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ACG31 Auditing Theory And Practice

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ACG31 Auditing Theory And Practice

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Course Code: ACG31
University: University Of South Australia

MyAssignmentHelp.com is not sponsored or endorsed by this college or university

Country: Australia

Question:

Objectives of the assignments Having completed the assignment, students should be able to:

Identify risk factors facing the auditor and understand the impact on audit procedures and the collection of audit evidence;
Apply accounting knowledge (lifelong learning skills) in identifying the risk of errors in financial reports;
Use the skills they have learned in previous Subjects to think critically about the quality of information.
Exercise judgment and learn about the investigative nature of audit tasks.
Apply theory to a simulated real world case.

Assessment of the events and impact on the evidence mix
– Identifying sufficient and appropriate evidence based around the types of evidence the auditor collects
– Evidence mix explained using all 5 types of evidence?
Presentation
– Compliance with Harvard referencing guidelines
 – Reference, in-text referencing list complies?
– Grammar and English satisfactory?
– Good presentation – headings used?
– Did not combine questions 1 and 2 together.
– Adheres to submission guidelines as outlined in the Subject Outline and Assignment Booklet.
– Sufficient research undertaken and applied (going beyond the textbook and entity homepage)
– Table was NOT used to answer question 1 (a table can be used to provide a summary of risks in question 2)
Word Limit Penalty?

Answer:

Answer to Question 1
In an audit process, the auditor is responsible for identifying the material misstatement which affect the viability of the financial statements which is prepared by the management of the company. The auditing process is conducted to mainly certify that the financial statement which is prepared by the business are showing true and fair view. In many cases, the audit process of the business is affected by certain key events which are material in nature and have the ability to affect the financial statements of the business. In this case, AMP ltd is considered for the purpose of identifying any key events which can affect the financial statements of the business and some of these events are listed below in details:
Foreign Exchange Fluctuations and Hedge Contracts
As per the annual reports which is prepared by the management of AMP ltd for the year 2017, the business has investments in foreign exchange hedge contracts which is undertaken by the business in order to avoid the risks associated with fluctuation of foreign exchanges. The annual report also shows that the business is engaged in foreign transaction and therefore the management needs to convert the foreign currency of the business into domestic currency (Corporate.amp.com.au. 2018). The annual report shows that the management has invested significant amount in hedge contracts after anticipating the receipts and payments and the timing of the transactions.
The accounting standard AASB 121 covers provisions relating to foreign exchanges and para 23 of the standard states that foreign exchanges for monetary items for cash and cash equivalents must be converted on the basis of the exchange rate on the reporting date of the business (Chen, Lee and Shrestha 2013). The potential area of misstatement would be in the reporting of foreign exchange adjustment which would affect the income statement directly and therefore the same can be considered as a material misstatement. The rate which is considered for translation of foreign currency where also misconduct can be committed. The auditor needs to check whether the auditor has converted the same as per the criteria which is provided by the standard and appropriate disclosures for the same is provided into the notes to account section of the financial statement.
The annual report of the business shows that the foreign exchange adjustment which is made by the business is of $ 205 million as shown in the notes to account section of the annual report. The same is shown to be in negative which shows that the business has incurred a loss of the same amount. Furthermore, the auditor of the business also needs to confirm whether the provisions and disclosure requirements of AASB 121 are fully satisfied with the treatments which is provided by the management of the business. In addition to this, the balances which are portrayed must be showing true and fair view from the auditing point of view. The disclosures are provided in the
Valuation of Goodwill and other Intangible Assets
As per the annual report of AMP ltd for the year 207, the management has shown significant amount of goodwill and intangible assets in the balance sheet. As per the value which is shown for goodwill and other intangible assets of the business is shown to be $ 3,218 million which is 2% of the total assets which is shown by the company. Therefore, the intangible assets of the business form a material part of the financial statements and misstatement of the same would definitely affect the viability of the annual reports of the business for the year. The goodwill of the business is valued on the basis of historical acquisition and the excess of Purchase consideration over the fair value of the asset. The annual report also specifies that the goodwill of the business is allocated to respective Cash Generating Units (CGU).
The potential misstatement which can take place in case of intangible assets is related to the in correct valuation of the intangible assets of the business and also appropriate identification for the same. The provisions for valuing the intangible assets of the business are done on the basis of AASB 138. As per Para 21 of AASB 138, an intangible asset of the business shall be recognized if it is probable that the expected future benefits that are attributable from the assets will flow in the entity and the costs of the asset can be measured reliably. The standard also specifies that the intangible assets of the business should be recognized on the basis of revaluation model and cost model of the business. The impairment and amortization of intangible assets is also an important consideration which needs to be taken into account by the auditor as the same might be understated in order to show more asset value for the business.
The disclosures should be provided by the management of AMP ltd should confirm with the provisions which are stated in AASB 138. Therefore, the auditor needs to ensure that all the provisions of AASB 138 needs to be followed and appropriate disclosures are provided by the management of the business in this respect. There is a significant risk that the valuation of the intangible assets of the business are not done properly and the balances of intangible assets are not showing true and fair view.
Investment in Companies in China and Japan
The half year reports which is prepared by the management of the business for the year 2018, shows that the management of the business is looking to expand the business in China and Japan. The company has invested significant amount of capital in national companies which are operating in China and Japan. The management of the company is intended to make investment in China Life Asset Management Company Limited (CLAMP) which will be further strengthen the relationship with China. The investment which is made by the business in CLAMP is anticipate to enhance the revenue generating abilities of the business and thereby also improve the overall business structure of the organization.
The accounting standard of AASB 128 covers all the provisions which are regarding investments which are made by businesses in an organization. ASSB 10 also specifies provisions regarding investments which can be made in a business. Both the standards state various disclosures and treatments which must be followed by the business in preparing the financial statement of the business (Hu, Percy and Yao 2015). In any investment property, the treatment and appropriate consolidation of the financial statement is always an important aspect which should ne considered and free from material misstatement. The auditor needs to check whether the balances which are shown in the annual reports are appropriate and showing true and fair. The auditor also needs to ensure that the disclosures which are required by the accounting standard should be followed by the business. There are significant risks that the financial statement might be representing in appropriate figures which is relating to investments which are made by the business in the financial statement for the year.
The disclosures which are provided by the management of AMP ltd for the investments in businesses in China and Japan is shown to be inappropriate and therefore the auditor needs to consider the same and form an opinion accordingly.
Contingent Liability
The contingent liability of the business in most of the cases affect the financial statements and can also lead to material misstatement if the same are not covered and shown in the annual reports of the business. The contingent liabilities which arises in a business is shown in notes to account section as there is uncertainty whether the contingent liability will convert into actual liability of the business. As per the information which can be accumulated from the annual report and quarterly reports prepared by the business of AMP ltd, the business has contingent liability which is related to the fine which would be imposed on the business of AMP ltd for the misconduct which was revealed by the Royal Commission. The company was engaged in a misconduct for which evidence was provided in April 2018 which was related to Misconduct in the Banking, Superannuation and Financial Services sector which can definitely impact the financial statement which is prepared by the business. The management of the company had charged significant amount of fees for advisory services for which no such service was provided by the business. This resulted in the business showing revenues for which the management of the company had not provided any services to the clients (Jessica 2018). In addition to this, the management of the company had also misguided the regulators regarding the misconduct which is committed by the management of the company (Bova 2016).
Therefore, there is significant risks relating to contingent liability of the business and the auditor needs to asses the item effectively and ensure that all disclosure requirement for the same is made appropriately by the management of the company. The provisions of AASB 137 more specifically para 37 states that any law suits against the company would impact the reputation of the business and thereby also affect the confidence of the business and also states that the management of the business is required to follow the disclosure requirements in accordance with para 86 of AASB 137.
The anticipated amount of liability needs to be disclosed on the basis of the fine which is to be charged as fines for the misconduct of the management of AMP ltd. The contingent liability of the business is to be disclosed in the notes to account section of the annual reports.
Answer to Question 2
Foreign Exchange Fluctuations and Hedge Contracts
As the fluctuation in foreign exchange rate increases so does the inherent risks and control risks of the business also increases as the business of AMP ltd is engaged in foreign transactions which involvements investments and lending as well. The annual reports of the business specify that the business considers the exchange rate on the reporting date and therefore the same is subjected to fluctuations (Abdel-Khalik 2013). The foreign exchange transactions and revenue which is generated by the business during the period needs to be converted and similarly shown in the annual reports which is prepared by the business considering appropriate accounting standard.
Evidence Mix
Effective internal control setting over the transactions which involves foreign currency would reduce the control risks of the business and also help in managing the numerous transactions which are taken by the management of the company (Louwers et al. 2015). However, the Inherent risks of the business would be high due to the fluctuations in foreign exchange rates applicable in the market.
 AAR = CR x IR x PDR
Medium to extensive   Low  High  High

