You are an Audit Senior currently planning the 30 June 20X9 audits of Comp Limited (Comp),
Health Limited (Health) and News Limited (News). At recently scheduled planning meetings
with Comp, Health and News, you obtain the following overview of this year’s operations for
each of the three client companies:
Comp is a manufacturer of computer hardware. The old costing system that was developed inhouse, could no longer keep up with the complex and detailed manufacturing costing process
that provides tender/bid submission costings and the company’s comprehensive reporting
requirements. As a result, Comp purchased and installed a popular off the shelf (not
customized) costing system to support the highly sophisticated and cost sensitive nature of its
product designs. Since this system had been utilised by many other firms in the industry, Comp
has not thoroughly tested the adequacy of the features and controls inherent within the system.
At the same time, the staffs are not feeling confident with the new system due to lack of training
and supervision. Staff are also concerned that data might be lost when converting to the new
system.
Health operates chemist shops in Perth. A large proportion of the sales transactions are
conducted in cash. Health claims on having strong control policies and procedures in place to
monitor the employees handling cash transactions and safeguarding the cash. However, the
proper implementation of those policies had been questioned by the previous auditor. As Health
is planning to expand to Mandurah and Busselton, it is applying for a bank loan to obtain
additional funding for the expansion. Before approving the loan, the bank requires Health to
provide them with an audited financial statement. The unaudited figures of current year suggest
Health’s revenue to have increased significantly by 25 percent from last year while the gross
profit appears to have increased marginally by 5 percent.
News has been in the paper manufacturing business for the last 17 years. It manufactures and
distributes paper throughout the Australian continent. During the last five years, News opened
four new factories in three different locations, financed mainly from bank loans. Due to rapid
growth in the company, the financial director John Brown is keen to set up an internal audit
department. Currently the project appears to have stalled, as some of the senior executives do
not foresee the benefit of setting up such a department and are unwilling to commit any
additional fund or resources on this plan. The senior executives argue that they are competent
enough to monitor the internal controls of News.
Required:
Prepare a memorandum to the audit manager, outlining your risk assessments relating to Comp,
Health and News. When making your risk assessments:
(a) Identify and discuss the risks that may arise from each of the above companies. In your
explanation, please mention the components of the audit risk model affected.
(b) Identify how the audit plan will be affected and recommend specific audit procedures
to address these risks.
Maximum 1200 words (exclude references)
Must using these references: ‘Leung, P., Coram, P., Cooper, B.J., Richardson, P. (2019). Audit and Assurance (1st Ed), John Wiley & Sons Australia (ISBN: 9780730363477)’
You are an Audit Senior currently planning the 30 June 20X9 audits of Comp Limited (Comp),
Health Limited (Health) and News Limited (News). At recently scheduled planning meetings
with Comp, Health and News, you obtain the following overview of this year’s operations for
each of the three client companies:
Comp is a manufacturer of computer hardware. The old costing system that was developed inhouse, could no longer keep up with the complex and detailed manufacturing costing process
that provides tender/bid submission costings and the company’s comprehensive reporting
requirements. As a result, Comp purchased and installed a popular off the shelf (not
customized) costing system to support the highly sophisticated and cost sensitive nature of its
product designs. Since this system had been utilised by many other firms in the industry, Comp
has not thoroughly tested the adequacy of the features and controls inherent within the system.
At the same time, the staffs are not feeling confident with the new system due to lack of training
and supervision. Staff are also concerned that data might be lost when converting to the new
system.
Health operates chemist shops in Perth. A large proportion of the sales transactions are
conducted in cash. Health claims on having strong control policies and procedures in place to
monitor the employees handling cash transactions and safeguarding the cash. However, the
proper implementation of those policies had been questioned by the previous auditor. As Health
is planning to expand to Mandurah and Busselton, it is applying for a bank loan to obtain
additional funding for the expansion. Before approving the loan, the bank requires Health to
provide them with an audited financial statement. The unaudited figures of current year suggest
Health’s revenue to have increased significantly by 25 percent from last year while the gross
profit appears to have increased marginally by 5 percent.
News has been in the paper manufacturing business for the last 17 years. It manufactures and
distributes paper throughout the Australian continent. During the last five years, News opened
four new factories in three different locations, financed mainly from bank loans. Due to rapid
growth in the company, the financial director John Brown is keen to set up an internal audit
department. Currently the project appears to have stalled, as some of the senior executives do
not foresee the benefit of setting up such a department and are unwilling to commit any
additional fund or resources on this plan. The senior executives argue that they are competent
enough to monitor the internal controls of News.
Required:
Prepare a memorandum to the audit manager, outlining your risk assessments relating to Comp,
Health and News. When making your risk assessments:
(a) Identify and discuss the risks that may arise from each of the above companies. In your
explanation, please mention the components of the audit risk model affected.
(b) Identify how the audit plan will be affected and recommend specific audit procedures
to address these risks.
Maximum 1200 words (exclude references)
Must using these references: ‘Leung, P., Coram, P., Cooper, B.J., Richardson, P. (2019). Audit and Assurance (1st Ed), John Wiley & Sons Australia (ISBN: 9780730363477)’
