a.City Health Limited has installed a new payroll module to its existing accounting system which integrates with the general ledger application. The new payroll application was purchased from the software company that supplied the general ledger application. The new system is more complex than the old system, but its reporting function provides more details. For example, the new application calculates leave, superannuation, payroll tax and work cover expenses, as well as the corresponding accounting accruals. There was very little time available to implement the new system, so the old application ceased operation on 31 December 2019 and the new application went live on 1 January 2020. There was no time to run the two systems in parallel as well as limited staff training and testing of the new application.RequiredWhat concerns would you have about the payroll application’s integration with the general ledger application?
b.Explain what is meant by the fraud triangle.
Question 2
a.How are tests of controls related to the evaluation of control risk? [10 marks]
a.Summer Hotel Group Ltd (SHG) operates a seaside resort at Byron Bay, providing accommodation, bar and restaurant facilities for tourists. Casual and part-time wages are a major expense item, particularly during summer, when up to on additional 30 staff members are employed. In order to keep track of casual and part-time wages, SHG’s operations manager prepares a weekly roster (using Excel) showing:
·employee name
·employment position (e.g. bar staff)
·days and hours rostered for the week
·hourly rate
any additional amounts to be paid (e.g. meal allowances).Each employee’s immediate supervisor is required to sign a hard copy of the Excel roster spreadsheet on a daily basis as evidence that the hours were worked as rostered. Any discrepancies (e.g. additional hours) are recorded on a separate payroll adjustment form (PAF) and co-signed by the employee. The Excel roster spreadsheet plus any PAFs are forwarded to the payroll officer at the end of the week and used as the basis for that week’s casual and part-time employee payroll. Last year, you still placed reliance on controls over casual and part-time wages, despite finding some breakdowns in controls, as you were able to obtain sufficient appropriate audit evidence that the controls were operating effectively.Assume that you have decided it is appropriate to test internal controls over the relevant payroll transactions.RequiredBriefly outline how the information provided above would affect the nature, timing and extent of tests of controls.
Question 3
a.Explain the purpose of substantive testing and give examples of the main types of substantive tests.
b.You are the audit senior working on the audit of Reef Building Supplies Limited (RBS), a large supplier of building materials, for the year ended 30 June 2020. While completing your risk assessment of RBS, you know that the company appears to have a significant debt recovery problem. The majority of RBS’s accounts receivable were outstanding for more than 60 days. RBS’s provision for doubtful debts is currently calculated at 1% of Accounts Receivable at month end. In the previous two financial years, RBS wrote off $760,000 and $1,050,00 worth of Accounts Receivable, respectively. In those years sales were $7,000,000 and $11,200,000, respectively. Required:Describe the substantive procedures you will carry out at year end in order to obtain sufficient audit evidence regarding the assertions of valuation and existence in relation to Accounts Receivable.
Question 4
You are the audit senior on the audit of Fox Electronics Ltd (FEL) for the year ended 30 June 2020. FEL is an Australian listed company that retails electronic equipment. During the year, FEL expanded rapidly both locally and overseas, particularly to France and Brazil. As a result of this rapid expansion its accounts receivable in countries both increased considerably. RequiredExplain the auditing procedures you would undertake to obtain necessary assurance that all subsequent events have been identified and considered before completion and signing of the auditor’s report
Question 5
Reporting – Answer both parts a) and b). [20 Marks]You are the audit senior on the audit of City Fabrications Ltd (CFL) for the year ended 30 June 2020. In your review of accounts receivable, you have identified that CFL as provided a provision for doubtful debts of $2,000,000. In the judgement of the audit manager, this provision should be $3,500,000. During the planning phase of this audit, the materiality for the client was set at $1,800,000.
a.Explain the auditor’s opinion you would issue for CFL for the year ended 30 June 2020 providing the reasons for the type of opinion you have chosen.
Would your answer to a.) above be different if CFL refused to adjust the financial report and materiality what set at $1,000,000? Give reasons for your answer.
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