ACCT3101 Auditing and Public Practice

ACCT3101 Auditing and Public Practice

Semester 2, 2020

Case Study

Background

You are very excited about being on your first financial statement audit as you launch into your new public accounting career at ABC Partners. Having graduated with a Bachelor of Commerce degree from UQ, you are thrilled to apply the skills acquired in your accounting program.

The first engagement you are working on is Fish N Things Pty Ltd (hereafter, Fish N Things, or the Company) for the financial year ended 30 June 2020. Fish N Things is a proprietary company, which supplies fish-keeping equipment, live fish and aquatic plants to retailers, including Petbarn Pty Ltd, Pet Stock Pty Ltd and several specialised aquarium stores.[1] It is an industry leader in Australia, shipping products to all states and territories. The Company has 24 shareholders, and most of them are closely involved in the business.

The Company has a close-knit culture and a family like atmosphere. Most staff members are keen aquarium enthusiasts themselves and are passionate about providing the best product to other hobbyists.


The company’s products and livestock are very popular. However, demand was weaker in March and April 2020, as retailers were forced to close during that time because of COVID-19 and government restrictions. During the stage two lockdown, pet stores (the retailers) could open for business, however due to the restrictions were not able to replenish their stock. This means the pet stores could not order from Fish N Things, until the restrictions were eased in May. As a result, the company temporarily shut down its business from 1 March to 10 May.

The closure impacts Fish N Things in several ways. First, sales were close to nil in March and April, but rebounded in May to an unusual high, as many people were drawn into fishkeeping after the lockdown. Second, when the company was temporarily shut down, fish and live plants still needed to be cared for, which increased the cost of livestock inventories. This included the additional food, fertiliser, equipment running cost and livestock fatality. Third, COVID-19 restrictions in countries, where the company’s equipment are sourced, disrupted the company’s supply chain. As a result, manufacturing and shipment has been struggling to keep up with higher sales since May. A sales representative at the company reveals to you that at times he and his colleagues have had to sign up sales contracts when the products are still on container ships.

The economic downturn due to COVID-19 impacted the retailers significantly. Some smaller retailers had cash flow issues during the lockdown: they are struggling to pay their suppliers and remain in business. This had a knock-on effect on the Company. Fish N Things have borrowed an $119,000 in May from NAB to provide additional working capital but the loan subject to a debt covenant – the company needs to keep its gross profit margin above 0.35.

The company was incorporated in 1989 and remains a private company till this day. Its founder and CEO, John Lyon, intended to sell his share of the business and retire in early 2021. Your firm has been the company’s auditor since its incorporation and no material misstatements were detected in the previous audits except for the 2019 financial year. In the 2019 audit, the audit team identified a $250,000 material misstatement in sales and accounts receivable account, which would overstate the 2019 profit had it went undetected. This was caused by a software failure, which duplicates some sales transactions in sales and accounts receivable data files. The problem has since been resolved by an IT expert from the audit firm.

You are to audit the client under the supervision of Audit Senior, Elizabeth Carson.

Trial Balance for the financial year ended on 30 June.

 2020 (Unaudited)2019 (Audited)
In thousands of Australian dollarsIn thousands of Australian dollars
Sales13001512
COGS800752
Rental expenses100100
Payroll expenses130[2]156
Impairment expense224
Interest expense506
Income tax expense1016
Cash and cash equivalent (Current asset)100132
Accounts receivable (Current asset-Gross)186135[3]
Provision for doubtful debts (Contra asset)53
Inventories (Current asset)650360[4]
Property, plant and equipment (Non-current asset)411411
Accounts payable (Current liability)160186
Provisions (Current liability)6335
Tax payable (Current liability)1315
Borrowings (Non-current liability)324205
Share capital (Equity)100100
Retained Earnings (Equity)682494

Required:

  1. Assessing audit risk

Complete Working Paper A-1.

  • Identify three factors that affect Fish N Things’ acceptable audit risk in the 2020 audit. Briefly justify your answer. Please note marks will not be awarded without sufficient justification. (6 marks)
  • To conclude the working paper, based on the factors identified in 1 (a), is the client’s acceptable audit risk high, medium or low? (1 mark)
  • Assessing inherent risk for sales and collection cycle

Complete Working Paper Schedule B-1 and B-2.

  • Identify two accounts that have a risk of material misstatement. For each account identified, use the information in the case to briefly explain why it is at risk and identify the audit objectives to be tested to manage the risk. Then use the information to complete Working Paper Schedule B-1. (16 Marks)
  • Perform two analytical procedures using the days to collect accounts receivable and inventory turnover ratio. Which accounts are likely to be misstated? Please identify the audit objective that should be tested. Use the information to complete Working Paper Schedule B-2. (8 marks)
  • Ageing analysis of accounts receivable

Complete Working Paper Schedule C-4.

Perform age analysis of overdue accounts receivable using Working Paper Schedule C-4.

In the excel spreadsheet provided, you will find a list of unpaid invoices as at 30 June 2020. After discussing with the financial controller Tony, the audit senior Elizabeth, suggests you applying the percentages in Schedule C-4 to various groups of accounts receivable, as they are consistent with the company’s accounts receivable accounting policy. (5 marks)

  • Inventory test count using Count Things

Complete Working Paper Schedule E-2.

Fish N Things have live fish in their inventory and some are high-valued. For example, a show porcupine puffer fish, can easily costs $200. Therefore, it is important that auditors perform a test count over the fish in stock.

Elizabeth has asked you to 1) count the number of fish from the provided pictures using the Count Things software, 2) fill in your counts in Working Paper Schedule E-2, the inventory reconciliation form, and 3) advise if any follow-up procedure is needed to address any difference between the client’s count and your own count and 4) if such procedure is needed, describe the procedure(s).

Please also note that if the difference in count between the auditor and the client’s record is below 30, it is considered trivial and inconsequential (i.e. not material) for this audit and no follow-up procedure is required.

Once you have processed the photo, complete Working Paper Schedule E-2.

Please also attach the pictures processed by the software to Appendix A of your submission, which will not be counted towards your word limit. Failure to do so will result in a penalty.
(6 marks)

Note: Count Things for Photos can be downloaded from https://countthings.com. Please login using the following credentials. We have limited number of licenses and each student can install the software on one device only. The licence can only be used for educational purpose and will expire by the end of November 2020.

Username: yang.xu@uq.edu.au

Password: %3101$ACCT%

  • Sampling

Complete Working Paper Schedule C-8.

You’ve decided to apply dollar unit sampling for the accounts receivable balance to identify which customers you will send confirmation letters to. Show your results in Working Paper Schedule C-8. (8 marks)

First, use the excel spreadsheet provided to calculate the closing balance for each customer and sort the result by customer name (alphabetical). Second, identify the key parameters for the dollar unit sampling and the systematic sampling. Third, select accounts into your sample.

[The End of Case Study]


[1] While Petbarn and Pet Stock are real businesses, Fish N Things is fictitious.

[2] There were no staff redundancies, lay-offs or pay cuts during the shut-down period.

[3] The gross accounts receivable as at 30 June 2018 is $130,000.

[4] The inventory balance at 30 June 2018 is $375,000.

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