Distinguish Between Independence in Fact and Independence in Appearance Accounting Assignment Help

Assignment Task

Part I
Advise an audit trainee what is the audit expectation gap, and what can be the reasons for this gap? (5 marks)
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Part II
Distinguish between independence in fact and independence in appearance. State three activities that may not affect independence in fact but are likely to affect independence in appearance. (5 marks)Suggested Answer:
Part III
Discuss three reasons why auditors are responsible for 'reasonable' but not 'absolute' assurance. (6 marks)
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Part IV
ASA500 requires the auditor to obtain sufficient appropriate evidence to support the opinion issued in an audit report. Auditors must be persuaded that their opinion is correct with a high level of assurance. In the audit of Jones Computer Parts Co. Ltd the auditor concludes there is a high likelihood of obsolete inventory.
Required:
Identify the two factors that determine the persuasiveness of audit evidence. (4 marks)
Suggested Answer:
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Question 2 (5 + 6 + 13 = 24 marks)
Part I
What are the legal requirements that a third party has to satisfy to successfully sue an auditor for negligence? (5 marks)
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Part II
You are the audit partner of CCC& Co, and you audited ABC Ltd, a custom-made products manufacturing company. ABC Ltd declared bankruptcy within three months of receiving an unqualified auditor’s opinion on its financial statements for the year ended 31 December 20X1.
The XYZ bank initiated a court challenge against AAA & Co on the grounds that the bank disbursed a $2,000,000 bank loan to ABC Ltd in May 20X1, but ABC went bankrupt shortly afterwards. The plaintiff alleged that your firm’s 20X1 audit of ABC was deficient and argued that the auditors failed to uncover that the value of ABC Ltd’s inventories were substantially lower than reported on the balance sheet.
CCC& Co audit firm did not issue privity letters to any third party in the past five years.
Required:
Explain whether the XYZ bank is likely to be successful. Use relevant cases established in common law to support your answer. (6 marks)Suggested Answer:Part III
The following independent situations raise questions about an auditor’s ethical conduct:
1.An auditor accepts an engagement knowing that she does not have the specialist knowledge required.
2.An auditor discloses confidential information about a client to a successor auditor.
3.A public accountant agrees to be the committee chairperson for a local fundraising activity.
4.An auditor accepts a commission from an insurance company for recommending it to one of its audit clients.
Required:
Discuss what are the fundamental principles of the Code of Ethics for Professional Accountants. (5 marks)
Suggested Answer:
There is a special need for ethical behaviour by professionals to maintain public confidence in the profession and in the services provided by members of that profession. The ethical requirements for accountants are similar to the requirements of other professions.
Indicate in each of the above situation whether the effect on professional ethics is (i) a violation or (ii) not a violation, and explain the reason. (8 marks)
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Question 3 (16 + 4 = 20 marks)
Your company audit the work for ABC Ltd for calendar year 20X1. There are some issues that you believe represent possible adjustments to the company’s books. In addition, there are others issues that need to be addressed.
All issues are listed below:
Some credit memos that were processed and recorded after year-end relate to sales and accounts receivable for 20X1. These total $30 000.
The company was concerned about the possibility of a liability, amounting to $72,000, that may result from an income tax dispute.
On 20 October 20X1, ABC Ltd declared a bonus issue of 5,000 shares with a par value of $150,000 of its ordinary shares, payable 1 January 20X2 to the ordinary shareholders on record as at 31 October 20X1.
Electricity invoices received after the cut-off date $36,000.
Some debit memos that were processed and recorded after year-end relate to purchases and accounts payable for 20X1. These total $43,000.
The company has not established a reserve for obsolescence of inventories. Your tests indicate that such a $33,000 reserve is appropriate under the circumstances.
Inventory cut off tests indicate that $28,000 of inventory received on 31 October 20X1 was recorded as purchases and accounts payable in 20X2. These items were included in the inventory count at year-end and were therefore included in ending inventory.
One of the directors for the ABC Ltd was a major shareholder in Fortune Manufacturing, who is their largest trade debtor (contract signed for $30,000 this year).
Your review of the allowance for doubtful accounts indicates that it is understated by $50,000.
You have noticed that the management’s attitude is that “once the books are closed, they’re closed”, and they do not want to make any adjustments.
Planning materiality for the engagement was $150,000, determined by calculating 5% of expected profit before tax. Actual profit before tax on the financial statements prior to any adjustments is $2,000,000.
Required:
Prepare the required adjusting journal entries and explain the treatment of all other issues. (16 marks)
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Given the management’s attitude about books being closed, what would you do in the circumstances? Explain. (4 marks)
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Question 4 (7 + 9 = 16 marks)
Part I
Describe the audit risk model and the interrelationships of its components. Which components of the audit risk model can be controlled by the auditor? (7 marks)
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Part II
The following are common audit procedures for tests of Sales and Collection Cycle.
Each audit procedure is to be considered independently:
Account for a numerical sequence of remittance advices and determine whether there is a cross-reference mark for each one, indicating that it has been recorded in the cash receipts journal
Examine duplicate sales invoices to determine whether the account classification for sales has been included on the document.
Select a sample of customer orders and trace the document to related shipping documents, invoices and the accounts receivable master file for comparison of name, date and amount.
Required:
Identify whether each audit procedure is a test of control or a substantive test of transaction. (3 marks)
For each of the audit procedure, state which of the six transaction-related audit objective(s) being fulfils. (3 marks)
For each test of control in part a, state a substantive test that could be used to determine whether there was a monetary misstatement. (3 marks)
Suggested Answer:
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Question 5 (8 + 12 = 20 marks)
Part I:
You have been asked to investigate the cash sales system of AAA Ltd, one of the subsidiaries. AAA Ltd sells office supplies in the Melbourne area. Its prices are highly competitive and it offers a same-day delivery service for orders telephoned before noon. Costs are kept down by requiring cash on delivery. Sales are made in the following way:
The customer phones through an order to the sales department, which raises a prenumbered multicopy sales order, two of which (the invoice copies) are priced and totalled.
The dispatch department makes up the order and gives the goods to the driver with the invoice copies of the order.
The driver delivers the goods, collects the cash and receipts the customer’s copy of the invoice.
The cashier records and banks the cash.
Required:
State four (4) weaknesses in the cash sales system. (8 marks)
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Part II
For the following independent and material situations, assume that you are the audit partner on the engagement:
Your client reported a note receivable consisting of principal and accrued interest receivable. The maker of the note filed a bankruptcy petition, but the client refused to reduce the recorded value of the note to its net realisable value. The net realizable value was 22 per cent of the amount reported.
Kieko Co. Ltd has prepared financial statements but has decided to exclude the statement of cash flows. Management explains to you that the users of their financial statements find this statement confusing and prefer not to have it included.
There was a fire that broke out a month before the year-end date. The fire has destroyed most of the accounting records and underlying receipts and invoices. Management has reconstructed the accounting records using its bank statements and other means, but they are uncertain if all material matters have been taken into account and they would like to wait until after a couple of months when subsequent receipts may assist them to compile further outstanding items. You have serious doubts as to the accuracy of the compiled figures and have been unable to verify any of the material balances.
 

   
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