Question:
Context
This group assignment provides students’ opportunities to be a part of an audit study. Ideally, there will be two members’ teams acting as management and other two members’ teams acting as auditor. Both management’s and auditor’s team shall prepare materials for debates based on the case.
Instructions
The debates should be focused on the outlines of the following four points or steps:
The audit planning documentation (includes gaining understanding of the client, identifying significant accounts and transactions in client’s record, and setting planning materiality) from the auditor team, and the anticipation of auditing materials (similar materials as with auditor team, except on anticipated basis) prepared for audit planning from the management team.
The audit evidence collected (request for information from management team may be facilitated by the lecturer in the process) based on substantive procedures from the auditor team, and the timely provision of the audit evidence provided by the management team.
The audit evidence collected based on testing of controls from the auditor team, and the anticipated defence (improvement of control by proposing changes) on existing internal control deficiency by the management team.
Case
Stronghold Ltd is an electronic component manufacturer located in Sydney. The following information relates to Stronghold Ltd at 30 June 2020 (except as noted)
Share capital
1,000,000 10% cumulative preference shares issued at $1 each
$1,000,000
2,000,000 ordinary shares issued at $1 each
$2,000,000
General reserve (balance 1 July 2019)
$600,000
Retained earnings (balance 1 July 2019)
$500,000
Revenue
$16,500,000
Cost of sales
$5,200,000
Depreciation expenses
$240,000
Interest expenses
$250,000
Other operating expenses
$450,000
Gain on sale of property, plant and equipment
$1,200,000
Income tax expense
$4,000,000
Cash at bank (balance 1 July 2019)
$850,000
Net increase in Cash in 2020
$1,200,000
Accounts receivable (net) (balance 1 July 2019)
$1,400,000
Inventories (balance 1 July 2019)
$1,900,000
Property, Plant and Equipment (balance 1 July 2019)
$9,580,000
Accumulated depreciation (balance 1 July 2019)
($1,200,000)
Net acquisition of PPE during 2020
$500,000
Net increase in accounts receivable (net) during 2020
$80,000
Net decrease in inventories during 2020
($280,000)
Accounts payable (balance 1 July 2019)
$800,000
Accounts payable (balance 30 June 2020)
$880,000
Loans payable, interest-only loan (balance 30 June 2020)
$1,000,000
Directors declared and paid dividends of 5% on the preference shares and 10c per share interim on ordinary shares
During the year, one of Stronghold Ltd’s major suppliers went bankrupt one month ago, causing major product shortages. To overcome the problem, Peter James, the husband of the finance director, Natalie James, provided electronic components to Stronghold Ltd through his private company. There is no formal agreement in place with Peter James, however, the goods are being provided at competitive prices. You are concerned about the electronic components that Peter James’ company is supplying, because his products are new to the market and there is rumour that some of Stronghold Ltd’s staff complaining that they are of poor quality.
Nick Long, CEO of Stronghold Ltd, has an older brother, Peter Long, who currently lease his property to Stronghold Ltd at a price lower than market rate. The rent on the Stronghold’s premise is currently $5,000 per fortnight.
The additions and disposals of fixed assets (PPE) during 2020 have not been significant. The factory was acquired four years ago at $6 million with an estimated useful life of 40 years. Since that date no independent valuation has been carried out. The finance director has assured you that the current market value of the factory is not less than $5.4 million
The auditor has obtained the account of internal control for the cash receipts and billing functions in Stronghold Ltd as the preliminary investigation. The accounts receivable supervisor at Stronghold Ltd independently verifies the pricing and other details on the charge form by reference to a management-authorised price list, corrects any errors, prepares the invoice, and supervises a part-time employee who mails the invoice to the customers. The accounts receivable supervisor electronically posts the details of the invoice in the accounts receivable subsidiary ledger; simultaneously, the transaction’s details are transmitted to the bookkeeper. The accounts receivable supervisor also prepares a monthly computer -generated accounts receivable subsidiary ledger without a reconciliation with the accounts receivable control account, and a monthly report of overdue accounts.
The cash receipts functions are performed by the cashier, who also supervises the cash register clerks. The cashier opens the mail, compares each cheque with the enclosed remittance advice, stamps each cheque “for deposit only”, and lists cheques for deposit. The cashier then gives the remittance advices to the bookkeeper for recording. The cashier deposits the cheques daily, separate from the daily deposit of cash register receipts. The cashier retains the verified deposit slips to assist in reconciling the monthly bank statements, but forwards to the bookkeeper a copy of the daily cash register summary. The cashier does not have access to the journals or ledgers.
The bookkeeper receives the details of transactions from the accounts receivable supervisor and the cashier for journalising and positing to the general ledger. After recording the remittance advices received from the cashier, the bookkeeper electronically transmits the remittance information to the accounts receivable supervisor for subsidiary ledger updating. The bookkeeper sends monthly statements to customers with unpaid balances upon receipt of the monthly report of overdue balances from the accounts receivable supervisor. The bookkeeper authorises the accounts receivable supervisor to write off accounts as uncollectible when six months have passed since the initial overdue notice was sent. At this time, the credit manager is notified by the bookkeeper not to grant additional credit to that customer.
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