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ACT303 Principles of Auditing

BSBRSK501 Manage Risk Answers



Written Assignment Information

Semester 1 2018

Total Marks: 60 marks and to be weighted @ 20% Length: Maximum 3,000 words

Submission Requirements.

This assignment may be submitted at or before 11.59pm (CST) Sunday, 6 May 2018,  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 .
  • 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.

  • 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.

  • 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.


Coversheets are no longer required.

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.

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

Learnline site.


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.


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 stu den t’ s ow n w ork.

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

Extensions and Late Lodgements


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.

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

Learnline site.

                            Assignment Details                      

Part A (20 marks)

Part A-1

You are an audit partner with Billings & Associates, a large and experienced audit firm.

You have been approached to accept the audit of Pharmaceuticals Ltd (Pharmaceuticals), a medium- sized chemical manufacturer. The manufacture of the chemicals results in highly toxic waste and Pharmaceuticals 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.


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

Part A-2

Pharmaceuticals Ltd (Pharmaceuticals) imports a number of pharmaceutical products. In order to hedge its foreign currency transactions, Pharmaceuticals entered into a number of forward rate agreements this year. Prior to this time Pharmaceuticals 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 Pharmaceuticals, 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.


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

Part A-3

Billings & Associates has agreed to take on a new audit client, Reaction Pty Ltd, a small garage door manufacturer that has never previously been audited. Billings & Associates 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.


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

Part A-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.


For each of the independent situations above:

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

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

Part B (10 marks)


Toy Universe Pty Ltd (TUPL) is a toy manufacturer. TUPL has factories across the country and its customer base includes retailers, as well as individuals, to whom direct sales are made through their website. You are an audit senior at Harley Quinn & Associates and you are currently reviewing documentation of TUPL’s internal controls in preparation for the interim audit.

TUPL’s website allows individuals to order goods directly and full payment is taken in advance. Currently the website is not integrated into the inventory system and inventory levels are not checked at the time when orders are placed.

Goods are delivered via local couriers; however, the couriers do not always record customer signatures as proof that the customer has received the goods. Over the past year, there have been customer complaints about the delay between sales orders and receipt of goods. TUPL has investigated these complaints and found that, in each case, the sales order had been entered into the sales system correctly, but was not forwarded to the despatch department for fulfilling.

TUPL’s retail customers undergo credit checks prior to being accepted and credit limits are set accordingly by sales ledger clerks. Neither the sales area managers nor the sales director are involved with this process. These customers place their orders through one of the sales team, who decides on sales discount levels.

Raw materials are purchased from a wide range of suppliers. As a result of staff changes in the purchase ledger department, supplier statement reconciliations are no longer performed. Additionally, changes to existing supplier details or inclusion of new supplier details in the purchase ledger master file can be undertaken by purchase ledger clerks, as well as supervisors.

In the past six months, TUPL has changed part of its manufacturing process and as a result some new equipment has been purchased. However, there are now considerable levels of plant and equipment that are now surplus to requirement. Purchase requisitions for all new equipment have been authorised by production supervisors and little has been done to reduce the surplus of old equipment.


  1. a) Identify five (5) deficiencies in the internal controls of TUPL. Explain how a business risk arises from each deficiency. (5 marks)

  2. b) Describe a control which TUPL could implement to address each of these deficiencies. (2.5 marks)

  3. c) Design a test of control Harley Quinn & Associates would perform to assess if each of those controls identified in (b) above is operating effectively. (2.5 marks)

You may wish to present your answer in a table format, as follows:

(a) Deficiency                  Explanation                     (b) Control                       (c) Test of control

Part C (20 marks)


You are the senior auditor on the audit of Unique Furniture Manufacturers Pty Ltd (Unique).   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 Unique and to understand its business operations, its environment and system of internal control.   Unique was founded 30 years ago and makes ‘grandfather’ clocks (freestanding, weightdriven, pendulum clocks). The clocks are made in one factory (situated in the Blue Mountains) 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, Unique’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 Unique’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 Unique’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. Unique 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 Unique’s financials:

 the current ratio as at 30 June 2017 is 1.24

 on an annualised basis, net sales are $350,000

 the shareholders’ funds to total assets ratio is 30%

 gross profit margins and net profit margins for the year ended 30 June 2017 have dropped to the level where losses are being incurred.

