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Client Engagement Workpaper |
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Audit Client: MSG |
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Lead Auditor: David Murphy |
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Policy & Practice Requirements |
Procedures to be Carried Out |
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Policy: It is important to acquire evidence on whether management and those charged with governance of MSG works with integrity and honesty. Reasoning: It is possible to assess the extent of integrity and honesty of the management and those charged with governed by evaluating their attitude and reaction which provides a basis to assess the fraud risk. |
Action 1 – Discussion should be made with the outgoing audit partner including its audit senior and audit managers to know whether the management of MSG was ever involved in the practices of earnings management and aggressive accounting (“ASQC 1”, 2022). Findings – Discussion with these parties showed that MSG’s senior management does not have any history of involvement with such accounting practices. |
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Action 2 – Information on the reputation and identify of MSG’s members of Board of Directors should be obtained from different sources. Outside references should be obtained for this purpose to acquire more information about them. Findings – The members of the Board of Directors of MSG are reputed professionals in their respective fields, and they do not have any bad professional records. |
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Completed: 22 August, 2020 Initials: D. M. |
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Policy: It is very important to confirm whether the acceptable/applicable financial reporting framework is used by MSG’s senior management for preparing and presenting the financial statements. Reasoning: In the absence of an acceptable/applicable, there is no appropriate basis to prepare and present the financial statements and it is not possible for the auditor to use a proper criteria to conduct the audit of its financial statements. |
Action 1 – It should be agreed with MSG’s management that they are well aware of their responsibilities for preparing and presenting the financial statements in accordance with the appropriate/applicable financial reporting framework and to ensure that the auditors have access to the required data and information to conduct the audit. Findings – The management knows these responsibilities and they are ready to provide with the necessary access of information. |
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Action 2 – The financial reporting framework used by MSG should be examined to assess its acceptability for preparing and presenting the financial statements. Findings – MSG has prepared its financial statements as per the acceptable/applicable financial in accordance with the Corporations Act 2001, AASB, IFRS and IASB (“Financial reporting framework in Australia”, 2022). |
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Completed: 22 August, 2020 Initials: D. M. |
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Policy: It is crucial to acquire an ethical authorization from the outgoing auditor. Reasoning: This policy should be adopted to know whether the previous auditor is not continuing with MSG because of any professional or ethical issue, and whether the audit engagement of MSG should be rejected. |
Action 1 – There needs to be a discussion with the ABC Auditors to ascertain whether they are leaving because of any ethical or professional issue from MSG’s end and Infinity Auditors should refuse to accept MSG as a client. Findings – Discussion with ABC Auditors shows that no ethical or other issue was there from MSG’s end for which the audit engagement should be refused. |
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Action 2 – The audit papers of the previous auditors should be reviewed for identifying any ethical issue was there during the audit engagement which might lead to the development of the threat to the fundamental ethical principles. Findings – No ethical issue was mentioned in the previous audit papers which requires Infinity Auditors to turn down the offer to accept MSG as a client. |
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Completed: 22 August, 2020 Initials: D. M. |
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Policy: It is important to evaluate the ethical and professional acceptability to provide any non-audit services to MSG. Reasoning: Providing the audit client with the additional non-audit services might create a threat to objectivity. Specifically, it might lead to the development of advocacy, self-review and self-interest threat, and these threats cannot be reduced to an acceptable low level by any safeguards. |
Action 1 – The confirmation needs to be obtained on whether the regime of disclosing the non-audit services is followed by MSG since it is an important initiative to maintain transparency in the provision of non-audit services. Findings: By maintaining its compliance with the non-audit services disclosure rule, MSG disclosed the details of the non-audit services in its annual reports. |
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Action 2: In order to determine the appropriateness of the provision of non-audit services to MSG, it is needed to utilize a principles-based approach. It is needed to confirm the presence of the safeguards so that the non-audit services can be provided (accaglobal.com, 2022). Findings: No threat to independence will be created as only administrative services have been demanded by MSG which do not create any threat to independence (“APES 110 Code of Ethics for Professional Accountants”, 2022). |
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Completed: 22 August, 2020 Initials: D. M. |
2. a) Debtor confirmation is a key audit procedure for accounts receivables. It is a document that the auditor sends to the debtors to confirm their balances. The main strength of debtor confirmations is its capability of providing evidence about the existence assertion for accounts receivables in MSG. If an affirmative answer is received from the debtor, an external evidence is obtained that the debtor is indebted to MSG for the services provided (“ASA 505”, 2022).
