You are the audit partner at Preston & Associates, a mid-tier audit firm.

ACC3AUD Practice Exercise
S2, 2022
The purpose of the practice questions is to assist you to be familiar with the type of questions
and the structure of the exam. You are expected to use these practice questions as part of
your subject review and exam preparation. The practice questions should NOT be used as the
only source of reference for the exam preparation.
Your best form of revision is the pre-class and in-class questions supported by the lecture
material.
The final exam comprises six application questions. Each question is worth ten marks.
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Q1. You are the audit partner at Preston & Associates, a mid-tier audit firm. You are
responsible for the audits of the following three independent entities for the year
ended 30 June 2022.
(a) Helping Hand Ltd is a non-profit entity. You have discovered that it has not kept
substantiating vouchers or receipts for more than 65 per cent of its expenses,
excluding salaries and allowances.
(b) Skyscrapper Ltd is a building contractor with a varying workload. In order to
compensate for the irregularity of its contracted building projects, Skyscrapper also
purchases large vacant blocks of land that it later subdivides for the construction of
houses and units. Skyscrapper then sells these on its own account. Your analysis
strongly suggests that the apportionment of costs to houses and units sold has been
kept low in order to boost profits. In your opinion, this has resulted in the
overvaluation of the unsold properties. The directors of the company do not agree
and hold to their view that the stock of properties is correctly valued.
(c) Big Event Ltd arranges for popular overseas entertainment artists to perform in
Australia. The band Eclipse was booked by Big Event to play in major cities across the
country. Big Event’s written contract required the company to pay the band in US
dollars but, in order to reduce costs. It did not hedge the amounts. Subsequent to year
end, the Australian dollar fell against the US dollar and a substantial loss relating to
the band’s tour was predicted. The management of Big Event tried unsuccessfully to
renegotiate the band’s contract and has been unable to obtain finance to cover the
expected shortfall. Big Event has now cancelled the tour and expects a substantial
claim from Eclipse. It is clear to you, as the auditor, that Big Event does not have the
income, cash or other assets to sustain such a loss (assume the client has prepared a
general-purpose financial report).
(d) You are the auditor of PPK Limited (PPK). Due to recurring operating losses and
working capital deficiencies, the status of the PPK is extremely doubtful. However, the
financial statement disclosures concerning these matters are adequate.
Required:
Assuming that all amounts involved are material, identify and justify the most likely
auditor’s opinion that you would issue on each financial report for the year ending 30 June
2022.
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Q2.
You are auditing Lifetime Tours Ltd for the year ended 30 June 2022. Consider each of the
following independent and material situations (1-3), each of which has occurred in relation
to Lifetime Tours Ltd. In each case:
• the balance date is 30 June 2022;
• the Directors’ Declaration and the audit report were signed on 30 July 2022;
• the completed financial report accompanied by the signed Audit report was mailed to
the shareholders on 12 August 2022.
(i) On 1 July 2022, the government issued a travel warning to a number of African
countries. Forty-five per cent of Lifetime Tours’ business comes from running
adventure tours in the countries mentioned in the warning.
(ii) On 15 July 2022, one of Lifetime Tours’ clients, Jungle Adventures, went into
liquidation. Jungle Adventures purchased travel packages in bulk. A letter from the
liquidator dated 30 July 2022 indicated that creditors were likely to receive ‘$0.10
in the dollars. At 30 June 2022, Jungle Adventures owed Lifetime Tours’ $1,245,285
and Lifetime Tours’ had provided for 10 per cent of the amount owed as a doubtful
debt.
(iii) On 20 August 2022, a bus transporting a Lifetime Tours tour group in New Zealand
crashed. Some passengers on board, including the Lifetime Tours guide, and the
driver had minor injuries. Lifetime Tours is concerned about the negative publicity
relating to the crash.
Required:
For each of the events described above, select the appropriate action from the list below, and
justify your response.
(a) Adjust the 30 June 2022 financial report.
(b) Disclose the information in the notes to the 30 June 2022 financial report.
(c) Request the client recall the 30 June 2022 report for revision.
(d) No action is required.
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Q3.
Uncle Sam Ltd has been operating for several years as a producer of canned vegetables. Uncle
Sam imports most of its vegetables from Thailand and Vietnam. All overseas shipments to
Uncle Sam are invoiced and require settlement in US dollars. Furthermore, Uncle Sam is
required to pay for freight and insurance costs. The insurance covers the period from the day
the goods are loaded onto the ship (i.e., Uncle Sam assumes ownership of the goods on the
day the goods are loaded onto ships in the various Asian ports from where the produce is
shipped) until the day they arrive in Uncle Sam’s warehouses in Australia. All shipments arrive
in Australia within a 21-day period after loading onto a ship. All overseas suppliers are settled
30 days after the date of shipment.
