FIN6002 Audit Assignment: You are an Audit Supervisor Responsible for Understanding

FIN6002 Audit Assignment Questions

Question 1

A. You are an audit supervisor responsible for understanding the entity and its environment and assessing the risk of material misstatements for the audit of Pharma Co for the year ending 31 July 2022. Pharma Co is a company listed on a stock exchange.

The company is a wholesaler engaged in the supplies of pharmaceutical products to a wide range of stores across the Northeast of England, under a variety of different brand names. You have worked on the audit of this client for many years as an audit junior.

Required:

Describe the information you will seek, and procedure you will perform in order to understand the entity and its environment and assess the risk for the audit of Pharma Co for the year ending 31 July 2022.
(10 marks)

B. You are now nearing the completion of the audit of Pharma Co for the year ending 31 July 2022. The draft financial statements have been produced and you have been given the responsibility of performing a review of the audit files before they are passed to the audit manager and the audit partner for their review.

You have been asked to concentrate on the proper completion of the audit working papers. Some of the documents have been produced electronically while others printed out for you.

Required:

Describe the types of audit working papers you should expect to see in the audit files and the features of those working papers that show that they have been properly completed.

Question 2

Jane Goldsmith Plc, a listed company, is a leading UK retailer of up–market clothing, shoes and accessories sold primarily under the “Jane Goldsmith” brand name. The brand represents classic styles, updated to reflect current fashion trends. Company stores offer a full range of
business and casual outfits, shoes and accessories coordinated as part of a total styling strategy. The company places a significant emphasis on customer service; sales associates are trained to assist customers in item selection and wardrobe coordination, helping them achieve a classic yet chic and current look, while maintaining the customers’ personal styles.

The company’s core business is focused on relatively affluent, fashion-conscious professional women with limited shopping time. Substantially all of the company’s merchandise is developed in-house by its product design and development teams. Production of merchandise is sourced to independent manufacturers in 14 countries. Approximately 35%, 15% and 5% of the company’s merchandise is manufactured in China, Thailand and Indonesia respectively.

The company operates 80 stores countrywide (under operating leases), having closed down 35 stores over the last two years. Merchandise is distributed to the company’s retail stores through three distribution centres spread across the UK.

The company also makes sales online and is highly rated for having one of the UK’s top five impressive fashion search databases online.

jane Goldsmith Plc. remained profitable amid the global financial crisis and as at 31 January 2023, the company had gross revenue of £1.3 billion and net profit of £121 million. The ompany recognises revenue as and when merchandise is sold to clients and a provision for estimated returns is established when sales are recorded. In terms of expenses, the company spends a lot on advertising and marketing; (Advertising costs were approximately £65 million for the year to 31 January 2023); salaries and wages (£245 million as at 31 January 2023), among others. The company’s non-current assets as at 31 January 2023 are valued at £1.1 billion.

However, the company intends to focus on reducing its cost structure over the next financial year, in light of the volatile nature of the current economic environment. Your firm, Holmes and Poirot, is in the initial planning phase of the audit for the year ended 31 January 2023. As the audit senior, you have been assigned responsibility for determining materiality. The audit partner has performed a preliminary analysis of the company and its performance and believes the likelihood of fraud is low.

Required:

a) Detail the matters to which you would pay particular attention in obtaining the required knowledge of the business and in developing your audit plan for the year ended 31 January 2013.

b) Identify and describe FOUR matters that give rise to audit risks associated with the audit of Jane Goldsmith Plc. 

c) Explain the concept of “materiality” and its importance during the audit planning process.

Question 3

You work for a firm of chartered accountants who specialise in external audit, tax advice, and retail systems. Most of your clients are small retail direct sales companies.

A large national company, Prina Plc, which operates in the same industry as several of your clients has approached you to work on their external audit after a disagreement and challenges faced with the previous auditor. They have offered a fee that would constitute 25% of the total revenue of your firm, but only on the condition that the work was completed within 3 weeks of their year-end.

Required:

a) State and explain the 5 ethical principles outlined by the International Ethics Standards Board for Accountants (IESBA) with examples for each principle.
(10 marks)

b) If your firm accepts this engagement state FIVE key points that must be covered by the engagement letter per ISA 210, then briefly explain the significance of the engagement letter.
(5 marks)

c) Discuss four potential ethical and other issues that your firm may face in the above scenario and conclude whether or not your firm should accept the appointment.

Question 4

You are a member of the recently formed internal audit of Signal Co. The company manufactures electrical materials which are supplied to large and small retailers. The management of those charged with governance of Signal Co have concerns about the effectiveness of their sales and despatch system and have asked internal audit to document and review the system. Sales and despatch system Sales orders are mainly placed through Signal’s website, but some are made via telephone.

Online orders are automatically checked against inventory records for availability; telephone orders, however, are checked manually by order clerks after the call. A follow-up call is usually made to customers if there is insufficient inventory. When taking the telephone orders, clerks note down the details on plain paper and afterwards they can complete a three-part pre-printed order form. These forms are not sequentially numbered and are sent manually to both the despatch and the accounts departments.

As the company is expanding, customers are able to place online orders which will exceed their agreed credit limits of 15%. Online orders are automatically forwarded to the despatch and accounts department.

A daily pick list is printed by the despatch department, and this is used by the warehouse team to despatch goods. The goods are accompanied by a despatch note and all customers are required to sign a copy of this. On return, the signed despatch notes are given to the warehouse team to file.

The sales quantities are entered from the despatch notes and the authorised sales prices are generated by the invoicing system. If a discount has been given, this has to be manually entered by the sales clerk into the invoice. Due to the expansion of the company, and as a large number of sales invoices, extra account staff have been asked to help out temporary with producing the sales invoices. Normally it is only two sales clerks who produce the sales invoices.

Required:

(i) Describe TWO methods of documenting the sales and despatch system, and for each explain an advantage and disadvantage of using this method.
(5 marks)

(ii) Explain FIVE control objectives of Signal Co sales and despatch system.
(5 marks)

(iii) Identify and explain SIX deficiencies in Signal Co’s sales and despatch system and provide a recommendation to address each of these deficiencies.