ACTG 1P91 Lecture 3: actg lec3

Write answers to each of the five (5) situations described belowaddressing the required criteria (i.e. 1 & 2) in eachindependent case. You may use a tabulated format if helpful having“Threats”, “Safeguards” and “Objective Assessment” as columnheadings.
Bret Hart has been appointed as a junior auditor of Black &White (BW). One of his first tasks is to review the firm’s auditclients to ensure that independence requirements of APES 110 (Codeof Ethics for Professional Accountants) are being met. His reviewhas revealed the following:

(c) BW has recently been approached by Pixcom Limited (PL) toconduct its audit. The accountant at PL, Charlotte Flair, is thedaughter of Ric Flair, who is one of the audit partners at BW.Being aware of Ric’s relationship with Charlotte, BW will not beassigning Ric to the audit team of PL.

(d) Jack, the current senior manager on the audit of Burj Steel(BS) Limited which specializes in the production of miningequipment, has just entered into a business venture (ZZ Motors)with the CFO of BS Ltd, whereby they are both equal partners in abusiness retailing motor vehicles. Jack has informed you that thisis not a problem since the 2 entities (BS Ltd and ZZ Motors) are indifferent non-competing industries.

(e) Awesome Machineries Limited (AML) has been an audit client ofBW since the past two years. BW has recently completed a review ofinternal controls for AML. BW has been requested by AML to takeresponsibility to implement a new software system that will form asignificant part of internal controls over AML’s financialreporting process and run a three hour training session for itsaccounting staff.

Required:

For each of the independent situations above, and using theconceptual framework in APES 110 (Code of Ethics for ProfessionalAccountants), answer the following questions:

1. Identify potential threat(s) to independence & recommendsafeguards (if any) to reduce the independence threat(s)identified.

2. Provide an objective assessment of whether audit independencecan be achieved

Write answers to each of the five (5) situations described belowaddressing the required criteria (i.e. 1 & 2) in eachindependent case. You may use a tabulated format if helpful having“Threats”, “Safeguards” and “Objective Assessment” as columnheadings.

Bret Hart has been appointed as a junior auditor of Black &White (BW). One of his first tasks is to review the firm’s auditclients to ensure that independence requirements of APES 110 (Codeof Ethics for Professional Accountants) are being met. His reviewhas revealed the following:

(a)Neptune Limited is one of BW’s audit clients. Mark is apartner in BW and practices in the same office as Bruce, who is thelead engagement partner for the Neptune Limited audit. Mark is notinvolved in the Neptune Limited audit himself. Mark’s wife Michelleowns shares in Neptune Limited. (2 Marks)

(b) Mariah Parker is an assurance manager with BW and it hasjust been decided to allocate her to the audit of Organic FoodsLimited (OFL). Mariah’s financially independent daughter, Juliette,has recently purchased a very large parcel of shares of significantvalue in OFL. (2 marks)

(c) BW has recently been approached by Pixcom Limited (PL) toconduct its audit. The accountant at PL, Charlotte Flair, is thedaughter of Ric Flair, who is one of the audit partners at BW.Being aware of Ric’s relationship with Charlotte, BW will not beassigning Ric to the audit team of PL. (2 marks)

(d) Jack, the current senior manager on the audit of Burj Steel(BS) Limited which specializes in the production of miningequipment, has just entered into a business venture (ZZ Motors)with the CFO of BS Ltd, whereby they are both equal partners in abusiness retailing motor vehicles. Jack has informed you that thisis not a problem since the 2 entities (BS Ltd and ZZ Motors) are indifferent non-competing industries. (2 Marks)

(e) Awesome Machineries Limited (AML) has been an audit clientof BW since the past two years. BW has recently completed a reviewof internal controls for AML. BW has been requested by AML to takeresponsibility to implement a new software system that will form asignificant part of internal controls over AML’s financialreporting process and run a three hour training session for itsaccounting staff. (2 Marks)

Required: For each of the independent situations above, andusing the conceptual framework in APES 110 (Code of Ethics forProfessional Accountants), answer the following questions:

1. Identify potential threat(s) to independence & recommendsafeguards (if any) to reduce the independence threat(s)identified. (5 marks)

2. Provide an objective assessment of whether audit independencecan be achieved (5 marks)

9. The followingare from the accounting records of Y ltd.:

An order has been received from anoverseas customer for 2,000 units at a price of $64 per unit to bedelivered this month.

By how much would this special order increase (decrease) thecompany's operating income for the month?

a) ($32 000)

b) $46,600

c) $12,000

d) $36,000

e) None of the above

10. ZZ co. produces a singleproduct. The cost of producing and selling a single unit of thisproduct at the company's normal activity level of 20,000 units permonth (80% of capacity) is as follows:

A special order has been received from a local customer for 5,000units at a price of $200 per unit to be delivered this month. Byhow much would this special order increase (decrease) the company'soperating income for the month?

a) $200,000 $

b) $136,000

c) ($500,000)

d) ($260,000)

e) None of the above

11. AA Company produces andsells three products:

A decision by AA Co. to discontinueProduct C would result in what monthly increase (decrease) in AACo.'s

operating income?

a) $800

b) $1,000

c) ($1,000)

d) ($1,800)

e) None of the above

12. The following data are for Division B of Ovechkin Inc.:

Sales $4,000,000

Totalasset 1,250,000

ROI 10 %

The asset turnover ratio is:

a) 3.20

b) 0.10

c) 0.3125

d) None of the above

13. Refer to question 12.The operating income of Division B is:

a) $2,750,000

b) 1,250,000

c) 125,000

d) 400,000