Overseas suppliers now represent 70 per cent of accounts payable. Local and overseas
suppliers are maintained in separate subsidiary ledgers within the accounting system.
The audit partner has identified that accounts payable is at risk of material misstatements.
Required:
(i) Outline the two key reasons why accounts payable is at risk of material
misstatement.
(ii) For each key reason outlined in (i), identity and explain the assertion most at risk.
(iii) For each assertion at risk outlined in (ii), describe substantive test of detail that is
specifically responsive to the risk of material misstatement.
You may wish to present your answer in the form of a table as follows:
(i) Reason
accounts
payable is
at risk
(ii) Assertion
most at risk
(ii) Explanation (iii) Substantive test of
detail
1.
2.
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Q4.
Jason is at a neighbourhood Christmas party with several of his flatmates. Over a few beers,
Jason gets into a conversation with a neighbour, Tony, about mutual acquaintances. Jason is
a junior auditor with a large accounting firm (although he tells Tony that he is a partner at the
firm) and Tony works for a large bank. During the conversation Jason and Tony discover that
they have both had professional dealings with a particular family-owned manufacturing
company. Tony reveals that the company’s line of credit is about to be cancelled because of
some irregularities with the security documents. Jason is concerned to hear this news because
he has just participated in the company’s financial report audit and there was no indication
of any problems with its borrowings. Jason tells Tony that he believes that the founder of the
family-owned company (and the current CEO) is having an affair with his personal assistant,
and has quietly increased his shareholdings in a listed company that supplies components to
the family manufacturing company. The components manufacturing company is about to
announce to the share market that it has just won a very large, and very profitable, contract
with a Chinese company.
Required
Discuss the ethical principles that are potentially breached by Jason’s behaviour at the party.
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Q5.
Stella Black has been appointed as senior audit manager of the accounts receivable area in
the statutory audit of Vast Vessel Voyages (VVV), a company operating leisure cruises from
ports on the eastern seaboard of Australia. VVV sells cruises to individuals (via its website)
and to travel agents for resale to customers. All cruises are paid in advance, with a 15 per cent
deposit on booking and the remainder collected at least three weeks prior to sailing. Travel
agents collect money from their customers, deduct their commission and forward the
remainder to the cruise company before the deadline. Stella has made a preliminary
assessment that the client is low risk and plans to conduct extensive testing of controls in the
accounts receivable area to support her assessment.
Required:
(a) What is Stella’s objective in testing of controls over accounts receivable?
(b) List some procedures Stella could use to achieve her objective.
(c) Assuming Stella achieves her objective; discuss the implications for the nature, timing and
extent of substantive testing of accounts receivable.
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Q6.
Dolphin Surf & Leisure Holidays Pty Ltd (Dolphin) is a resort company based on the Great
Barrier Reef. Its operations include boating, surfing, diving and other leisure activities, a
backpackers’ hostel, a family hotel and a five-star resort. Justin and Sarah Morris own the
majority of the shares in the Morris Group which controls Dolphin. Justin is the chairman of
the board of directors of both Dolphin and the Morris Group, and Sarah is a director of both
companies as well as the CFO of Dolphin.
Justin and Sarah have a fairly laid-back management style. They trust their workers to work
hard for the company and reward them well. The accounts staff, in particular, are very loyal
to the company. Justin tells you that some accounts staff enjoy their jobs so much they have
never taken any annual leave, and hardly any workers ever take sick leave. Justin and Sarah
have not bothered much in the past with formal procedures and policies, but they have
requested the accounts staff to start documenting the more common procedures. They do
not conduct formal performance reviews; they rely on their staff to tell them when there is a
problem.
There are three people currently employed as accounts staff, the most senior of which is Peter
Pinn. Peter heads the accounts department and reports directly to Sarah. He is in his fifties
and plans to retire in two or three years. Peter prides himself on his ability to delegate most
of his work to his two accounts staff, Kristen and Julie. He claims he has to do this because he
is very busy developing the policy and procedures manual for the accounting department.
The delegated work includes opening mail, processing payments and receipts, banking funds
received, performing reconciliations, posting journals and performing the payroll function.
