ACCT3101 - Auditing and Public Practice - Case Study - Auditing Assignment Help

Assignment Task

Case Study Assignment
You have just graduated from the Bachelor of Commerce program from UQ and joined a large accounting firm, ABC Partners. After the orientation, your first task as a new associate is to audit Café & Restaurant Ltd (C&F thereafter) for the financial year ended 31 December 2020. This is the third year ABC Partner audits C&F’s financial statements.
Café & Restaurant Ltd
Audit Planning File
Company Background
Prepared by: David Smith
Date: 5 August 2020
The Client’s Business
C&R is a food and beverage company in Queensland, which is listed at Australian Stock Exchange (ASX). It is Australia’s largest multi-brand café and restaurant operator as well as a supplier of high-quality coffee products. It has three major business lines:
1. Directly managing the following café and restaurants: Gourmet Pizza, Glorious Beans Café, Winnie’s Bakery and Three Lads’ Kitchen.
2. Operating coffee roasting facilities, and supplying coffee and allied products to the company’s own cafés, restaurants and third-party operators, under the Beanie Coffee brand; and
3. Operating five large food warehousing and distribution centres across Australia.

Leadership and Management Team
The CEO, John Baker, is an ambitious businessman. Some would say ruthless. He typically sets up high performance targets that are almost impossible to achieve. This creates a highly stressful working environment for employees. Until August 2020, three senior managers left the company for alternative employment, including the sales manager, the financial controller and the human resource manager. The company’s employee turnover, 28%, is higher than the industry average of 17.9%.
John Baker’s remuneration consists of three parts: a base salary, superannuation, and a performance bonus. The performance bonus allows him to receive an additional $300,000, if the company reports sales of $300 million or more.
The CFO, Helen Lambe, changes the company’s accounting policies frequently and often argues for marginal or inappropriate accounting treatment, especially on sales recognition. She also has access to all part of the client’s information system, and from time to time implement changes as she sees fit.
Impact of COVID Pandemic
The COVID pandemic as well as the economic downturn pose challenges for C&R. At the height of the pandemic in April-May 2020, 90% of the restaurant patrons are lost. In the second half of the financial year, while most part of the country is easing back into normality, the restaurant and cafe business still have not resumed to its pre-pandemic level. Poor profitability along with the company’s commitment to keep all its restaurants and cafes means the company does not have sufficient cash inflows for its working capital requirement. As a result, the company negotiated with the bank to borrow significant amount in November 2020 and secured a $45 million debt with ANZ.
The client’s share price also took a hit: at the beginning of the financial it was $1 per share, which has since been reduced to 20 cents per share by the end of the financial year.

The Wage Scandal
In July 2020, Australia Business Review, a national newspaper, revealed that C&F’s distribution centres failed to correctly pay the minimum wage, overtime and public holiday rates. The company’s CFO, Helen, suggests that the incident occurred because the hourly overtime and public holiday rates were not setup properly in the payroll system for some workers. However, this does not explain why the company failed to pay the minimum wage.
While the matter is still investigated by the Fair Work Ombudsman (FWO), and the spokesperson at FWO, Sarah Parker, suggested that the company could be fined for failing to comply with workplace laws. However, the client has not disclosed any contingent liability related to the breach in the footnotes to the 2020 financial statement.
Past Misstatements
In the 2019 financial year, we detected a material overstatement of $1,200,000 in sales account. This is because the client recorded sales before goods are picked up by the carriers. This misstatement was adjusted by the client company so we issued unqualified audit opinion for the 2019 audit.
We also advised the client to restate the accounts receivable accounts in the 2019 financial year. After performing age analysis, we believe the allowance for doubtful debts was insufficient and consequently the net account receivable was overstated by $400,000 for the financial year ended 31 December 2019.

Café & Restaurant Ltd
Audit Memo on Internal Controls
Sales and Collection Cycle for the Coffee Bean Business
Prepared by: David Smith
Date: 24 December 2020
The coffee bean sales starts from the C&R receives orders from customers, including its own cafes, franchisees and third party cafes and restaurants. Then an employee from the sales team verify if the customer has been approved by looking up the name in the customer master file. If it is not an approved customer, the sales personnel will forward the order to the credit manager for approval.
If the customer is in the customer master file, the sales personnel will check whether the amount in the sales invoice exceeds the approved credit limit (credit limit is a column in the customer master file). If the credit limit is exceeded, the sales representative will contact the credit manager to increase the limit before further processing the order. If the dollar value of the sales order is below the credit limit, the sales representative will apply an appropriate unit price - sales representatives can offer customers a discount up to 10% based on the approved price list according to the company policy. This is determined on a case-by-case basis by each sales representative and does not require additional approval.
After confirming the unit price, the sales representative will create a document called sales order. Once the warehouse receives the sales order, the ordered goods are scanned as they are loaded in the designated shipping area. Upon scanning, sales are automatically recorded in the accounting information system and the accounts receivable ledgers updated. Most goods are picked up by carriers by the end of the day, but one particular carrier, Fast Delivery, only picks up the goods once a week. As a result, goods can remain in the shipping area for up to a week, and occasionally this leads to disastrous outcome. The shipping area of the warehouse was built to accommodate delivery trucks, but does not provide optimal storage environment for the coffee beans: the humidity is too high. In March 2020, a severe thunderstorm in Brisbane damaged a roof panel above the shipping area and most of the coffee beans there at the time were spoilt. C&R had to replace the damaged items at its own cost. When carriers pick up the goods from the client warehouse, they issue bills of lading (i.e. shipping document) to the client.
The system matches three source documents - customer order, bill of lading and sales order - and a billing staff creates the sales invoice accordingly. The billing staff’s access to the invoicing system is password protected. However, an interview with the billing staff reveals that in June 2020 the CFO, Helen, accessed the system, and implemented some changes that the billing department does not agree on: some sales invoices were created as soon as the sales contract was signed rather than upon the point of delivery. This created a fair a bit of friction between the CFO and the billing department, which was said to be the main reason why the head of the billing department left for alternative employment in early December 2020.

