Question 4 [8 Marks] (a) Joe & Donald (J&D) Pty Lid is a fast-growing manufacturing company. J&D is by far your largest audit client. While conducting the audit you discovered that several engagements were potentially in breach of the independence requirements of APES110. The unrelated cases are listed in the table below. For each case (4 marks each case -8 marks total): (i) Does a potential threat to audit independence exist in the circumstances (Yes/No)? (ii) If your answer to part (i) is yes, identify the single most significant type of potential threat and recommend a safeguard. if any, that could reduce or remove the threat. Alternatively, if your answer to part (i) is no, give reasons why no threat exists, Situations Does a If your answer to recommend a safeguard. potential part () is yes, if any, that could reduce threat to audit identify the or remove the threat. independence single most (2 marks) exist in the significant type circumstances potential (Yes/No)? threat. (1 mark) (1/2 mark) (i) Your audit firm is divided into different autonomous divisions with each having separate partners and staff. The Tax Consulting Division has recently submitted the tax return for J&D. The return was prepared by your tax consulting division using the information provided by J&D. The client reviewed the return and signed it before submission. (i) A small Pty Limited company audit client has processed all the accounting transactions and adjustments for the year and has produced a final trial balance. To comply with the terms of a mortgage loan the company needs to urgently present audited financial statements to the bank. but the statements can't be prepared because the accountant has fallen ill and is in hospital. The client asks if your firm can prepare the statements for them using their trial balance figures.Situation 3 Your client Suits Ltd is a event management company. Suits Ltd arranges for popular overseas entertainment artist to perform in Australia. Bruno Mars concert was booked to be played in major cities in Australia. Suit's written contract required the company to pay the artist in US dollars, but in order to reduce costs, it did not hedge the amounts. Subsequent to year end, the Australian dollar fell against the US dollar and a substantial loss relating to the Bruno Mars concert was predicted. The management of Suits Lid tried unsuccessfully to renegotiate the Bruno Mars contract and has been unable to obtain finance to cover the expected shortfall. Suits has now cancelled the concert and expects a substantial claim from Bruno Mars. It is clear to you, as the auditor, that Suits does not have the income, cash, or the other assets to sustain such a loss. Audit opinion (1 mark) Explanation (1 mark)Question 1 [10 Marks] - Part A- (6 Marks) For each of the following independent and material circumstances, identify the type of audit opinion required and explain the basis of your answer. Situation 1 Your client, Home and Away Lid, had a challenging year and did not keep appropriate books and records. This was due to the accounting department being understaffed, transactions were not entered promptly, and reconciliations were not performed. To sort out the mess, a temporary accountant was employed; however, he was unable to even reconcile the bank account at year end. Therefore, the audit was extremely difficult this year, and you are not satisfied all transactions that occurred during the year are reflected in the financial report. Audit opinion (1 mark) Explanation (1 mark) Situation 2 While auditing your client Basma & Basma Lid for the year ended 30th June 2021. You have identified material misstatements of the property, plant, and equipment account due to the incorrect depreciation rate used for the past five years. However, recent technological changes in the industry have convinced you that the useful lives of Basma and Basma's property plant and equipment account need to be adjusted, resulting in an increased depreciation charge. The Directors of Basma and Basma refuse to make any change to the depreciation rates, despite you explaining that this will put them in breach of the requirements regarding impairment tests Audit opinion (1 mark) Explanation (1 mark)Part B (4 Marks) Your firm is the external auditor of Hard Rock Lid, a large and diversified entity, to which the following timelines apply. A balance date of 30 June 2021: . Directors declaration and audit report to be signed 28 July 2021 Financial report and audit report to be mailed to shareholders 4 August 2021. Required: For each of the following independent and material situations, select the appropriate action from the list below, and justify your responses: A. Adjust the 30 June 2021 financial report B. Disclose the information