HI6026 Audit, Assurance and Compliance Final Assessment Tr1 2021

This document contains a comprehensive solution to the HI6026 Audit, Assurance, and Compliance final assessment for Trimester 1, 2021. The assessment covers key topics including the audit expectation gap, ethical considerations for accepting an audit appointment, the concept of sufficient appropriate audit evidence, audit planning for a retail company, the importance of internal controls, and the auditor's responsibilities regarding fraud. The solution provides detailed explanations, analyses, and recommendations for each question, addressing issues such as ethical dilemmas, the evaluation of audit work performed by assistants, and the application of auditing standards and procedures. The document offers a thorough understanding of auditing principles and practices, covering aspects of evidence gathering, risk assessment, and the auditor's role in ensuring the integrity of financial information. The assignment emphasizes the application of auditing concepts to practical scenarios, providing a valuable resource for students studying audit and assurance.

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HI6026 AUDIT, ASSURANCE AND COMPLIANCE
FINAL ASSESSMENT
TRIMESTER TR1, 2021
Assessment Weight: 50 total marks
Instructions:
 All questionsmust 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
HI6026 Final Assessment T1 2021

Adapted Harvard Referencing
Holmes has now implemented a revised Harvard approach to referencing:
1. Reference sources in assignments are limited to sources which provide full text
access to the source’s content for lecturers and markers.
2. The Reference list should be located on a separate page at the end of the essay and
titled: References.
3. It should include the details of all the in-text citations, arranged alphabetically A-Z
by author surname. In addition, it MUSTinclude a hyperlink to the full text of the
cited reference source.
For example;
P Hawking, B McCarthy, A Stein (2004), Second Wave ERP Education, Journal of
Information Systems Education, Fall,
http://jise.org/Volume15/n3/JISEv15n3p327.pdf
4. All assignments will require additional in-text reference details which will consist of
the surname of the author/authors or name of the authoring body, year of
publication, page number of content, paragraph where the content can be found.
For example;
“The company decided to implement an enterprise wide data warehouse business
intelligence strategies (Hawking et al, 2004, p3(4)).”
Non - Adherence to Referencing Guidelines
Where students do not follow the above guidelines:
1. Students who submit assignments which do not comply with the guidelines may be
required to resubmit their assignments or incur penalties for inadequate referencing.
2. Late penalties will apply per day after a student or group has been notified of a
resubmission requirements.
 Students whose citations are identified as fictitious will be reported for academic
misconduct.
HI6026 Final Assessment T1 2021

Question 1 (7 marks)
Explain the definition of the audit expectation gap? Then, discuss some approaches to
reducing the expectation gap.
ANSWER: ** Answer box will enlarge as you type
The particular concept of audit expectation gap is define the difference between what auditors
consider themselves responsible for and public & financial information users such as
stakeholders’ perception regarding the mentioned authority’s duty. In addition to this, it can
arises concerns about actual performance of auditors that hamper auditing process. There is
misperceptions in public related to auditors roles that creates hurdles in smooth functioning of
auditing procedure of company. The factors that are misperceived by mentioned parties in
respect to auditors includes liability, ethical & legal framework audit reports (Bhuiyan and
D’Costa, 2020). With respect to this, it influences auditor's independence, regulations appoint,
etc. Various approaches assist in eliminating audit Expectations Gap (AEG) in order to avail
effectual pattern for carrying forward business practices. There are two types of gap such as
feasibility and performance that need to emphasize in turn removing difference can become
possible.
The strategies that can be taken into process includes increasing awareness of public for
auditors roles & responsibilities. It will helps in clearing false opinion that public has related to
auditors so that appropriate legal framework can established to get efficient working methods.
Inclining involvement of external auditors for checking of internal prepared reports can give
assistance in accomplish objective of narrowing expectation gap. Educating auditors for
understanding established standards through providing training & development in turn
professionalism approach can be attained. Appropriate knowledge related to interpretation
financial statement via its user parties can play role in declining misconception of auditor’s
responsibilities. Increasing communication between mentioned profession and society interested
in auditing process can contribute largely in attaining goal of lessening s in appropriate
expectations. Several effective measures to increase quality performance of auditor can enable
to bridge gap and as well provide assistance in implementing correct expectation through making
all involved parties alter in respected to stated subject matter.
Question 2 (7 marks)
The audit partner has just advised you that he has been approached to accept the
appointment of auditor to Bungie Limited. Bungie Limited is a manufacturer of gaming
machines and has been named in a recent anti-corruption enquiry as having offered
incentives to state government members to support a proposed bill that would allow an
HI6026 Final Assessment T1 2021