The accounts receivable are collected through direct bank transfer or BPay, where the amounts are directly deposited into the client’s bank account. Every week, the accountant, Debbie Woo, performs bank reconciliation to identify and account for the differences between the bank statement (issued by the bank) and the client’s cash receipt journal.
By the end of every month, Peter Stone, the credit manager reviews all outstanding credit sales, identify the customers that have not pay on time and follow up with them. Peter has been working for C&R for 11 years and has been on long service leave since November 2020. When he is on leave, no one is acting his position. The account receivable accountant, Stacy Fisher, performs the age analysis of accounts receivable every month, estimates the level of allowance for doubtful debts required and books it accordingly.

Trial Balance
The audit team received the following trial balance from the company shortly after the financial year.
  Year 2020 (Trial Balance) Year 2019 (Audited)
  DR CR DR CR
Revenue   $303,001,000   $380,000,000
Cost of sales (COGS) $124,137,000   $136,241,000  
Selling expenses $1,423,000   $3,437,000  
Marketing expenses $12,079,000   $19,664,000  
Occupancy expenses $9,058,000   $14,781,000  
Wage expense $36,420,000   $37,507,000  
Operating expenses $29,321,000   $40,227,000  
Finance Costs $9,188,000   $19,654,000  
Other expenses $65,671,000   $68,000,000  
Income tax expense $1,423,000   $19,697,000  
Cash and cash equivalents-Current $10,248,000   $12,317,000  
Accounts receivables (Gross)-Current $36,084,000   $16,395,000  
Provision for doubtful debts (Contra asset) $1,000,000 $1,000,000
Other financial assets-Current $35,871,000   $2,371,000  
Inventories-Current $20,951,000   $6,878,000  
Current tax assets-Current $26,000   $194,000  
Other current assets-Current $9,064,000   $70,566,000  
Other financial assets-Non-Current $53,596,000   $2,338,000  
Property, plant and equipment-Non-Current $39,045,000   $23,101,000  
Intangible assets-Non-Current $238,088,000   $256,188,000  
Deferred tax assets-Non-Current $81,960,000   $55,874,000  
Other non-current assets-Non-Current $39,000   $0  
Trade and other payables-Current   $43,806,000   $14,968,000
Borrowings - Current   $8,482,000   $95,746,000
Lease liabilities - Current   $43,003,000   $0
Provisions - Current   $16,274,000   $16,398,000
Financial instruments - Current   $1,892,000   $3,063,000
Unearned income - Current   $6,190,000   $10,580,000
Other current liabilities - Current   $608,000   $54,148,000
Borrowings -Non-Current   $45,127,000   $25,000
Lease liabilities-Non-Current   $81,052,000   $0
Deferred tax liabilities-Non-Current   $81,960,000   $55,874,000
Other provisions-Non-Current   $3,982,000   $11,927,000
Unearned income-Non-Current   $15,423,000   $20,603,000
Other-Non-Current   $88,000   $86,000
Share capital   $100,000,000   $100,000,000
Retained earnings   $76,085,000   $61,804,000
 

Questions
What is your assessment of the C&F’s audit risk? Justify your answer using information in the case.
Assessing inherent risk
a) Based on the inherent risk assessment using the audit memo to the audit planning file - company background, which accounts are likely to be misstated? Please identify three accounts, the relevant audit objectives and justify your answer with relevant information in the case. (9 marks) Complete Working Paper Schedule B-1.
b) Calculate the ratios listed in Working Paper Schedule B-2 and identify the accounts that are likely to be misstated. (8 marks) Complete Working Paper Schedule B-2.
From the audit memo on the client internal controls over the sales and collection cycle,
Please identify four control deficiencies. For each deficiency, identify the audit objective(s) affected and the potential misstatement(s). Please identify four internal controls from the case you believe are effective. For each identified internal control, design a test of control procedure.
When multiple test control procedures are possible, list the most reliable procedure. Note if multiple procedures are provided, we will mark the first one but not the rest. Complete Working Paper Schedule C-2.
All sales transactions for the 2020 financial year have been pulled out from C&R’s sales journal into the Excel spreadsheet provided. Please use information in the Excel spreadsheet to answer the following questions.
You wish to select a sample of sales transactions from the sales journal for vouching. You have decided to use dollar unit sampling with systematic sample selection method to select invoices into the sample. Determine the key parameters in the sampling process and list the first 15 invoices in your sample. (6 marks) Complete Working Paper Schedule D-8.
For each sales transaction, compare the invoice date to the shipping date. What is the dollar value of the sales transactions that should be recorded in the 2021 financial year but have been recorded prematurely in 2020? If the applicable tolerable error for sales account is $3 million, is the account acceptable? Please justify your answer in the conclusion. (2 marks) Complete Working Paper Schedule D-9.

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