ACCT601 Australian Auditing And Assurance Services :You are the audit senior on the audit of EasyFit Pty Limited,
ACCT601 Australian Auditing And Assurance Services :You are the audit senior on the audit of EasyFit Pty Limited,
Case: 1
You are the audit senior on the audit of EasyFit Pty Limited, a large manufacturer of shoes. EasyFit Pty Limited’s main market lies with 18 to 24 year olds.
This is the first year in which your firm has performed the audit. As part of the planning work, you have performed analytical procedures on an annualised basis and compared the results to industry averages and last year’s audited financial information. The results are given below:
| Industry average | EasyFit Pty Limited | ||||
| Ratio | 2017 | 2016 | 2017 | 2016 | |
| 1 | Current ratio | 2.84 | 3.27 | 1.89 | 2.24 |
| 2 | Receivables turnover ratio | 4.9 | 4.6 | 6.3 | 7.0 |
| 3 | Inventory turnover ratio | 3.7 | 3.8 | 5.0 | 5.5 |
| 4 | Return on total assets | 7% | 5% | 13% | 11% |
| 5 | Net profit ratio | 0.06 | 0.06 | 0.04 | 0.04 |
| 6 | Gross margin | 0.20 | 0.26 | 0.20 | 0.18 |
Required:
Explain the general meaning of each of the above ratios, discuss the conclusions that you can draw about EasyFit’s financial position and identify potential audit risks to be investigated further.
Case: 2
Your firm is auditing the financial statements of Herbert Manufacturing Ltd for the year ended 30 June 2016. You have been assigned to the audit of the company’s property, plant and equipment, which includes freehold land and buildings, plant and machinery, fixtures and fittings and motor vehicles.
The freehold land and buildings were purchased 12 years earlier (in July 2004) for $2 million. At the date of purchase, a valuer estimated that both the land and the buildings each had a value of $1 million. Depreciation has been charged since 2004 on the buildings at 2% per year on cost. At June 2010 the accumulated depreciation is $200,000 before the revaluation.
A qualified valuer, who is not an employee of the company valued the land and buildings at $5 million ($2.9 million for the land and $ 2.1 million for the buildings). These values will be incorporated into the financial statements as at 30 June 2016.
The partner in charge of the audit is concerned at the large increase in the value of the land and buildings since they were purchased. She has asked you to check the reliability and accuracy of the valuation. She suggested that ASA620 Using the work of an expert (ISA 620) could help you when carrying out this work.
In addition, you have been asked to verify the existence and completeness of plant and machinery recorded in the company’s computerised non-current asset register, which records the description of each of non-current asset, the original cost, the depreciation charge and the accumulated depreciation.
Required
- Describe the audit work you will carry out to check whether the valuer has provided an accurate and independent valuation of the land and buildings.
- Describe the audit work you will carry out to check the existence and completeness of plant and machinery, as recorded in the company’s non-current asset register.
Case: 3
Consider each of the following independent and material situations. In each case:
- The balance date is 30 June 2017.
- The fieldwork was completed on 5 August 2017.
- The financial report and audit report were signed on 12 August 2017.
- The financial report and audit report were mailed to the members on 20 August 2017.
- On 14 August 2017, you discover that a debtor of your client, Galaxy Ltd, was placed in provisional liquidation on 8 August 2017. The debtor owed $600,000 as at 30 June 2017; a specific provision of $300,000 of this amount was made at this date. On very preliminary information, the likely payout to unsecured creditors is zero.
- A flood occurred in the warehouse of your client SuperSpring Ltd on 2 July 2017. Inventory valued at $2m was destroyed. The directors believe only half of this value will be recovered from the insurers.
- Your client, Outback Mining Limited (hereinafter referred to as ‘Outback’), owns a mineral exploration licence in Central Australia. At 30 June 2017, Outback’s licence was valued by an independent expert at $50,000,000. This valuation is reflected in the financial report. On 8 August 2017, Outback received notice that a claim was being lodged under the Native Titles Act for land which included that subject to the exploration licence. If the claim is successful the exploration licence will be worthless.
- Your client, Bird Pty Limited, derives approximately 10% of revenues from selling aviary supplies to city-based bird breeders. A draft copy of a government report, leaked to the press and reported in the media on 11 May 2017, recommends that strict limits be placed on the number of birds that are allowed to be kept in suburban areas. Bird Pty Limited estimates that if the recommendations are enacted, about 70% of its customers will have to cut their flocks by 50% or more. This would affect not only future sales but also their ability to pay existing debts. No further information, other than the draft report, is available as at 12 August 2017.
Required:
(a) Identify the periods during which the auditor is responsible for identifying subsequent events and indicate the extent of the auditor’s responsibility.
(b) For each of the above events (i) to (iv), state the appropriate action that the auditor would require in order to issue an unqualified opinion for the situation and justify your response.
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