increased number of gaming machines in licensed premises. No charges have yet been
laid against Bungie Limited or any of its employees. The audit partner explains to you
that Bungie Limited’s auditors were re-appointed for the current financial year at the
Annual General Meeting held two months ago. However, Bungie Limited’s managing
director is unhappy with the existing auditing firm as the audit partner assigned to
Bungie Limited has been changed.
Required:
The audit partner is unsure whether he should accept the appointment and has asked
you to outline any ethical, legal, and other factors to consider in his decision about
whether to accept the appointment for the current year and indicate the steps that need
to be taken prior to the appointment.
ANSWER:
The auditor partner should accept the appointment of Bungie Limited as from the case it can be
understood that working in such organization would be beneficial from all perspective. There are
various ethical principles that helps an auditor to work efficiently and fairly. The set of principles
aids in recognising difference between correct & in appropriate activities. These comprises
integrity, confidentiality, competency and objectivity while conducting practices of auditing.
Being and independent working professional it requires to contribute to ethical & legitimate
objectives of organization (Australia, 2019). In accordance with corporation act organization
appoint an auditor so having proper outline of legal framework for getting deep insights of
related aspects in turn significant factors influencing decisions can be taken into practice. In
addition to this, facts relevant to the integrity of management, auditing procedure,
communication with governance, connection with organization team for getting information
regarding deficiencies & weakness of internal control. Financial reporting framework,
compliance with laws & legislations, etc.
Factors indicates the independence, appointment and expectation related to roles &
responsibilities must be clarify before accepting the offer. Integration of accounting standards
with substantive law serve vital function through utilizing principles mandated by legislation.
Bungie Limited’s offer for auditing position acceptance should complete with emphasising prior
on following steps. Pre engagement procedure that assist in getting data regarding an
independence and communication with previous auditors. Letter of compliance with relevant
professional standards, disclosing relationship between auditor & entity affecting roles,
potential risk , identifying major changes in respect to scope, materiality, timing, approaches,
etc.
It becomes essential to give focus on director’s and other parties of organization in order to
HI6026 Final Assessment T1 2021

check the ability work smoothly in company. Assessment of risk and other related components
like nature of reporting entity (Bartnik and et.al., 2018). Ensuring legal framework in relation to
removal of previous auditors, assessing availability of necessary resources, work is suitability
low risk, etc. Having engagement letters prior to mentioned condition becomes essential. It
specifies the nature of contract between firm & auditors so that expectation gap regarding roles
& responsibilities can be minimized.
Question 3(7 marks)
You have reviewed the work performed by your assistant, Samson Chow, on the audit of
Bexca Ltd for the year ended 30 June 2018 and have noted the following two
independent matters:
(i) In testing investments in listed securities, Samson selected all shareholdings with a
market value above $200,000 and checked them to the closing market value
reported by the Australian Stock Exchange to determine the net realisable value of
each shareholding.The items tested totalled $5,500,000, or 60% of the total
balance. Of the items tested, only one error of $110,000 was discovered. Samson
concluded that the error was not itself material, as only 2% of the balance was
tested. He extrapolated this error to the total population and estimated that the
error for the total population would be $185,000, which was also immaterial.
Therefore, he concluded that the investments in listed securities were fairly stated
at the lower of cost or net realisable value.
(ii) Bexca Ltd has 1,000 stock lines that are maintained on a perpetual inventory
system. Stock is counted on a cyclical basis so that all lines are covered at least
once per year. Samson attended the March stocktake to observe the counting
procedures and conducted 20 test counts from the floor to the client’s count
sheets and 20 from the client’s count sheets to the floor. He uncovered two minor
discrepancies of one item each, which he considered to be immaterial. The client
also uncovered five minor discrepancies between the perpetual records and the
actual quantity on hand. None of these discrepancies was adjusted on the
perpetual records, as the amounts involved only totalled $50,000 and were
considered to be immaterial. Samson concluded that no further work was
considered necessary on stock quantities at year-end.
Required:
HI6026 Final Assessment T1 2021