Unique’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 Unique. The bank covenant, which is due for review shortly, requires Unique 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 2017 and have it audited according to Australian Auditing Standards. (Note that this is a requirement of the bank covenant as Unique is not required to produce a general purpose financial report under the Corporations Act 2001.)

Part C.1 Required:

For parts (a), (b) and (c) of this question, please disregard all going concern considerations.   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. (1 mark)

(c)  Describe three (3) factors that may bring into question the going concern assumption for Unique. (3 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. (3 marks)

Part C.2

After examining Unique’s detailed trial balance, you notice that one of the expenses of the sales and marketing department is ‘sales bonuses’. You question this expense and the company’s accountant informs you that a monthly bonus of 10% of salary is paid to all sales and marketing staff if sales for the month exceed the budgeted target. The marketing manager is entitled to a 20% bonus if the targets are achieved. This incentive was implemented during the previous financial year and was in place for the last six months of the year.   You note that the bonus has been paid every month since the incentive was implemented (except for the previous month, when sales were much lower than expected). This seems a little unusual because Unique had only achieved its budgeted sales targets in two out of the six months prior to the start of the scheme. You investigate results for the last six months of the year and find that:

 sales were above the monthly budget figure when bonuses were paid

 there was no significant change in gross margins

 returns of stock sold on the ‘sale or return’ basis were well below those in the first six months except in the final month of the year

 debtors’ levels (measured in days outstanding) were above their budgeted levels but returned to a more normal level at year end.

On further enquiry, the accountant advises that the marketing manager is authorised to do the following with regard to the stock sold on a ‘sale or return’ basis:

 offer customers a ‘sale or return’ deal as long as the deal is within the company’s pricing structures and the terms of the scheme

 initiate and approve the invoicing of customers when a sale is made (i.e. if the stock is not returned within 60 days)

 initiate and approve the issue of credit notes for these customers when returns are made within 60 days or when pricing or quality issues arise.

Part C.2 Required

Based on the information to Part C.2, answer the following questions: (a)  Explain one (1) internal control issue at Unique. (1 mark)

(b) Identify two (2) fraud risk factors at Unique. (2 marks)

(c)  Identify one (1) account balance at risk and its two (2) assertions at risk as a result of the fraud risk factors identified in (b) above. Justify your answer with reference to the background scenario. (4 marks)

(d) Describe two (2) audit procedures that would address potential misstatements arising from fraudulent financial reporting. Ensure that your procedures are specific to the scenario and the fraud risk factors identified in (b) above. (2 marks)

Part D (10 marks)

Phil, an audit senior at KMC Partners (KMC) is currently reviewing the materiality level for one of his clients, Sali Ltd (Sali).

In March 20X6, Sali decided to move from the SuperD IT system to the SuperB IT system. The expected completion date of the transition was June 20X7. Due diligence was performed on the new system and another auditor (PGD) was engaged to perform data migration work. KMC liaised with PGD on several occasions to obtain access to their workpapers in order to obtain sufficient appropriate audit evidence around the data migration. No major issues were noted.

Ten well-regarded staff members of Sali were made redundant in April 20X7, and as a result, staff morale is very low at Sali. Employees are wondering who will go next, and do not feel that their jobs are safe. Most of them are putting in extra hours, but despite this, the lack of motivation is seriously impacting the quality of their work. Some senior staff members have decided to search the current job market for another suitable positions.

It is now 8 July 20X7 and the audit team is currently finalising its substantive testing and tests of controls. Phil becomes aware of the following events:

Event    Description

1            Sali’s finance manager abruptly resigned in June 20X7, and no replacement has been found.

2            Sali’s HR manager resigned in June 20X7, and a replacement was found in July 20X7.

3            While performing a full reconciliation of data on SuperD to data on SuperB as at 30 June

20X7, two material variances were discovered. Phil inquired with management who confirmed that these were errors that will be fixed.

4            While finalising the controls testing of the unlisted investments, the audit team note an issue with one of the 40 samples selected for testing:

Description of Issue:

No purchase document on file for Dune Ltd which makes up 14% of the unlisted investments.

Response by Sali:

The purchase occurred on 29 June 20X7, and most entities take a week to provide the associated documentation. We made an urgent request to Dune Ltd, obtained the purchase document, and sent them to the KMC office on 7 July 20X7.


Determine the impact of each event on the materiality amount (increase, decrease, no impact). Explain your answers. (10 marks)

You may wish to present your answer in a table format, as follows:

Event    Description                                    Impact on



*** End of Assignment***

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