Evidence about the rights and obligations assertion of the accounts receivables is also provided by debtor confirmations, because the auditor can get evidence from them about whether the amounts were owned to MSG (CPA Hall Talk, 2022). However, the key weakness is its inability to provide reliable evidence about the valuation and allocation assertion of accounts receivables because the debtors do not assure that they have the intention to pay the dues to MSG. Although, it may be noted by these debtors that an error in their accounts balance are there.
As per the provided case of MSG, accounts receivable is considered as a material accounts and its balance is $3,980,250 on 30 June, 2020. Even though the payment terms are 14 days, a large number of smaller accounts are overdue for more than 60 days. As suggested by this situation, the policies and procedures implemented at MSG to approve creditors and collect dues from the debtors is deficient and ineffective.
5 medical practitioners represent 60% of the balance of accounts receivables. The auditor of Infinity Auditors could send debtor confirmations to the large balances of accounts receivables in order to collect evidence about their existence. However, only debtor confirmation would not be adequate as further audit procedures would be performed to collect reliable evidence about the valuation assertion of accounts receivables. The duration for which these accounts have been outstanding is not stated. If these are outstanding for less than 14 days, it is less probable that significant doubt is there about their ultimate recovery. However, additional evidence would be provided by a subsequent receipt review which would be essential as these accounts are material.
The smaller accounts representing 40% of the account receivables seem to be more in doubt as most of them are outstanding for more than the allowed 14 days. Evidence about the existence of these balances would be provided by debtor confirmation, other audit procedures would be needed to test the valuation assertion. Since the allowance for doubtful debts is taken directly against the trade receivables account, it would be needed to review the transactions and evaluate their reasonableness by taking note of the obvious ineffective credit control. Analysing the characteristics of the debts and reviewing the subsequent receipts would also give evidence about the valuation assertion.
Procedures to be Carried Out
b) It is not practically possible for Infinity Auditors to use debtor confirmations solely as an audit evidence, as debtor confirmations only provide evidence about the existence assertion of account receivables and it does not provide any evidence about the valuation assertion of this account. Since the balance of account receivables in MSG is material and many smaller balances are overdue for more than 14 days, evidence on the valuation assertion is needed along with the evidence on existence assertion.
MSG’s management’s use of assumptions, data and methods regarding accounts receivables would require to be considered by the auditor in order to evaluate their reasonableness, and the reasonableness of any adjustments made to this account would be evaluated as well. It would be required to assess MSG’s management’s approach to recognize the doubtful debts so that the valuation and allocation assertion could be tested by performing additional audit procedures.
The additional audit procedures for account receivables balances would be testing the subsequent receipts and additional invoices to these debtors to the degree that it would take into account the outstanding account balances of the five large practitioners by putting additional focus on their collectability.
The auditor would be needed to document the ageing analysis of the balances of the accounts receivables. This would require the auditor to take into account certain specific aspects like identification of the characteristic of the account receivables, who performed the audit and review work, date of performing the audit and review and others (“ASA 230”, 2022).
3. a) Existence and completeness are two important assertions associated with the inventory account. The assertion of existence confirms that the reported inventory balances on the financial statements actually exist at the reporting date. The assertion of completeness means that the reported inventory on the balance sheet includes all the inventory related transactions that have taken place during the financial year (“ASA 315”, 2022).