in a note at the 30 June 2021 financial report C. Request that the client recall the 30 June 2021 financial report for revision D. No action is required. Situation 1 Hard Rock Lid sells high-value drainage components. Due to these items' size and quantity, they are stored in a large outdoor space on the outskirts of Sydney. Shortly after the year-end on 23rd July 2021, a significant amount of this stock was stolen. The security at this site was inadequate, and no record of the theft was available. Action (1 mark) Explanation (1 mark) Situation 2 One of the major debtors, Loser Ltd, which existed on 30 June 2021, was unexpectedly declared bankrupt on 20 July 2021. Action (1 mark) Explanation (1 mark)Question 5 [10 Marks] Jonny Depp an audit senior at Amber Heard Pty Lid. a large international audit firm. He has been asked by the audit partner to evaluate the following audit risks of a major International client. For each of the audit risks described below complete the following: (1) Identify the impact (i.e., increase of decrease) on the component(s) of audit risk affected and explain why it is an audit risk; and Identify the prime audit assertion(s) to be tested and the key account balance(s) affected; and (iii) Identify the best audit procedure you would use to reduce the risk of material misstatement. NB: The situations are independent of each other and are to be treated separately in your answers. Situation 1 As part of the business risk assessment for a major audit client, the auditor reviews monthly newsletters of the client and discovered that six weeks prior to year-end, the payroll manager was dismissed because it was discovered he had included his wife and daughter on the payroll for the past five years. They hadn't worked there at all. 10 Identify the impact Explain why it is an Identify the prime Identify the best "(ie., increase or audit risk. (1/2 assertion(s) (1/2 audit procedure decrease) on the mark) mark) to be tested you would use to components of the and the key reduce the risk of audit risk (1/2 account balance(s) |material mark) affected (1/2 mark |misstatement (1 each) mark) Situation 2 Your client changed its manufacturing processes last year and now uses cheaper components to reduce production costs. This change has not affected sales quantities and prices, but they have been experiencing an increase in warranty claims for product repairs. The client has recently increased its warranty provision account by 10% in anticipation of more claims. Identify the impact Explain why it is an |Identify the prime Identify the best (.e., increase or audit risk. (1/2 assertion(s) (1/2 audit procedure decrease) on the mark) mark) to be tested you would use to components of the and the key reduce the risk of audit risk (1/2 account balance(s) |material mark) affected (1/2 mark |misstatement (1 each) mark) 11Question 3 [10 Marks - 1/2 Mark each test] Listed below are assertions for transactions and accounts. Provide details of two completely different types of tests that an auditor can undertake to gain appropriate evidence about each assertion. TESTING AN AUDITOR CAN UNDERTAKE TO GAIN APPROPRIATE EVIDENCE ABOUT THE ASSERTION (i)) Existence of Inventory (ii) Rights and obligation of Accounts receivable (iii) Completeness of payroll expenses (iv) Cut-off of repairs and maintenance expense (v) occurrence of salescomponents to reduce production costs. This change has not affected sales quantities and prices, but they have been experiencing an increase in warranty claims for product repairs. The client has recently increased its warranty provision account by 10% in anticipation of more claims. Identify the impact Explain why it is an Identify the prime Identify the best (le., increase or audit risk. (1/2 assertion(s) (1/2|audit procedure decrease) on the mark) mark) to be tested you would use to components of the and the key reduce the risk of audit risk (1/2 account balance(s) |material mark) affected (1/2 mark |misstatement (1 each) mark 11 Situation 3 While auditing the client's accounts payable processes, the audit manager has noted in the working papers that the client requires (1) the supplier code and invoice number to be input at the time of processing payment and (2) reconciliation of supplier accounts each month with an emphasis on detecting debit balances (i.e., accounts with more payments than invoices). Identify the impact Explain why it is an Identify the prime Identify the best "(i.e., increase or audit risk. (1/2 assertion(s) (1/2 |audit procedure decrease) on the mark) mark) to be tested you would use to components of the and the key reduce the risk of audit risk (1/2 account balance(s) |material mark) affected (1/2 mark |misstatement (1 each) mark) END OF EXAM PAPER 12