SWINBURNE UNIVERSITY OF TECHNOLOGY ACC80003 COMPANY AUDITING FACULTY OF BUSINESS & LAW Final Individual Assessment (Beta) - Semester 1, 2020 Page 1 THERE ARE SIX ISSUES TO BE ADDRESSED – RESPOND TO...

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SWINBURNE UNIVERSITY OF TECHNOLOGY ACC80003 COMPANY AUDITING FACULTY OF BUSINESS & LAW Final Individual Assessment (Beta) - Semester 1, 2020 Page 1 THERE ARE SIX ISSUES TO BE ADDRESSED – RESPOND TO EACH ISSUE ON A NEW PAGE. Your firm has been engaged as auditors of BETA Limited. Using the information for BETA Limited for the year ended 31 March 2020 that follows, you are required to use your theoretical and application knowledge (that is how you would apply your auditing knowledge) address the following issues pertaining to Alpha Limited and its audit: 1) Evaluate the strengths and weaknesses of Beta’s Control environment and identifying three strengths and three weaknesses. [(3 x 1) + (3 x 1) = 6 marks] 2) Identify at least two internal controls over the purchase-inventory - payables system and for each of the two you identify: (i) state the audit assertion to which the control relates; and (ii) describe an audit procedure (audit test) you would perform to determine whether the controls are operating effectively [ (2x 2) + (2 x 2) + (2 x 2) = 12 marks] 3) Explain the rationale for conducting substantive tests of balances for Accounts Receivable and in addition: (i) identify the assertions at greatest risk; and (ii) Describe at least two substantive procedures to obtain sufficient appropriate evidence. [4 + (2 x 2 marks) = 8 marks] 4) List the factors that indicate Beta Limited may have a going concern problem and consider if there are any mitigating factors. [2 + 2 = 48 marks] SWINBURNE UNIVERSITY OF TECHNOLOGY ACC80003 COMPANY AUDITING FACULTY OF BUSINESS & LAW Final Individual Assessment (Beta) - Semester 1, 2020 Page 2 5) Following the health alert in March 2020, the COVID-19 pandemic resulted in activities being reduced with only on-line sales. At the end of May 2020, the impact of COVID-19 resulted in the bankruptcy of a major customer. The customer owed the company $1.1 million at 31 March 2020 against which an adjustment of $0.1 million had already been made. Required: (i) Discuss the need for COVID-19 pandemic disclosures in the 31 March 2020 financial report; (ii) Explain whether the bankruptcy of a small customer is an adjusting or non- adjusting subsequent event and justify your response. (iii) How would your response be different if the customer owed the company $1 million for sales you made on 2 April 2020. [2 + (2 x2) + 4 = 10 marks] 6) In making your recommendations on the form of the auditors opinion: (i) Describe the circumstances the auditors opinion would be modified; (ii) Describe the types of unmodified and modified auditors opinion an auditor may issue in each circumstance; (iii) Describe the type of auditor’s opinion you would recommend for the year ended 31 March 2020 together with your reasons. [(2 x 1) + (4 x 1) + (2 x 2) = 10 marks] SWINBURNE UNIVERSITY OF TECHNOLOGY ACC80003 COMPANY AUDITING FACULTY OF BUSINESS & LAW Final Individual Assessment (Beta) - Semester 1, 2020 Page 3 Client background information The company was established in 2015. The Company’s Chairman has significant industry experience and is highly respected among peers. The Company has in place: a) Code of ethics which is enforced to maintain the company’s integrity and ethical values b) The executive recruitment process is outsourced and is rigorous in order to maintain a high level of competence. c) The Audit and Risk Committee (ARC) is independent from management and interacts with external audit. However the ARC has only met once since the last audit in 2019. d) Management is control conscious and has implemented all improvements recommended by the external auditors in the past. e) The organisational structure is aligned to the corporate objectives. f) The Human Resources (HR) section has detailed policies and procedures over staff recruitment, induction, performance management and compensation. However, at the beginning of 2019 the HR Manager left and has not been replaced. It is unclear as to whether new staff have received training. g) The Information system (IT) is tightly controlled with user names and passwords that expire every month. The IT servers are maintained in a secure locked room. h) The company has had five different Chief Finance Officers in the last two years. Accounting systems: General notes General ledger is maintained on MYOB. Cash at bank is reconciled every week and reviewed by the Chief Finance Officer Cash flow is monitored on a daily basis and reported to the executive. Accounts receivable