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With control risk being assessed as less than high, the audit strategy will need to focus on extensive controls testing and analytical testing in the payroll area. If the tests of controls are not able to confirm the preliminary assessment of control risk in the payroll area, then the audit strategy would need to be switched to extensive substantive testing. Some common tests of controls that can be performed in the payroll area include the observation of segregation of duties (approval of time worked/payroll preparation/payroll distribution) and inspection of documentation (time cards/time sheets). Since the preliminary assessment in the payroll area is less than high, materiality level does not need to be reduced. On the contrary, the materiality level for the payroll function could be increased. END OF PART B
End of Semester 2, 2016ACCT3000 Auditing Mock Final Exam PaperPage 11 of 16 PART C (30 MARKS) ANSWER ONE (1) OF TWO (2) QUESTIONS. QUESTION 1 Your client is Queenscorp Ltd, a diversified business operating throughout Australia. Year- end was 30 June 2011, the auditor’sreport was signed on 31 July 2011 and the financial statements were mailed to shareholders on 14 August 2011. During your subsequent events review you noted the following independent and material items: 1.Queenscorp has been involved in a legal dispute with a competitor for a number of years. The dispute relates to alleged breaches of copyright by Queenscorp. On 27th July you discovered that Queenscorp had settled legal action out of court on terms more favourable than expected. 2.On 10th July one of Queenscorp’smajor product lines developed a fault that rendered the product unusable. Queenscorp became aware of the fault on 30 July. Although the fault posed no safety risks to consumers, Queenscorp decided to launch a full product recall on the following day. 3.Queenscorp has invested significant funds in developing a new type of cholesterol- reducing margarine. On 7th July Queenscorp applied for a patent for the margarine, only to discover that the competitor has lodged a similar application previously. The granting of Queenscorp’sapplication is now in doubt. 4.Queenscorp’sbank loan is conditional upon certain ratios being maintained at all times. On 20th August you discovered that one of the ratios was breached for a 24- hour period on 18th August. 5.In early June, one of Queenscorp’slargest debtors informed Queenscorp that it was experiencing serious financial difficulties. On 5 July, Queenscorp was informed that the debtor had gone into receivership. Preliminary reports suggest Queenscorp will recover only 10 cents in the dollar of the outstanding debt. Required (1)
Describe your obligations as the auditor to each of the above subsequent events.