AF304: AUDITING

ASSIGNMENT
AUDIT CASES – A PRACTICAL
APPROACH TO AUDITING

TIFFANY HELENA NIUROU

University of the South Pacific
Lautoka Campus
ID: S11147096
  
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TABLE OF CONTENTS

Table of Contents

INTRODUCTION.................................................................................................................................2
Section 1: Subsidiary 1 – Carpets International (USA) Limited........................................................3
Section 2: Subsidiary 2 – Fashion Designers Limited........................................................................5
Section 3: Subsidiary 3 – Computek Electronics Limited..................................................................7
Section 4: Subsidiary 4 – Enron Electric Limited (EEL)...................................................................9
Section 5: Subsidiary 5 – General Machinery Company Limited....................................................10
BIBLIOGRAPHY...............................................................................................................................11

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INTRODUCTION

Audit and assurance services work together to ensure that companies or organizations are
following the rules, policies and guidelines, and also ensures that these companies or
organizations provide both the internal and external confidence for financial statements.
Audit and assurance are key areas that organizations need to focus on in order to increase and
maximize reliability levels, and are also used by organizations to present financial reports to
end users without any issue. This research assignment will be looking into the aspects of
audit and assurance. In an organization, there are a total of five subsidiaries, and each one of
these subsidiaries contains a unique technique that will be analysed in this research
assignment. The Las Vegas Group Corporation in based in the United States of America and
is headquartered in the Las Vegas City, Nevada. It is a parent company operating under a
wide range of exported items in the international market. The company operates in various
countries which are Fiji, Australia, New Zealand, Singapore, Malaysia, Hong Kong, China
and Japan. This research assignment will look into the five subsidiaries of the Las Vegas
Group Corporation pertaining to the audit and assurance services.

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Section 1: Subsidiary 1 – Carpets International (USA) Limited

A. In the case of Carpets International (USA) Limited, certain types of analytical

procedures should be carried out as part of the planning for audit. The Carpets
International (USA) Limited has received a clearance document from the Las Vegas
Group Corporation. The initial screening of the financial statement of Carpets
International (USA) Limited was included in the analytical review procedure, and
another key factor that the Carpets International (USA) has took into consideration is
complying with the relevant accounting standards. In order to make everything on
point, the accounting standards that need to be applied in this same scenario are
appropriateness, understandability and materiality.

B. The difference between the actual and estimated aspect are the risk factors regarding
the Carpets International (USA) Limited in relation to its accounts receivable and
inventories. Since the auditors are finding it difficult to control the accounts
receivable, this is then considered to be a risk factor that will heavily impact the audit
of receivables and inventories. In order to overcome this particular issue, necessary
communication in the organization is recommended to avoid misleading information
and to improve workflow.

C. Inherent risk is another risk factor that Carpets International (USA) has that will
impact the audit. The inherent risk factor affects Carpets International (USA) Limited
in certain ways that includes making personal computer equipment useless in nature,
possibly provide miscalculated results of old decorations, failure to meet potential
trading fluctuations due to inability to secure inventory, more competition between
stores that provide customers with large discounts, and the issue cannot be assessed
since the opportunity does not meet the criteria.

D. There should be a high level of materiality that needs to be applied on the financial
performance and positioning statement of Carpets International (USA) Limited, as
materiality is the quality of relevant composure or being totally significant. The same
criteria is always chosen because of sensitivity of the information, since this
information is to be used by most of the stakeholders of Carpets International (USA)
Limited.

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E. The following is a draft memo to audit partner:

To,
The Audit Partner
Las Vegas Group Corporation
Subject: Audit approach to be adopted
It is important to take into consideration the critical and monitoring approach
in order for Carpets International (USA) Limited to be able to access the values of
receivables, inventory, and land and buildings. In this approach, the accounting
standards required are relevance and materiality, these two accounting standards will
be used to make sure that the figures are spot on and are accurate. While the financial
performance and positioning statement are being made, the audit partner must take
into consideration that this approach should increase and maximise the company’s
potential.

