BAC313 Audit Theory and Assurance | My Assignment Tutor

Assessment 2 BAC313 Audit Theory and Assurance 2021 Semester 1BAC313 Audit Theory and AssuranceAssessment Task – Assessment 2 – 30% weightageSemester 1 2021Submission: Using the Turnitin link on MoodleDue Date: Week 10 16th May 2021 by 11pmStudents are to answer all of the following four (4) parts (Total max. 2,000 words)Part A: Identifying audit risk and audit proceduresPart B: Identify business riskPart C: Identifying and testing effective internal controlsPart D: Identify weak internal controls in the payroll accountStudents will need to use the background information, Internal Control information and the ratio analysisprovided below to answer each part asked in the required sectionBackground informationYou are a manager in the audit division at Anderson, Frazer and Mutter (AFM), an accounting firm with officesthroughout the major regional centres of Western Australia, Victoria and New South Wales. Although amedium sized firm by national standards, AFM is the second largest regional accounting firm in Australia. Mostof AFM’s audit clients are in the agriculture, mining, manufacturing and property industries. All of thoseindustries are currently under pressure, either from a downturn in commodity prices or fierce competitionfrom overseas competitors.You are gathering information to prepare the audit plan of Blasting, Drilling and Earthmovers Limited (BDE), acompany that leases and services large mining machinery to several of the gold mines in the region. Thefollowing information has been gathered to date.Principle activities of BDE:• mining machine leasing, mainly to gold, coal and iron ore miners.• machine maintenance, and• contracting machine operators to the mines.BDE was incorporated as a private company in 1979 importing and maintaining mining equipment. It survivedthe downturn in mining in 1982/3 operating profitably as a private company until it experienced a recentmining boom in 2018. At that point the directors decided that the company needed an injection of fundsenabling the company to capitalise on the need for extensive new machinery in the mining sector. Acombination of share issue and bank finance provided the capital to expand and update the machines that BDEcould offer the industry.The directors are:• Mr. Matthew Collins, Chairman.• Mr David Long, Chief Executive Officer.• Ms Cynthia Brown.• Mr Jeff Ferguson.• Mr Patrick Singh.Assessment 2 BAC313 Audit Theory and Assurance 2021 Semester 1Mr Jeff Ferguson and Mr Patrick Singh are independent, non-executive directors and have been directors since2010. Mr David Long was recently hired as CEO, coming to the firm with extensive experience in the miningindustry. The other two executive directors were employed by the company prior to its public share issue.AFM has placed reliance on most internal controls based on satisfactory results of extensive tests of control.Recent discussion with the client revealed that there have been changes to the systems and software used torecord and pay contractors. No other changes to the internal control system have been made since the lastaudit when the permanent file was updated. In past audits reliance had been placed on the internal controls,thus reducing the amount of substantive testing.AFM has placed reliance on most internal controls based on satisfactory results of extensive tests of control.Recent discussions with the client revealed that there have been changes to the systems and software used torecord and pay contractors. No other changes to the internal control system have been made since the lastaudit when the permanent file was updated. In past audits reliance had been placed on the internal controlsthus reducing the amount of substantive testing.Over the past 18 months there has been a decline in the demand for the machinery already owned and anincreased demand for computer controlled equipment and for contract staff to maintain this equipment. As aresult, BDE has had to increase borrowings to finance the new equipment required. You have walked aroundthe main warehouse and yard and noticed that there are several large used mining machines standing idle inthe yard.Ms Leanne Hopkins, the audit partner for BML, has identified several areas she is concerned about and wantsyou to report back to her about these before you complete the audit program. She has advised you about afew changes in the metals market that may have an impact on BML’s operations. The metals market hasfluctuated with:• gold dropping 24.95% since 2015 but has risen 9.25% over the past year.• iron ore dropping 43.78% since 2015 and dropping 9.71% in the past year.• coal rising 9.99% since 2015 and rising 18.35% in the past year.The areas and accounts of interest for the preliminary audit assessment are:• Plant and Equipment.• Machinery Finance Liabilities.• Accounts Receivable.