Issues to Consider for Auditing Highlard Packard Pty Limited
1. As mentioned by Jane, the previous two auditors were left because of the difference in opinion about accounting policies and treatments for various transactions including research and development. This is a key issue to consider because it indicates that the directors of Highlard Packard Pty Limited may have a nature to accept only those accounting treatments which increases the profit.
2. The company want the auditor to complete the audit ASAP so that the audited financial statements can be provided to the potential financers to access the additional funds. This is another key issue to consider because as a reduction in the audit timetable will lead to the increase in the detection risk and the audit team will be under additional pressure to obtain sufficient appropriate audit evidence.
3. The audit firm has wide experience in the industry but it does not have any previous connection to the company. It is an important issue to consider because the audit firm may not have the required competence and adequate resources to perform the audit work of Highlard Packard Pty Limited.
4. Another major concern is the quick and significant increase in the profit and sales of Highlard Packard Pty Limited. This indicates that the directors of the company might be involved in aggressive accounting practices or earnings management to increase sales and profit.
1. It is needed to discuss with the previous auditors about any issue regarding the accounting policies and transactions including research and development. The previous audit files should also be reviewed for identifying any issue regarding this matter.
2. The audit firm is needed to take into account any issue which might arise and could threaten the auditors’ compliance with the ethical requirements of APES 110. If any such issue is there, their significance needs to be considered.
3. The audit firm needs to assess whether they have the required competency for performing the audit work of Highlard Packard Pty Limited and whether appropriate resources would be available along with the specialist knowledge or skills for the audit of the company.
4. The audit firm needs to consider assessing the integrity and reputation of the directors of Highlard Packard Pty Limited. If the firm does not know the directors formally, it may want to obtain reference.
5. The audit firm is required to assess the level of risk associated with the audit of Highlard Packard Pty Limited and whether such risk is acceptable to the firm. It requires assessing whether the expected fee is sufficient in relation to the audit of Highlard Packard Pty Limited.
6. The previous auditors should be contacted by the audit firm to evaluate whether any ethical or professional reason is there for which the audit engagement of Highlard Packard Pty Limited should not be accepted. The audit engagement should be refused if Highlard Packard Pty Limited does not permit the audit firm to do this.
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(a) Potential Threat |
(b) Actions to Eliminate any Threat |
(c) Safeguard |
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Self Interest Threat – A member of the audit team, Alan Gold, holds shares in the audit client, Smartwear Limited, and it may lead to the impairment of the independence and objectivity of the auditor. |
Alan Gold should immediately dispose of the shares in Smartwear Limited or he should not be the part of the audit team responsible for the audit of Smartwear Limited. |
CDO is needed to employ policies and procedures that restrict the employees from holding shares in any audit client. The firm should ask the audit team members to sign an independence declaration before joining the team. |
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Self-Review Threat – CDO provided valuation services of intellectual property which will be disclosed in the balance sheet of Smartwear Limited and this balance sheet will be audited by the same audit firm, CDO. |
There is a requirement of an independent valuation for the intangible assets disclosed on the balance sheet or CDO should not be appointed as the auditor of Smartwear Limited. |
CDO should employ a policy which will disallow the delivery of valuation services to the audit clients. It should be required to disclose all existing relationships and engagements before accepting a new audit client. |
It can be seen from the provided information that Cancer Care Association Inc. is a Sydney based small association. As per the audit strategy, it is not needed to assign a large audit team and use large resources to conduct the audit. The audit strategy should include providing a reasonable assurance about the financial statements of the company. It will require detail testing of the accounts and accounting records, accounting processes walkthrough and analytical testing. The main aim of the audit will be to assess whether the financial statements are free form material misstatements and whether the company has complied with the applicable framework for financial reporting.
