UNIT CODE: ACT303

UNIT NAME: PRINCIPLES OF AUDITING

Written Assignment Information
Semester 1 2021
Marks and Weight: 70 marks and to be weighted @ 20%
Length: Maximum 3,000 words

Submission Requirements.
This assignment may be submitted at or before 11.59pm (ACST) Sunday, 9th May 2021,
(Study Week 9)
Assignments are to be submitted by one of the following means;
· The assignment must be lodged on or before the due date indicated in the assignment details.

· Submit your Assignment as one document, using PDF or Word doc format1

· Ensure your file is named using a file naming convention that allows the lecturer to identify to whom it

belongs. Failure to use an acceptable file naming convention may result in your assignment lodgement

being rejected (For students working in groups, ONLY the group leader will submit the

Assignment - be sure to indicate all the Names and Student Numbers on the front cover/first

page).

· The assignment must conform to the requirements set out in this assignment

· The assignment must be lodged online via the ACT303 Learnline Assignment Lodgement link on the

ACT303 Learnline site.

· DO NOT LODGE VIA EMAIL or FAX - assignments lodged by email or fax will not be

accepted.

KEEP A COPY - Ensure you have a copy of the assignment lodged.

1 Instructions for creating PDF documents and/or combining documents of different formats are provided on the
Learnline site.

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Online Submission
Students will now be required to affirm at the point of submission that the work they are submitting is their
original work. This is built into the submission point.

The submission text reads as follows:

By clicking the SUBMIT button I certify that this assignment is my own work, based on my own personal study
and research, and that I have acknowledged all material and sources in the preparation of this assignment,
whether they be books, articles reports, lecture notes, images, videos, any other kind of document or personal
communication.
I also certify that this assignment has not previously been submitted for assessment in any other course or at
any other time in the same course (except as a DRAFT submission) and that I have not copied in part or whole
or otherwise plagiarised the work of other students and/or persons.
I have read Charles Darwin University's Academic and Scientific Misconduct Policy (pol-001) and Student
Breach of Academic Integrity Procedures http://www.cdu.edu.au/governance/procedures/pro-092.pdf and
understand its implications.

Format
The assignment may be completed manually, or with the use of an electronic spreadsheet, word processing
software or with the use of accounting software. Marks may be deducted for illegible or partially illegible papers.
If completed using multiple file formats or manually, the document must be combined into one document, in
PDF format2.

Resubmission
As a general rule resubmission of assessment items is NOT possible, however the Lecturer may ask for
resubmission if it is deemed appropriate. Details for such resubmission will be made available by the Lecturer if
and when the situation occurs.

Oral Test or Viva Voce

Lecturers may, at their discretion, ask students to verbally present their assignment
submissions or rewrite some selected part/s of their answer in a controlled setting.
Lecturers may exercise this discretion where they feel that the assignment was not the
student’s own work.

University Plagiarism policy!

Plagiarism is the unacknowledged use of material written or produced by others or a rework
of your own material. All sources of information and ideas used in assignments must be
referenced. This applies whether the information is from a book, journal article, the internet,
or a previous essay you wrote or the assignment of a friend.
Plagiarism policy is available at:
http://www.cdu.edu.au/governance/policies/pol-001.pdf and Student Breach of
Academic Integrity Procedures http://www.cdu.edu.au/governance/procedures/pro-
092.pdf

2 Instructions for creating PDF documents and/or combining documents of different formats are provided on the
Learnline site.

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Extensions and Late Lodgements

LATE ASSIGNMENTS WILL GENERALLY NOT BE ACCEPTED UNLESS AN

EXTENSION TO THE DUE DATE HAS BEEN GRANTED BY THE HEAD OF SCHOOL.
Exceptions will only be made where assignments are late due to special circumstances that are supported by
documentary evidence, and may be subject to a penalty of 5% of assignment marks per day. Partially
completed assignments will be accepted with appropriate loss of marks for the incomplete portion.

Should students foresee potential difficulties with submission of assessment items, they should contact the
lecturer immediately the difficulties come to notice, to discuss suitable arrangements etc for the submission of
those assessment times. An Application for Assignment Extension or Special Consideration should be
completed and provided to the Head of School, School of Law and Business.
This application form, explanation and instructions is available on the ACT303 CDU Learnline course site or
direct from
http://learnline.cdu.edu.au/units/lb_school_templates/deployed/assignment_extension.docx

Please note that it is now Faculty policy that all extension requests must be approved by the Head of School.
The lecturer is no longer able to personally approve extension requests.

