Auditing Final Assessment - HA3032 - T2 2021

This assessment consists of six (6) questions and is designed to assess your level of knowledge of the key topics covered in this unit. The questions cover topics such as materiality, audit risk model, independence, audit procedures, subsequent events, and audit opinion. The subject is Auditing, course code HA3032, and the course name is Auditing. The college/university is not mentioned.

HA3032
AUDITING
FINAL ASSESSMENT
TRIMESTER T2, 2021
Assessment Weight: 50 total marks
Instructions:
 All questions must be answered by using the answer boxes provided in this paper.
 Completed answers must be submitted to Blackboard by the published due date
and time.
Submission instructions are at the end of this paper.
Purpose:
This assessment consists of six (6) questions and is designed to assess your level of
knowledge of the key topics covered in this unit
HA3032 – Auditing - Final Assessment T2 2021

Question 1 – Materiality
(7 marks)
As stated in ASA 320;
“The auditor’s determination of materiality is a matter of professional judgement, and is affected
by the auditor’s perception of the financial information needs of users of the financial report.”
(AUASB, 2015)
With reference to the statement above from ASA 320, define materiality and discuss how the
“needs of users” will affect how materiality is determined.
ANSWER: ** Answer box will enlarge as you type
Materiality in auditing means the effect of misrepresentation of financial figures in
accounting statements that can impact the economic decision making and interpretation
by the various users of these reports. An auditor makes use of this concept for the purpose
of performing its audit and identifying the effect of misstatements. They do not consider
only the quantity but also takes into account the quality aspect of accounts. There are two
types of this concept (Seyyedjavadin and et. al., 2020).
 Overall materiality- In this, auditors check the whole financial statement to
determine the effect of all misstatements on the analysis of reports.
 Specific materiality- this refers to identify mistakes or misrepresentations in a
specific content. It can be in particular class of transaction, balances of accounts or
in different sections of company that can effect the decisions of its users.
While conducting Audit, there is a need of analysing the materiality factors which can
affect the process of their decision making. The auditors has to take care of their interests
while calculating it. Sometimes , firms try to hide their profits from the users by
presenting some artificial or over recorded expenses. This will reduce the overall income
of business, thus, less dividend to the shareholders. This will also help them in evading
tax which is a type of cheating with government and public interest. Non-disclosure of
any relevant data also affects the choices of users ( Perera and Abeygunasekera, 2021).
For instance, a firm has invested a large amount in some company which is going to
liquidate in coming future and organisation did not specified the name of this firm in its
statements. In this case, the investors of business will not be provided with adequate
information and relevant data is missing as presence of this information can make them to
draw their money back. Auditors while auditing the accounts have to keep the interests of
HA3032 – Auditing - Final Assessment T2 2021

the various users as they are the most effected persons from misstatements. Thus, they
have to plan their audit according to this only.
Question 2 - Audit Risk Model (7 marks)
What is the purpose of tests of controls? With reference to the three (3) main risk components
of the Audit Risk Model, explain the circumstances where it is NOT appropriate for the Auditor
to test the controls of the client entity.
ANSWER:
A test of Audit means any procedure of auditing that is used to examine the internal
control of organisation. The objective of this statement is to check that if the system of
company is able enough to identify or prevent any kind of material misstatements (Nolder
and Sunderland, 2021).
Purpose of Test of control- It aims at inhibiting such a control system in the firm that
there is no requirement of any additional audit procedure which can prove to be time and
money consuming for the business. It also look to get some audited evidences that
supports the statement provided by auditor. This test further examines the capacity of
company in evaluating the system of firm that whether it can keep a check on material
misstatements or not.
An audit risk model means a tool that is used for evaluating and managing the risks
that can be arisen while performing the auditing functions. There are normally three kinds
of risk.
 Inherent risk- in this auditor assess the chances of misstatement on its beliefs
related top some transactions, disclosure of information or in balance of accounts.
This takes place before considering the internal control of firm, as such materiality
is present in the structure of firm or the whole industry only and is obvious to
happen.
 Control risk- in this, the auditor checks the number of times a particular material
misstatement is occurring and is not identified by the already existing internal
control system of client (Mengyan, 2020).
 Detection Risk- Here, the client demand a type of audit through which the audit
assertion is not able to detect any kind of material misstatement.
It is inappropriate for an auditor to conduct test of control when it is expected that the
deviation rate expected is much more than the tolerable rate of difference. It is also not
HA3032 – Auditing - Final Assessment T2 2021

