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HI6026
AUDIT, ASSURANCE AND COMPLIANCE FINAL ASSESSMENT
TRIMESTER TR3, 2021

Assessment Weight: 50 total marks

Instructions:
 All questionsmust be answered by using the answer boxes provided in this paper.
 Completed answers must be submitted to Blackboard by the published due date
and time.

Submission instructions are at the end of this paper.

Purpose:
This assessment consists of six (6) questions and is designed to assess your level of
knowledge of the key topics covered in this unit

HI6026Final Assessment T3 2021

Question 1 (7 marks)

LockyPrivetra is considering investing in Sea Lounge Ltd (SLL), a large cruise ship company. Locky
has reviewed SLLL's 2020 audited financial report, which shows a net profit of $700 000 and a net
asset position of $3 million. The auditor's report is unmodified, stating that in the auditor's
opinion, the financial report gives a true and fair view of the entity's financial performance and
financial position. As a result, Locky is now confident about her proposed investment in SLL, as
she believes that the auditor's report provides absolute assurance about the accuracy of the
financial report, including the healthy profit and net asset figures, and there is no chance of the
company going bankrupt. Further, while she is aware of the management frauds that have
occurred in some companies in recent years, she is comforted by the fact that she believes that
the unmodified auditor's report means that no fraud has occurred within SLL.

Required:
Explain the situation and implications of the reasonable or absolute assurance and unmodified
Auditor’s opinion. Do you think this company should achieve absolute assurance and unmodified
Auditor’s opinion?

ANSWER: ** Answer box will enlarge as you type

No, simply giving an audit report as a unmodified assessment does not guarantee that the
accounts are fraud-free. The expectation gap explains the disparity between Locky's expectations
as well as the auditor's function and obligation. There is a disparity among Locky's impression of
the auditor's position and duty and the real function and obligations of the auditor. The user
thought that the auditor will avoid all frauds as well as check all transactions to ensure that they
were not fraudulent. However, this is not the case. The auditors get a small period of time to do
the audit (Romaniuc et al.2022, p190(1)). As a result, they are unable to verify single
transaction. They use a practise known as transaction sampling and verification. As a result, the
auditors are unable to guarantee total confidence. The auditors give reasonable confidence that
the financial statements are error-free.
Auditors often depend on management for a lot of the specifics and data. As a result,
determining if the information is accurate or not is not often easy, and it must occasionally be
taken too seriously. If a company's management is unethical and tries to cheat the system, it's
likely that perhaps the auditor might overlook it because management could generate data to
substantiate what they claimed.

HI6026Final Assessment T3 2021

Question 2 (7 marks)

Ronald Partners is negotiating with its audit client (Maxim Industries) for its upcoming audit fees.
Maxim Industries' audit partner offers the company a discounted audit fee if it also gives all its
tax consulting work to the firm.
Required
Explain whether the managing partner at Ronald Partners should agree to approve the deal
negotiated by the partner in charge of Maxim Industries' audit.

ANSWER:
No, Ronald Partners' managing partner must not approve the contract negotiated by Mazim's
managing partner. The cause for this is because the auditor's independence appears to be in
jeopardy. APES 110.100.12 and APES 110.200.3 show the same behaviour.
Moreover it includes:
Intimidation Threat: The auditor may be scared by the prospect of losing employment if the
charge is not revised. It would have an effect on their objectivity.
Self-review threat: If the auditor accepts the reduced charge for further tax advice. They may
advise businesses on numerous metrics, which they must later assess as auditors, therefore they
cannot be supposed to be objective while examining their respective work.
Self-interest threats: The auditor like to expand the company, thus getting tax consulting
employment for the auditor would have been in their best interests ( Li et al.2019,p5(1)).
Therefore, if an auditor is providing tax counselling, they will assist the firm in reporting lower
income and exaggerated costs in order to save money. This would be in direct contrast with their
auditing responsibilities, which require them to view the accurate and fair image of the books. As
a result, their independence is compromised.
Advocacy threat: Like a tax consultant, an auditor might well be forced to promote a client's
interest to the point that their impartiality is affected.

By analysing all the above threats, Ronald Partner must decline the agreement.

HI6026Final Assessment T3 2021

Question 3 (7marks)
All companies are required to disclose in their annual reports the amounts paid to their auditors
for both the financial report audit and any other services performed for the company.

Required
Obtain a copy of a recent annual report (most companies make their annual reports available on
the company's website) and find the disclosures explaining the amounts paid to auditors. How
much was the auditor paid for the audit, non-assurance, or other services?

ANSWER:
I obtained a copy of ACE Wi-Fi annual report in order to conduct an evaluation of the fees paid
for audit, non-assurance, as well as other services.
The below data has been obtained and the same is stated in the disclosure:

2021 (in thousands) 2020 (in thousands)

Audit and review of group 695 627
financial statements
Audit and review of subsidiary 26 26
financial statements
Others assurance services 10 7
Total remuneration 731 660

In 2021, 721000 has been paid to the auditors for their audit services and 10,000 for additional
assurance services, as shown in the chart above ( Atmadja and Saputra, 2018, p22(5)). The
other assurance charges in 2021 has been 10000 and in 2020 the same has been 7000. The audit
charge has been increased from the previous year. The firm also used the services of an auditor
i.e,KPMG in certain tax concerns associated with the acquisition of Good Guys, although the
former owner of Good Guys is responsible for paying the fees.