The auditor would attend the physical inventory counting at all four MSG locations. This would involve observing the performance of MSG’s management’s count procedures to obtain evidence that the instructions of the management and count procedures have been designed and implemented adequately. After that, the auditor would be needed to inspect the inventory when attending the physical inventory counting as it is important to ascertain the existence of inventory and to identify ageing, damaged or obsolete inventory. In addition, the auditor would be needed to assess the instructions and procedures to record and control the results of the physical inventory counting. In this context, the relevant matters which would be considered include the application of suitable controls, procedures used for estimating physical quantities, control over the movement of inventory, and identification of damaged and obsolete items in the inventory and inventory owned any third party (“ASA 501”, 2022).
Debtor Confirmation and Accounts Receivables
It would be needed to perform test counts by tracing the items chosen from management’s count records to the physical inventory, and tracing items chosen from the physical inventory to the counts records of the management (“ASA 501”, 2022). After that, a disclosure checklist would need to be prepared to confirm whether MSG has made all the inventory related disclosures appropriately. If needed, the auditor would undertake a trace test count and track them back to the listing of inventory to confirm the completeness assertion of the inventory. It would be important for the auditor to inspect the inventory of MSG at any third party location. If the inventories are there at the third parties, the auditor would require to confirm the inventory balance by external confirmation from those third parties. Additional audit procedures could be performed such as comparison of current and prior year’s gross profit, and others.
b) The correct selection of the sampling strategy is crucial to test the existence and completeness assertions of inventory. The auditors use the statistical and non-statistical sampling methods based on the nature of the audit engagement. Random sampling and systematic samplings are the parts of statistical sampling. Since inventory is such an account which includes many items, the random sampling would need to adopt (“ASA 530”, 2022). It implies that the population of inventory is large and by using the random sampling method, the auditor would be able in selecting a certain number of items randomly from the whole population. Random sampling ensures that every item in the population stands an equal chance to be chosen for the verification of the existence and completeness assertions. The auditor would be able to make a conclusion after the completion of the testing.
References
APES 110 Code of Ethics for Professional Accountants. Apesb.org.au. (2022). Retrieved 23 April 2022, from https://apesb.org.au/uploads/home/02112018000152_APES_110_Restructured_Code_Nov_2018.pdf.
ASA 230. Auasb.gov.au. (2022). Retrieved 23 April 2022, from https://auasb.gov.au/media/34xp0ixk/asa_230_12_21.pdf.
ASA 315. Auasb.gov.au. (2022). Retrieved 23 April 2022, from
https://www.auasb.gov.au/admin/file/content102/c3/ASA315_03-20.pdf.
ASA 501. Auasb.gov.au. (2022). Retrieved 23 April 2022, from https://auasb.gov.au/media/35zct5uf/asa_501_12_21.pdf.
ASA 505. Auasb.gov.au. (2022). Retrieved 23 April 2022, from https://auasb.gov.au/media/d3gloee1/asa_505_12_21.pdf.
ASA 530. Auasb.gov.au. (2022). Retrieved 23 April 2022, from
https://auasb.gov.au/media/ggwcjhpk/asa_530_12_21.pdf.
ASQC 1. Auasb.gov.au. (2022). Retrieved 23 April 2022, from
https://www.auasb.gov.au/admin/file/content102/c3/ASQC_1_Compiled_2020.pdf.
Confirmation of Receivables: Is It Required?. CPA Hall Talk. (2022). Retrieved 23 April 2022, from
https://cpahalltalk.com/confirmation-of-receivables-required/.
Financial reporting framework in Australia. Iasplus.com. (2022). Retrieved 23 April 2022, from
https://www.iasplus.com/en/jurisdictions/oceania/australia.
https://www.accaglobal.com, A. (2022). Acceptance decisions for audit and assurance engagements. Accaglobal.com. Retrieved 23 April 2022, from https://www.accaglobal.com/pk/en/student/exam-support-resources/professional-exams-study-resources/p7/technical-articles/acceptance-decisions.html.
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