RECENT ASSIGNMENT

Assignment Details
Length Maximum 3000 words
Part A (20 marks) Consider the following independent situations:
1. You have established an audit practice with two separate divisions: account preparation and audit. Each division has a different partner and staff team. Your firm commonly prepares financial accounts and conducts audits. Your firm has recently been provided with a trial balance from a listed client Green Pastures Ltd, for whom your firm is preparing the financial accounts and conducting the audit. The client has significant expertise and approves all adjusting journal entries.
2. Samuel Rose is part of the audit team for the current audit of Saturn Ltd. After 2 weeks at the client, he has advised you that he has been offered a job at Saturn Ltd as soon as the current audit is finished.
3. One of your major clients, Fresh Juices Ltd, has talked to you about a consulting engagement next year for you to do a complete review of the adequacy of the entity’s quality controls over the production of its fruit juices. However, the managing director has indicated that some of the Board are concerned about you taking up too much of their staff’s time asking unnecessary questions. Therefore, he has suggested that your chances of getting the engagement will be significantly improved if you keep your questions of staff to a minimum during the current audit.
4. You have audited Excelsior Ltd, a stable engineering firm, for several years. At the start of this year, the finance director, Susan James, retired after 10 years with company and was replaced by Steve Price, a long-time friend of the audit manager Geoff Holmes, who was best man at Steve’s recent marriage.
5. One of your audit clients, My Super Ltd (MSL) is a large superannuation fund. The Australian Taxation Office has advised MSL that it has rejected its taxation treatment of a material amount of income from investments and that it disagrees with the taxation advice MSL gave to its members. The matter has been referred to the Superannuation Complaints Tribunal and MSL has requested that you represent them at the Superannuation Complaints Tribunal.
REQUIRED: For each of the independent situations above:
(a) Identify the type of potential threat to independence. Justify your answer. (10 marks)
(b) Explain what safeguards, if any, that could be implemented to reduce the independence threats. (5 marks)
(c) Assess whether audit independence can be achieved. (5 marks)
You may like to present your answer in the form of a table as below.
Situation a) Threat Justification b) Safeguard c) Assessment of audit independence

Part B (10 marks)
Background
LCM is the wealth management division of Majestic Bank (Majestic) 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 LCM 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 ISA 240. (10 Marks)
Part C (10 marks)
You are currently planning the audit of Food Plus Pty Ltd (FPPL), a large proprietary company that operates a small chain of convenience stores. You are in the process of developing an understanding of its objectives and strategies and the related business risks. Competition in this sector is intense, with major supermarket chains aggressively purchasing smaller rivals and discounting products below cost in order to increase market share. In order to compete, FPPL has been forced to offer value-added services such as complimentary coffees based on a loyalty scheme. While these strategies have helped to maintain its customer base, its gross margins have dropped by 10%. In an effort to increase profits, FPPL has recently focused on expanding the products available in each store. However, these items have achieved only limited acceptance to date among FPPL’s customers and stock obsolescence is high. All of FPPL’s premises are leased. Two of the leases are due to expire prior to the end of the current financial year. In both cases, the land on which the premises are situated has been re-zoned as residential. Due to “prior use” legislation, this does not prevent the premises from being used as a supermarket in the future. However, it does mean the land’s value has increased and, on this basis, the lessor is demanding a 50% increase in rent. FPPL is also experiencing difficulties with two of its major suppliers, who have withdrawn their volume rebates and reduced payment terms from 30 to 14 days. In addition, FPPL has recently initiated legal action against a major supermarket chain for anti-competitive behaviour and predatory pricing.
REQUIRED: (a) Identify five (5) business risks, as per ISA 315, which may lead to the risk of material misstatement at the financial statement level for FPPL. (5 marks)
(b) For each business risk you identified in (a) above, describe how it may lead to the risk of material misstatement
You may wish to present your answer to (a) and (b) using the following table:
(a) Business risk (b) How it might lead to risk of material misstatement
Part D (10 Marks)
Clearview Ltd (Clearview) is a manufacturer of glass fencing for swimming pools and balconies. Clearview operates from a large production facility, where it undertakes continuous production 24 hours a day, seven days a week. Also on this site are two warehouses, where the company’s raw materials and finished goods are stored. Clearview’s year end is 30 June. Clearview is finalising the arrangements for the year-end inventory count, which is to be undertaken on 30 June 2014. The finished glass fence panels are stored within 25 aisles in the first warehouse. The second warehouse is for large piles of raw materials, such as sand, used in the manufacture of glass. The following arrangements have been made for the inventory count: The warehouse manager will supervise the count, as he is most familiar with the inventory. There will be ten teams of counters and each team will contain two members of staff, one from the finance and one from the manufacturing department. None of the warehouse staff, other than the manager, will be involved in the count. Each team will count an aisle of finished goods by counting up and then down each aisle. As this process is systematic, it is felt that the team will not need to flag areas once counted. Once the team has finished counting an aisle, they will hand in their sheets and be given a set for another aisle of the warehouse. In addition to the above, to assist with the inventory counting, there will be two teams of counters from the internal audit department and they will perform inventory counts. The count sheets are sequentially numbered, and the product codes and descriptions are printed on them, but no quantities. If the counters identify any inventory which is not on their sheets, then they are to enter the item on a separate sheet, which is not numbered. Once all counting is complete, the sequence of the sheets is checked and any additional sheets are also handed in at this stage. All sheets are completed in ink. Any damaged goods identified by the counters will be too heavy to move to a central location, hence they are to be left where they are located, but the counter is to make a note on the inventory sheets detailing the level of damage. As Clearview undertakes continuous production, there will continue to be movements of raw materials and finished goods in and out of the warehouse during the count. These will be kept to a minimum where possible. The level of work-in-progress in the manufacturing plant is to be assessed by the warehouse manager. It is likely that this will be an immaterial balance. In addition, the raw materials quantities are to be approximated by measuring the height and width of the raw material piles. In the past this task has been undertaken by a specialist; however, the warehouse manager feels confident that he can perform this task.
REQUIRED:
(a) (i) Identify and explain four (4) internal control weaknesses in the inventory count arrangements of Clearview. (ii) Explain the impact of these weaknesses on the audit. (6 marks)
(b) (b) Describe a recommendation to address each weakness identified in part (a). (4 marks)
Note:
Please Refer to the text books of auditing as below while answering the above questions
Leung, P; Coram, P; Cooper, B; Richardson, P; Modern Auditing & Assurance Services; 6th Ed; Wiley; 2015. ISBN 9781118615249 (pbk.)