• Lease Income.Ratios extracted from an unaudited set of financial reports at 31 December 2020 together with auditedcomparatives for the year ended 31 December 2019 and the industry averages are set out below for yourreview. Ratio2020 (Unaudited)2019 (Audited)Industry AverageReturn on equity %152226Profit/lease income %812No dataReturn on total assets %141720Gross margin %252530Net profit margin %14.518.520.27Times interest earned1.93.514.10Days in accounts receivables6253.45Current ratio: 11.021.541.66Quick asset ratio: 10.70.780.82Debt to equity ratio: 11.051.351.5 Assessment 2 BAC313 Audit Theory and Assurance 2021 Semester 1Internal Control Information:The Financial Controller for BDE has provided you with the latest internal control manual which includes detailsof the controls over contract payments. As the system is new you also walk through the system checking thatthe walkthrough matches the information in the internal control manual.Details of the controls over contract payments evidenced in your walkthrough are listed below:➢ BDE tenders for a contract to lease a number of machines and provide the operator at a set price over acertain period.➢ When the contract is accepted an accounts receivable account is set up by the accountant responsible forthe machine contract, and a payroll account is set up for the employee who operate the machine.➢ The payroll clerk demonstrates the setup of the payroll account entering a ‘super user’ name andpassword specifically set up for the walk through. The menu screen appears and displays many functions.➢ The clerk selects the ‘add new employee’ function. You are advised that the details can only be enteredfrom a hard copy form signed by the employee and the contracts manager and a signed income taxinstalment declaration form. The clerk then enters the following information:▪ employee name▪ employee number▪ contract number▪ employee address▪ employee phone number▪ employee email▪ start date▪ employee date of birth▪ employee tax file number▪ hourly rate▪ general exemption from tax Y/NThe fictitious employee is now set up in the system.➢ The clerk goes back to the main screen and clicks the item ‘enter hours’ and explains that the employeecan enter their own hours but that this must be approved by the contracts manager before the pay-runcan be processed.➢ The clerk then approves the hours.➢ Then the clerk selects ‘process pay-run’ and explains that the system automatically calculates the monthlypayments based on hourly rate and the current tax rate. The system also calculates the superannuationaccrual for the employee.➢ The system then generates a standard report entitled ‘monthly pay-run’ that lists the employees, theirpayments and the total tax paid. This report is then approved by the contracts manager who then, in a livepay run, uploads the Australian Bankers Association (ABA) file to the bank. The pay-run is automaticallyposted to the general ledger on approval by the contracts manager.➢ The contracts manager’s bank login gives him the rights to approve processing of payments on the bankwebsite. The bank account is reconciled monthly by the accountant who also has a bank login that giveshim the right to approve processing of payments on the bank website. Other regular payments throughthe bank account occur on a weekly basis when the accountant uploads the ABA creditor’s payment file tothe bank and approves it for processing.You note that the contracts payroll can be checked to the contracts accounts receivable by deducting from theaccounts receivable amount the standard mark-up on the contracts.Assessment 2 BAC313 Audit Theory and Assurance 2021 Semester 1Required:Prepare a business report to answer following parts (Part A-D). Your business report should follow a standardbusiness report format.Part A: 12 marksAnalyse the ratios and the background information associated with the four accounts listed by your auditpartner. Identify the potential audit risks and any particular audit steps that need to be undertaken to reduceaudit risk.Answer this question using the following headings: AccountAnalysis(ratio and background information)Audit RiskAudit steps toreduce riskAccounts ReceivablesDo NOT write on the question sheet allcomments must go in the businessreport in this formatPlant and equipmentMachinery FinanceLiabilitiesLease income Part B: 3 marksAnalyse the ratios and the background information and list and explain business risks that BDE faces (minimumof 3 business risks required). Business RiskExplanation:Do NOT write on the question sheet allcomments must go in the businessreport in this format PART C 9 marksIdentify (any three) internal controls in the system that are potentially effective, the risk that the control couldalleviate and one test of control for each of the identified potentially effective controls.Answer this question using the following headings in a table format: Effective ControlsRisk AlleviatedTest of ControlDo NOT write on the question sheet allcomments must go in the businessreport in this format Assessment 2 BAC313 Audit Theory and Assurance 2021 Semester 1PART D 4 marksList and identify (any three) weaknesses in internal control for contract payroll Internal Control WeaknessWhat might go wrongDo NOT write on the question sheet all commentsmust go in the business report in this format These last two criteria relate to all of the above questionsProfessional communication 1 markAppropriate resources and correct referencing 1 markMarking criteria: CriteriaHigh DistinctionDistinctionCreditPassAnalysis of ratiosand otherinformationdemonstratingaudit riskassessment skillsand critical andreflectivejudgement(8 marks)Correctinterpretation ofratios and otherinformationprovided,demonstrating asophisticatedunderstanding ofhow the ratios canbe used to analysethe