1. a) Situation 1 – In the current situation, it was explained by Chris that the Board of directors were impressed with last year’s audit and would like to propose to reappoint Clarke & Johnson (CJ) as the auditor of the 30th June 2014 financial report audit. Chris also informed that the Board would also like to invite Geoff, the audit partner of Clarke & Johnson (CJ) to give a speech about Luxury Travel Holidays Ltd. (LTH) at the next travel agency seminar, to assist in promoting LTH’s business to attract more investors. However, the auditors are not allowed to promote the business of clients. The auditors are not allowed to present speech for the client for attracting more investors for investing in clients business. Even if the client prescribed such terms and conditions for acceptance of audit engagement, the auditor should not accept the term as it is against the ethical requirement for conducting audit and the same will affect the independence of auditor in providing a true and fair view based on the audit conducted by the auditor. (ASIC, 2017)
Situation 2 – In the current situation, Chris explained that LTH would like to provide a complimentary 14-day package voucher for four people to the Greek isles for both Geoff’s and your family. All expenses, including accommodation and travelling cost, will be paid by LTH’. However, as an ethical requirement and criteria for acceptance of audit, the auditor should not accept any monetary/ non-monetary benefits from the client except the audit fees and reimbursement of actual expenditure incurred. If the auditors accept the travel package from the client, the same will create and biasedness and preference for the client, which may directly or indirectly affect the auditor’s independence for conducting the audit. It may also affect the quality and adequacy of the opinion given by the auditor after conducting the audit of the client. (Austii, 2017)
Situation 3 – In this situation Michael stated that his father is LTH’s financial controller and is also responsible for the preparation of LTH’s financial report. This indicates that Michael is a related party to the financial controller of the organization. So, there are higher possibility that in case Michael is a part of engagement team and if he came across any mistaken or discrepancies in the financial report of LTH, that he will inform the same internally to his dad for rectification and the issue will remain unrecorded in the audit report issued by CJ. Thus, the relation of Michael with the financial controller of the organization may affect the independence of the auditor and may affect the quality of report presented by C&J. (ASIC, 2017)
Situation 4 – In the discussion, Annette informed that she was on a temporary assignment at LTH’s just a month ago, helping LTH with its tax calculations and preparing accounting entries that will be reflected in the 30 June 2015 financial report. She also informed that as per her understanding, she don’t think that there will be much audit work required around the tax accounts. As per Annette discussion, it is very clear that she has developed a good relation with the employees of the client. Further, she also mentioned that they don’t need to perform a lot of work for tax account. However, as Annette and the C&J are working on two different assignment, the work performed in one assignment should not influence the work required to be perform in other assignment. Further, while performing the audit, the auditor should not depend and use the work performed by the employee of the organization. Initially, Annette was working as the employee of the organization and now she will work as the auditor of the organization. Thus, the involvement of Annettee as part of engagement team may affect the independence of work as she may rely on the work performed by her at the time of temporary assignment. Further, there are possibility of ignorance of error as she has developed a good relation with the client and she may be biased towards the client. (AustralianGovernment, 2017)
b). Situation 1 – C&J may accept the audit engagement provided the Audit Partner, Geoff shall not give any speech for promoting LTH’s business for more investors. The auditor should clearly specify that they will not give any speech in favor of the business.
Situation 2 – C&J should not accept any additional benefit except audit fees and reimbursement of actual expenditure from the client. (APESB, 2017)
Situation 3 – Michael shall not be included as a part of audit engagement team. He shall not be assigned to the engagement.
Situation 4 – Annette shall not be included as a part of audit engagement team. She shall not be assigned to the engagement. (ICAB, 2017)
2. a) In this case we need to advice to the company named MSL as an audit advisor from Crampton and Hasaad. MSL is engaged in the business of selling mining equipment and spare parts to the mining companies across Australia. They have various operational centers across Australia, along with these centers, warehouses are also located. But the company is not manufacturing these equipment, instead even they are purchasing from other companies. They have an equipment purchase order contracts with various manufacturing suppliers based in Europe, US and Canada. These manufacturers are to keeping these equipment in stock, instead they are making these equipment on make to order basis and then ship them to MSL’s operating centers. Now since company is ordering the equipment’s from other countries, there some business risks that the company needs to face. Business risks to be faced are discussed below: (AASB, 2017)
Cost Risks: the first most dangerous risk which the company has to face is the cost risk. Whenever a company opts for global sourcing there are risks involved in relation to the hidden costs. The reason behind these hidden costs would even be because of the different cultures and different time zones. In addition to this, monitoring global manufacturers would involve greater costs as well. In this case MSL a company in Australia is outsourcing its mining equipment’s from other countries like Europe, US and Canada. There is no doubt regarding the quality of the equipment’s since all are well developed countries. At the time when purchase order is issued for equipment then it also has to include the taxes paid to other countries. Different type of taxes are taxed in other countries, and so the tax component would increase in this case. Europe, US and Canada would be having different tax elements, hence all these tax elements needs to be included at the time when the purchase order is made. This might become more expensive since more taxes are involved here. Generally, in such situations import duty has to be paid at the time when the goods are shipped in Australia. If the import duty is not paid at the time of shipment then company is not allowed to take the goods in time. This is one of the risk involved while purchasing the equipment from other countries. Apart from this one more risk involved in the cost risk is the payment risk. Every country has separate currencies. There are chances that the currency rate would be different at the time when the goods are ordered and at the time when the goods are actually received. When the actual payment has to be made to the supplier then the exchange rate would be different as well. For example company had ordered some equipment at a price of $100 but at the time when payment had to be made then the price increased to $120. In this case company had to pay $20 more. (ASA200, 2017)
Security Risks: there are many developing countries which has been identified for low costs global sourcing. These countries may be subject to political uncertainty or even internal political turmoil. Such risks need to be assessed in terms of whether the offshore supplier would be able to provide the equipment’s successfully. In the current scenario MSL is ordering equipment from three countries which were US, Canada and Europe. There were major changes in the politics in US so chances are that the equipment ordered from these would be at risks. After Donald Trump became the US President he is preferring his US companies first. So there are chances that the equipment’s ordered from there would not be delivered in time or even would not be delivered at all. Europe is also facing various financial crises where several countries in Europe were getting removed from the European Union as well. So there are chances that the equipment’s are not delivered on time or even equipment’s might get damaged. Canada is not facing much political or financial crises, so chances are less that there would be any problem from that country. (Audit, 2017)
So these are the above two risks which company had to face when they outsourcing products from other countries.