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Section 2: Subsidiary 2 – Fashion Designers Limited

A. The basics in the commitment of audit of a group materiality level based upon the
estimated 31 December 1993 figures, have important factors to take into
consideration. The information gathered from the financial reports are as follows:

Particulars 31/12/1992 31/12/1993

Operating profit before tax $86974 $96170

Operating profit after tax $62254 $70200
Operating profit before abnormal $113220
Item before tax
Total current asset $531200 $602700
Total non-current asset $916040 $1056500
Total asset $1447240 $1659200
Total current liabilities $620330 $757740
Total equity $398470 $428780
Net asset $398470 $428780

The level of the branch-mark can be determined depending on the professional

judgement of the auditors:
1% of equity 4288 = (428708*0.01)
0.5% of total asset 8296 = (1659200*0.005)
5% of pre-tax income 5661 = (113220*0.05)

B. One needs to communicate with Fashion Designers Limited in order to request for
access to the model for investigating the work files of the company. There are certain
procedures that must be followed by XYZ & Co. when auditing work for operation
overseas:
- A questionnaire would be helpful in reviewing the summary of the findings.
- The findings must be discussed with the other auditors.
- Feedback from other auditors are is required in order to gather all the information
to form a more effective and detailed questionnaire.
- Another thing that the auditors must take into consideration is the nature and
timing to extend the audits procedures being performed.

C. The audit procedure that should be adopted to verify the carrying value of brand
names is the suitability of the Ted Baker PLC accounting agreement. In order to
verify the carrying amount of brand names, the following audit procedures must be
adopted:

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- The original contract must be examined to ensure that the terms and conditions are
pertaining to the purchases of these brand names.
- The actual payment must be vouched in regards to the purchase prices of these
brand names.
- The life-span of these brand names must be reviewed for the writing off of the
values.
- These brand names must be disclosed under the intangible asset of the asset side
of the balance sheet.

D. The auditors must audit the qualification report since the company did not provide
any amortization for these purchased brand names. In regards to the accounting
standards, an amortization is applied to all of the intangible assets except for
goodwill, since these intangible assets have costs which are measured reliably and
these are also the profitability of the future of economic benefits that will flow into
the company. In this scenario, the company did not comply with the treatment.

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Section 3: Subsidiary 3 – Computek Electronics Limited

A. The going concern assumption states that if the business is facing any sort of financial
difficulties, the organization will continue to operate in the future and will have no reason
stating that the business operations of the organization will have to come to an end. In this
case, the Computek Electronics Limited has issues that its business may have a going
concern problem because the company’s revenue is generated through its websites.
Company transactions that are processed online can be very risky due to the fact that the
sales of items have decreased. This decrease in sales indicates that the business operations
are not operating well. For instance, the one modem stock item which was released in 1997
was used excessively, therefore, not all was used. However, the revenue represents a source
of revenue. Another indication that the company may have a going concern problem is that
the management is in charge of overseeing the operations such as the recording of figures in
the financial statements. In order to evaluate the issue, the management needs to look into
the issue to identify the key areas of why the business is not operating well such as checking
to see if the workers of Computek are handling the operations properly or not, and also by
checking to see why the sales of the business is decreasing and finding ways to solve these
issues.

B. Audit assertions are also known as management assertions and financial assertions. These
assertions are made by the management and are responsible for preparing all of the
financial statements. This management was created to make implicit or explicit claims such
as assertions, thus, to also address the key audit assertions.
i) Trade debtors – the company should look into time period of the receivable
balances and the ones that are due, overdue or will not be paid at all. Seek reasons
for the balances that are outstanding for more than six months to a year. If these
balances are not likely to be paid, then it should be written off in the profit and loss
account.
ii) PC inventories – the business in particular should seek the inventory schedule to
keep track. There should be someone in charge to conduct a physical check on the
inventory, and must also check to ensure that obsolete material which are
inventories, cannot be sold or considered worthless to be recorded.
iii) Returns provision – companies should ensure to check the returns provision
utilization of the previous years and see how effective it has been, and must also see
that assumptions are used by the management for calculating returns on provision.
iv) Operating revenue – companies should monitor the invoices that were cut-off, and
should also check all the receipts that had been done for delivery. The companies
should also check all documents that are associated with shipment, and lastly, to
ensure that all sales recorded are in line with the company policy.

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C. According to the 1998 Computek Electronics Limited’s financial statement, the company was
in a poor financial position because it was exhorted by the business and will continue for the
next two years if there is no turnaround in the cash flows, revenue and profits for the
financial year as at 31 December 1999. Hence, this shows that the going concern problem is
a major issue that the business faces. Computek Electronics Limited may be at the risk of
turning into a high-risk company that takes part in deceitful activities such as controlling the
financial dates of the business. The auditors should use information from original and
reliable sources rather than copied records. Therefore, in order for the business to ensure
that all financial reports are free from error, the auditors need to follow the steps of testing
on details of transaction accounts.

D. The following are audit procedures that are used for disclosure:

- The repairs and supports account must be reviewed. The audit procedure treatment for
this type of error is to disclose the cost as capital, not as expenses.
- The records receivables must be confirmed. The audit procedure treatment for this type
of error is to disclose existence of accounts receivable.
- Costs with advanced payables are to be reconciled. The discloser provides the interests
incurred on the accounts that are to be expended in the financial statements.

