QUESTION 1 (13 MARKS)

 Background

 Assume you are Chris Mula, the audit manager at RCD Chartered Accountants (RCD) in charge of the financial statement audit of Creative Minds Pty Ltd (CMPL).

CMPL is a toy wholesaler to both retail outlets and educational institutions. Over the last eight years of being an audit client of RCD, HT has grown at a steady pace. However, during the current financial year, sales have doubled, mainly as a result of the market leader in the toy wholesaling industry collapsing amid the global financial crisis (GFC).

 

As a result of the sudden increase in demand, the following changes have taken place in the business:

 

• Product lines have more than doubled, with CMPL importing the majority of stock for the first
• Warehousing of stock has been decentralised, with CMPL now operating five warehouses around Australia, rather than the single warehouse it previously maintained near its offices in
• CMPL’s IT system was replaced during the year. Previously, CMPL operated an off-the shelf package with minor modifications. The new system is a specialised system that was designed and built specifically for The new system lets CMPL operate a true e-commerce system, allowing automatic re-order of stock by customers’ systems, and fully automated invoicing. The IT system is considered one of the best of its kind in the country and, due to its complexity, came at a large cost to CMPL. Future enhancements would need to be contracted out, as CMPL does not have the skills in-house to alter the system.
• As a result of the rapid growth in CMPL’s operations, staff numbers have almost doubled in the past

 

You have been allocated the task of planning the audit for the year ending 30 June 2020. From your prior year file review and discussions with CMPL’s management, you note the following:

• The senior levels of your audit team are very experienced in dealing with CMPL – both the audit partner and yourself have completed the engagement for the last five
• For each of the years that CMPL has been an audit client of RCD, it has received an unmodified
• Substantial reliance has been placed on the CMPL internal control system for the last two years and in a brief conversation with you in the office hallway, the CMPL audit partner said that he expects that RCD should be able to place substantial reliance on internal controls at CMPL again for this year-end’s audit.
• Preliminary analytical procedures around accounts receivable balances indicate that CMPL is not collecting its accounts receivable balances in a timely manner; days sales outstanding has increased from 45 days to 59 days year-on-year.
• The audit partner views the CMPL audit as a very low risk engagement because of the strong management control and supervision of operations in the business that have historically been exerted by the experienced management
• During the IT system changeover, the inventory tracking module did not work when the system went live. As a result, manual inventory tracking procedures needed to be used for one
• Many long-standing employees have left CMPL as a result of changes that they deemed overly complex. None of these resignations was above middle management

 

Required:

 Prepare a memo for the audit partner outlining the results of preliminary enquiries and analysis with respect to the planning of the CMPL 2020 year-end audit. (11 marks)

 

• Describe the impact of APES Standards on the planning of your (2 marks)

 

QUESTION 2 (12 MARKS)

 Background

 Creative Hardwares Pty Ltd (CHPL) is a national hardware retailer that is listed on the Australian Securities Exchange (ASX). CHPL introduced a new executive compensation plan (ECP) on 1 July 2019. The plan allows for cash bonuses to be paid to executive directors under the following terms and conditions:

 

• A bonus will be paid if the company’s earnings per share (EPS) exceed ‘normal’
• ‘Normal’ EPS has been agreed to be $0.65 per
• The bonus is calculated to be 5% of any profit generated in excess of that required to result in an EPS of

$0.65.

The draft financial statements for the year ended 30 June 2020 show an EPS of $0.922 per share and a bonus payable under the ECP of $108,800.

Additional information

 

On 1 December 2019, CHPL entered into an agreement with Apex Investment Pty Ltd (Apex Investment) to lease a property to Apex Investment. The terms of the agreement are as follows:

• The period of the lease is 20
• The consideration payable to CHPL at the inception of the lease is $2.5 million.
• The interest rate implicit in the lease is 5%.
• CHPL signed an unconditional agreement to repurchase the property after six years for a fixed amount of

$3.43 million.

At the request of the executive directors of CHPL, the property has been derecognised from the statement of financial position and a profit of $1.5 million has been recognised in the statement of comprehensive income. The $1.5 million profit was calculated by comparing the $1 million carrying value of the property prior to disposal with the consideration received.

Prior to derecognition, the property was being depreciated on a straight line basis at 5% per annum, based on an initial cost of $1.4 million.

 

Required:

You are employed as a senior auditor by RCD Chartered Accountants (RCD).

(a)   Determine whether or not the correct accounting treatment has been adopted by CHPL in relation to the transaction between the company and Apex Investment. If you determine that the accounting treatment adopted is not correct, advise on the correct accounting treatment. (5 marks)

• Explain why the directors may have been motivated to adopt the accounting treatment that has been (3 marks)
• Determine whether the directors have acted unethically and what (if any) impact this would have on you, as auditor of (4 marks)

QUESTION 3 (25 MARKS)

NOTE: In answering this Question, use APA referencing style and support your answers with relevant accounting and auditing standards as well as published peer-reviewed academic journals. A minimum of 5 peer-reviewed academic journals is expected. (Hint: this is a great opportunity to utilise the University’s Library Services online such as Library Search, Advance Search, eJournals and Databases such as EBSCOhost, etc.) You are expected to support your answers with the relevant Australian Accounting Standards and Australian Auditing Standards and with authorised/published Peer- reviewed Academic Journals and Articles.

 

Case Background

In February 2012, the Australian Accounting Standards Boards decided at its meeting to propose the withdrawal of AASB 1031 Materiality. There were several reasons for this proposal which includes: there is no International Reporting Standard equivalent and it does not look like there will be, since 2005 there has been the gradual withdrawal of additional Australian guidance from a number of Australian Accounting Standards, and there is now an updated guidance on materiality in the IASB Conceptual Framework.

 

The major impact of the withdrawal of AASB 1031 is the removal of the specific quantitative guidance for materiality. The withdrawal of AASB 1031 became effective to annual reporting beginning on or after 1 July 2015.

Required:

1. Prior to the withdrawal of AASB 1031 and with reference to the AASB 1031 Materiality (issued by the Australian Accounting Standards Boards - AASB) and the ASA 320 Materiality in Planning and Performing an Audit and ASA 450 Evaluation of Misstatements Identified during an Audit (issued by the Auditing and Assurance Standards Board – AUASB):
   1. What is materiality as per the Accounting Standards and Auditing Standards? (2 marks)
   2. Outline the qualitative and quantitative guidelines of materiality as per the Accounting Standards and Auditing (5 marks)
   3. Before the removal of AASB 1031, how do the standards and guidelines of “materiality” influence the auditors’ judgment on materiality level and material misstatements? Provide (5 marks)

 

1. Post withdrawal of AASB 1031, and with supporting academic research articles in accounting/auditing research in materiality, would the removal of AASB1031 Materiality Standards:
   1. harmonise/bring uniformity/homogeneity to auditors’ assessment of materiality misstatements or would this bring disparity/heterogeneity to auditors’ assessment of misstatements? Explain your answer. (4 marks)
   2. What other factors or influences, if any, the removal of AASB 1031 would impact the auditors’ judgment on materiality? Explain your (4 marks)
   3. What are the implications this would have on the usefulness of financial reports? Discuss your answer and (5 marks)