ACCT 3000: Pluto Ltd (Pluto) Manufactures Generators for Domestic Users - Auditing Assessment Answers

Assignment 2 – Auditing ACCT 3000

1. Tech Ltd (Tech) runs a chain of superstores in Australia. Tech highly depends on the electronic data interchange system to manage their transaction processes with the suppliers. Each individual store can raise their own inventory requisition without authorisation from the central purchase department and as a result saves them a lot of time. Mr. Abbot is the new CEO, who joined Tech three months ago. He used to work in the fashion industry and hence he is quite confident that Tech’s superstores sales can be increased by introducing clothing labels in the stores.
2. Pluto Ltd (Pluto) manufactures generators for domestic users. Seven years ago Pluto manufactured a generator far superior to any of its competitors at half the price. It has therefore dominated the market over the past few years. However, recently one of Pluto’s main competitors introduced a new generator to the market. Based on the new competitor’s latest advertisements, you are aware that the competitor’s generator can produce electricity at twice the amount of Pluto’s generator by spending same amount of fuel and hence is superior to Pluto’s generator. However, Pluto’s CEO is quite optimistic about the whole situation. He told you that a pricing strategy will soon be implemented to fend off the new competitor and make redundant some employees to remain competitive.
3. A team of internal auditors has been hired 10 months ago by Saturn Ltd (Saturn) to improve on its existing internal control, which has been relied on for the past 10 years. Based on your experience, the revamping process should only take about 8 months. It came to your attention that only a short while after the employment of the internal auditors, the CEO of Saturn experienced severe personal financial difficulty. You also find that the process of revamping the internal control has been dragging because the CEO kept on declining the internal auditors’ suggestions for improvement. The accountant of Saturn has been notorious for finding gaps in the legislations in order to make its clients’ financial statements look presentable as desired by the clients themselves. In the past few years, Saturn has always been required by the Australian Tax Office to provide additional supporting information after the lodgement of its tax returns.

Required

For each of the above independent situations, answer the following:

(a) Identify and discuss why the above situation represents a risk.

(b) By applying auditing knowledge, identify the main account or group of accounts affectedin the audit plan by the risks identified in (a).

(c) Identify how the audit plan will be affected by the risks and recommend specific auditprocedures to address these risks.

Answer 1

a)At present there is no need of any authorization from the central purchase department. Due to this reason there appears a weakness in the internal control system of the company and there exists a control risk. Individual stores can raise undesired inventory requisitions and this is a very serious issues, thus this poses a high control risk. As the control risk is high, detection risk needs to be on the lower side.

b) The accounts which are directly affected are inventory or purchase account, and accounts payables. Besides that cost of goods sold may also be affected. Raising an unnecessary inventory requisition may results in accumulation of undesired inventory and this will slow down the inventory turnover (AUASB 2009). Besides that it will also block the working capital.

c)Auditor needs to make changes in audit procedures. Now a higher sample size might be required, to cross check where there was actually a need of inventory. However there will still be a detection risk, that the audit procedures may not find the errors and frauds in accounting system. Hence it is necessary to ask the management to make improvements in the internal control system. It may be noted that whether there exists a sufficient control at each individual store to inventory purchase. If no such control system exists at individual stores also, that it further increases the control risk.

Answer 2

a)The business of audit client may face high competition in coming months. Besides that top management has hinted that some of the employees may be made redundant. Thus there is inherent risk that client may face a going concern issues (Baldauf, Steller & Steckel 2015). It may be noted that the inherent risk is much more the companies which are facing financing financial difficulties or facing high competition. Pluto ltd is facing a high competition and thus it has a high inherent risk. Facts of the case does not provided any data about the internal control system of Pluto.

b)In this situation, there is need to perform a close scrutiny of the employee expenses, salary payable, short term liabilities, cash flow statement and creditors balance. When a firm faces going concern issues, it is unable to clear its dues. However in the present case there is no such fact which indicates a doubt for going concern ability of Pluto (AUASB 2013).

c)Auditor should focus more on the short term liabilities and long term liabilities. There may be a detailed vouching of the liability accounts. If the internal control system of the Pluto is strong than there may not be need to increase the audit sample size and size of the audit team.

Answer 3

a)The fact of the case indicates serious inherent and control risks. The business attitude and environment is not professional and there is high inherent risk due to that. As the internal control system is not strong there is also a strong control risk (Gramling 2012). As the internal control system is going a change, there are high chances that at present neither new nor old internal control system is present.

b)Most of the accounts pay be affected in this situation, particularly cash, self-generated and intangible assets and short term liabilities. As due to high inherent and control risk, auditor needs a low detection risk, there is need to audit almost each and every transaction to the extent it is practically possible.

c)Auditor should increase the sample size and increase the size of audit team so that more and more transactions can be audited. As inherent risk and control risk are on the higher side, auditor needs to maintain a lower detection risk. This can be done by increasing the sample size and size of audit team. Obviously this will also increase the cost of audit and this cost has to be reimbursed by the client.