You are a senior auditor of the accounting firm Y&Z Partners. Your audit team is currently

| December 10, 2017

Auditing Assignment (10 marks)You are a senior auditor of the accounting firm Y&Z Partners. Your audit team is currentlyplanning the 2015 audit of OfficeHelp Limited, a medium sized business which imports andsells office furniture. This is the third year your accounting firm is engaged to perform the auditfor this client. The financial year being audited ends on 30 June 2015. Past audit work andinitial audit procedures performed this year reveal the following information:OfficeHelp Limiteds profit has grown at an average rate of 8% in the past 3 years. The boardof directors is satisfied with the companys profit and share price performance, and rewards theChief Executive Officer (CEO) with an annual bonus of the companys shares when profitgrowth exceeds 7% for a particular year. The CEO is keen to maintain the good performance,so the CEO plans to open 15 new stores in the next two years. To raise the money required forthe expansion plan, the company borrowed $7 million in February 2015 from a local bank. Oneof the conditions in the debt contract requires the audit clients interest coverage ratio(calculated as net profit divided by interest expense) to be above 12. The companys interestcoverage ratio is 9.4 on 31 March 2015 based on its net profit for the first 9 months of thefinancial year. The ratio has increased to 12.1 on 30 June 2015 based on unaudited financialresults.The bank loan is not sufficient to cover all costs for the expansion plan, so the company is alsoplanning to make a major public share issue in September 2015. To obtain the best share pricepossible, it is important for the company to show a strong and healthy financial report. TheCEO e-mailed all employees in March 2015 to encourage all staff to help increase revenues andcut costs. A special bonus will be paid to all staff if the companys profit growth reaches 9%for the financial year under audit.Inflation and a weak Australian dollar during the financial year resulted in higher operatingcosts including inventory purchase costs. The company is considering raising its productsselling prices but has not done so yet due to concerns about losing market share to competitors.The table below shows the historical trend of sales and cost of goods sold (COGS) for the pastfour years. Note that the 2015 numbers are not yet audited.Sales growthCOGS/Sales20159%0.4120148%0.49201310%0.4520127%0.42015-1 Auditing Assignment, p.2The audit client uses a perpetual inventory system. The accounting department is separate fromother operating departments. Only the accounting staff have access to the accounting system.Even the CEO does not have direct access to the accounting records. The CEO needs toconsult with the chief accountant about any proposed changes. If the chief accountant agreesthat an adjustment is appropriate, the chief accountant would then make the change in thecomputer system.The accounting staff check all related documents before recording journal entries in thecomputer system. When accounting staff record a sale, the accounting system shows a messagewhich reminds the staff to record the corresponding journal entry for cost of goods sold.However, the sales transaction can still be processed by the system without a correspondingCOGS entry. The accounting system is integrated with the inventory information system so theaccounting staff can easily look up inventory records to find the correct unit price for theinventory items sold. A senior supervisor or the chief accountants authorisation (i.e.,password) is required to adjust or delete past journal entries. The accounting departmentspolicies require senior accounting staff to sample check junior staffs work every week, butduring busy times senior staff often cannot spare the time to do so.The chief accountant was hired by the CEO about 4 years ago and you know they are closefriends. The chief accountant keeps the CEO updated about the companys financial progressand discusses major accounting issues with the CEO. However, they both say that the CEOdoes not attempt to override the chief accountants professional judgment.RequiredFor the completeness assertion of the cost of goods sold (COGS) account, answer all of thefollowing questions in accordance with the Australian Auditing Standards. You need toperform your analysis using the facts in the case study.(1) Assess inherent risk for the completeness assertion of COGS. (4 marks)(2) Assess control risk for the completeness assertion of COGS. (3 marks)(3) Perform one analytical procedure to assess the likelihood of misstatements for thecompleteness assertion of COGS. Briefly analyze your findings. (1 mark)(4) Suggest one test of control to test the completeness assertion of COGS for this audit client.The test should be based on the facts given in the case study. Briefly explain how this testof control specifically tests the completeness assertion of COGS. (1 mark)(5) Explain one substantive procedure that produces reasonably reliable evidence to test thecompleteness assertion of COGS for this audit client. Do NOT suggest analyticalprocedures. Do NOT use the same procedure here as the test of control in part (4). (1mark)

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