Failure to upload a TMA to the OLE in the required format may result in the score for the TMA being adjusted to zero.

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Archibald Hawkins
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1 Assignment File 15 Assignment 1 Due date: 19 October 2016 Important note You must use word processing software (such as Microsoft Word) to prepare the TMAs, and submit them via the Online Learning Environment (OLE). All assignments must be uploaded to the OLE by the due date. Failure to upload a TMA to the OLE in the required format may result in the score for the TMA being adjusted to zero. Question 1 (55 marks) Read the case study Comptronix Corporation: identifying inherent risk and control risk factors on pp and answer the questions below. You need to understand that some of the US accounting and auditing standards are different to the standards in Hong Kong as set out by the Hong Kong Institute of Certified Public Accountants (HKICPA). You should answer the following questions from the Hong Kong perspective. Required: a b c d Professional auditing standards present the notion of audit risk, which is used to determine the nature, timing, and extent of audit procedures. Describe the components of audit risk and discuss how changes in each component affect the auditor s need for evidence. (8 marks) One of the components of audit risk is inherent risk. Describe typical factors that auditors evaluate when assessing inherent risk. With the benefit of hindsight, discuss five inherent risk factors that were present during the audits of the 1989 through 1992 Comptronix financial statements? (20 marks) Another component of audit risk is control risk. Discuss four characteristics of Comptronix s internal control which would lead to increased control risk for the audits of the year-end financial statements? (12 marks) Auditing standards note that there is a possibility that management override of controls could occur in every audit and accordingly, the auditor should include audit procedures in every audit to address that risk. i Discuss the meaning of the term management override. ii Provide two examples of where management override of controls occurred in the Comptronix fraud. (15 marks)

2 16 ACT B866 Audit Theory and Practice Source of case: Beasley, M S, Buckless, F A, Glover, S M and Prawitt D F (2012) Auditing Cases: An interactive learning approach, 5th edition, New Jersey: Pearson Education, Inc., Question 2 (32 marks) Your CPA firm, Ho and Lo, has been the auditor of Dragon Products, a company listed on the Hong Kong Stock Exchange, for a number of years. The engagement partner has asked you to describe the matters you would consider when planning the audit for the year ended 31 August During a recent visit to the company you obtained the following information: i The company installed a new computerized inventory control system which has been operating from 1 January As the inventory control system records inventory movements and current inventory quantities, the company is proposing: To use the inventory quantities on the computer to value the inventory at the year end; and Not to carry out an inventory count at the year end. ii You are aware there have been reliability problems with the company s products, which have resulted in legal claims being brought against the company by customers, and customers refusing to pay for the products. iii The sales increase in the ten months to 30 November 2015 over the previous year has been achieved by attracting new customers and by offering extended credit. The new credit arrangements allow customers three months credit before their debt becomes overdue, rather than the one month credit period allowed previously. As a result of this change, receivables age has increased from 1.6 to 4.1 months. Required: a b Describe the general matters you will consider in planning the audit. (8 marks) Describe the matters you will consider in planning the audit (including audit risks) concerning the matters listed in points (i) to (iii). (24 marks) Question 3 (13 marks) The following questions deal with the important issue of independence of auditors. a Distinguish between independence in fact and independence in appearance. Describe two examples in which an auditor may be independent in fact but not in appearance. (6 marks)

3 Assignment File 17 b During the year, you conducted a feasibility study to advise the management of Low-tech Ltd. on the best way the company can implement a computerized accounting system and which computer would best meet the needs of the company. The company in turn accepted and implemented your recommendations. Discuss the effect of accepting this management services engagement upon your independence in expressing an opinion on the financial statements of Low-tech Ltd. for this fiscal year. (7 marks)

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Professional scepticism: its implications on audits of financial statements

Professional scepticism: its implications on audits of financial statements Professional scepticism, which should never be a new term to any accounting student, is often perceived as the cornerstone of