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Audit Individual Assignment

ACCT410 Section 3

Rainbow LAU Yi Tak (104063)

Chapter 36 Case Study 4


With the acquisitions of Amber Pan Europe (Amber), we, the audit team, should plan carefully for the consolidated financial statements, for the group. There are several things needs to be reminded. First of all, we should understand the environment of the subsidiaries, like Talc, Socolla, which entered the group of Amber. Secondly, we should be aware of intra-group transactions between Amber and its subsidiaries. We should make sure the adjustments of intra-group transactions have been made. Reconciliation should be made. For example, the investment in Socolla should be eliminated in the group financial statement. Thirdly, we have to set up the materiality level for the group, materiality for particular area, materiality level for different subsidiaries and also the clearly trivial level for subsidiaries as reference. Fourthly, we should make sure the accounting policies of the subsidiaries are consistent and the financial year ends of different entities in the group are the same. If they are not consistent, the

group financial statement would not be correct or they have to calculate proportionally or make disclosure. Also, we have to discuss with the auditor of Socolla whether they would work as the groups auditors and if they provide adequate work for the groups financial statement. We should send a letter to request for cooperation with Socollas auditors. Then, they have to discuss the adequacy of audit work, the audit procedures and the timetable of the group audit works so that they can follow. Last but not least, we should discuss with the component management that the authority and responsibility of the auditors and the component management responsibility. We should inform
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Audit Individual Assignment

ACCT410 Section 3

Rainbow LAU Yi Tak (104063)

them what they should provide when we prepare the group audit work. may monitor and assess the companys control system and its IT system.

Also, they should know we

Chapter 44 Case Study 4


a. It is always difficult to detect the related party transactions. The related parties may operate in a complex way and the auditors cannot recognise it due to the complexity. Besides, the IT

system may be ineffective to identify and assess the transactions and balances that was outstanding. Also, the related party transaction cannot be recognised easily since it is not stay in the normal market terms and condition. Some of them even without the exchange of

considerations. Moreover, since the related parties want to keep on operation in a going concern way. They would present their status in a favourable way, therefore, it increases the difficulties for detecting such related parties transactions. b. To identify the related parties transactions, we would suggest some audit procedures. The auditors can practice test of details with the balances and transactions. check if the transactions are being recorded correctly. The auditors can also check the minutes of the board of directors or the shareholders. Also, auditors should review the large balances, for example, the large outstanding balances or the balances outstanding for a long time. They should also review the unusual items to check if they have relationships with the related parties. To add more, they can check the confirmations from the banks. So that they can match with the company record and check whether it incur error or fraud or not. c. The company should ask the Sales Director if he does not have any related parties with the companys business. The Sales Director should report the conflicts of interests. So that they can

The company should check the company thoroughly and the sales record to check if there are
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Audit Individual Assignment

ACCT410 Section 3

Rainbow LAU Yi Tak (104063)

any related parties transactions with the Coutier Limited. Also, the company should strengthen their internal control to increase the awareness of the related parties transactions. The company should set up some rules and regulations to enforce the directors who are important and have large delegation of the company to report their conflicts of interests to the company. The company should also check the item and terms in the contract with Coutier Limited to check whether it is unfair with the other companies. If there are some unfair items on the

contract, the auditors should discuss with the management to see whether it is appropriate. The auditors should request written representations from the management level of the company, Chao & Co. to show that the management level have provide adequate information, relationships and transactions, with the requirement of regulatory framework. Also, they

should make sure that they have disclose the identification of related parties to the auditors.

