ANSWERS TO WEEKLY QUESTIONS FROM LECTURE AND TUTORIAL OUTLINE FOR

LECTURE 4
ANSWER TO QUESTION 1
There are a number of important issues an auditor will consider when deciding whether or
not to take on a new client. The auditor will consider the legal and ethical framework within
which an audit is conducted; certain aspects of the client; and certain characteristics of the
auditor.

The legal and ethical framework comprises those requirements of the Corporations Act
relating to auditor appointment and resignation (where the client is an Australian company);
the auditing standards, and the code of ethics.

Audit quality is held to be an important objective at the client acceptance phase of the audit.
In particular, the auditor must have sound systems and processes to ensure audit quality by
applying the auditing standards and the code of ethics. Audit quality is critical because it
can impact on the reputation of the auditor and also the profession. .

At the client acceptance phase of the audit, the auditor will need to consider two closely
related issues: (1) Integrity of management and (2) the quality if audit evidence. As well the
auditor must be satisfied that the preconditions for an audit are present. That is, the auditor
must be satisfied that: (1) management acknowledges its responsibility for preparation of
the financial report and the establishment of internal controls; (2) that the auditor will be
provided with access; and (3) the use of acceptable financial reporting framework by the
client.

The speakers also noted the importance of the procedures required where there is a change
of auditor, in particular: (1) the appointment and resignation requirements of the
Corporations Acts; and (2) the communication between the outgoing and the incoming
auditor concerning any ethical impediment to the audit.

From the auditor’s perspective, he/she must consider if they can meet the independence
requirements to avoid any conflict of interest; and whether or not they have the resources
and technical competency to perform the audit.

The final matter referred to by the speakers was the engagement letter. This is a very
important document because it sets out the responsibilities of both the auditor and the client
and is, in effect, a contract between the parties.

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ANSWER TO QUESTION 2 (a):
Changes in professional appointment are covered in the Code of Ethics at APES110 S 210.9
- AUST210.15.1. The incoming auditor communicates with the outgoing auditor to ensure
that the reasons for the change in auditor are proper. The communication helps protects the
outgoing auditor from any unethical pressures that could be exerted by management. As
well it protects the incoming auditor by ensuring that he/ she is aware of any unethical
pressures that may have been exerted by management. The communication also ensures
that both auditors maintain appropriate ethical relationship with each other in respect of
proper professional behaviour. That is, while competition for work between auditors is a
normal part of private practice. It must be conducted within the ethical requirements of the
professional accounting bodies. I.e. it must be fair and not involve diminishing the reputation
of other members (and by extension, the profession).

ANSWER TO QUESTION 2 (b):

The requirement to evaluate the integrity of management is covered at ASA220.12 and A8
Management, because of the extensive power and authority it influences over the affairs of
the entity, has the capacity to influence the conduct of the audit and the auditor’s reputation.
The conduct of the audit
As well, management is responsible for the internal controls. If internal controls are poor
some audit evidence may be unobtainable and the quality of the evidence collated from
within the entity will be unreliable.

ANSWER TO QUESTION 2 (c):

The requirement to ensure the suitability of the auditor to perform the audit is covered at
APES110; ASA102; ASA 220.9 and 11. There is a requirement at ASA 220.9 to comply with
ethical requirements, and in particular, with the independence requirements (ASA 220.11).
ASA 220. 14 and A8 requires the auditor to have the competence to perform the audit and
have capabilities, time and resources to do so.

QUESTION 3 (Use of Handbook):

ASA 210 requires that the auditor shall ensure that the preconditions to an audit are present
in order to accept or continue an audit engagement. With reference to both the Mandatory
Requirements and the Application and Other Explanatory Material in ASA 210 explain what
the mandatory requirements are and why it is important to establish their existence.

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ANSWER QUESTION 3
The requirement to ensure that the preconditions for an audit are present is covered at ASA
210.6.The purpose of ensuring that the preconditions for an audit are present is to ensure
that it is actually possible for the audit to be undertaken. There are three matters that
comprise the preconditions for an audit.

The first is that the client uses an acceptable financial reporting framework. This is a critical
issue because it is the financial reporting framework that provides the auditor with a
benchmark for forming an opinion and also that, when the opinion is provided, it is an
opinion on whether or not the client has prepared the financial report in accordance with the
applicable financial framework.