Actions Needed for a Successful Audit of Highlard Packard Pty Limited
As per the provided information, Cheaper Chemist PTY Limited is a large company with a turnover of $600 million and an employee base of 500. It has been growing fast over the past ten years with a high reputation for its leadership, governance and management. Therefore, the audit strategy will include determining the analytical procedures to be applied as risk assessment procedures. The auditor will be needed to obtain a general understanding on the business operations and environment of Cheaper Chemist PTY Limited to identify the areas with a higher risk of material misstatement. After that, it will be needed to determine materiality. Since Cheaper Chemist PTY Limited is a large organization, the audit strategy will include determining both overall and performance materiality. In terms of appointing the audit team members, the strategy will be to include such members who have high skills, expertise and experience to perform the audit of Cheaper Chemist PTY Limited. At the same time, it will be ensured that adequate resources are deployed to perform the audit. It will be needed to test both the inherent risks and control risks at the assertion and balance sheet levels. The audit procedures will include test of controls and substantive audit procedures including test of details, test of transaction and analytical procedures.
In the provided scenario, the method of customer confirmation that would be appropriate to test the assertions of existence, and accuracy and valuation of accounts receivable as at 30 June 2022 would be the positive confirmation. Positive confirmation request can be regarded as a request that the confirming party directly respond to the auditor indicating whether the confirming party disagrees or agrees with the information in the request, or giving the information requested. This is the reason why a positive confirmation is strongly referred, as the audit evidence acquired from the positive confirmation is much stronger than the information gained from a negative confirmation method.
Information provided in the case study suggests that the account receivable of $56 million exist as at 30 June 2022, but it does not provide any proof of the accuracy of the amount recorded. It requires the auditor to undertaken the following steps:
- It is needed to send a confirmation request/letter to the customers of ABC Kitchenwear Limited, requesting specific information of the details about their dues.
- It is required to agree the debt to the supporting documentations such as sales invoice and signed delivery docket, or payment received after the year end.
- The auditor should verbally confirm the balances in accounts receivables.
Reviewing the subsequent receipts is a key audit procedures that the auditor undertakes when no response is received from the customers against the confirmation request sent, and it is a key audit procedure used for testing the existence assertion of account receivables. The auditor would review the subsequent receipts because it would help in verifying whether the amount in the outstanding receivables is subsequently received that is after the year end but before completing the audit. This would provide evidence on the existence of the dues from the customers, and evidence of the amount that was collectible.
a) As per the provided information, there has been a material misstatement in the statement of financial position and profit and loss statement because of the significant reduction in the useful lives of plant and equipment because of technological changes. It requires issuing a qualified audit opinion as the misstatement is material but nor pervasive, as it only affects the plant and equipment.
b) The basis of opinion should include that there has been a material misstatement in the statement of financial position and profit and loss statement of Black and White Pty Limited because of the reduction in the useful lives of plant and equipment due to the technological changes. It would materially misstate the plant and equipment account.
c) The format should be as follows:
Report on the Audit of the Financial Report of Black and White Pty Ltd
Qualified Opinion
Basis for Qualified Opinion
Key Audit Matters
Other Information
Responsibilities of the Directors for the Financial Report
Auditor’s Responsibilities for the Audit of the Financial Report
Report on the Remuneration Report
[Auditor’s name and signature]
[Name of Firm]
[Date of the auditor’s report]
[Auditor’s address]
a) As per the provided information, Red and Blue Pty Ltd failed to keep adequate accounting records as the accounts department was understaffed and chief financial officer resigned. It created an inability to obtain sufficient appropriate audit evidence on which the audit opinion is to be based. It was not possible to verify any yearend balance and there was dissatisfaction that all transactions took place during the yearend recorded and reported in the financial report of the company. Therefore, it is rational to assume that the potential effect of the adjustments are so pervasive that the financial report as a whole is materially misleading. Therefore, a disclaimer of opinion should be issued.
b) Under the basis of opinion section, it is needed to mention that it was not possible to obtain sufficient appropriate audit evidence on all the transactions occurred during the year in the financial report of Red and Blue Pty Ltd. It is also needed to mention that the auditor was unable to satisfy himself by alternative audit procedures. Therefore, the auditor was unable in confirming the account balances.
c) The format of the audit report should be as follows:
Report on the Audit of the Financial Report of Black and White Pty Ltd
Disclaimer of Opinion
Basis for Disclaimer of Opinion
Responsibilities of Management and Those Charged with Governance for the Financial Report
Auditor’s Responsibilities for the Audit of the Financial Report
Report on Other Legal and Regulatory Requirements
[Signature]
[Date of the auditor’s report]
[Auditor’s address]
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