AUDITING AND ASSURANCE: 11762 SEMESTER 2 2024Matlab

Java Python AUDITING AND ASSURANCE: 11762

INDIVIDUAL CASE STUDY

SEMESTER 2, 2024

Marks: 25 marks

Weight: 25%

File submission: format (.doc or .docx)

Instructions

•    Please read the unit outline for more details.

•    The basic report format is a cover page,a table of contents, page numbers and headings.

•    You must ensure that you are using materials that are yours. If you copy any reference that is not yours, use  proper referencing. The teaching team can use Ouriginal to guarantee the authenticity  of your  answers.  Coping  materials that are not yours can indicate a sign  of plagiarism which  is  against  UC  policies.  We  recommend  you  take  the Academic  Integrity Module (AIM) in case you are unsure. Students who commit academic misconduct, such as plagiarism etc., will be in breach of UC policies and will face a summary inquiry conducted by the Associate Dean of Education.

•    Referencing style. is Harvard, and you should include a reference list and in-text citations, where necessary.

•    The discussion question requires you to provide evidence that supports your arguments, including primary sources (journal articles, accounting  standards and other regulatory documents).

•    Please respond to all questions as best as possible.

•    Part 1 is worth 8 marks and consists of short answers.

•    Part 2 is worth 17 marks and consists of a report-style. question.

PART 1

INSTRUCTIONS - 8 MARKS

Part 1 focuses on you applying your skills from the first part of the unit (Week 1-6). There are some elements of application, explanation and some minor calculations. The goal here is to explain and evaluate the audit process.

SCENARIO: OLD MOON FINE FOODS

You are currently planning the audit for the year ended 30 June 2025 for a large retail business that operates  a  range  of  stores  across  Australia  and  New  Zealand. The  retail  business  specialises  in imported food and wine, and especially in luxury or high-quality goods. This is your first engagement with this company.

Given the current economic climate, characterised by a series of events with stubborn inflation and a cost of living crisis, the business has been struggling with declining sales. Sales across 2023 and 2024 declined by 20% and management predicted a larger percentage decline into 2024 if nothing changed.

In response, the business has decided to open a chain of discount grocery stores in both Australia and New Zealand, largely copying the business model from other discount supermarket chains in Australia so  as to  attract  a  new  market.  While  the  business  has  been  able  to  use  its  existing  distribution networks,the business has had to invest in and outfit 15 new stores, spend money on advertising and building brand networks, source and order a new product range, and hire and train a new workforce. The business has borrowed $240 million for this new business.

Sales  have  been steady  in the  new concept stores, with sales tracking slightly above  predictions. However, the discount model is based on a significant volume of sales. Consequently, the business expects a large loss in year 1, and predicts only a small return (profit) in year 2.

In an attempt to offset the  impact of the  new  business, the  company  has  changed  its  inventory ordering processes in the premium food and wine business. While it used to carry highly specialised items and promise customers it would have such items in stock, the business has cut some of its more obscure and specialised lines. This has made its inventory ordering and warehousing more efficient, but has also lead to some customer complaints and customer loss. The company has also changed its debt terms. While it used to offer established clients up to 45 days to pay debt to the company, the company has recently reduced this to 23 days, with the belief that this will bring cash faster into the business. Management estimates that 4% of customers have left as a result of this change.

You are provided the following financial information

ACCOUNTS/AMOUNTS ($M)                  FORECAST                      ACTUAL

                                                   31 DECEMBER 2024          30 JUNE 2023

NET ASSETS                                            1,351                           1,299

PROFIT BEFORE TAX                                 (234)                            306

REVENUE                                                 2,652                           1,691

TOTAL ASSETS                                         2,351                            2,624

Management seem genuinely committed to the success of both businesses, but they do admit that their expertise is not in discount grocery. They have an effective internal control system for the luxury food and wine business, but management admit that this control system needed significant updating to work for a discount retailer. You note that there are gaps in how the control system is being used across all types of stores.