HI6026Final Assessment T3 2021

Question 4 (7 marks)
You are the auditor of Birham Ltd and are in the process of completing the audit for the year
ended 30 June 2020.

There are two outstanding matters highlighted in your firm's completion documentation:

(i) You have heard rumours that Birham Ltd isready to merge with a competitor. If correct,
this may have disclosure implications. Management advises you that although they have
had several meetings with the competitor's management in question, no such merger is
currently planned. Management hasoffered to make written representations confirming
their intentions.

(ii) The invoices to support the cost of a significant purchase of plant and machinery cannot be
traced. Management hasoffered to make written representations confirming the cost of
the plant and machinery.

Required:

(a) What is the purpose of a management representation letter? (3 marks)

(b) Are the management's written representations sufficient to resolve the two outstanding
matters noted above? Please justify your answer. (4 marks)

ANSWER:
a) A management representation letter is written by the firm's auditors as well as approved
by the company's top key management, such as the Chief executive Officer an Chief Financial
Officer. The goal is essentially to delegate some of the financial statement duty to
management. First before auditors offer their view on the accounting information, the
management representation letter is normally signed. Although this doesn't free the auditors
of their auditing obligations and responsibilities, if a few items turn out to be misrepresented,

HI6026Final Assessment T3 2021

 management might well be held responsible for these kind of misstatements based on a
management representation letter. Overall, it is used as part of the audit proof.

b) Management representation letters can also be used to fix unresolved issues by handing
over control to management. But, the auditors must still take responsibility for some
concerns.

i) Rumors cannot be used to form the foundation of an auditor's report. I reasoned that the
auditor should look into it. The first audit proof must be obtaining a management statement
on merging prospects with a key rival, because this would have been a source of substantial
information, coupled with meeting notes ( Mökander and Floridi, 2021, p31(2) ). As a result,
if Management Representation is required, it should have been examined.

ii) The management representation in the situation of misplaced receipts for purchases
of major plant and machinery has not been appear to be relevant. An auditor must examine
the financial statements as well as gather the relevant data in order to develop a judgement
on whether they are free of serious misleading statements. Because the asset acquisition in
issue is significantly important, it is inevitable to collect invoices as well as other
documentation proving the purchase of an asset and the amount of that asset, which must be
recorded on the audit report. Furthermore, if receipts could not be identified in relation to
the acquisition of substantial equipment and machinery, the company's accounting records
are called into doubt. In this case, management representation is insufficient to correct the
problem.

Question 5 (11 marks)

Healesville Sanctuary is a family-owned and operated wildlife park located in Melbourne.
Healesville Sanctuary has more than 150 animal species, some of which are loaned from overseas
animal parks. Healesville Sanctuary has two divisions for selling merchandise: a retail operation
that sells food, beverages, shirts, souvenirs and other novelties to visitors within the park, and a
wholesale operation that sells toys to department stores.
The following management figures are relevant for the year ended 30 June 2020:

HI6026Final Assessment T3 2021

 Total assets 69 120 000
Total current assets 34 560 000
Inventories 28 800 000
Net assets 51 840 000
Profit after income tax 9 792 000
The company tax rate is 30 per cent.

During the conduct of the audit, the following items of interest were noted by the audit team:
(i) Due to an electrical contractor accidentally drilling through a power cable, all invoices for
items sold through HealesvilleSanctuary's wholesale operations on 22 and 23 June had to be
manually prepared. Many of the manual invoices from this period omitted some of the items that
were sold to department stores. The total value of the omitted items was $30 666 (2.75 marks).
(ii) Healesville Sanctuary lodged its tax return late and received a substantial fine. Payment of the
fine was not made by the required date, and liability for the amount has not been recorded. The
fine was $300 000 (2.75 marks).
(iii) Some of the toy crocodile products distributed to department stores by
HealesvilleSanctuary's wholesale operations were incorrectly priced due to a special one-off
'Crocodile Creature Month'discount not being reflected in the price the department stores were
charged. These incorrect sales were made on 23 June 2018. The total misstatement arising from
the incorrect sales was $14 261 (2.75 marks).
(iv) A number of senior executives flew to an animal conference in Melbourne. From the airport,
they hired cars and parked outside the hotel for three nights, ignoring 'No parking'signs. The
resulting parking fines were charged against HealesvilleSanctuary's meals and entertainment
account. The parking fines, totalling $1053, were all due before 30 June 2020 (2.75 marks).
Required:
For each of the individual misstatements listed, explain whether the item should be reported to
management or is clearly trivial.