b). As per Australian Auditing Standard there are three kinds of audit risks. The three kinds of audit risks are explained below:
Inherent risks: it is the risk of material misstatement in the financial statements of the company because of error or omission as a result of factors other than the failure of controls.
Control risks: it is also a risk of material misstatement in the financial statement which mainly arise due to the absence or failure in the operation of important controls in the entity. (AuditRisks, 2017)
Detection risks: these are those kind of risks in which auditors fail to detect a material misstatement in the financial statements. Auditors need to apply audit procedures to detect material misstatement in the financial statements whether due to error or fraud.
Audit risks which would be detected in the current scenario are discussed below:
i. There was a high cost risks in the current business scenario. In this case auditors needs to be careful while auditing the import documents. If they miss any point then there are chances of detection risks. Lots of foreign currency transactions are involved in this case, so foreign exchange account would be at high risks. From the accounting and auditing perspective, auditors needs to vouch the documents relating to imports. There are chances of mistakes while making payment to the vendors. Auditors need to validate the exchange rate both at the time when the order is placed and at the time when payment is made to the vendor. There would be huge exchange gain or loss for MSL business, hence auditors need to be very careful while auditing the exchange account. There would be a huge accounting impact if auditors fail to detect any material misstatement. They need to audit all the exchanges rate which were considered when the orders were booked and when the payments were made to the parties. After proper audit of the financial statements, it would show true and fair view. (Businessinfo, 2017)
ii. The second business risk was in relation to security risk. There were chances that goods would not reach the operation centers in a proper manner. There is a huge audit risk involved regarding the goods being damaged. Auditors needs to be in high alert regarding the damage invoices. If any goods are damaged then auditors needs to ensure that proper credit motes are there. If credit notes are not there for damage transactions then it would raise control audit risk. This would increase the risk of high fluctuations in the cost of goods sold. Since the goods are directly ordered from other countries, purchase price of the goods are the cost of goods sold for the company. Hence if credit notes are not booked properly then cost of goods sold would go on a toss. Finally it would affect the margin of the company. If margin is getting affected then the net profit of the company would also get affected. Hence it would not show true and fair view of the financial statement. Hence auditors need to be alert while auditing the cost of goods sold account. (AuditRisk, 2017)
References
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Available at: https://www.auasb.gov.au/Pronouncements/Australian-Auditing-Standards.aspx
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APESB, 2017. apesb.org.au. [Online]
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Available at: https://www.auasb.gov.au/admin/file/content102/c3/ASA_200_27-10-09.pdf
[Accessed 23rd April 2017].
ASIC, 2017. https://asic.gov.au/. [Online]
Available at: https://asic.gov.au/regulatory-resources/financial-reporting-and-audit/auditors/auditor-independence-and-audit-quality/
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ASIC, 2017. treasury.gov.au. [Online]
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Audit, 2017. diva-portal.org. [Online]
Available at: https://www.diva-portal.org/smash/get/diva2:318924/fulltext01
[Accessed 23rd April 2017].
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Available at: https://www.aicpa.org/Research/Standards/AuditAttest/DownloadableDocuments/AU-00312.pdf
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Available at: https://accounting-simplified.com/audit/risk-assessment/audit-risk.html
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Austii, 2017. austlii.edu.au. [Online]
Available at: https://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s324ce.html
[Accessed 23rd April 2017].
AustralianGovernment, 2017. frc.gov.au. [Online]
Available at: https://www.frc.gov.au/about_the_frc/annual-reports/annual-report-2010-11/ar_10-11_part_3/
[Accessed 23rd April 2017].
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[Accessed 23rd April 2017].
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