suitable for closing and opening entries, reconciliation statements, depreciation and
disclosure in balance sheet and profit and loss account. Many times, auditing requires
substantive approach. Thus, it is not appropriate for the auditors to do so ( Menendez
2021).
Question 3 – Independence (7 marks)
A senior partner in a large incorporated accounting firm has 400 shares in a large client’s
company. Whilst this ownership stake is considered an insignificant part of the partner’s total
share portfolio, the firm has strict requirements about equity investments in clients based on
s307C of the Corporations Act and the APES 110 Code of Ethics for Professional Accountants.
Required:
a) Has the partner violated the independence requirements of the firm? Discuss (3 marks)
b) Explain whether the ownership is likely to affect the partner’s independence in fact.
(4 marks)
ANSWER:
(a) Yes, the client has violated the requirements of firm. According to the rule, the
auditing party should not be related to the company of whom it is conducting audit. By
taking shares of the client firm, the auditor has created a personal interest in the company,
which will make the auditor to show only positive aspects of the firm. It also implies that
the auditing person would show the good position of organisation rather then showing
their losses (Mathiasen, 2020).
(b) Yes, the ownership will affect the independence fact as there is a case of intimidation
threat. The auditing party can alter the values according to its needs by presenting it as a
profitable firm and hiding some relevant data that can change the decisions of investors
and other users of accounts.
Question 4 - Audit Procedures (7 marks)
Your firm Temasek, Smith & Partridge are currently auditing the financial accounts of Riddell Ltd
for the year ending 30 June 2021. You are the Audit Manager on this engagement and one of
your new graduates has performed the following audit procedures in relation to the sales and
collection process of Riddell Ltd, as follows:
1. Examined a sample of shipping documents to determine whether each document has a
sales invoice number included on it.
2. Added the columns on the aged trial balance and compared it to the total noted on the
general ledger.
3. Observed whether the financial accountant makes an independent comparison of the
total in the general ledger with the trial balance of accounts receivable.
HA3032 – Auditing - Final Assessment T2 2021

4. Examined a sample of customer orders to see whether each order has a credit
authorisation.
5. Compared the date on a sample of shipping documents a few days before and after the
balance sheet date with related sales journal transactions.
6. Computed the ratio of the provision for doubtful debts divided by accounts receivable
and compared it with previous years.
7. Examine a sample of non-cash credit entries in the accounts receivable master file to
determine whether the internal auditor has initialled each one.
Required:
For each audit procedure stated above from 1) – 7), identify the applicable type of audit
evidence, type of test and provide an explanation of the purpose of the audit procedure.
Please use the following table to complete your responses:
ANSWER:
a.
TYPE OF EVIDENCE
b.
TYPE OF TEST
c.
EXPLANATION
Sales Invoice Substantive test -
transactions
This will enable the
auditor to ensure that there
is no vague entry of sales
in books of accounts and
also no transaction is
missing. Its will also be
helpful in making sure that
all entries are recorded as
per the actual figures.
Journal, Ledger
and Trial balance
statement
Test of balances This will examine the
authenticity of shifting the
balanced from one place
to another (Masoumi
Bilondi, Hosseini and
Molanazari, 2020).
List of accounts
receivables, ledger
and trial balance
Test of balances It ensures that all the
accounts of debtors are
correctly recorded.
There is no
misrepresentation by
showing amounts in
excess.
HA3032 – Auditing - Final Assessment T2 2021

