ACC305: Steel Pty Ltd (Steel) | Luke and Zane-Big Four Accounting Firm | Peak Sawmill Limited - Report Analysis Assessment Answers

August 04, 2017
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Solution Code: 1BCA

Question: Research and Analysis Assignment

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Scenario One:

You have been asked by your audit client, Bolts Ltd (Bolts), to prepare a report that analyses the potential acquisition of Steel Pty Ltd (Steel). Prior to conducting your analysis, you decide to verify the accuracy and completeness of the cash flow statement provided by Steel for the year ended 30 June 2012. After reviewing a draft of your analysis, the chief financial officer (CFO) of Bolts has asked you to focus your attention on the sales and profitability of Steel and to avoid the distraction of cash flow reporting. He suggests that the acquisition will provide substantial future financial benefits to Bolts and that confusing the board with cash flow issues would not be helpful to the acquisition or to the likelihood of your being asked to undertake similar engagements in the future.

Required

List two threats to compliance with the fundamental principles that may exist resulting from your discussion with the CFO, and identify the fundamental principles at risk of being breached.  

Scenario Two: 

Luke and Zane are two audit seniors working for the same Big Four accounting firm. Both started employment with the firm around the same time. They have mutual respect for each other; however, they have been highly competitive since they commenced work together.

Luke has recently married and he and his wife are paying off their mortgage. Zane is single with a reputation in the firm for playing hard but working hard too. They have both been seniors for almost 18 months and are looking for promotion to audit supervisor. They are both aware that there is only one supervisor position available.

Luke recently replaced Zane on a particular job, and the reason given to both Luke and Zane was that another assignment had arisen with a long-time client of Zane's. Once Luke had replaced Zane on that particular job, he realised that the client had called the audit manager to say that they were not impressed with Zane, as he had missed a number of issues within the audit and was arriving at work late. The audit manager had not discussed these comments with either Luke or Zane. After going through the work that Zane had completed, Luke realised that Zane had performed an excellent job, identifying a number of issues that he thought he might possibly have missed. Furthermore, Luke suspects that Zane and the client had a personality conflict, and that the client has misled the audit manager.

Luke realises that he can finish off the audit, resolve the issues and obtain a good review from this assignment, which would help him in the promotion stakes. He also knows that the audit manager is unlikely to bring the client's unsupported allegations to Zane's attention.

Required

  1. Work through this scenario using the American Accounting Association decision making model, and decide what action Luke should take.

  1. Would your decision be any different if you used the Mary Guy decision-making model?  

Scenario Three:

The Peak Sawmill Limited (Peak) operates a timber sawmill in a large regional town. It sources its raw material (pine logs) from a number of local growers and from its own plantations. Logs are transported on large trucks that are weighed in on the company's weighbridge and weighed out after dropping their loads in the storage area. Logs are then debarked and sawn to size in the cutting area of the mill. The various logs are then sent to other areas of the sawmill depending on what they will be used for.

You are a senior on the audit. In the planning stage of the audit, you perform analytical procedures. In the current audit period, the average number of days to pay creditors has declined significantly from the average recorded over the past three financial years.

Your investigation reveals that log suppliers represent more than 90 per cent of the value of accounts payable. As an internal control, details of the goods received notes are matched against the supplier's invoice. The accuracy of the invoice is checked, after which the invoice is authorised for payment by the mill accountant. Any discrepancy between what the supplier's invoice amount should be and the actual amount charged by the supplier is communicated to the supplier by way of a pre-numbered ‘request for credit’ form. This form provides reasons for the differences and the amount requested to be credited to the company by the supplier.

The correct amount of the invoice is entered into the accounts payable accounting system and the supplier's monthly statement is reconciled to the accounts payable balance per the creditors' ledger at month end. The differences are mostly attributable to:

  • unprocessed invoices due to pricing differences

  • timing differences in the recorded date of a payment made

  • amounts requested for credit

  • settlement discounts disallowed.

Cathy Vernon, the company's financial controller, informs you that due to the increase in the price of timber, new contracts with suppliers have been negotiated over the past year. The accounts payable personnel have complained that management is too slow in informing them about the effective dates of the implementation of the contracts and the revised prices. A brief inspection of the accounts payable reconciliations for five of the biggest suppliers indicates that many invoices are being held back due to the lack of correct pricing.

Required

  1. List two key assertions at risk in relation to accounts payable.

  1. Provide your justification for each assertion.

  1. For each assertion, outline one substantive test of detail to obtain sufficient appropriate audit evidence.

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Solution:

Scenario 1

The fundamental principles of auditing include the following expectations from the auditor:

  • Integrity and honesty in all professional relationships.
  • Objectivity or not allowing undue influence of others in professional judgments.
  • Professional competence and due care including knowledge and skill as expected by the client based on current standards.
  • Confidentiality and not to disclose clients information to third parties without authority, unless warranted by professional duty.
  • Professional behaviour to comply with the standards of the profession. (Apesb,2016)

The two threats to compliance with the fundamental principles that may exist resulting from the discussion with the CFO include:

  • The fundamental principles of auditing i.e. the objectivity wherein the auditor reports free of allow bias and undue influence of others and uses his professional judgment would be at risk.
  • The other auditing fundamental relating to exercise of Competence and Due Care while performing the audit and use of his best professional knowledge and skill commensurate and as expected for the post acquisition audit such that the client i.e. the company in this case; is given a true and fair evaluation would be missing. It is important for the auditor to discharge competent professional service based on acting diligently and in accordance with professional standards. The code of ethics for professional competence; APES 110 specifically mentions rules in this regard.

Based on the above, it is all right for the auditor to verify the accuracy and completeness of the cash flow statement provided by Steel for the year ended 30 June 2012.

