QUESTION’

ASSIGNMENT
BAO3306 AUDITING

Semester 1, 2012

Overview
Assignment is worth 20% of the overall assessment for this subject.
Due date: Week 10
Length: Maximum word limit 3000 words (including Appendices)

Introduction
This assignment requires you to form a group of two (2) to develop an audit plan. You
must refer to Chapter 6 of the textbook for information relating to audit planning.
Your submission for this assignment must not exceed 3000 words in length. You must
attach the assessment declaration sheet to the front of your assignment. You must sign
and date the assessment declaration sheet. For domestic students, submission should
be made as instructed below. Offshore students should follow the instructions of the
local lecturer.

You must ensure the clarity of your answer and the overall presentation of your
assignment. Presentation includes grammar, spelling and compliance with the word
limit. You must complete your assignment in group of two (2).

Submission instruction
Assignment must be submitted electronically and in hardcopy.
Electronic submission: must be submitted via turnitin located on webct. An
originality report is available to students upon submission. Note: turnitin may take up
to 24 hours to produce a report. Assignment with originality report level of more than
30% may indicate that the contents have more than 30% in similarity with
assignment submitted by other students OR assignment has not been properly
referenced. Assignment with originality report level exceeding 30% will be penalised
by four (4) marks. Students can re-submit assignment on webct as many times as
necessary but the final submission both in electronic and in manual format must be
made by the due date.
Hardcopy submission: must be submitted by the due date. A signed declaration form
must be attached to the front of the assignment.

Only one member of the group needs to submit the assignment. Students can submit
assignment on Webct until 11:59PM on the due date. Assignments not meeting these
requirements will be subjected to a penalty of four (4) marks for poor presentation.
An additional penalty of two (2) marks per day will apply for late submission.
Note: Webct will not accept late submission.

Plagiarism
Plagiarism is defined as present ing someone else’s work, including the work of other
students, as one’s own. Any ideas or materials taken from another source for either
written or oral use must be fully acknowledged, unless the information is common
knowledge. All students are strongly advised to do the following:
– goto http://wcf.vu.edu.au/GovernancePolicy/PDF/POA040915000.PDF
– enter School of Accounting and Finance
– enter Student Resources
– read the PLAGIARISM POLICY.

Background
The rationale for BAO3306 – Auditing as per Unit of Study Outline is that on
completion of this unit students should have a sound understanding of the underlying
concepts of auditing and in particular of financial auditing. By adopting a logical,
structured approach they should have the capacity to analyse the salient audit issues
and apply relevant auditing theories and succinctly communicate their professional,
ethical decision.

One of the unit outcomes requires students to be familiar with key tools used by
auditors for collecting and evaluating evidence, in both manual and computerised
accounting information systems, which will enable them to express an opinion on the
fair presentation of financial reports.

To ensure the audit is carried out efficiently and in a timely manner, the auditor
develops an audit plan for the conduct and scope of the audit. ASA300.5 states that
the auditor shall plan the audit so that the engagement will be performed in an
effective manner.

Required
1. For the purpose of the assignment, you assume the role of an auditor and your firm
has recently been appointed as external auditor of an entity. As required by Auditing
Standard ASA300, you are preparing an audit plan for the audit of the entit y’s
financial statements.

2. The audit fee is $92,000 and had been communicated to the client in the
Engagement Letter.

3. You are required to download the 2011 annual report published by the following
entity:

ACRUX (www.acrux.com.au)

4. Using the first four steps in the audit process as prescribed in Chapter 6 (pages 254255)

of the textbook, plan the audit for the entity you have chosen. Since you are
required to develop an audit plan for a real life entity, quoting directly from textbook
does not meet the objective of the assignment.

