AAA_Study_Guide_Questions_and_Answers_3rd_edition.pdf.

Study guide Questions and Answers ADVANCED AUDIT AND ASSURANCE To be used in conjunction with Advanced Audit and Assurance, 3rd Edition. ii | ADVANCED AUDIT AND ASSURANCE Contents Question 1.1 1 Question 1.2 2 Question 1.3 4 Question 1.4 5 Question 1.5 6 Question 1.6 7 Question 1.7 8 Question 1.8 9 Question 1.9 10 Question 1.10 11 Question 1.11 12 Question 1.12 13 Case study 1.1: Principles of professional conduct 14 Case study 1.2: Toe Ltd 20 Case study 1.3: Galaxy Ltd 21 Case study 1.4: Analyse Reading 1.1 23 Case study 1.5: Analyse Reading 1.2 26 Question 2.1 29 Question 2.2 30 Question 2.3 31 Question 2.4 32 Question 2.5 33 Question 2.6 37 Question 2.7 38 Question 2.8 39 Question 2.9 40 Question 2.10 41 Question 2.11 43 Case study 2.1: Public sector audits 44 Case study 2.2: LRS Ltd 45 Case study 2.3: Potholders Ltd 46 Case study 2.4: Professional scepticism 49 Case study 2.5: JBR Ltd 50 Case study 2.6: HIH and the independence of auditors 51 Case study 2.7: HIH 53 Case study 2.8: WorldCom 55 Case study 2.9: Clive Peeters 56 Question 3.1 58 Question 3.2 59 Question 3.3 60 Question 3.4 61 Question 3.5 62 Question 3.6 63 Question 3.7 64 Question 3.8 65 Question 3.9 66 Question 3.10 67 Question 3.11 68 Question 3.12 72 Question 3.13 74 CONTENTS | iii Case study 3.1: LM Ltd 77 Case study 3.2: Beta Ltd 79 Case study 3.3: Dobbie Pty Ltd 82 Case study 3.4: Acme Ltd 84 Case study 3.5: China Wide Consortium 86 Case study 3.6: ProGolf Ltd 90 Case study 3.7: Cosmic Electronics Ltd 94 Case study 3.8: Timber floors 95 Case study 3.9: Airline industry 96 Case study 3.10: Creamy Ltd 98 Case study 3.11: QRS Ltd 99 Case study 3.12: MNO Ltd 104 Question 4.1 106 Question 4.2 108 Question 4.3 109 Case study 4.1: The Education Fund Ltd 110 Case study 4.2: Gamma Pty Ltd 113 Case study 4.3: Interlock Pty Ltd 114 Case study 4.4: Huggins Ltd 117 Case study 4.5: Amna Ltd 121 Case study 4.6: South Ltd 124 Case study 4.7: Clark Ltd 128 Case study 4.8: Pet Ltd 132 Case study 4.9: Carey Ltd 136 Question 5.1 138 Question 5.2 140 Question 5.3 141 Question 5.4 143 Question 5.5 145 Question 5.6 147 Question 5.7 149 Question 5.8 151 Question 5.9 153 Case study 5.1: Idealic Pty Ltd 154 Case study 5.2: E- Ltd 156 Case study 5.3: Diabetes Victoria 158 Case study 5.4: Manna Pty Ltd 161 Question 6.1 163 Question 6.2 164 Question 6.3 165 Question 6.4 166 Question 6.5 167 Question 6.6 169 Question 6.7 170 Case study 6.1: Performance reporting by departments 172 Case study 6.2: Home Care Service 173 Case study 6.3: Starlights Defence Force 176 Question 7.1 180 Question 7.2 182 Question 7.3 183 Question 7.4 184 Question 7.5 185 iv | ADVANCED AUDIT AND ASSURANCE Question 7.6 186 Question 7.7 189 Question 7.8 190 Question 7.9 191 Case study 7.1: Key performance measures 192 Case study 7.2: RST Ltd 195 Case study 7.3: Internal control system 198 Case study 7.4: OnTrend Appliances Ltd 200 Case study 7.5: Trivoria Kneeball League 202 Case study 7.6: XYZ Ltd 205 Part 1: Client continuance 207 Part 2: Ethics 208 Part 3: The engagement letter 212 Part 4: Understanding the entity and its environment 214 Part 5: Preliminary analytical procedures 221 Part 6: Misstatement risk for sales, receivables and cash 227 Part 7: Tests of controls 233 Part 8: Substantive tests 238 Part 9: Using audit software 241 Part 10: Audit differences 243 Part 11: Audit reporting 247 Part 12: The fraud triangle 250 Part 13: Management’s responsibility for fraud 253 Part 14: Professional scepticism 255 Part 15: Audit team communications and fraud 258 Part 16: Whistleblowing policy 263 Part 17: Fraud risk assessment 264 Part 18: Board oversight 266 Part 19: Analytical procedures for 20X7 270 Part 20: Summary of fraud risk factors 275 Part 21: Audit approach 277 Part 22: Review of the general journal 279 Part 23: Management override of controls 281 Part 24: Management representations 282 Part 25: Reporting obligations 283 Part 26: Continuing the audit 285 Part 27: The Australian wine industry 287 Part 28: Review of minutes 289 Part 29: Management’s assessment of going concern 291 Part 30: Analytical procedures for 20X8 295 Part 31: Evaluating management’s assessment of going concern 301 Part 32: Mitigating factors 306 Part 33: Segment level analysis 308 Part 34: Auditor’s going concern assessment 312 Part 35: Auditor’s reporting considerations 313 Part 36: Further communications 316 Part 37: Communicating key audit matters in the audit report 318 Study guide Questions and Answers | 1 Question 1.1 Outline where you would expect to see the words ‘shall’, ‘should’ and ‘may’ in auditing standards. The word ‘shall’ is used in ISAs and ASAs to indicate the auditor’s mandatory requirements (they are in the ‘Requirements’ section of these standards). For example, see ASA 101, para. 9: ‘The auditor shall apply the mandatory components of the Australian Auditing Standards when conducting an audit …’. In the previous AUSs, the word ‘should’ is used to describe the auditor’s responsibility. Such instances are now rare. The word ‘may’ is used within the ‘Application’ and ‘Other Explanatory Material’ sections of the ISAs and ASAs. For example, see ASA 210, para. A1: ‘Assurance engagements, which include audit engagements, may only be accepted …’. 2 | ADVANCED AUDIT AND ASSURANCE Question 1.2 Consider the following three requirements of audit firms. Complete the table by describing practical policies and procedures a firm could implement to ensure compliance. Requirements of audit firms. Practical policies and procedures Requirements of audit firms Practical policies and procedures 1. Audit firms must have policies and procedures to provide reasonable assurance that the firm and its personnel maintain independence. 2. Audit firms must communicate with and educate partners and professional staff, including non-audit personnel, to ensure they understand the independence policies that relate to their activities. 3. Audit firms must maintain adequate records to identify, communicate and monitor compliance with specific independence requirements (e.g. prohibited investment lists).