(a) Explain what is meant by sufficient appropriate audit evidence. (2 marks)
(b) Explain whether sufficient appropriate audit evidence has been obtained for each of
the above situations. Give reasons for your answer. (5 marks)
ANSWER:
A
Sufficient appropriate evidence refers to the number & quality of audit evidences. It becomes
essential for auditor to ensure that there are significant availability of all reports to perform
assessment. Having accessibility to sufficient auditing evidences enable mentioned authority to
derive proper conclusion of company’s performance. Quality of evidence that they obtain should
be enough to attain reliability & relevancy (Kirby, 2019). Financial statements & other required
detailed reports formulated through following all fundamental principles of accounting.
Reliability of auditor largely depends on the nature of evidence they achieve from third parties,
clients, etc. it can be obtained from inspection, observation, re performance, analytical
procedure, confirmation, etc. Sufficient appropriate evidence includes quality, quantity,
reliability & relevancy of sources, internal control, financial reports for getting corrective
conclusions.
b.
i. From the evaluation of case relating to testing investments in listed securities it can be
identified that Samson has performed appropriate actions to accomplish the auditing. In
addition to this, Samson has given emphasis on net realisable value for getting fairness of
securities above $200,000 . He has focuses on market value of 60% of the total balance
to fulfil objective of auditing securities. It can be evaluated that statement taken into
consideration for assessing reliability and relevancy of information are immaterial. Non
material evidence provides significant details to reach correct conclusion. Only one error
of $110,000 was discovered from the identifying & evaluating selected group of
securities. This mistaken is also well interpreted through giving concentration on nature
of statement referred for getting actual result of research. The nature of evidence for
implementing auditing procedure should also include strongest form of confirmation
from third authorised party for agreeing with the reported balance out of convenience.
ii. It can be interested from the evaluation of this particular case that there are various
aspects that has been emphasized in order to get smooth functioning of auditing. These
procedure as largely involves giving consideration of all types of evidence taken to make
proper evaluation (Miah and et.al., 2020). The mentioned auditor has focus on perpetual
inventory system to get details of discrepancies regarding one of each item to get fair
conclusion. Addressed discrepancies are found to be minor nature but it largely impacts
the process. Evidences such as more quantity related documents, establishing
comparison with previous statement to derive its reliability & relevance of recording
HI6026 Final Assessment T1 2021

