Auditing

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Assignment 2 – Auditing ACCT3000 (Semester 2, 2016)

(i) JJ Hi-Fi Limited (JJH), an Australian listed company, has been experiencing declining
sales over the last 2 years. Cost cutting has proved difficult due to the high level of
imported machinery used in JJH’s operations and consequently margins have been
falling. Over the last 2 months, warranty claims on JJH’s best-selling product line, M4
– a ‘no frills’ microwave oven, have increased from 1.5% to 4.5% of sales. This
problem appears to relate to the glass turntable, which shatters if the oven is constantly
used. The average cost of repair has risen by 20% to $200 per claim. While the bankers
are presently happy to continue providing JJH with loan facilities, they do expect to see
improved results in the next financial report.
(ii) Ultimate Fitness Limited (UF) is a family-owned company distributing gym equipment
in Perth. Majority of the sales transactions are done in cash. UF is planning to expand
to Melbourne and Sydney. It is applying for a loan from the bank to get funding for the
expansion. Before granting the loan, the bank requires UF to provide them with the
audited financial statement. The unaudited figures of current year suggest revenue to
have increased significantly by 20 percent from last year while the gross profit appears
to have increased marginally by 5 percent. You have been auditing UF for the past two
years and have previously questioned the integrity of UF’s accountant who has a
reputation for adopting aggressive accounting practices to make the clients’ financial
statements look presentable as desired by the clients themselves.
(iii) Austfield Limited (Austfield) is a supermarket chain throughout Australia and has been
operating since the last 10 years. Due to rapid growth in business, the finance director
Mr. Moss Green 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 funds or
resources on this plan. To help achieve the budgeted sales for the year, Austfield is
about to introduce bonuses for its sales staff. The bonuses will be an increasing
percentage of the gross sales made, by each sales person, above certain monthly targets.
Required
For each of the above independent situations, answer the following:
(a) Identify and discuss why the above situation represents a risk.
(b) By applying auditing knowledge, identify the main account or group of accounts affected
by this risk in the audit plan.
(c) Identify how the audit plan will be affected by the risks and recommend specific audit
procedures to address these risks.

TOTAL MARKS: 10

Description

  1. Inherent risk is high following the high costs incurred and the consequent fall in the company margins. The company experiences difficulty in cost cutting following the high level of machinery used in JJH’s operations as well as the rise in the repair costs which have lowered the company profitability. This increases chances of material misstatement to make the books look better since the costs shall see the company report lower profits. This might be difficult to detect on audit posing high detection risks.
  2. The company reports increased costs as showcased from the increase in the warrant claims from 1.5% to 4.5% and repair costs by 20% to $200 per claim. The expense accounts, credit accounts, liability accounts, income accounts are the majorly affected by the inherent and detection risks with the accountants being tempted to lower the costs on reporting.