Leaving a request for an extension, special assessment or special consideration until the last moment, based
on grounds that students could have reasonably been able to foresee, may result in the application being
rejected.

Ensure that you maintain suitable backup copies of your assignment during preparation, before completion and
after lodgement. Loss of data/assignment due to failure to maintain a suitable backup will not constitute
grounds for an extension.

Asia Pacific College of Business & Law Semester 1 2021 Page 3 of 10

 Assignment Details

QUESTION 1 (20 MARKS)

Case 1

During the financial year 2020/2021, you are one of the audit partners with Summit and Associates CAs, a large
and experienced audit firm.

You have been approached to accept the audit of Chem Safe Ltd (Chem Safe), a medium-sized chemical
manufacturer. The manufacture of the chemicals results in highly toxic waste and Chem Safe is currently under
investigation by the Environmental Protection Agency for a significant spill of toxic chemicals into a nearby river.
The media have reported that senior employees were allegedly involved in trying to cover up the spill.

Required:

Identify and explain the key ethical matter regarding Chem Safe and its management that you should consider
before making the decision to accept the engagement. (2 Marks)

Case 2

Chem Safe Ltd (Chem Safe) imports a number of pharmaceutical products. In order to hedge its foreign
currency transactions, Chem Safe entered into a number of forward rate agreements this year. Prior to this time
Chem Safe had had little exposure to derivative instruments, but a series of bad experiences resulting from
fluctuating exchange rates convinced the company that a hedging strategy was necessary. During planning for
the audit of Chem Safe, the company’s hedging arrangements were identified as inherently risky and increased
testing was carried out in this area. A number of small errors were noted in accounting for hedge transactions,
but there did not appear to be any material errors and as such no adjustments were made. A review of the audit
file suggests that the errors noted were a result of inexperience and poor controls in the area. While all of the
errors were brought to the attention of the treasurer, who is responsible for the company’s hedging strategy, no
further action has been taken to date.

Required:

Outline what further action the auditor should take in response to the errors and control weaknesses identified.
Justify your response. (2 Marks)

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Case 3

Summit and Associates CAs has agreed to take on a new audit client, Reaction Pty Ltd, a small garage door
manufacturer that has never previously been audited. Summit and Associates CAs has issued an engagement
letter prior to commencing work for the current year. While conducting the audit, the audit team is unable to gain
sufficient appropriate audit evidence around accounts receivable due to a lack of documentation. You have
informed client management that you need to issue a modified auditor’s report due to the scope limitation. In
response, management has requested that the engagement become a review engagement with the associated
lower level of assurance, as they are not required to have an audit.

Required:

Outline the appropriate response to this situation. Provide reasons to support your response. (4 Marks)

Case 4

Consider the following independent situations:

1. You are the auditor of Hail Pty Ltd a medium sized furniture manufacturer. Your audit firm has finalised the
financial statements after the client has substantially prepared the accounting records. However, the client
admits to having limited knowledge of identifying and calculating impairment and has asked for your
assistance. You have proposed a number of adjustments to account for the impairment of assets.
2. You are the auditor of Travel Time Ltd, a large travel agent that also handles all your audit firms travel
arrangements on normal commercial rates and provides excellent service. The managing director of Travel
Time has indicated that the company is having a tough time of it due to the lack of consumer confidence in
the economy at the moment and has asked if you could help by recommending their services to your other
audit clients. He has said that he will understand if you are not able to do so. You happily agree to provide
the recommendation, as you have always been satisfied with their service.
3. Your audit firm has been approached by a new client, Civil Constructions Ltd, to conduct the audit for the
coming year. As part of your client acceptance procedures, you identify that the wife of one of the audit
firm’s partners has a substantial shareholding in Civil Constructions Ltd.
4. Your audit client, Pleasure Cruises Ltd, is having cash flow problems and has not paid any of the current
year’s fee by the time the auditor’s report is due to be issued. They expect business to pick up in the coming
year and have requested an additional time to pay the bill.

Required:

For each of the independent situations above:

a) Identify the type of potential threat to independence. Justify your answer. (8 marks)

b) Describe a safeguard, if any, which could be implemented to reduce each of the independence threats. (4
marks)

[2 + 2 + 4 + 8 + 4 = 20 marks]

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QUESTION 2 (10 MARKS)

Case Background
You are the audit senior on the audit of Best Furniture Manufacturers Pty Ltd (Best). Your firm has recently been
appointed as the first auditors of the company.