concerned subject matter. From the evaluation it can be stated that there is more
requirement of appropriate & sufficient evidence to make the whole procedure of audit
proper in order to get right outcome of contributed efforts
Question 4 (7 marks)
You are currently involved in planning for the audit of Spot Light Ltd (SLL), a national
company producing curtains and blinds. The curtain and the blind market is highly
competitive, and SLL has been experiencing declining sales over the past three years.
Cost-cutting has proven very difficult, as the cost of materials used in the company’s
production lines has increased each year. SLL’s bank has continued to provide SLL with
loan facilities; however, it has indicated that it expects to see improved results in the
next financial report and has placed a number of quite restrictive covenants in SLL’s
lending agreements. Recent articles appearing in the financial press concerning SLL’s
expected financial results have been very pessimistic about its likely performance.
Required:
Based on the information provided:
(a) Discuss the overall impact on audit risk. Which specific component(s) of audit risk
would be affected? (4 marks)
(b) In refer to Question No. 5, for each matter explains from 1 to 3, outline how each
matter considers as fraud audit risk factors in relation to Colette Hayman Ltd
(CHL)’s case study ( 3 marks)
ANSWER:
a.
Audit risk refers to inappropriate opinion when financial statements are materially misstated. In
case of SLL has been found to inappropriate sales decline due to cut down of prices in
competitive industry. These evaluation helps in making proper assessment from concentration
on detecting risk. There are 5 risks such as inherent, control, detecting risk that can be
understood by focusing on loss occurring situation in organization. Having incorrect opinion from
the misstated financial statement does not enable firm to recognize unforeseen situations
impacting growth. Audit risk also indicates that company has been failed to detect the miss
statement. The components that would be get impacted from the inefficient auditing practices
are inherent, control as well detection. These particular mentioned criteria largely influence
accuracy, relevancy and reliability of financial results published by organization. These type of
HI6026 Final Assessment T1 2021

issues hamper both credibility and trustworthiness in industry so providing emphasis on all these
components for executing control in legalized manner. Eliminating all these specified risk
becomes essential for getting desirable position in industry.
(b)
1. Loan from bank taken by the company is large without any adequate security measures putted
in place so in casethe auditor fails to identify the true picture of the company’s performance
then this might result into significant audit risk factor as it is very much material for the bank in
knowing the actual health of the company mainly in respect to the return it is generating on its
assets.
2.The aged debtors of the company has increased by 37.5% in respect over 90 days credit period
which is mainly due to the financial problems faced by the customers. But this is huge risk which
the auditor requires to consider there are possible chances that it might turn into bad debts.
3.The bank has already looking for the increase in the sales of the company for the next year and
due to the change in supplier, the sales have further declined which might pose as a potential
fraud risks which is needed to be accounted for by the auditor.
Question 5 (11 marks)
You are an audit manager at Carillion & Associates and have been assigned to the audit
of Colette Hayman Ltd (CHL) for the year ending 30 June 2020. CHL is an Australian
manufacturer, wholesaler and retailer of women’s handbags and shoes. CHL
manufactures all its products at its Melbourne factory and sells via retail outlets
throughout Australia. CHL is listed on the Australian Securities Exchange, and Carillion &
Associates has been its auditor for several years.
In recent years, CHL has been finding it difficult to meet its projected profit forecasts due
to increased competition from new local competitors, imported products and online
shopping; the increasingly high Australian dollar; and the impact of the global and USA
financial crisis on consumer spending.
During the planning stage of the audit, you become aware of the following matters:
1. CHL has significant loans from its bank. The bank has indicated that it is concerned
about CHL’s ability to meet specific loan covenants, particularly the return on total
assets (net profit/total assets).
2. The aged trade accounts receivable listing indicates that the percentage of accounts
receivable exceeding 90 days has jumped from 15 per cent to 37.5 per cent during the
last 12 months. The credit manager has indicated that this is because some of CHL’s
customers are currently experiencing financial difficulty.
3. In order to reduce costs, CHL changed one of its major suppliers of raw materials in
February 2020 to a cheaper overseas supplier. However, the number of product
HI6026 Final Assessment T1 2021

