Accounting (Auditing) 300: Assignment 3Student ID: 14694743Class: Thursday 9:30AM

RQ 12.5

As stated in ASA 520.6, the purpose of applying analytical procedures in the completion stage of the audit is to: 1) Assist in the overall review of the reasonableness of the financial report.2) Support any conclusions formed during the audit.3) To ensure that the financial report as a whole is consistent with the auditor’s knowledge of the business.

RQ 12.6

As stated in ASA 560, the auditor has a responsibility to ensure management discloses events occurring after balance date but prior to time of completion. The auditor must also consider subsequent events up to the time they sign the audit report. There are two types of subsequent events which are adjusting events and non adjusting events as discussed in Gay and Simnett (2010, 606).

RQ 12.10

ASA 580.9 requires auditors to obtain appropriate representations from management. Management representation letters serve the following two purposes as discussed in (Gay and Simnett 2010):

1) Formalises the inquiry procedure by putting management’s replies into a black and white document.

2) Acknowledgement of management’s responsibility for design and implementation of internal control to prevent and detect errors and for the truth and fairness of financial reports.

As discussed in (Gay and Simnett 2010), management representation letters do not relieve the auditor of the responsibility of gathering the adequate evidence about the items covered. Representation letters complement other audit procedures but are not a substitute for them.

DP 12.18

(a) Examining the director’s minute report and a discussion with the board on the reason of the director’s resignation should have brought the managing director’s sudden resignation to attention. If there were serious disagreements the auditor needs to check for materiality on the financial reports and follow up on them when necessary. This is

Accounting (Auditing) 300: Assignment 3Student ID: 14694743Class: Thursday 9:30AM

to ensure that financial reports are true and fair and are not affected by the conflict of the skilled managing director.

(b) Reviewing the capitalisation costs of the new type of photocopy paper developed and obtaining documentation from the relevant development department should have brought the rejected patent to attention. Since the patent is now rejected and worthless, the patent’s value is likely to be overstated in the financial reports. A revaluation of the patent’s value should be carried out to amend the overstated financial reports.

(c) Discuss with management the impact of changes in stock value. Recalculation should be done on the 11th of August. It is a non adjusted event, but the sudden decline in value should be disclosed in the financial statements.

DP 12.23

(i) Two key account balances that are most likely to be affected by the fire are the inventory and property plant and equipment accounts. The inventory and property plant and equipment accounts are likely to be overstated by the fire.

(ii) For the inventory account, the existence assertion will be affected. The fire has destroyed the stocks and the assertion that all of these assets exist is not true anymore. There would be a large number missing inventory due to the fire and the amount of inventory is likely to be overstated in the financial reports.

For the property plant and equipment account, the valuation and allocation assertion will be affected. The building suffered damage and as a result its value has decreased. Revaluation of the building should be taken out to ensure the proper value.

(iii) For the inventory account, one audit procedure that could be performed is physical examination of the inventory on 30th of June 2010.

For the property, plant and equipment account, one audit procedure that could be performed is to hire an expert surveyor to determine the extent of the fire damage and provide a new market value for the building.

(iv) a) Since the fire occurred at 25th of June 2010, both the building and inventories will have significant damages reported at 30th of June 2010. According to ASA560, auditor has the responsibility to ensure management discloses events occurring after balance date and prior to time of completion. Therefore, auditor should advise

Accounting (Auditing) 300: Assignment 3Student ID: 14694743Class: Thursday 9:30AM

the director to adjust the carrying amount of the building and the amount of inventory to reflect the actual amounts of these assets.

(b) 10th of July 2010. According to ASA 560.6, the auditor has a responsibility to apply sufficient audit procedures to enable auditor to make necessary adjustments up until the date of the report. Since the fire occurred after the balance date, no adjustments are required. However, if the damage on the building and inventory is material, then directors need to make full disclosure in their financial report as users may benefit from this information.

(c) 15th August 2010. According to ASA 560.10, the auditor has no responsibility to undertake audit procedures to identify events subsequent to the date of the audit report. The director’s declaration is scheduled to be signed on 14th August 2010. The fire occurred after the audit report is authorised, and therefore no adjustments are required.

Accounting (Auditing) 300: Assignment 3Student ID: 14694743Class: Thursday 9:30AM

References

Auditing and Assurance Handbook 2011. 2011. Bentley, W.A.: Curtin University.

Gay, and Roger Simnett. 2010. Auditing & Assurance Services in Australia. North Ryde: McGraw Hill Publishing.