a.
TYPE OF EVIDENCE
b.
TYPE OF TEST
c.
EXPLANATION
Receipts of
customer orders,
payment history
of customers
Test of control It helps in ascertaining
that whether the
customers of firm are
holding enough money
to pay its debt. It will
further help in
checking the liquidity
position of firm.
Sales journal book
and receipts of sales
transactions
Substantive test -
transactions
It aid the auditor in
checking whether the
effect of sales s shown
in books of accounts
according to the date
of transaction or not.
Sales journal
book, cash book
Substantive test -
Procedure
With the help of this,
the auditor will be able
to know whether the
organisation can
recover its amount
form debtors or not
and in which time
period and up to which
extent.
Sales journal book,
other subsidiary
books
Substantive test -
Procedure
This is required to be
done to know whether
all credit sales
transactions are
recorded in the books
or not ( Lobo, Xie and
Yan, 2021).
Question 5 - Subsequent Events (11 marks)
ASA560 includes the following statement:
“If, after the financial report has been issued, a (material) fact becomes known to the auditor
that, had it been known to the auditor at the date of the auditor’s report, may have caused the
auditor to amend the auditor’s report,…” (AUASB, 2015)
Required:
HA3032 – Auditing - Final Assessment T2 2021

a) Based on the statement provided above from ASA560, explain the actions required of the
auditor in this situation, that is, where a material fact arises after the financial report was
issued. (4 marks)
b) What are the potential risks to the auditor when this problem arises? Discuss. (7 marks)
ANSWER:
(a) when the auditor discovers materiality after filling of financial report then, it has no
obligation to perform any enquiry regarding it. It just has to inform the whole matter to
the management or the person charged with governance and urges them to take
appropriate action. At the time of revision of this report, the auditor has to follow
necessary procedures in that situation, and then new report is issued. The revis4ed report
should mention the reason for updation of the new statement (Hassan and Al-Taie, 2021).
(b) In such case, the license of the auditor can be cancelled if the mistake is very big, it
can also have to face penalty in terms of fine or suspension. There can be some other
punishment as decided by the law authorities.
Question 6 - Audit Opinion (11 marks)
Required:
The following are four (4) independent situations. For each case, state the type of audit opinion
which should be expressed and provide an explanation for your choice of audit opinion in each
case shown below a) – d), as follows:
a. Whilst auditing the Long-Term Investments account of Brownllow Medal Ltd., the auditor
has been unable to obtain the audited financial statements for a material investment of
an entity located in an overseas jurisdiction. The auditor concludes that sufficient and
appropriate evidential matter regarding this investment cannot be obtained in the
required time. Additionally, as the Audit Manager in charge of the audit-engagement,
you have to weigh up the requirements of the audit-engagement with the additional cost
of spending extra time at the client’s premises. (2 marks)
b. Due to recurring operating losses and ongoing working capital deficiencies, the auditor
has some serious doubts about BMP Ltd.’s ability to continue as a going concern for a
reasonable period of time. However, the financial statement disclosures concerning
these matters, which you have now reviewed and evaluated, are adequate, and the BMP
Ltd. senior management team has been co-operative and helpful with all information
requests. Nonetheless, your professional scepticism leads you to suspect there are likely
to be serious operational challenges for BMP Ltd in the next twelve months. (3 marks)
c. Mirrabella Pty Ltd has completed the preparation of its financial statements for 2020/2021,
but it has decided to exclude the Income Statement. The Chief Financial Officer (CFO) of
HA3032 – Auditing - Final Assessment T2 2021