returns has increased significantly since April 2020, and your discussions with
management have indicated that the increased returns have involved customer
complaints concerning the quality of the product.
4. Your review of the payroll system has indicated that when an employee is hired or
terminated, the payroll clerk immediately prepares the paperwork and enters the
information into the master file of the payroll computer system.
5. The payroll department at CHL’s head office processes payroll weekly. The factory
manager signs off all timesheets that are submitted by factory workers. The
timesheets are input into the computer by the factory manager, and the payroll
department then makes payment.
Required:
(a) Describe the two types of misstatement in a financial report that may arise from
fraud. (2 marks)
(b) Explain the difference between general and application controls. In refer to matters 4
and 5 above, outline one weakness in either the control activities or information
systems. (3 marks)
(c) Describe how the internal control weakness could lead to the material misstatement
in the financial report. (2 marks)
(d) For each weakness provided in your response to (b) above, describe one practical
manual general control and one practical IT-automated application control. (4 marks)
Matter
no:
(b)
Weakness:
(c) How it leads
to material
misstatement:
(d) Manual
control:
(d) IT application
control:
4 Manual
paper work is
done by the
payroll
department
which then
inputted into
the computer
This has the
chances of
missing out
some of the
important
information
related to the
worker. Along
Practical manual
control is that
one person will
be responsible
for checking all
the formalities
requiring
paperwork in
The entity should
come up with the
application system
in which all the
entries are filled
directly into the
system without
lookingat the paper
HI6026 Final Assessment T1 2021

system. with that it
might lead to
error in
configuring the
same into the
system which
increases the
chances of
material
statements.
order to meet
with all the
needs and
requirements so
that all the
information is
gathered.
work and also
timely configuration
of the same is also
carried out in order
to make sure
everything is fine.
5 Manual sign
off by the
workers on
timesheet
which is then
submitted to
the factor
manager.
This function is
completely
dependent
upon the
humans which
might not
operate
effectively as
there the
workers can
sign foranother
worker who
was not duty so
that their wages
are not cut
The supervisor
should manually
check for the
attendance of
the workers in
order to make
sure everything
goes well and no
one tries to
cheat.
An automated
attendance system
can be introduced
in which the sign in
and sign off is done
through the
workers biometrics
which makes it easy
for the factory
manager and the
payroll department
in monitoring the
attendance of the
workers. This will
help in overcoming
HI6026 Final Assessment T1 2021

(Oussii and
Taktak,2018).
Such practices
might lead to
misleading
outcomes.
the material
misstatements.
ANSWER:
(a) Basically, there are 2 types of misstatements which are relevant pertaining to the auditor’s
consideration arising from fraud are: misstatement from the fraudulent financial reporting,
which is intentional misstatements or refers to the omission of the amount or making disclosure
to deceive the financial statements users.Second is misstatement which has arisen from the
misappropriation of the assets, involves the theft of the company’s assets which results into
affecting the financialstatements complying with the GAAP.
(b) Protection and prevention of the information resources needs a well organised and
structured set of controls. The computer systems are controlled through the combination of
both general and application controls (Axelsen, Green and Ridley, 2017). The general control is
basically governing the design, security along with the computer programs which also involves
the security of the data files within the entity’s IT infrastructure. Thus, in simple words, general
controls are applicable to the computerized application which incorporates the hardware,
software in addition to the procedures which will create control environment. While, the
application control,refers to a particular control which is unique toevery computer application
like the payroll and order processing. It involves the controls which is applicable to the business
functional areas pertaining to specific system.
In reference in matter 4, the weakness is related to the information system, as it can be seen
that there is no set procedure to be followed and the payroll department immediately completes
the paperwork and puts the information on the system without looking at the other procedures
which might be required. In matter 5, the weakness is pertaining to thecontrol activities, as there
is no regular monitoring of the sign off of the workersas the other worker can sign for the absent
workers so that their pay is not cut. Under the situation, when the audit is conducted and also
the material weakness is being identified within the company’s internal controls, then in such
situation, the auditor’s reports the material weaknesses to the audit committee.
HI6026 Final Assessment T1 2021

(c) If there is a deficiency in the internal control system which is having the possibility of bringing
material weakness, then this would lead to material misstatement within the entity’s financial
statements. This will consequently lead to less reliable and ineffective financial reports which
might not be able to depicts the true financial health of the company (Abidin, 2017). A material
weakness reported by the auditor simply conveys that the misstatement might occur and if
timely actions are not undertaken then it will result intoremaining undetected and unresolved.
This has the possibility of occurring into the organization’s financial reports as well, thus having a
tangible effect on the entity’s valuation.
(d) In above table.
HI6026 Final Assessment T1 2021