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Section 4: Subsidiary 4 – Enron Electric Limited (EEL)

A. - Substantive procedures
- Substantive procedures
- Vouching (test of transaction)
- Verification (test of balances)
- Test of controls
- Test of controls

B. The general issues related to deciding whether to use a test of control approach or a
substantive approach is: that the main idea is both a test of controls and substantive
procedures which are all involved in the audit test to determine the effectiveness of the
clients internal control system. However, substantive procedures are also an audit test to
test the reasons of why all the items in the financial statement are recorded. Both the test
control approach and the substantive approach are vice versa to each other, meaning that if
the internal control in the business is effective, then the auditor in charge will only use the
test control approach but if it is not, then the auditor will use the substantive approach.

C. The risk assessment is in relation to the choice of approach because each approach has its
own definition and solution to each risk assessment present in the question.

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Section 5: Subsidiary 5 – General Machinery Company Limited

A. i) Land revaluation – in regards to this, it is treated as an extra-ordinary item and is part

of the operating profit. Under land revaluation, the profit should not be realized, it
should be only be realized when it has occurred.
ii) Inventory – only an expected consumption of two years should be valued in regards to
the auditor’s opinion. The price of $27,000 should be written-off. When a particular
inventory is being valued, it just creates extra profit and the investors are being misled
by the falsifying financial statements.
iii) capitalization of salaries and engineering cost – auditors should not only be satisfied
knowing that the productivity will improve but should also be satisfied that it can be
maintained because once it can be maintained, the costs are capitalized.

B. Auditors only provide an adverse report when the company’s assets have been violated,
hence, pledged for using the overdraft facility as well as the going concern assumption.

C. Auditors carry a heavy responsibility in regards to the information of any business.

Whenever there is a material uncertainty, auditors should be able to identify it because
it may result in an important doubt on the entity’s ability continuing as a going concern.
The going concern principle states that the company will continue to operate in the
foreseeable future. For instance, the General Machinery Company Limited has utilized
its $300,000 bank overdraft secured over its assets. Hence, the question is, should the
business continue to operate or no? Whenever there is sufficient information disclosed
in the financial statements, an unqualified opinion needs to be experienced by an
auditor. However, if there is adequate information disclosed in the financial statements,
then a qualified opinion is experienced. For part (A) above, the mistreatment of asset
values in order to increase the asset values has been shown. This is evident in the land
revaluation, there was no proper valuation to justify and provide evidence of the
$150,000. The changes made to the inventory policy was to have to organization’s
expenses capitalized and considered as an asset. To conclude, the audit team should
take into consideration the events or conditions that may exist because for a company
following the going concern may not be seen operating in the future.

D. The responsibility of the auditor for accompanying a financial report is to:

- Have arrangements with management in order to get information regarding the financial
report or to have better access to the financial revision of the documents that are within
the scope of the ISA.
- Have a discussion regarding the documents of its nature and the time period that is
expected to be issued.

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BIBLIOGRAPHY

Ifac.org. (2019). [online]

Available at: https://www.ifac.org/system/files/publications/files/ISA-720-The-Auditor's-
Responsibilities-Relating-to-Other-Information-in-Documents.pdf
[Accessed 14 Oct. 2019].

Pcaobus.org. (2019). AS 2110: Identifying and Assessing Risks of Material Misstatement. [online]
Available at: https://pcaobus.org/Standards/Auditing/Pages/AS2110.aspx

[Accessed 14 Oct. 2019].

The Balance Small Business. (2019). Defining a Going Concern in Business and the Involvement of
Auditors. [online]
Available at: https://www.thebalancesmb.com/going-concern-393294
[Accessed 14 Oct. 2019].

Iasplus.com. (2019). IAS 16 — Property, Plant and Equipment. [online]

Available at: https://www.iasplus.com/en/standards/ias/ias16
[Accessed 14 Oct. 2019].

Na.theiia.org. (2019). Pages   - Evaluating Corporate Social Responsibility and Sustainable

Development. [online]
Available at: https://na.theiia.org/standards-guidance/recommended-guidance/practice-
guides/Pages/Evaluating-Corporate-Social-Responsibility-and-Sustainable-Development-Practice-
Guide.aspx
[Accessed 14 Oct. 2019].

William, M., Glover, S. and Prawitt, D. (2019). Auditing and Assurance Services: A Systematic
Approach. [online] Lib.hpu.edu.vn.
Available at: https://lib.hpu.edu.vn/handle/123456789/22013
[Accessed 14 Oct. 2019].

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