Mirrabella Pty Ltd explains to you that the users of their financial statements find the
Income statement confusing, too long and unnecessary because the Balance Sheet already
has the essential information which shareholders require. Accordingly, the CFO has refused
to have the Income Statement in the annual report for the year ending 30/06/21.
Furthermore, the CFO has implied that Mirrabella Pty Ltd will be seeking to appoint a
different auditor for the next audit. (3 marks)
d. Your client, Metro-Quinn Ltd, operates a chain of fast-food outlets throughout Australia. It is
now the end of the audit and it was found that major internal control deficiencies exist in
relation to the completeness of recording and banking of cash sales. Cash register tapes are
not available to determine which cash sales amounts should have been recorded and
banked. There is a lack of separation of duties between the custody of cash and its
recording. Metro-Quinn Ltd senior management have not provided any explanation for
these deficiencies, nor have they indicated that they will act on your recommendations to
remediate the problems and issues in the internal control environment. (3 marks)
ANSWER:
(a) In this situation, information system audit must be used for collecting the required
data. This software keeps the full data of all the processes and can be used by auditor for
filtering the data and identifying the required information for fulfilling their objective.
With the help of this system , auditor of firm could determine the material investment of
overseas jurisdiction. This will also help in tracking any kinds of frauds or hacking of data
in the organisation (FANG and GAO, 2021).( Fan and et. al., 2020).
(b) Here, financial audit can be applied, which will help the checkers to know the true
picture of organisation. This will also help the company in kn owing that whether all its
accounting statements are recorded correctly or not. Through this they can also check the
creditors and debtors of business along with their creditworthiness.
In this case, compliance audit should be implemented, which provides information about
the fact that whether the business has presented all the required documents to the firm or
not. It will also check the relevancy in the reports to be filled by them, through which the
confusion created by income statement will also be resolved ( Çelikay, 2021).
(d)There is a strong requirement of internal audit in this case. Through this, they will
be able to check whether all the transactions have been recorded in the accounts
books or not. This will make the whole recording authenticated with required bills
and completed transactions.
References
Çelikay, D.Ş., 2021. Women Managers in Auditing Sector: A Descriptive Research on
Turkey. Kadın/Woman 2000, Journal for Women's Studies. 22(1). pp.133-150.
HA3032 – Auditing - Final Assessment T2 2021

Fan, K. and et. al., 2020. Enhancing cloud storage security against a new replay attack
with an efficient public auditing scheme. The Journal of Supercomputing. 76(7).
pp.4857-4883.
FANG, Q.L. and GAO, S.F., 2021. Data-Based Audit Approach: the Supply-Side Reform
of Auditing Driven by Digital Technology. Contemporary Finance &
Economics. (8). p.137.
Hassan, K.F.I. and Al-Taie, B.F., 2021. A proposed model for disclosing the role of the
collective intelligence system in improving joint auditing.
Lobo, G.J., Xie, K. and Yan, C.J., 2021. Signaling under Threat: Evidence of Voluntary
Disclosure in Contested Takeovers Forthcoming at Journal of Accounting,
Auditing & Finance. Auditing & Finance (September 27, 2021).
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Mathiasen, D., 2020. The Separation of Powers and Political Choice: Budgeting,
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Evaluation (pp. 19-39). Routledge.
Menendez, D., 2021. Cyber forensics: Compliance and auditing. In Cyber Forensics (pp.
1-34). CRC Press.
Mengyan, G., 2020. The Cause of Auditing Expectation Gap. Journal of Finance
Research. 4(2). pp.51-54.
Nolder, C.J. and Sunderland, D., 2021. Root Cause Analysis Research Framework
Mapping Auditing Judgment and Decision Making Research to Root Cause
Analysis of Auditing Deficiencies in Practice–A Way Forward. Available at
SSRN 3911302.
Perera, P.A.S.N. and Abeygunasekera, A.W.J.C., 2021. Impact of blockchain adoption on
accounting and auditing from a developing country perspective.
Seyyedjavadin, S. and et. al., 2020. Types, levels and stages of human resource auditing:
applying meta-synthesis method. Journal of Management Accounting and
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HA3032 – Auditing - Final Assessment T2 2021