Consider each of the following independent situations:
(a) City Ltd, a property developer, has several major projects in progress in Brisbane's central business district. Due to a downturn in the commercial property sector and an abundance of city office space, no buyers have been secured for the projects.
(b) Your client, Web Ltd, has recently purchased new computer software, which allows extensive management financial analysis and improved quality management reporting.
(c) During the year Beauty Pty Ltd, a manufacturer of cosmetics and skincare products, established an overseas branch operating as a sales outlet. Inventory has been transferred from Australia to the new branch to reduce lead times to existing customers and to provide inventory for samples as part of an increased marketing effort.
Required
For each situation, identify the main audit planning issues that need to be addressed in the planning documents.
Case Study 2:
You are the auditor in charge of a car fleet leasing company, Vroom Ltd. The company owns and leases cars and related equipment to government bodies. The following table summarizes the planning outcomes of Vroom Ltd, including the preliminary assessment of inherent risk (IR), control risk (CR) and detection risk (DR).
Preliminary Risk Assessment Planned Approach: Test of control vs. Substantive Tests
Objective IR CR DR
Disclosure and existence of finance leased assets Medium Medium Medium Primarily tests of controls with some components of substantive procedures at the balance date
Measurement and completeness of depreciation expense Low Low High More significant level of test of controls with minimal substantive procedures at the balance date
Rights and obligations in relation to vehicles Low Medium High More significant level of test of controls with minimal substantive procedures at the balance date
Valuation of vehicles High High Low No tests of controls. 100% reliance on substantive procedures
Required
(a) What are the general issues related to deciding whether to use a test of controls approach or a substantive approach?
(b) How do the risk assessments above relate to the choice of audit approach?
(c) If you adopted the approach set out in the planning summary, what audit procedures would you use for the accuracy and completeness of depreciation expense?
Case Study 3:
Jim Strong, your audit assistant, is unsure of the relationship between the attributes of financial reporting information and auditing.
Required
Explain to Jim the connection between auditing and the communication of accounting information.