subsidiary ledger is usually reconciled to the general ledger control account. However, during the year, there were issues with a customer which had delayed the review of debtors ageing and reconciliations by six months. A Perpetual inventory system is maintained; there is half yearly stocktakes after which a detailed reconciliation is performed. The Inventory manager is very experienced and maintains all documentation in a structured file. Intellectual Property Register is maintained by the executive who closely monitor costs in this area Accounts Payable subsidiary ledger is supposed to be maintained and reconciled every month by the Accounts Payable Officer. The staff member is new and is unclear as to how to perform reconciliations. The Payroll system is maintained on an excel spread-sheet. SWINBURNE UNIVERSITY OF TECHNOLOGY ACC80003 COMPANY AUDITING FACULTY OF BUSINESS & LAW Final Individual Assessment (Beta) - Semester 1, 2020 Page 4 Narrative of purchase-inventory - payables system All purchases require a purchase requisition which is sent to the purchasing department which makes all purchases for the company. The purchasing department prepares a purchase order, obtains approval and sends it to the approved suppliers. There is a master file detailing all approved suppliers. All inventory shipment is received with a Goods Received Advice (GRA). The Inventory Manager reconciles the stock quantities received with the GRA prior to update of the perpetual inventory system. The GRA is sent to the Accounts Payable Officer. All supplier invoices are received by Account Payable where the invoices are checked for arithmetic accuracy and initialled. The Accounts Payable Officer matches the GRA with the approved supplier invoice and the purchase order. Any unmatched supplier invoices are investigated. The supplier invoice is account coded to both the subsidiary ledger and the general ledger by the data processor (using a chart of accounts). The account coding is checked by the Accounts Payable Officer before the invoices are posted to the purchase journal, the Accounts Payable subsidiary ledger and the general ledger. Month end procedures include: (i) reconciliation of Accounts Payable subsidiary ledger; (ii) review of unmatched supplier invoices; and (iii) approval of payments of the prior months matched supplier invoices. Other systems – Revenue Receipts & Receivables; Payroll The narrative for other systems is not documented. Pre-arranged timelines between the auditors and management are as follow: # Deliverables Deadline 1. AGM 31 August 2020 2. Directors Report 1 August 2020 3. Auditors report 26 July 2020 4. Board Adoption of Financial report 26 July 2020 5. Audit and Risk Committee meeting to recommend adoption of Financial report by Board 22 July 2020 6. Finalised financial report 10 July 2020 7. Draft financial report 19 June 2020 SWINBURNE UNIVERSITY OF TECHNOLOGY ACC80003 COMPANY AUDITING FACULTY OF BUSINESS & LAW Final Individual Assessment (Beta) - Semester 1, 2020 Page 5 Extract from DRAFT Financial report BETA Limited STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR YEAR ENDED 31 MARCH 2020 31-Mar-20 31-Mar-19 $000's $000's Revenue 1,165 791 Cost of Sales (1,000) (700) Administrative expenses (675) (557) Employee benefit expenses (684) (343) Amortisation expense (540) (540) Consultant expenses (3,093) (3,240) Depreciation expense (9) (7) Share-based payments expense (587) (1,359) Financial and compliance expenses (283) (310) Software development expenses (4,336) (2,991) Marketing and promotional expenses (731) (714) Patent costs (42) (61) Legal expenses (162) (109) Travel and accommodation expenses (580) (575) Loss before income tax (11,557) (10,715) Income tax expense 0 0 Loss for the year (11,557) (10,715) Other comprehensive loss 0 0 Total comprehensive loss for the year (11,557) (10,715) SWINBURNE UNIVERSITY OF TECHNOLOGY ACC80003 COMPANY AUDITING FACULTY OF BUSINESS & LAW Final Individual Assessment (Beta) - Semester 1, 2020 Page 6 BETA Limited STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH 2020 31-Mar-20 31-Mar-19 $000's $000's CURRENT ASSETS Cash and cash equivalents 2,298 10,766 Inventory 3,000 2,000 Receivables 2,470 2,071 Other receivables 286 265 TOTAL CURRENT ASSETS 8,054 15,102 NON-CURRENT ASSETS Intellectual property 3,465 4,005 Property, plant and equipment 35 20 TOTAL NON-CURRENT ASSETS 3,500 4,025 TOTAL ASSETS 11,554 19,127 CURRENT LIABILITIES Trade and other payables 6,000 5,000 Employee provisions 53 25 TOTAL CURRENT LIABILITIES 6,053 5,025 TOTAL LIABILITIES 6,053 5,025 NET ASSETS 5,501 14,102 EQUITY Issued capital 32,382 30,048 Share based payments reserve 4,986 4,363 Accumulated Losses (31,867) (20,309) TOTAL EQUITY 5