You interview the managing director of the company to obtain background information on Best and to
understand its business operations, its environment and system of internal control. You noted and documented
the following:
• Best was founded 30 years ago and makes ‘grandfather’ clocks (freestanding, weight driven, pendulum
clocks).
• The clocks are made in one factory (situated in the Alice Springs) and are distributed through boutique
homeware and antique furniture stores.
• The clocks are advertised mainly in local newspapers and through pamphlet drops.
• In order to promote longer production runs and minimise finished goods stocks, Best’s retail distributors are
offered stock on a ‘sale or return’ basis. This means that the homeware and antique furniture stores are
invoiced immediately, subject to a 90-day term of payment, but are allowed to return the stock up to 30 days
before payment is due. Only the marketing manager has been given the authority to make these offers.
• All of Best’s timber is obtained from offshore sources. Timber prices, which are denominated in US dollars,
have risen substantially over the past two years and the recent drop in the value of the Australian dollar has
caused them to rise even further.
• Timber purchases are secured by providing Best’s suppliers with letters of credit which become due when
the container shipment of timber arrives in Australia.
• Labour costs are high due to the craftsmanship and quality required for the production of the grandfather
clocks. Skilled labour is not easy to obtain and wage rates have recently risen.
• Best has found it difficult to pass on these timber and labour price increases to customers.

An analysis of costs indicates that there have been material negative purchase price variances in purchases of
timber over the course of the year. You have compiled the following information from Best’s financials:
➢ the current ratio as at 30 June 2020 is 1.24
➢ the shareholders’ funds to total assets ratio is 30%
➢ gross profit margins and net profit margins for the year ended 30 June 2020 have dropped to the
level where losses are being incurred.

NB: An excerpt of Best’s Financial Reports is attached.

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Best Furniture Manufacturers Pty Ltd (Best)

Balance Sheet
2020 2019 2018
Current assets
Debtors 748,681 774,469 665,939
Sale or return debtors 483,020 499,657 429,638
Inventory 300,035 305,013 256,376
1,531,737 1,579,140 1,351,953

Non-current assets
Property, plant and machinery 1,967,404 1,993,058 1,867,593

Total assets 3,499,141 3,572,198 3,219,546

Current liabilities
Trade and other creditors 395,019 343,545 289,049
Bills payable 509,494 517,947 435,355
Bank overdraft 135,576 13,337 55,672
Current portion of bank loans 200,000 200,000 200,000
1,240,090 1,074,830 980,076

Non-current liabilities
Bank loans 1,200,000 1,400,000 1,600,000

Equity
Share capital 500,000 500,000 500,000
Retained earnings 559,051 597,368 139,470
1,059,051 1,097,368 639,470

3,499,141 3,572,198 3,219,546

Profit and Loss Account

Gross sales 6,077,296 6,233,124 5,350,321

Returns - 200,551 - 153,958 - 123,057
Net sales 5,876,745 6,079,166 5,227,264

Cost of sales
Materials 2,066,281 2,100,563 1,765,606
Labour 1,397,778 1,153,128 963,058
Other 516,570 506,130 438,726
3,980,629 3,759,820 3,167,390

Standard Cost Variances

Purchase price (121,546) (49,865) (16,051)
Labour cost (182,319) (62,331) (26,136)
(303,865) (112,196) (42,187)

Operating profit 1,592,252 2,207,149 2,017,686

Expenses
Administration 791,918 754,208 600,841
Sales and marketing 663,198 642,012 524,331
Financing 175,452 156,789 123,457
1,630,569 1,553,009 1,248,630

Net profit (loss) (38,317) 654,140 769,057

Tax 0 196,242 230,717
Net profit after tax (loss) (38,317) 457,898 538,340

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Best’s bank finances the company’s timber purchases using bills of exchange drawn at 90 days from the date of
payment of the shipment. It has also extended loan finance to Best. The bank covenant, which is due for review
shortly, requires Best to:
➢ maintain a current ratio of 1.2
➢ maintain a shareholders’ funds to total assets ratio of at least 30%
➢ maintain net sales of a minimum of $100,000 per quarter
➢ prepare a general purpose financial report for the year ended 30 June 2020 and have it audited
according to Australian Auditing Standards. Note that this is a requirement of the bank covenant as Best
is not required to produce a general purpose financial report under the Corporations Act.