The second mater that constitutes a pre-condition for an audit is that management
acknowledges its responsibilities for the preparation of the financial report and the
implementation of a system of internal controls. It is important to establish this before the
auditor commences because there must be a clear demarcation between the auditor and the
client on these matters I order to ensure that the audit is conducted independently.

The third main issues is that management acknowledges that it will allow the auditor access
to the evidence he/she requires, including access to staff of the client. This is important
because, without such access, the auditor would not be able to collate sufficient appropriate
evidence on which to form a conclusion and provide an audit opinion.

ANSWER QUESTION 4 (Use of Handbook)

ASA 315.11 posits five key areas.
(1) Industry, regulatory and other external factors. Examples (i) prevailing technology; (ii)
cyclical or seasonal activity.
(2) The nature of the entity, including operations, ownership and governance structure,
the types of investments the entity has; and the way the entity is structured and
financed. Examples. (i) how the entity earns its revenue; (ii) key markets; (iii) major
suppliers.
(3) The accounting policies selected by the entity. Example: (i) inventory cost flow
assumptions; valuation of plant and equipment.
(4) Business Objectives and strategies. Examples (i) use of IT; (ii) product development.
(5) Measurement and review of financial performance. Example: (i) whether accrual
accounting or cash basis for measuring management performance; (ii) KPIs.

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ANSWER TO QUESTION 5 (RESEARCH QUESTION):
(i) What is the size (by revenue) of the Australia soft drinks industry?
ANSWER: In 2017/18, revenue is expected to be $4.7b and there are 307 firms.

(ii) What is the expected growth in this industry over the next 5 years?
ANSWER: 1.3% p.a.

(iii) How does this compare with growth over the past 5 years?
ANSWER: Growth over the past 5 years was 1.8% p.a. This is significantly
different to the expected growth over the next 5 years of 1.3% p.a.

(iv) Briefly outline the key external drivers of this industry.

ANSWER: Key drivers are: (1) demand from supermarkets and grocers; (2)
demand from the fast food industry; (3) the health consciousness of the
population and (4) real household disposable income.

(v) What are the major products and markets for firms in this industry?
ANSWER: Major products include: carbonated soft drinks; sports drinks; energy
drinks; drink mixers; and other non-alcoholic beverages. The major markets are:
supermarkets; specialty soft drink wholesalers; grocery wholesalers and other
markets

(vi) Provide a brief overview of the competitive landscape for this industry.
ANSWER: This is a highly competitive industry that is dominated by two very
large firms: Coca-Cola Amatil ltd (39.8% of market) and Asahi Holdings
(Australia) Pty Ltd (20.1% of market). Together these firms have 59.9 % of
market share (by revenue), with no other single firm having more than 5%.

(vii) Who are the major companies in this industry?

ANSWER: The major players are Coca-Cola Amatil ltd and Asahi Holdings
(Australia) Pty Ltd, which (as noted above). The next largest firm is True Blue
Beverages with less than 5% of the market.

(viii) Briefly outlie the main operating conditions for this industry.

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 ANSWER: The industry is moderately capital intensive because of the nature of
the plant and equipment (machinery) that is required to be competitive. This
machinery is highly automated and computerised. In recent years, such
automation/ computerisation has been particularly evident in quality control and
packaging. Revenue has been displayed little volatility, however, it is highly
dependent on disposable income.

ANSWER QUESTION 6
You come across an article* by Elizabeth Knight in the Sydney Morning Herald of July 9
2016, titled, “Soft drink and beer are under increasing pressure as society thinks healthier”.
(i) Comment briefly on whether or not this article is consistent with the IBIS World
Research Report referred to above. In your commentary, identify matters of
consistency and inconsistency between the two pieces.
ANSWER: The article focusses on one of the key issues identified in the IBISWorld
report, that of health consciousness. As such it has a narrower focus that does the
IBISWorld report. However, it is nonetheless consistent with it in respect of this issue.
The article also reports the significant impact on Coca Cola Amatil that has taken
place in recent years. Overall, the article provides a very useful illustration of the key
factors identified I IBIS World.

(ii) Specify one other useful source of information that you could access in
undertaking your research I order to understand the entity and its environment.

ANSWER: Other sources of information include: reserve bank reports, newspapers

and industry journals and / or reports.