05 Jun Question ASSESSMENT ITEM 3 Assignment 2 Value: 20%
Question
ASSESSMENT ITEM 3
Assignment 2 Value: 20%
Due date: 15-May-2013
Return date: 05-Jun-2013
Length: 2500 to 3000 words
Submission method options
Hand delivery (option applies to Internal only)
Alternative submission method
Task
Question 1 – Inherent Risk, Control Risk and Audit planning(6% of total subject assessment)
You are the audit senior responsible for the audit of Delilah Ltd. You are currently planning the audit for the year ended 30 June 2012. During your initial planning meeting held with the financial controller, he told you of the following changes in the company’s operations:
(i) Due to the financial controller’s workload, the company has employed a treasurer. The financialcontroller is excited about the appointment because in the two months that the treasurer has been with the company he has realised a small profit for the company through foreign-exchange transactions in yen.
(ii) Delilah has planned to close an inefficient factory in country New South Wales before the end of2012. It is expected that the redeployment and disposal of the factory’s assets will not be completed until the end of the following year. However, the financial controller is confident that he will be able to determine reasonably accurate closure provisions.
(iii) To help achieve the budgeted sales for the year, Delilah is about to introduce bonuses for its sales staff. The bonuses will be an increasing percentage of the gross sales made, by each salesperson, above certain monthly targets.
(iv) The company is using a new general ledger software package. The financial controller isimpressed with the new system, because management accounts are easily produced and allow detailed comparisons with budgets and prior-period figures across product lines and geographical areas. The conversion to the new system occurred with a minimum of fuss. As it is a popular computer package, it required only minor modifications.
(v) As part of the conversion, the position of systems administrator was created. This position isresponsible for all systems maintenance, including data backups and modifications. These tasks were the responsibility of the accountant.
(vi) The managing director has returned from the USA, where he signed a contract to import a line ofclothing that has become the latest fashion fad in the USA. The company has not previously been engaged in the clothing industry.
Required:
For each of the scenarios above, identify which of the components of audit risk (inherent, control or detection risk) are affected. In your answer you will need to justify you choice. Format your answer as follows:
Part Inherent Risk or CR Justificationi ii iii
iv
Question 2 – Internal Controls and Substantive Testing (6% of total subject assessment)
You are the auditor of PC Ltd., a company that produces low cost electronic goods to children and young adults. The audit has a year end of 30 th June 2012.
There are four main people involved with the acquisitions of inventory for PC Ltd. Ms Auburn is the purchases officer; Mr Brown is the Accounts Payable Clerk; Mr Crimson is the Financial Controller and Ms Dark is the Payments Officer.
The acquisitions system works as follows:
· Ms Auburn is responsible for purchases within PC ltd. There is a computerised inventory system and whenever the inventory level goes below a certain level, Ms Auburn prepares a purchases requisition to buy new stock from one of three suppliers that PC uses.
· Ms Auburn then prepares a three part prenumbered purchase order. Every Month Mr Crimson reviews a listing of purchase orders issued to ensure all have been accounted for. The original copy of the purchase order is sent to the vendor. The receiving department within PC is sent the second copy, which is then used as a receiving report. The third and final copy is kept on file within the purchases department along with the original purchases requisition.
· When the purchased goods arrive they are immediately sent to the receiving department where the receiving report (which is the second copy of the invoice) is filled out by the store-room employee and authorised by the store-room supervisor. A copy of this document is taken and kept in the store-room.
The original is sent to Mr Brown in accounts payable.
· When the supplier invoice is received it is forwarded to Mr Brown. He checks the price on the invoice, compares the quantities to the details on the receiving report and checks the footings and calculations. Once this is done he enters the details of each invoice into the computer system that updates the purchases journal and accounts payable master file.
· The invoice is then sent to Mr Crimson for authorisation. Attached to the invoice is a copy of the materials purchase requisition and the receiving report. After Mr Crimson has approved the invoice for payment the documents are sent to the person responsible for cheque preparation in the accounting department (Ms Dark).
Required:
a) Identify three controls that operate within this system and state the potential errors they are aimed atpreventing.
b) Describe two additional controls (or improvements to controls) that you would implement into thissystem and why.
c) Describe the substantive tests that you would perform on transactions in the acquisitions cycle ofthis system to gain adequate assurance over the assertions of completeness, cut off and accuracy.
Question 3 – Analytical procedures and Substantive Testing (8% of total subject assessment)
Below are the financial statements and additional information for Tehran Ltd.
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