Julie is a recent Chartered Accountant graduate. Kristen works part time — coming into the
office on Mondays, Wednesdays and Fridays. Kristen is responsible for posting all journal
entries into the accounting system and the payroll function. Julie does the balance of the
work, but they often help each other out in busy periods. Kristen authorises Julie’s
transactions and Julie returns the favour by authorising Kristen’s transactions. Together, they
usually make the accounts balance.
Required:
(a) Explain how the internal control components are usually adjusted to meet the needs of
less complex entities. What advantages and disadvantages does this bring?
(b) Assess the internal controls at Dolphin. What changes would you recommend?
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Q7.
Dolphin Surf & Leisure Holidays Pty Ltd (Dolphin) is a resort company based on the Great
Barrier Reef. Its operations include boating, surfing, diving and other leisure activities, a
backpackers’ hostel, a family hotel and a five-star resort. Justin and Sarah Morris own the
majority of the shares in the Morris Group which controls Dolphin. Justin is the chairman of
the board of directors of both Dolphin and the Morris Group, and Sarah is a director of both
companies as well as the CFO of Dolphin.
In February 2020, Justin Morris approached your audit firm, Clarke Partners, to carry out the
Dolphin audit for the year ended 30 June 2020. Dolphin has not been audited before but this
year the audit has been requested by the company’s bank and a new private equity investor
group which has just acquired a 20 per cent share of Dolphin. You know that one of the
partners at Clarke Partners went to school with Justin and has been friends with both Justin
and Sarah for many years.
Required:
(a) Identify and explain the significant threat to independence for Clarke Partners in
accepting the audit of Dolphin.
(b) Explain any relevant and practical safeguards that Clarke Partners could implement to
reduce the threat.
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Q8.
The Magenta Majesty Hotel is located close to the main railway station in a large regional city.
Its main client base is businesspeople visiting the city for work-related purposes. Other
important groups of clients include groups of (mainly) women visiting the city for its great
shopping, and (mainly) men visiting the city to attend important sport matches.
Occupancy rates have been reasonable, but not growing, during the last few years, providing
a steady but low rate of return for the owners of the hotel. Revenues have been sufficient to
cover operating costs, but no substantial progress has been made on repaying the large, longterm loans used to finance the hotel. In an effort to increase the hotel’s profitability, a major
renovation program was undertaken and completed earlier this year. The renovation was
predicted to increase the relative attractiveness of the hotel to guests. It was also undertaken
to earn additional revenue from the rent of a new coffee shop on the ground floor. The coffee
shop is run by a separate company that has purchased a franchise of a major international
brand.
Business travel is down by 30 per cent across the country this year due to tougher economic
conditions. Further, discretionary retail spending is down by 42 per cent, particularly in the
regions. Several specialty shops in the city have already shut and others are cutting their
opening hours. The sport matches have not drawn large crowds, and the coffee shop owners
went bankrupt and closed down, breaking their lease. The hotel owners are seeking legal
advice on whether they can claim penalty fees on the broken lease.
Finally, the hotel owners’ bank is warning that the short-term finance obtained for the
renovations will not be renewed when it is due (one month after year-end). The hotel
managers had expected to repay the debt from this year’s bookings and the coffee shop lease.
The hotel owners are still hopeful that the winter will bring a large lift in occupancy (and
revenue) as the local football teams are doing very well and several key games are scheduled
for the city. This expected winter trade is essential to meet repayments on the long-term debt
as well as convince the bank to extend the short-term debt.
Required:
(a) Is there a going concern issue in this case? Explain.
(b) Are there mitigating factors? Explain them and how they would impact the auditor’s
conclusion.
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Q9.
Consider the following independent situations. All situations apply to audits of entities for the
year ending 30 June 2022:
(i) Comfort Pty Ltd is a small primary producer specializing in the production of angora
wool. Comfort’s recent display at a trade show has seen orders flood in from overseas
buyers. The accountant, Rob, has done his best to satisfy the orders as quickly as
possible while maintaining the appropriate (foreign currency) accounting records.
However, from some of the questions he has been asking you, you suspect he is out
of his depth.
(ii) Exquisite Pty Ltd has been manufacturing uniforms for the Australian market for the
last 30 years. The government’s recent tariff reduction policy has placed Exquisite in
direct competition with cheaper uniforms manufactured overseas. In a bid to maintain
market share, Exquisite has been selling part of its school uniform range at less than
cost. However, overall profit figures remain buoyant.
Required:
For each of the above independent situations, describe the overall impact on audit risk
and identify the specific component(s) of audit risk affected.