Required:
Based on the background information above and your use of preliminary analytical procedures, answer the
following questions:
a) Identify and explain two (2) asset accounts at risk of material misstatement (4 marks).
b) Describe one (1) issue regarding the prior year’s figures and explain why (2 marks).
c) Describe two factors that may bring into question the going concern assumption for Best. (2 marks)
d) Disregarding the evaluation of management’s assessment of the going concern assumption, briefly describe
the effect of the facts on your audit planning (2 marks).
[4 + 2 + 2 + 2= 10 marks]

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QUESTION 3 (10 MARKS)

Background
Safe Net is the wealth management division of Security Bank (Security) and provides investment,
superannuation, insurance and private wealth solutions to corporate and institutional customers. The following is
a list of the auditor’s planning file notes in relation to fraud detection for the audit of the Safe Net unit.

1. Ensure all material fraud instances are detected.

2. The auditor is responsible for maintaining professional scepticism throughout the audit, considering the
potential for management override of controls and recognising the fact that audit procedures that are
effective for detecting error may not be effective in detecting fraud.
3. Respond appropriately to fraud or suspected fraud identified during the audit.
4. A discussion among all of the audit firm’s staff on how and where the entity’s financial statements may
be susceptible to material misstatements due to fraud, including how fraud might occur.
5. Make enquiries of management, and others within the entity as appropriate, to determine whether they
have knowledge of any actual, suspected or alleged fraud affecting the entity.
6. Obtain sufficient appropriate audit evidence to confirm all potential fraud instances have been
uncovered and their impacts considered.
7. Test the appropriateness of journal entries recorded in the general ledger and other adjustments made
in the preparation of the financial statements.
8. Determine whether management has sufficient skills to prevent and detect fraud (e.g. through proof of
attendance at appropriate industry seminars and workshops, or past experience with fraud).
9. Obtain a copy of the client’s code of ethics document, and ensure employees have access to it.

10. Evaluate whether the accounting policies selected by the entity may be indicative of fraud.

REQUIRED:
Identify the activities that are part and the activities that are not part of the auditor’s responsibilities relating to
fraud under ASA 240.

[10 marks]

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QUESTION 4 (30 MARKS)
NOTE: In answering this Question, use APA referencing style and support your answers with relevant
accounting and auditing standards as well as published peer-reviewed academic journals. A minimum of 5
peer-reviewed academic journals is expected. (Hint: this is a great opportunity to utilise the University’s
Library Services online such as Library Search, Advance Search, eJournals and Databases such as
EBSCOhost, etc.)
You are expected to support your answers with the relevant Australian Accounting Standards and
Australian Auditing Standards and with authorised/published Peer-reviewed Academic Journals and
Articles.
Case Background
In February 2012, the Australian Accounting Standards Boards decided at its meeting to propose the withdrawal
of AASB 1031 Materiality. There were several reasons for this proposal which includes: there is no International
Reporting Standard equivalent and it does not look like there will be, since 2005 there has been the gradual
withdrawal of additional Australian guidance from a number of Australian Accounting Standards, and there is
now an updated guidance on materiality in the IASB Conceptual Framework.

The major impact of the withdrawal of AASB 1031 is the removal of the specific quantitative guidance for
materiality. The withdrawal of AASB 1031 became effective to annual reporting beginning on or after 1 July
2015.

Required:
A. Prior to the withdrawal of AASB 1031 and with reference to the AASB 1031 Materiality (issued by the
Australian Accounting Standards Boards - AASB) and the ASA 320 Materiality in Planning and
Performing an Audit and ASA 450 Evaluation of Misstatements Identified during an Audit (issued by
the Auditing and Assurance Standards Board – AUASB):
a) What is materiality as per the Accounting Standards and Auditing Standards? (3 marks)
b) Outline the qualitative and quantitative guidelines of materiality as per the Accounting Standards and
Auditing Standards. (6 marks)
c) Before the removal of AASB 1031, how do the standards and guidelines of “materiality” influence the
auditors’ judgment on materiality level and material misstatements? Provide examples. (6 marks)

B. Post withdrawal of AASB 1031, and with supporting academic research articles in accounting/auditing
research in materiality, would the removal of AASB1031 Materiality Standards:
a) harmonise/bring uniformity/homogeneity to auditors’ assessment of materiality misstatements or would
this bring disparity/heterogeneity to auditors’ assessment of misstatements? Explain your answer. (6
marks)
b) What other factors or influences, if any, the removal of AASB 1031 would impact the auditors’ judgment
on materiality? Explain your answer. (4 marks)
c) What are the implications this would have on the usefulness of financial reports? Discuss your answer
and rationale. (5 marks)
[15 + 15 = 30 marks]
*** End of Assignment***

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