5. Your audit plan must include the followings:

1. Executive summary
2. Introduction
3. Audit plan with the following headings:

a. Understanding the entity and its environment
b. Understanding internal control
c. Assessing the risks of material misstatement (for 5 key accounts)
d. Developing responses to assessed risks (for the accounts selected above)
4. Conclusion
5. References
6. Appendices

Additional information
For the purposes of the assignment, the following auditing standards are relevant:
– ASA210 Terms of Audit Engagements
– ASA220 Quality Control for Audits of Historical Financial Information
– ASA230 Audit Documentation
– ASA250 Consideration of Laws and Regulations in an Audit of a Financial Report
– ASA300 Planning an Audit of a Financial Report
– ASA315 Understanding the Entity and its Environment and Assessing the Risks of
Material Misstatement
– ASA320 Materiality and Audit Adjustments
– ASA330 The Auditor’s Procedures in Response to Assessed Risks
– ASA520 Analytical Procedures

Hints and Tips

1. You are required to plan the audit using only information that is publicly
available. That is, you only use the information that is published by the entity
either on its website or printed materials.
2. You must download and use the proforma audit plan on webct.
3. Informat ion on the organisat ion’s internal control structure can be obtained by
looking at the relevant section in the annual report, materials published on the
entity website and comparing them to the Principles of Good Corporate
Governance and Best Practice Recommendations published by the ASX
Corporate Governance Council.
4. In assessing the risks of material misstatement, you are required to identify
five (5) account balances at risk of being materially misstated. You are
required to support your selection using the Audit Risk Model.
5. Quoting directly from textbooks and reports will increase the similarity index.
Quoting without proper referencing will also increase the similarity index.
You are advised to develop your own audit plan.
6. Turnitin has the facility to report on whether your assignment is copied from
other sources. Penalty of four (4) marks applies for exceeding the 30% limit.
Serious breaches will be reported to the disciplinary panel.
7. Only one student in the group needs to submit the assignment.
8. Word limit applies to the entire assignment except appendices, bibliography
and references. Penalty of four (4) marks applies for exceeding the word limit.
9. If you want to remove the previous version of the assignment on turnitin,
submit a blank assignment or a new version.
10. Turnitin may take up to 24 hours to generate originality report. Late
submission is subjected to a penalty of two (2) marks per day.
SOLUTION

1. Introduction

ACRUX Australia is a pharmaceutical company that develops products for the global markets. ACRUX Australia has a diversified portfolio comprising of various pharm products used globally, ACRUX is a market leader in the development of these products. ACRUX Australia has effectively partnered with other global pharmaceutical companies like Eli Lilly, KV pharmaceutical as well as Aspen, the population council and Dream Pharma. These partnership with these corporations is global as some of them are based in the US, South Africa and as well as South Korea. The range of partnerships with global companies is a clear indicator of the diverse brand portfolio of the corporation.

(www.acrux.com.au- accessed on 2/6/2012)

Thus being a global corporation it is important for ACRUX to have an effective audit plan to effectively manage the vast resources as well control the flow of information throughout the organization and thus avoid the overall financial misreporting or misstatement. An effective audit plan is essential to control the internal operations of the company as well as maintain investor confidence by reporting accurately. The aim of the paper is to understand the effectiveness of an audit plan for the corporation.

2.  Internal Control Mechanisms

The internal control mechanisms consists of 5 key parts, these mechanisms have be effectively applied to each of the businesses to maintain organization and control in the business The risk assessment process is the most important competent of the internal control mechanism. The organization has to effectively evaluate the risk before undertaking any investment.  The effective risk assessment mechanism enables the organization to enable efficient and clear decision making process. Identification and the effective assessment of the risk is the key for an audit plan. The potential risks have to be identified as strategies have to implement to minimise the risk or to avoid the risk completely. Excessive risk exposure reduces the efficiency of the company and lead to lower profitability levels.  Based on the risk assessment programme 5 key risks for ACRUX have been identified.

2.1 Foreign Exchange Loss

ACRUX is a global corporation with associations in countries like US, South Africa as well as South Korea. This effectively exposes the corporation to a high degree of foreign exchange risk as a large proportion of the revenues are dependent upon these global corporations. With the appreciation of the Australian dollar over the past year, the foreign exchange risk of the corporation has increased.  The corporation is exposed to high degree of foreign exchange loss as the sales are valued at the current dollar rate. These can lead to the differences in the settling of payments of certain key transactions which have an effect on the revenues. The Australian dollar appreciation makes the exports more expensive in comparison with thee trading partners and other associates thus having a huge impact on the sales of the corporation and exposing the company to a greater exchange rate risk. Therefore, it is important to account for this greater exchange rate risk exposure,and account for it in the audit plan and adopt measures to minimise the currency risk exposure.