ANSWER:
When determining whether or not a transaction must be disclosed to management, consider
how important the transaction is to the company's overall financial statements. The same may
be said for the percentage of revenue or the percentage of assets. If the sum is significant, the

HI6026Final Assessment T3 2021

relevance levels are too high, and it must be communicated to management. The cause for this is
that a large volume of material transactions might mislead financial statements, giving an
inaccurate image of the situation.

(i) The excluded items have a total sum of $30,666, that may be evaluated to net profit. Because
the company's net profit is $9,792,000, the missing items account for 0.31 percent of the net
profit. As a result, it has no meaningful influence on the financial statements and could be
omitted from management reporting.

(ii) In the above case scenario, there is a tax liability of amount 300,000 that has been not paid.
Moreover t he same thing is true for current liabilities, which must be matched to the company's
current assets (Shneiderman, 2020, p10(4)). The existing assets are utilised to pay off the
current debts. There is no need to record the amount because it is less than 1% of the existing
liabilities.

(iii) Missing sales amount to 14,261 dollars, or 0.14 percent of net revenue. The quantity is
likewise less than 1%, thus it has no bearing on the firm. As a result, it is not required to be
disclosed and communicated to management.

(iv) The parking fine of $103 is little to the company's financials and would not affect the
accurate and fair image of the financial statements, thus it doesn't have to be disclosed and
communicated to the management.

Question 6 (11 marks)

Oscar Wylee Women Glass Ltd is a supplier of fashion women sunglasses. The audit report for the
year ended 30 June 2021 was signed on 8 August 2021, and the financial report was mailed to
shareholders on 12 August.

Consider the following independent events. Assume that each event is material.

HI6026Final Assessment T3 2021

 i. On 5 July, Oscar Wylee entered into a new contract to deliver sunglasses to Specsavers, a
new major department store. The contract was similar to other previously contracted
contracts(2.75 marks).

ii. Oscar Wylee has financed huge funds in developing a new type of solidsunglasses lens.
On 8 July, Oscar Wylee applied for a patent for the lens, only to identify that a competitor
had lodged a similar application on 25 June. The granting of Oscar Wylee application is
now ofmajor concern (2.75 marks).

iii. One of Oscar Wylee major customers, Phoenix Pty Ltd, suffered a fire on 23 July. Since
Phoenix Pty Ltd was uninsured, it is unlikely that their accounts receivable balance will be
paid (2.75 marks).

iv. On 27 July, a well-known financial planner advised his clients not to invest in Oscar Wylee
due to poor long-term growth prospects. The market price for Oscar
WyleeAccessories'shares subsequently declined by 50% (2.75 marks).
Required:
For each of the individual misstatements listed, explain auditors' responsibility and consequence
auditing report.

ANSWER:
In relation to the foregoing, the assessment of the auitor's duty and effects identifies the
occurrences.

i) In context of this situation, it is the operation's primary obligation to assess Oscar Wylee's
connection with Specsavers. The relationship review would offer relevant information about the
contract's motivation and its influence on accounting records.

ii) In the facts of this case, the auditor's principal role is to ensure that the organization's
stakeholders as well as investors are fully informed on the issues ( Al-Dhubaibi, 2020, p6(3)).
This would guarantee corporate operations are transparent, as well as offer sufficient
information to prospective investors in order for them to make decisions on making investment.

HI6026Final Assessment T3 2021

iii) In this case, the auditor should first comprehend the connection between the company and
its customers, as well as ensure that bad debt is properly disclosed in the financial accounts
when it occurs.

iv) Finally, it is the operation's primary obligation to investigate the different causes of a drop in
stock price, as well as to ensure that the organization's management accurately reflects a large
drop in stock price in its accounting records.

References
Romaniuc, R., Dubois, D., Dimant, E., Lupusor, A. and Prohnitchi, V., 2022. Understanding

cross-cultural differences in peer reporting practices: evidence from tax evasion games in

Moldova and France. Public Choice, 190(1), pp.127-147.

Li, Y., Huo, Y., Yu, L. and Wang, J., 2019. Quality control and nonclinical research on CAR-T

cell products: general principles and key issues. Engineering, 5(1), pp.122-131.

Atmadja, A.T. and Saputra, K.A.K., 2018. The influence of role conflict, complexity of

assignment, role obscurity and locus of control on internal auditor

performance. Academy of Accounting and Financial Studies Journal, 22(5), pp.1-5.

Mökander, J. and Floridi, L., 2021. Ethics-based auditing to develop trustworthy AI. Minds

and Machines, 31(2), pp.323-327.

Shneiderman, B., 2020. Bridging the gap between ethics and practice: guidelines for

reliable, safe, and trustworthy human-centered AI systems. ACM Transactions on

Interactive Intelligent Systems (TiiS), 10(4), pp.1-31.

HI6026Final Assessment T3 2021

Al-Dhubaibi, A., 2020. Auditors’ responsibility for fraud detection: Views of auditors,

preparers, and users of financial statements in Saudi Arabia. Accounting, 6(3), pp.279-

290.

END OF FINAL ASSESSMENT

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HI6026Final Assessment T3 2021