1. Hans Ltd, a reporting entity, uses last-in first-out in respect of valuation of closing inventories, which is one of the most significant balance sheet accounts. The difference between first-in first-out and
last-in first-out has an effect on the closing inventory balance.
Required:
What would you do in this case? What type of audit opinion would you issue? Explain. (5 marks)
2. The financial year of Adrian Ltd ended on 30 June 201X. You signed the auditor’s report on 25 August and the financial statements were issued on 10 September.
On 1 August, a lawsuit was filed against Adrian Ltd for damages that allegedly occurred before 30 June. In the opinion of the company’s lawyers, there is a danger of a significant loss.
Required:
What is your responsibility in relation to the above event? Explain. (5 marks)
Question 4 (12 marks)
Roma Ltd is a well-known Australian retailer.
The company has branches across Australia. One of its branches is managed by the wife of one of Roma Ltd’s directors.
This year, the company’s senior management has offered large bonuses to managers to meet financial targets. The directors have reported that it has been another good year for the organisation and that they
expect the coming year to be successful. However, the whole retail industry has experienced some economic difficulties lately.
You are planning the audit of Roma Ltd for the year ended 30 June 2018.
Question 4 – continued
The draft income statement for 2018 together with audited figures for 2017 is given below:
30 June 2017 30 June 2018
Income statement (actual ) (draft)
Revenue $1 234 280 $1 073 988
Cost of sales (605 576) (644 374)
Gross profit 628 704 429 614
Other income 14 372 —
Operating expenses
Administration (184 128) (190 876)
Selling and distribution (159 866) (101 150)
Finance costs (15 246) (14 868)
Profit/(loss) before tax 283 836 122 720
Required:
Based on the above information, discuss the issues that you will consider in your audit planning. Show all supporting calculations. (12 marks)
Question 5 (8 + 4 + 4 + 4 + 4 + 6 = 30 marks)
1. You are in the planning stage of the audit of Swans Ltd.
The company’s revenue for the year is $50 million and profits are $6 million.
A long-standing customer has made a claim against Swans Ltd for breach of contract. They claim that products were not delivered in accordance with the contract and this led to them having to engage other
contractors to carry out the work at great expense. The customer is suing the company for damages of $2 million.
So far, you have collected mainly electronic evidence relevant to the case.
Required: Describe substantive procedures that would provide sufficient appropriate evidence in relation to the above issue. (8 marks)
2. Briefly discuss two benefits to the auditor from using statistical sampling. (4 marks)
3. Briefly explain the difference between selective testing and stratification in selecting items for audit testing. (4 marks)
4. What is your view on “giving the role of appointing auditors to ASIC”? Explain. (4 marks)
Question 5 – continued
5. Explain what is meant by ‘cut-off’ and why it is important to auditors in establishing the fairness of financial statements. (4 marks)
6. Briefly explain the benefits and the limitations of a financial report audit. (6 marks)
Question 6 (13 marks)
CORE- 8 is an exclusive members-based health club. The club income comes from subscriptions from club members as well as charging for equipment rentals.
You are planning the audit for the year ended 30 June 2018 and are considering the completeness of income. You have noticed some irregularities in invoicing and cash collection procedures.
Club membership and subscription details are as follows:
According to the last annual report, the club had 320 members. This financial year, while 22 members did not renew their membership, the club gained 42 new members who signed up from 1 July 2017. In addition
to this, 21 new members joined halfway through the year and 10 new members joined in the last 3 months of the year.
Subscriptions are due for the year from July to June. For the year 2018, the subscription was set at $2 000 per member.
Equipment rentals are made to both members and non-members. The rentals amount to $500 per month per person. The rental accounts remain unpaid for 26 non-members. All overdue accounts are charged an interest
rate of 10% per year.
Required:
Explain how analytical procedures can be used to audit revenue. Show all supporting calculations. (13 marks)
