ACCT6006 Auditing Theory and Practice Case Study Sample
Task Summary
Students are required to work in the group with maximum of three members. The assessment is designed to assess the subject learning outcomes above including students’ ability to research audit related issues and apply their knowledge to real cases. Students are expected to develop a professional report addressing tasks within following areas:
i. Inherent risk identification.
ii. Audit procedures in response to inherent risks identified.
iii. Analytical review of the financial statements with the purpose of identifying areas of concern or comfort.
iv. Substantive audit procedures addressing the identified risks.
v. Audit report, its basis, and legal issues.
The report should include an Executive summary, Introduction, Body (covering all tasks) and Conclusion.
Context:
The case study requires students to work in a group and develop a professional report.
A key aspect in your group’s choice of format/layout should be to ensure you impart your key messages effectively (i.e., complete the requirements) and efficiently (i.e., it should be succinct and consider the word limit).
The report should be coherent, and consistency is expected throughout (e.g., formatting, languagestyle, linkages between the parts).
Note, groups who split up the requirements and work independently are likely to have more difficulty accomplishing this objective compared to groups who work on each of the parts collaboratively (i.e., as an ‘audit team’).
Instructions:
Review the Financial Year 2021 audited annual reports including financial statements presented to the shareholders for the following organizations:
• Flight Centre Travel Group Ltd
• Nanoionics Ltd
Assume that your audit team is responsible for planning the audits for both companies for the most recent financial year. Discuss your strategies addressing each of the tasks below:
1. Identify at least three inherent risks that you would have to consider for each company in the audit planning phase and justify your answer. Cite the relevant ASAs/ISAs to support your answer.
2. Which audit procedures and/or tasks would you have planned to carry out in response to the inherent risks identified above? Cite the relevant ASAs/ISAs to support your answer.
3. Carry out an analytical review on the financial statements of these companies in the planning phase and identify areas of concern (high risk, problem areas) or comfort. Identify at least three areas for each company and justify your answer.
4. Which audit procedures and/or tasks would you have planned to carry out in response to the high risks or problem areas identified above? Alternatively, in relation to which area would you have minimised your evidence gathering procedure?
5. Discuss ethical and legal responsibilities/liabilities of the auditor sin case they would have given an inappropriate audit opinion. Discuss safeguards available to the auditors.
Effective communication, Presentation quality and peer review (6 Marks + 3 Marks + 3 Marks)
The report should be expertly presented, persuasive, logical communication, coherent and consistency is expected throughout (e.g., formatting, language style, and linkages between the parts).
Each group member is required to assess other members based on collaboration and contribution towards the assessment tasks. Please include the peer review commentary at the end of your assessment after the conclusion section. Peer review marks must be allocated in line with the learning rubric placed at the end of the assessment brief.
Solution
3. Analytical review of the financial statements:
Analytical review on the financial statements is conducted to understand the areas of the balance sheet, income statement that will be considered as risky and areas that might not require much attention. This will help the auditor to focus on areas that need attention and are more prone to risks and fraud. University Assignment Help, One of the ways of conducting the analytical review is using ratio analysis as well. Hence, in this case, some of the ratios have been calculated for both the companies, which will help to identify the areas that are more prone to risks and needs more attention.
Flight Centre Travel Group:
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From the above, it can be seen that the ratios of the company are declined, and increased, and the performance of the company has not been positive in 2021. This is major because of the travel restrictions in countries due to which the operations of the company were not active.
So, it can be seen that the gearing ratio of the company has increased, which increases the credit risk and interest risk, and hence, it is important to put reliance on debt and interest part (Dai et al., 2019, p.45).
However, the liquidity of the company has improved in terms of the current asset ratio, but, it can also be due company holding its assets for a long-term time. Likewise, special reliance is to be paid on accounts receivable, because the turnover ratio has declined significantly, which increases the risk of bad debts for the company.
The three areas are:
1. Debt and interest payment
2. Existence of current assets
3. Credit policy of company
Nanosonics:
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From the above ratios, it can be seen that the gearing ratio of the company is very low and the company is financing its business majorly through assets. Hence, it increases the risks of maintaining the assets, as ownership gets divided and financial leverage is very low. Also, the current ratio of the company is high, and it is important to analyze the current assets of the company to ensure that current assets are existent and it is not only overvalued in the books of the company. Accounts receivable turnover of the company has also increased. Hence, it is important to review the credit policy of the company to ensure that the risks of bad debts are not high in the company (Saha et al., 2017, p.34).
Hence, the three areas are:
1. Analysis of debtor’s collection process
2. Inventory held by company
3. Debt and equity formation
Audit procedures to be applied:
There are generally two types of audit procedures i.e. analytical audit procedures and substantive audit procedures. Analytical procedures are applied in normal situations to collect audit evidence, but, substantive procedures are applied when it becomes difficult to collect audit evidence. For instance, to gain evidence on the balance of accounts receivable, it is better to take an external confirmation from the debtors directly, and this will come under the substantive procedure.
Hence, in the case of Flight Centre:
1. The risks of debt are very high, and hence it is important to check the debt obligation documents and the interest rates at which debt is taken. Also, the payment schedule is to be checked to ensure whether the company is paying its debt on time. This can also be done by taking an external confirmation from the bank directly.
2. In addition to this, risks regarding the accumulation of current assets are moderate, as it is better to analyze it based on the efficiency of the company to generate cash from these assets. However, based on sensitivity analysis done by the company, the revenue of the company is very sensitive, and hence, it is a risky area.
3. For receivables, it is better to take external confirmation (Odendaal et al., 2018, p.45).
While in the case of Nanosonics:
1. The debt-asset ratio of the company is very low, which indicates that the company is not reliant on debt, which reduces the credit and interest risk of the company. However, here current assets of the company are sensitive and it is important to analyze the returns company is earning to ensure that it is not decreasing the operating cash flows of the company.
2. So, in this analysis, it was identified that the accounts receivable turnover of the company is high due to which recovery days are low. But, the same has increased in 2021, so it will be better to take confirmation from debtors and to analyze the credit policy of the company i.e. whether the credit period allowed to customers is after taking authorization or not, and that credit is allowed based on the credit score of the debtors (Pankova et al., 2020, p34(8)).
However, reliance should not have been paid to gearing ratios in the case of Nanosonics because it does not increase the risks, but, the assets of the company can generate risks for the company, hence, it is important to check purchase documents and to conduct physical verification of assets to ensure that company owns the assets as on the balance sheet date.
Reference:
Dai, J., Vasarhelyi, M. A., & Medinets, A. F. (2019). Audit analytics in the financial industry (Ser. Rutgers studies in accounting analytics ser). Emerald Publishing Limited. Retrieved November 18, 2021. https://lesa.on.worldcat.org/v2/oclc/1124605784
Odendaal, E., Mentz, M., &Barac, K. (2018). An audit evidence planning model for the public sector. Journal of Economic and Financial Sciences, 11(1), 1–14.https://lesa.on.worldcat.org/v2/oclc/7784689362
Pankova, S. V., & Popov, V. V. (2020). Applying analytical procedures for performance audit of customs authorities. Economic Analysis: Theory and Practice, 19(6), 1035–1055. https://lesa.on.worldcat.org/v2/oclc/8620549188
Saha, S. S., & Roy, M. N. (2017). Quality control procedure for statutory financial audit : an empirical study (First). Emerald Publishing Limited. Retrieved November 18, 2021. https://lesa.on.worldcat.org/v2/oclc/993432933
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