Auditing assignment on Principles of Auditing
QUESTION 1
Case 1
During the financial year 2020/2021, you are one of the audit partners with Summit and Associates CAs, a large
and experienced audit firm.
You have been approached to accept the audit of Chem Safe Ltd (Chem Safe), a medium-sized chemical
manufacturer. The manufacture of the chemicals results in highly toxic waste and Chem Safe is currently under
investigation by the Environmental Protection Agency for a significant spill of toxic chemicals into a nearby river.
The media have reported that senior employees were allegedly involved in trying to cover up the spill.
Required:
Identify and explain the key ethical matter regarding Chem Safe and its management that you should consider
before making the decision to accept the engagement. (2 Marks)
Case 2
Chem Safe Ltd (Chem Safe) imports a number of pharmaceutical products. In order to hedge its foreign
currency transactions, Chem Safe entered into a number of forward rate agreements this year. Prior to this time
Chem Safe had had little exposure to derivative instruments, but a series of bad experiences resulting from
fluctuating exchange rates convinced the company that a hedging strategy was necessary. During planning for
the audit of Chem Safe, the company’s hedging arrangements were identified as inherently risky and increased
testing was carried out in this area. A number of small errors were noted in accounting for hedge transactions,
but there did not appear to be any material errors and as such no adjustments were made. A review of the audit
file suggests that the errors noted were a result of inexperience and poor controls in the area. While all of the
errors were brought to the attention of the treasurer, who is responsible for the company’s hedging strategy, no
further action has been taken to date.
Required:
Outline what further action the auditor should take in response to the errors and control weaknesses identified.
Justify your response. (2 Marks)
Asia Pacific College of Business & Law Semester 1 2021 Page 5 of 10
Case 3
Summit and Associates CAs has agreed to take on a new audit client, Reaction Pty Ltd, a small garage door
manufacturer that has never previously been audited. Summit and Associates CAs has issued an engagement
letter prior to commencing work for the current year. While conducting the audit, the audit team is unable to gain
sufficient appropriate audit evidence around accounts receivable due to a lack of documentation. You have
informed client management that you need to issue a modified auditor’s report due to the scope limitation. In
response, management has requested that the engagement become a review engagement with the associated
lower level of assurance, as they are not required to have an audit.
Required:
Outline the appropriate response to this situation. Provide reasons to support your response. (4 Marks)
Case 4
Consider the following independent situations:
1. You are the auditor of Hail Pty Ltd a medium sized furniture manufacturer. Your audit firm has finalised the
financial statements after the client has substantially prepared the accounting records. However, the client
admits to having limited knowledge of identifying and calculating impairment and has asked for your
assistance. You have proposed a number of adjustments to account for the impairment of assets.
2. You are the auditor of Travel Time Ltd, a large travel agent that also handles all your audit firms travel
arrangements on normal commercial rates and provides excellent service. The managing director of Travel
Time has indicated that the company is having a tough time of it due to the lack of consumer confidence in
the economy at the moment and has asked if you could help by recommending their services to your other
audit clients. He has said that he will understand if you are not able to do so. You happily agree to provide
the recommendation, as you have always been satisfied with their service.
3. Your audit firm has been approached by a new client, Civil Constructions Ltd, to conduct the audit for the
coming year. As part of your client acceptance procedures, you identify that the wife of one of the audit
firm’s partners has a substantial shareholding in Civil Constructions Ltd.
4. Your audit client, Pleasure Cruises Ltd, is having cash flow problems and has not paid any of the current
year’s fee by the time the auditor’s report is due to be issued. They expect business to pick up in the coming
year and have requested an additional time to pay the bill.
Required:
For each of the independent situations above:
a) Identify the type of potential threat to independence. Justify your answer. (8 marks)
b) Describe a safeguard, if any, which could be implemented to reduce each of the independence threats. (4
marks)
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