The claim made by the CFO that the acquisition will provide substantial future financial benefits to Bolts and that confusing the board with cash flow issues would not be helpful to the acquisition or to the likelihood of the auditor being asked to undertake similar engagements in the future is not tenable or sustainable and may even be reported to by the auditor to the owners of the company. The fundamental principles at breach would be the objectivity, professional behaviour and competence expected from the auditor.

The CFO’s advice will result in ignoring and breaching the fundamental principles of accounting also. As per AASB 107, the review of the cash flow statement coupled with the balance sheet and income statement would enable the users to judge the changes in net assets, financial structure, solvency and sufficient liquidity in order to meet the cash requirements as and when required. It will also point out to the cash generation ability of the entity after acquisition based on which users might like to take decisions based on their assessment of the present value of the future cash flows of the entity after acquisition.  The perusal of the cash flow information will also enable the elimination of the effects of using different accounting treatments for the similar transactions. The perusal of the historical cash flow information may also clearly indicate to the auditor the amount, timing and certainty of future cash flows and in examining the relationship between profitability and the associated cash flows. (Aasb,2016)

Scenario 2

Working on through this scenario using the American Accounting Association decision making model, Luke has alternative courses of action to decide and choose from. Following the steps of the model, the implications of each alternative will be clear to the auditor which will impact the quality and propriety of his final decision.

Step 1: The facts of the case

the facts are that Luke has found out that Zane had done an excellent job of audit so far but has also identified a number of issues and has a suspicion that the client had a personality conflict with Zane and had also misled the audit manager.  He can finish off the audit easily and get the promotion without pointing out these flaws to anybody. He is sure that the audit manager would not bring anything to Zane's attention.

Step 2: The ethical issues involved

the ethical issue is whether Luke should by instinct finish off the audit without pointing out the anomalies and get the promotion. This way he would compromise on his Professional competence and due care including knowledge and skill as expected by the client based on current standards, Professional behaviour to comply with the standards of the profession and Integrity and honesty in all professional relationships.

Step 3: The values at stake

Luke is expected to finish off the audit as per the fundamental principles of auditing including the following expectations from the auditor:

  • Integrity and honesty in all professional relationships.
  • Objectivity or not allowing undue influence of others in professional judgments.
  • Professional competence and due care including knowledge and skill as expected by the client based on current standards.
  • Confidentiality and not to disclose clients information to third parties without authority, unless warranted by professional duty.
  • Professional behaviour to comply with the standards of the profession.

Step 4: The alternatives available

Alternative 1 to finish off the audit, get good rating as well as the promotion. Alternative 2 to report the issues and other problems between Zane and the client ; still resolve the issues and complete the audit .

Step 5: The best course of action in the circumstances

Option 2 to report the issues and other problems between Zane and the client; still resolve the issues and complete the audit.

Step 6: What are the consequences of each possible course of action?

Under Alternative 1, to finish off the audit, get good rating as well as the promotion and surpass Zane, his professional competitor. However, there is also the fear and anxiety of doing an audit in violation of the duties.

Alternative 2 is to report the issues and other problems between Zane and the client; still resolve the issues and complete the audit. This would maintain public confidence in audit, and would be in the best interest of the client, auditor as well as the profession,

Step 7: What is the decision?

b) Using the Mary Guy decision-making model; the decision would still be the same. However, the basis on which the decision would be based would be the ten core values inbuilt in the model. The values in relation to Luke’s decision are:

Caring implies the values of compassion, respect, dignity and honest intentions for all that Luke ought to observe while taking his decision.

Honesty implies giving more weight age to the truth behind a situation rather than short term or long term benefits arising out of the situation.  This would not only undermine Luke’s reputation later on in his career but also will not be in the best interest of the client and the auditing profession in general.

Accountability implies accepting responsibility for one’s decisions, actions and the resultant consequences without resorting to impropriety. Here too, the decision taken by Luke in the previous part is warranted.

Promise keeping is commitment keeping. Here, Luke ought to keep his promise of expectations of performance and responsibility expected of him.

Excellence implies diligence and total commitment to the cause and work at hand.

Loyalty implies independent professional judgments as expected from the auditor.

Fairness implies avoidance of taking undue advantage of someone position or circumstances and having strong core values in taking one’s decision.

Integrity implies non conflicts of interest. This value in decision making will guide Luke not to indulge in seeking his own personal interests in the given scenario.

Responsible citizenship implies respect to societal values. This may also have an implication in the current scenario, though indirectly as Luke ought to set an example for his professional colleagues as such.

Respect for others respect for human dignity and taking decisions accordingly. It also implies taking decisions based on ones moral duty to provide information.

All these core ethical values form the basis of one’s decision under the mentioned model. Here, Luke may not be ethically responsible to the client or his own firm but has a professional duty to follow the correct course of action. So he ought to maintain this duty. In serious circumstances, he may even consider resignation where his independence is likely to be impaired. These benchmarks are vital for taking the decision in the instant case. The Mary guy decision making model is devoid of a step wise framework but gives ten core values which ought to form the basis for all decagons including professional decisions as warranted by the circumstances of Luke’s scenario. Luke ought to consider these values under the model and arrive at the same decision choosing alternative 2 form the given alternatives. The model guides the decision maker by directing him to observe these ten values while taking his decision. To illustrate the point, Luke realised that Zane had performed an excellent job, also identifying a number of missed issues. He also suspects that Zane and the client has misled the audit manager and had personal conflict with Zane. Luke realises that he can finish off the audit, and get the promotion stakes. However, that conflict in his mind will be resolved with these values. (Ebeni.wordpress.com, 2011)

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