Required:

1.    In a paragraph, explain any risks that you perceive in this company.                              (2 marks)

2.    Determine an appropriate overall materiality threshold for this audit. Explain the judgements and the approach you take in the materiality threshold                                                    (2 marks)

3.   You are concerned with the accounts receivable, given the changes to debt terms (requiring payment in 23 days as opposed to 45 days). The company’s accounts receivable book value was recorded as $8,167,000 and comprises over 1,500 customer accounts. The  10 largest customer balances comprised more than 15% of the whole accounts receivable. In relation to the determining a sampling technique, you have access to the following information:

Risk of incorrect acceptance	1%
Tolerable misstatement	$50,000
Expected error	$0
Number of errors	0

Relationship between reliability factor and risk of incorrect acceptance (Table 10.5 Gay & Simnett, 2018)

Risk          of          incorrect acceptance (%)	Reliability Factor
1.0	4.6
5.0	3.0
7.5	2.6
10.0	2.3

Reliability Factors for assessing desired level of assurance (Table 10.5 Gay & Simnett, 2018)

Number of Errors	99%	95%	90%
0	4.61	3.00	2.31
1	6.64	4.75	3.89
2	8.41	6.30	5.33

Elect one particular sampling method and use that approach to calculate the necessary sample size for your audit of the accounts  receivable.  Explain your judgements  in calculating the sample size               (2 marks)

4.    In  relation  to  your  planning  for  substantive  procedures  and  collecting  evidence  for  the accounts receivable account, you have identified the following controls:

•    An independent credit approval process prior to shipment to customers.

•    A  requirement that the  legal team verifies both the credit and contract terms around supply on credit.

•    An independent proofreading of invoices.

•    An independent process for checking accounts receivable journal entries.

•    Access is restricted to billing software.

•    Cash receipts matched to sales invoices before posting to the accounts receivable master journal

Please identify an example of one procedure that could be used to test the control for each of the key controls identified above (refer to the example posted from the workshop in week 5).

Keep this table in mind:

ACCOUNT BALANCE ASSERTIONS
Existence	Actually exist
Rights and Obligations	Entity has rights/control
Completeness	Recorded correctly.
Accuracy/Valuation	Recorded correctly/disclosures
Classification	Properly  classified  in  accordance with accy standards.
Presentation	Sufficient and proper disclosure

(2 marks)

INSTRUCTIONS TO PART 2 - 17 MARKS

This part of the assignment is expected to be 1,750 words in total (subject to the normal +/- 10 per cent rule).  The assignment should be written in a report format.

You are to draw upon relevant academic research (where appropriate) as well as examples from news media,  textbooks  and  other   sources  to  support  your  work.  Appropriate   academic  referencing and integrity expectations apply to this part of the assignment, in particular.

You should reference wherever appropriate in the report. You should also use examples to support your argument, as well as drawing on relevant resources including published research articles and other forms of supporting material. In your decision-making around supporting material, you should evaluate the academic weight of the material - eg. a Wikipedia page or a random Internet blog is considered less persuasive in comparison to a refereed journal paper. Equally, as this report requires you to come to and make a judgement (this is what is meant by critically evaluate), it is makes sense that you use the term ‘ I’ in your essay.

Background:

Ethics and auditing practice has recently been in the news. Recent scandals in Australia (such as PWC and   its   ethical   behaviour   in   consultancy   work  concerning  taxation   reform. for   multinational corporations  and  alleged  issues  with  billing  practices  by  KPMG  in  relation to  its  work  with the Department  of  Defence),  significant  audit  failures  (including  British  Telecom,  Galliford  Try,  Kier, Stagecoach, Rolls-Royce, Autonomy, Conviviality, and other similar failures) and record fines by the Financial Reporting Council (the FRC) in the UK as well as fairly regular fines issued by the US Securities and Exchange Commission) around a lack of auditor independence all have helped to question the ethics of auditing firm behaviour.

Required:

In your report, you are expected to address the following issues:

a)    Critically evaluate whether the audit expectation gap model is sufficient to be able to account for the perceived ethical failures suggested above? If yes, explain where and how the model accounts for expectations around ethics? If no, explain how you would adapt or change the model to better illustrate the expectations around ethical behaviour.

b)   Choose one particular ethical scandal or significant audit failure and criticially evaluate what was the cause or causes of your particular ethical scandal or significant failure. Make sure you use evidence to support your argument here.

c)    Critically  evaluate  the  relationship  between  ethical  scandals  and  audit  failures  upon  the professional practice concept of professional scepticism. If you think that these scandals have no impact, then explain why that is. If you think that these scandals have an impact, explain what that impact might be