ACFI3005 Auditing And Assurance Assignment 3

Unit Code & Title :- ACFI3005 Auditing And Assurance
Assessment Type :-  Assignment 3
Part A – Discussion
This part is separated from part B below. It aims to help you step away from the technical knowledge for auditing and do research on different issues that challenge the audit industry.
Your task:
1. Find a company whose auditor has given a modified audit opinion on the financial statements after 1 Jan 2020.
2. Briefly describe the case and identify basis and situations supporting the audit opinion.
Please use an essay format for your discussion.
ACFI3005 Auditing And Assurance Assignment 3

Part B – Report
Background :-
Curtains Master is a large proprietary company established in North Queensland in the 1990s selling a wide range of high-quality fabric curtains for household decoration. The company purchases products from manufactures in Vietnam Bangladesh and China and then sells its products to wholesales customers in Australia Germany and the United States. The company also places its products on consignment in various small retail stores in Queensland. Sales mainly peak from the second half of the financial year generating an average of 60% of revenue for the whole year. In past years the company has performed well with its profit rate at around 12% and an average increase in annual revenues of 5%.

In the last two years the company has extended its marketing from Germany to other countries in Europe. As a result of this, in the budget for the year 2019-2020, the company while aiming to maintain its profit rate plans to increase its revenues by 8%. The company uses USD to pay its suppliers and EUR or USD or AUD in its dealings with customers.

While the business is expanding in Europe sales in Australia and US are struggling to reach their targets. These markets are quite competitive providing more affordable products with a large range of designs and choices. Further, in recent years, countries like Vietnam and China have become more eco-conscious, attempting to reduce their industrial impact on the environment.

As such textile manufacturing has been discouraged with strict regulations.
Some of CurtainsMaster’s suppliers have reduced their production capacity and have experienced an increase in production costs.

Managing inventory on consignment has been an issue for CurtainsMaster in the past 12 months. On several occasions, the company lost track of their inventory movements and status at the various retail premises.

To support the business expansion and strengthen internal controls for inventory, in January 2020 the company installed a new inventory management system on the cloud which allowsinventory movements to be followed up from production to end-users. The system will also help to follow up and calculate inventory ageing from the day the inventory was entered into the system. In the past five years old and work-in-progress inventory has piled up due to new designs orders cancelled by customers or specification problems. When the new system was implemented these stock items together with others were entered into the system as the beginning balance for the inventory.

ACFI3005 Auditing And Assurance Assignment 3

Since January 2020, CurtainsMaster has also experienced significant impact due to the COVID-19 pandemic. Approximately 50% of customer orders due to be delivered in May June and July have been cancelled.

Payments from customers have been delayed as they have also been impacted by the situation. Since the middle of February the company’s sales at small retail stores have decreased dramatically by approximately 70%. From the middle of March, 60% of staff both casual and full-time were made redundant.

For the last three months of the current financial year, the company is expecting to have no sales but still pay another 10% of the current total expenses. To minimise the impact of a tight cashflow in February when the financial market was peak, the company sold all its financial investments and generated some extra cash for the business before the market dived in March. However things can get worse there is much uncertainty and no clear indication of when the pandemic will end.

Requirements :-
Assume you are one of the audit team members who will conduct the financial report audit – year ending 30 June 2020 – for Curtains Master. Using the company’s information given above prepare a report dated June 10, 2020 for the audit manager outlining the audit plan. As it is the beginning of the audit do not prepare a final audit report/opinion. The report should cover the following areas under the suggested headings

ACFI3005 Auditing And Assurance Assignment 3

1. Risk Assessment
From the background and financial information given above:
i. identify and explain four (4) potential HIGH risks including BOTH inherent risk and control risk (doesn’t matter how many of each).
ii. for each risk listed, identify the type of risk (inherent risk or control risk and the associated financial accounts and key assertions that would be affected.

Please use the following table to present your answers:

2. Analytical Procedures

As part of the risk assessment phase, you conducted analytical procedures and the results are as below:

Using the above analysis and financial information given
1. discuss the results of the analytical procedures by outlining four (4) potential problem areas that is where possible material misstatements in the financial reports exist and any other special concerns for example going concern.
2. Specify the account balances and related assertions that would require particular attention in the audit.
3. For each problem identified you must use the above quantitative analysis to support your argument.

Please use the following table to present your answers:

Potential risk – type of risk                Accounts                                Assertions
description

3. Planning Materiality
The audit firm dictates that one planning materiality amount is to be used for the financial statement as a whole. The planning materiality bases are as follows:

ACFI3005 Auditing And Assurance Assignment 3

Based on the information given and your risk assessment
a. select the base for planning materiality that you believe is most appropriate and provide three reasons justifying the base you have chosen
b. calculate the planning materiality.
You can refer to Cloud 9 case and textbook pages 123-125 and other resources for further understanding.

4. Conclusion
Based on the risk assessment processes and analytical procedures undertaken in the previous sections conclude the overall level of risk materiality of the firm and recommend the areas of audit focus.