expressing an opinion on the financial report as mandated by ASA 315 (ISA 315). Refer to the standard and legislation
Washington Cleaning has more than 50 employees and has several contracts to clean offices in the central business district. In order to keep disruption to a minimum, the teams of cleaners do not commence work until after 6 pm each night. In the working papers documenting the control testing results
You are testing the controls over bank accounts for your audit client, Orleans Ltd. You note that the responsibility for bank reconciliations has changed due to a corporate reorganisation halfway through the current financial year. Both the staff member performing the bank reconciliations and the
Nebraska Industries manufactures and wholesales small tools. It sells the tools to a large group of regular customers and makes most sales by telephone to this group. Additionally, it receives orders online by its sales team who sign up new customers within the sales area. In the past, Nebraska
Denver Drapers supplies custom-fitted curtains and blinds to retail customers. It has recently expanded to offer a wide variety of home decorating products through its six stores across the state. After some initial problems with stock control it installed a new automated inventory system in April
In relation to the new manufacturing costing system, describe two automated application controls that MaxSecurity could be using.MaxSecurity Limited (MaxSecurity) has been an audit client of Smith & Associates (S&A) for the past 15 years. MaxSecurity is based in Wollongong, where it manufactures
Discuss the implications of finding evidence that the controls identified in question 8.31 are(a) Effective,(b) Not effective.MaxSecurity Limited (MaxSecurity) has been an audit client of Smith & Associates (S&A) for the past 15 years. MaxSecurity is based in Wollongong, where it manufactures
Amy Adams, the audit senior, is reviewing the working papers written by the audit assistant on the audit of Virginia Creepers, a garden nursery and retailer of garden accessories. Amy reads the following description of the results of testing of inventory controls written by the audit
The sales transactions at Colorado Park, a new audit client, are handled by a software application that is not supported by very detailed documentation. The audit partner requests the team to re-perform some controls to ensure that the software application controls are working as described by
For each of the accounts for Shady Oaks (1 and 2 above) identified to be a significant risk:(a) Determine the key assertion at risk(b) Describe a practical prevent internal control that would directly address the risk(c) Describe a practical detect internal control that Shady Oaks could implement
The audit senior on the audit of Frankel Factors is preparing the audit plan for the year ended 30 June 2017. The following notes relate to the payroll application system that went live on 1 January 2017.1. The new payroll application is more complex than the old system, but its reporting function
Answer the following questions based on the information presented for Cloud 9 in the appendix to this text and the current and earlier chapters. You should also consider your answers to the case study questions in earlier chapters.RequiredUsing the results of your controls testing in the case study
(a) Identify the key assertion at risk for payables in relation to payments made prior to receipt of goods.(b) For the control procedures (1) to (5) above for payables:i. Identify the key preventative internal control that directly addresses the risk of payments being made by Shady Oaks to its
Designing substantive procedures responds to the risk of:(a) Material misstatement at the entity level.(b) All types of misstatements at the entity level.(c) Material misstatement at the assertion level.(d) All types of misstatements at the assertion level.
Which of the following statements about the reliability of data used for analytical procedures is correct?(a) Inflation does not affect data reliability.(b) Data reliability affects the persuasiveness of the evidence from analytical procedures.(c) Data is more reliable on a consolidated basis than
Which of the following is a correct statement about misstatements?(a) They are documented in the audit working papers.(b) They can be categorised as errors or judgemental misstatements.(c) They must be considered for their effect on the financial report both individually and in aggregate.(d) All of
Explain how decisions about when and how much substantive testing is performed relate to the overall risk assessment for the item being tested.

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Auditing A Practical Approach 3rd Edition Robyn Moroney, Fiona Campbell, Jane Hamilton - Solutions

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