Audit Individual Assignment

ACCT410 Section 3

Rainbow LAU Yi Tak (104063)

Chapter 48 Case Study 7


a. We should evaluate HKMs internal auditors objectivity of the internal audit function, for example, the organizational status of the internal audit function of the entity and the appropriateness of the internal audit reports and make sure there are no conflicting responsibilities of the internal auditors to the companies and the restrictions imposed by the management level to the internal auditors. Also, we have to evaluate whether the internal auditors carried out their work with due professional care. The internal audit activities should be planned properly and supervised carefully and make appropriate documentations. Also, the audit manuals should fulfilled the existence and adequacy.. Besides, the technical competence of the internal auditors should be enough to let them provide professional opinions. And we should also make sure that they have established policies for recruiting the internal auditors and provide adequate trainings for them. Last but not least, we should make sure effective communication exist between HKMs auditors and us. For the work they performed, we should evaluate the nature and scope of work performed by the internal auditors. We should also assess the risk of material misstatement at the assertion level for particular classes of transactions, account balances and disclosures. Moreover, the subjectivity that would affect the evaluation of the audit evidence by the internal auditors should be evaluated. b. We would not use the work of HKMs internal auditors in the specific ways suggested by Mr. Lee. First of All, for the year-end physical inspections of the property, plant and equipment, we can observe that the amount of property, plant and equipment has increased around HK$100 million this year which is unusual. We should practice physical inspection by us once again
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Audit Individual Assignment

ACCT410 Section 3

Rainbow LAU Yi Tak (104063)

and check whether it is correct or not especially the financial reports would announce publicly which will affect the intention of the investors. Besides, for the on-going monitoring activities of the completeness of acquisition of merchandise from suppliers, we can find that the amount of trade and bills payable increased more than HK$100 million. Since we keep on monitoring on the activities of suppliers, we

can just practice test of totality which sum up the single accounts with the books.

Audit Individual Assignment

ACCT410 Section 3

Rainbow LAU Yi Tak (104063)

Chapter 28 Case Study 7


a. Sampling risk that arise from A&Bs conclusion refers to the risk that the auditors conclusion based on a same may be different from the conclusion if the entire population were subjected to the same audit procedures. Non-sampling risk that arise from factors that affect A & B to conclude a conclusion wrongly for any reason not related to sampling risk. For example, A&B may practice inappropriate audit procedures or incorrectly obtain audit evidence and fail to detect the error or fraud. Sampling risk can be reduced by increasing sampling size while non-sampling risk cannot can they can be reduced only if they planned the engagement activities and review the transaction properly. b. While performing test of details on the DEF Ltd, a class of transaction or its balance might be stratified by monetary value. The auditors may perform the procedures on a higher value items which has a higher possibility of overstatement and with high risk of monetary error. have to make sure if the untested part is not material. If the variability in the monetary size of items in the sampling size is high, test in group in similar items would be more effective. When the population can be stratified, the strata would be definitely less than the sample size before. The effectiveness of A & B audit procedures is workable when the sample are selected from significant value items rather than various non-representing items. c. For the cash balance in outlets, the auditors can practice a walkthrough on the collecting money process. walkthrough test. Besides, the auditors can reconcile the cash balance with actual cash and check the credit card
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Also, they

So they can check the possibility of error and fraud when practicing the

Audit Individual Assignment

ACCT410 Section 3

Rainbow LAU Yi Tak (104063)

sales with the receipts placed in the outlets. Also, they can ask the supervisor to keep the cash balance remain less the routine expense of outlets. Last but not least, they should perform a surprise visits to the outlets and practice the cash count. d. For the $10,000,000 bank loan outstanding at the year-end, the auditors should request the confirmations by the bank and check the loan details including the loan amount and interest and the term for repayments.

Audit Individual Assignment

ACCT410 Section 3

Rainbow LAU Yi Tak (104063)

Chapter 29.2 Case Study 1


The auditors of Luxe can use CAAT to perform substantive procedures to audit Luxes payroll related expenses in the following ways. The auditors can compare the details of the each employees payroll to the payroll master file to ensure the accuracy and completeness. Besides, the auditors can select sample from the master file to check the accuracy of each transactions. Also, the auditors can practice the surprise check on the distribution of payroll to make sure whether the employees get the corresponding salary. The auditors should also calculate the ratio expense to profit ratio to show the proportion of payroll is too large. And make the management level be aware of it. The auditors should also perform test runs to contain some test data to check whether it is correct before submitting the information for audit and preparing audit report.

Reference
Lau, T.Y.P. and Lam, C.Y.N. (2012). Auditing and Assurance in Hong Kong. 3rd Edition, Pilot Publishing Company. Ch.28, 29, 36, 44, 48