audit risks.Correctinterpretation ofratios and otherinformationprovided,demonstrating aclearunderstanding ofhow the ratios canbe used to analysethe audit risks.Mostinterpretations ofratios and otherinformationprovided correct,demonstrating anunderstanding ofhow the ratios canbe used to analysethe audit risks.Mostinterpretations ofratios and otherinformationprovided correctbut a limitedunderstanding oftheir usefulness inidentifying theaudit risks.Identification ofaudit tests thatminimise audit riskidentified throughthe analysis of theratios and theadditionalinformation(4 marks)All appropriateaudit testsidentified with aclear statement asto how these willminimise audit risk,demonstrating asophisticated levelof audit planning.Most appropriateaudit testsidentified. A clearunderstanding ofhow audit testsminimise audit risk.Many appropriateaudit testsidentified. Someunderstanding ofhow audit testsminimise audit risk.Some appropriateaudit testsidentified. Basicunderstanding ofhow audit testsminimise audit risk.Analysis of ratiosand otherinformationdemonstratingbusiness riskidentification skills(3 marks)Strong applicationof analyticalprocedures andother providedinformation toprovidecomprehensiveassessment of atleast three items ofbusiness risk.Sound applicationof analyticalprocedures andother providedinformation toprovideassessment of atleast three items ofbusiness risk.Some applicationof analyticalprocedures andother providedinformation toassessment of atleast two items ofbusiness risk.Use of someprovidedinformation inlisting at least twoitems of businessrisk. Basicapplication ofanalyticalprocedures.Appraisal of theclient’s internalcontrolenvironment andapplication to theaudit risk model(6 marks)Identification of atleast three internalcontrols that arepotentiallyeffective, with acomprehensiveexplanation of theIdentification of atleast three internalcontrols that arepotentiallyeffective, with anexplanation of therisk each one couldmitigate.Identification of atleast two internalcontrols that arepotentiallyeffective, with anexplanation of therisk each one couldmitigate.Identification oftwo internalcontrols that arepotentiallyeffective with basicexplanation of therisk each one couldmitigate. Assessment 2 BAC313 Audit Theory and Assurance 2021 Semester 1 CriteriaHigh DistinctionDistinctionCreditPassrisk each one couldmitigate.Development of aseries of auditsteps that assessthe effectivenessof internal controls(3 marks)Development of acomprehensiveseries of auditsteps designed toassess theeffectiveness ofinternal controls.This demonstratesa deepunderstanding ofthe audit process.Development of aseries of highquality audit stepsdesigned to assessthe effectivenessof internalcontrols. Thisdemonstrates aclearunderstanding ofthe audit process.Development ofaudit stepsdesigned to assessthe effectivenessof internalcontrols. Thisdemonstrates amoderateunderstanding ofthe audit process.Development ofbasic audit stepsdesigned to assessthe effectivenessof internalcontrols. Thisdemonstrates abasicunderstanding ofthe audit process.Identified internalcontrolweaknesses(4 marks)Identification ofandcomprehensivejustification for atleast three payrolland disbursementinternal controlweaknesses.Identification ofand justificationfor at least threepayroll anddisbursementinternal controlweaknesses.Identification ofand justificationfor at least twopayroll anddisbursementinternal controlweaknesses.Identification ofbut limitedexplanation for atleast two payrolland disbursementinternal controlweaknesses.These last twocriteria relate tothe whole of thecase study.Professionalcommunication(Note: you arerequired to spacebetweenparagraphs; useArial 10pt or TNR12 pt; use 1.5 ordouble linespacing)(1 mark)Work containsdistinctunderstandablestatements with noerrors. Extremelywell organised.Content isstructured in amanner thatfacilitates thereader’sunderstanding.All components(executivesummary,introduction, body,conclusion) for abusiness report arecorrectlypresentedWork containsdistinctunderstandablestatements withminimal errors.Answer is wellorganised. Contentis structured in amanner thatfacilitates thereader’sunderstanding.All components(executivesummary,introduction, body,conclusion) for abusiness report arecorrectlypresented withonly minormistakesMinor spelling,grammar andpunctuation errors.Work showsevidence ofproofreading.Well-structuredwith one main ideaor argumentprovided perparagraph.All components(executivesummary,introduction, body,conclusion) for abusiness report arecorrectlypresented with fewmistakesSome spelling,grammar andpunctuation errorsfound but the workis readable andstructured. Workmay include toomany ideas in oneparagraph.All components(executivesummary,introduction, body,conclusion) for abusiness report arepresented withsome mistakesAppropriateresources andcorrect referencing(1 mark)A range of sources.All work has beenreferencedcorrectly as perHarvardreferencing styleUsed three ormore sources. Allwork has beenreferencedcorrectly as perHarvardreferencing styleUsed two or moresources. All workhas beenreferenced withinthe body of theanswer and in thereference list, withfew omissions orerrors in termsUsed one or moresources. All workhas beenreferenced withinthe body of theanswer and in thereference list, withsome omissions orerrors in terms

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