(Annual Report 2011, ACRUX and education.theage.com.au – accessed on 2/6/2012)

2.2 Property Plant and Equipment

The constant depreciation expense of the property plant and equipment accompanied with high maintenance costs exposes the corporation to a higher degree of risk. According to the 2011 annual report of ACRUX, the property plant and equipment depreciated on a straight line basis assumes a life of 2.5 years to 14 years.  A shorter life span for some of the assets assumes the fact the corporation would have to replace assets fairly quickly which imply huge costs. These higher costs could be detrimental to the firm’s probability as well as the cash flows of the company, thus leading to financial inefficiency. Therefore appropriate amount of depreciation are essential to effectively evaluate and account for this risk exposure.

(Annual Report 2011, ACRUX)

2.3 Deferred Tax Liability

A deferred tax liability causes an increase in the amount of the future tax payable by a particular corporation. The ACRUX deferred taxes have experienced a gain in the past year thus posing a higher tax liability to the corporation.

Deferred tax assets not brought to account

As per the Annual report of the corporation the company has experienced an increase in the tax losses accrued to the firm of about $100,000, Thus as the losses mount the tax liability of the corporation also experiences an increase applying a greater pressure on the cash flow , and reducing the profitability of the organization. To reduce the risk of the deferred taxes am effective e tax strategy has to be in place which is targeted at reducing the liability of the corporation. The tax compliance should be met by the corporation accompanied with strategies to reduce the tax liability by adopting tax strategies in the audit process. Recognition of the tax risk is important to minimise losses from the taxes.

(Annual Report 2011, ACRUX, Bhakker et al, 2009)

2.4 Income Tax Expenses

Thus as the losses mount the tax liability of the corporation also experiences an increase applying a greater pressure on the cash flow , and reducing the profitability of the organization. To reduce the risk of the deferred taxes am effective e tax strategy has to be in place which is targeted at reducing the liability of the corporation. The tax compliance should be met by the corporation accompanied with strategies to reduce the tax liability by adopting tax strategies in the audit process. Recognition of the tax risk is important to minimise losses from the taxes. The income tax liability of the corporation has increased by a large amount over the one year period from 2010-2011, therefore it is important to have appropriate provisions to reduce the tax load.

The internal tax auditors have to ensure that the correct and qualified humanresource is at the post of applying the tax control functions. The role of the internal audit department is to ensure what is evaluated is done. The effective tax control function can only be implemented in the organization through the internal audit department when the tax strategies are communicated to all levels and the strategic levels of the management in the organization. The tax control function has be implemented to increase the operational expense of the organization which would ultimately result in greater net profit levels and higher cash flows for the organization.

(Annual Report 2011, ACRUX, Bhakker et al, 2009)

2.5 Long term Provisions

Long term provisions are formulated with the purpose of providing long term finance o the corporation. The presence of provisions ensures the long term availability of finance to the corporation with the availability of the retained earnings. The retained earnings of the corporation  can used to felicitate the expansion programme of the corporation as well as make provisions to account for other business losses like depreciation , bad debts etc. The presence of provisions is crucial in today’s business activities particularly in the presence of liquidity constraints in themarket(Steve  et al , 2008).

3. References

• “Acrux – Developing advanced pharmaceutical products globally .”Acrux – Developing advanced pharmaceutical products globally .N.p., n.d. Web. 2 June 2012. <http://www.acrux.com.au/IRM/content/default.html>.
• “Annual Report ACRUX 2011.” www.acrux.com.au. N.p., n.d. Web. 2 June 2012. <http://www.acrux.com.au/IRM/Company/ShowPage.aspx?CPID=1685&EID=68771540>.
• “Joy and sorrow in the rising dollar – The Age Education Resource Centre.” The Age Education Resource Centre – News in Education – Melbourne, Australia – The Age Education Resource Centre. N.p., n.d. Web. 2 June 2012. <http://education.theage.com.au/cmspage.php?intid=152&intversion=27>.
• Bakker, Anuschka. Tax risk management: from risk to opportunity. Amsterdam, The Netherlands: IBFD, 2010. Print.
• Albrecht, W. Steve, Earl K. Stice, and James D. Stice. Financial accounting. 10th ed. Mason, OH: Thomson/South-Western, 2008. Print.

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