Understanding of internal control

Test of Control

Substantive Tests of Transactions

Analytical Process

Test of Details of balances

Medium to Extensive

Extensive

Extensive

Low

Medium to Extensive

Valuation of Goodwill and other Intangible Assets
The annual report shows that the business has significant amount of intangible assets and form significant part of the assets section which is reported by the business. There is a high level of detection risks which suggest that material misstatement might be there which might not be identified by the auditor of the business (Griffiths 2016). The goodwill of the business needs to be valued appropriately and appropriate disclosures are also required to be produced by the business.
Evidence Mix
The control risks in this scenario is also high as appropriate valuation of the intangible assets of the business might not be done by the management of the company. The inherent risks is also high due to fact that the valuation of goodwill is a complex process and therefore can be missed out by the auditor of the business.
AAR = CR x IR x PDR
Medium to extensive   High  High  Low

Understanding of internal control

Test of Control

Substantive Tests of Transactions

Analytical Process

Test of Details of balances

Medium to Extensive

Extensive

Extensive

Low

Extensive

Investment in Companies in China and Japan
The management of AMP ltd has undertaken significant investments in the other companies in order to further revenue generating capacity of the business. The detection risks in this case is not very high as the item is considered to be material and therefore the auditor would definitely consider the item. The inherent risks in this case is high due to investments are made in foreign companies such as companies in China and Japan.
Evidence Mix
The management needs to keep a track of its investments and also ensure that the investment is made as per the plans of the management. The inherent risks of the business would be high due to uncertain nature of the companies which are operating in foreign countries.
AAR = CR x IR x PDR
Medium to extensive   Low  High  Low

Understanding of internal control

Test of Control

Substantive Tests of Transactions

Analytical Process

Test of Details of balances

Medium to Extensive

Low

Extensive

Extensive

Extensive

Contingent Liability
The misconduct which is committed by the business can lead to legal liability in the form of fines and therefore the inherent risks of the business would be high. Due to the misconduct it is anticipated that the fine would be charged and significant amount would be incurred in such legal proceedings (Arslanalp 2015). The control of the business is ineffective and therefore the control risks of the business is high.
Evidence Mix
The contingent liability of the business is valued appropriately and the assumptions and estimation is clearly shown in the notes to account section of the annual report. The misconduct committed by the business would result in higher risks for the business.
AAR = CR x IR x PDR
Medium to extensive   Low  High  High

Understanding of internal control

Test of Control

Substantive Tests of Transactions

Analytical Process

Test of Details of balances

Extensive

Medium to Extensive

Extensive

Extensive

Medium

Reference
Abdel-Khalik, A.R., 2013. Accounting for risk, hedging and complex contracts. Routledge.
Arslanalp, M.S., 2015. Contingent Liabilities from Banks. International Monetary Fund.
Bova, M.E., 2016. The Fiscal Costs of Contingent Liabilities. International Monetary Fund.
Chen, S.S., Lee, C.F. and Shrestha, K., 2013. Futures hedge ratios: a review. In Encyclopedia of Finance (pp. 871-890). Springer, Boston, MA.
Corporate.amp.com.au. (2018). Reports. [online] Available at: https://corporate.amp.com.au/shareholder-centre/results-reporting/reports [Accessed 21 Oct. 2018].
Griffiths, P., 2016. Risk-based auditing. Routledge.
Hu, F., Percy, M. and Yao, D., 2015. Asset revaluations and earnings management: Evidence from Australian companies. Corporate Ownership and Control, 13(1), pp.930-939.
Jessica Irvine, C. (2018). ‘Just appalling’: AMP misconduct and lies exposed. [online] The Sydney Morning Herald. Available at: https://www.smh.com.au/business/banking-and-finance/just-appalling-amp-misconduct-and-lies-exposed-20180417-p4za67.html [Accessed 21 Oct. 2018].
Louwers, T.J., Ramsay, R.J., Sinason, D.H., Strawser, J.R. and Thibodeau, J.C., 2015. Auditing & assurance services. McGraw-Hill Education.

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