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question 1Ch3 Case study – Cloud 9 (Work on answering questions (m) – (v); textbook p.112-113)

You are a graduate working for W&S Partners, an Australian accounting firm with offices located in each of the major cities. W&S Partners has just won the 31 December 2016 statutory audit for Cloud 9 Pty Ltd (Cloud 9). The audit team assigned to this client is: • Partner, Jo Wadley • Audit Manager, Sharon Gallagher • Audit Seniors, Josh Thomas and Suzie Pickering • IT Audit Manager, Mark Batten • Graduates, Ian Harper and you. As a part of the risk assessment phase for the new audit, the audit team needs to gain an understanding of Cloud 9’s structure and its business environment. By understanding the client’s business, the audit team can identify potential risks that may have a significant effect on the financial report. This will assist the team complete the audit.

Required Answer the following questions based on the additional information about Cloud 9 presented in the appendix to this text and the current and earlier chapters. You should also consider your answer to the case study questions in earlier chapters where relevant. Your task is to research the retail and wholesale footwear industries and report back to the audit team. Your report will form part of the overall understanding of Cloud 9’s structure and its environment. You should concentrate your research on providing findings from those areas that have a financial reporting impact and are considered probable given Cloud 9’s operations. In conducting your research, you should consider the following key market forces, as they relate to Cloud 9’s operations

Product information(m) Is there a specific lifecycle for the product?(n) Is the product dependent on trends or styles?Customer information(o) Are there specific customers on whom the client is highly dependent?(p) What is the overall profile of the client’s customers? Have there been significant fluctuations in the client’s customer base? Supplier information(q) Who are the key suppliers?(r) Are the materials subject to significant price movements or influenced by external market forces?Technological advances and the effect of the internet(s) How does the industry use technology?(t) What technological trends are impacting the industry?Laws and regulatory requirements (u) Are the client’s operations affected significantly by local or foreign legislation?(v) What new laws and regulations recently enacted (or pending) may have significant effects on the company?

Question 2

PART 1 Inherent riskIn chapter 3, you were required to research the key market forces, as they relate to Cloud 9’s operations. The topics you researched included the general and industry-specific economic trends and conditions; the competitive environment; product, customer and supplier information; technological advances and the effect of the internet; and laws and regulatory requirements. The purpose of this research is to identify the inherent risks for this client. The auditor needs to identify which financial report assertions may be affected by these inherent risks. Identifying these risks will help determine the nature of the audit procedures to be performed. Management implicitly or explicitly makes assertions regarding the recognition, measurement, presentation and disclosure of the various elements of a financial report. Auditors use assertions for account balances to form a basis for the assessment of risks of material misstatement. That is, assertions are used to identify the types of errors that could occur in transactions that result in the account balance. Consequently, further breaking down the account into these assertions will direct the audit effort to those areas of higher risk. The auditors broadly classify assertions as existence or occurrence; completeness; valuation or allocation; rights and obligations; and presentation and disclosure.

Required Based on your results from researching the client and its industry for the case study questions in earlier chapters, discuss the inherent risks in the audit of Cloud 9. Identify the associated financial accounts and assertions that would be affected and provide an assessment of ‘high’, ‘medium’ or ‘low’ in relation to the likelihood and materiality of the risk occurring.

PART 2Other auditors and experts W&S Partners will need the assistance of auditors in China and the United States and derivatives experts to complete the Cloud 9 audit. The other auditors will be asked to provide evidence about the inventory shipped to Australia from the production plants in these countries. Although the inventory is shipped FOB (free on board), there have been several occasions where the shipping agent was unable to place the inventory on a ship. In these cases, the inventory is stored in the shipping agent’s warehouse until a vessel is made available. Suzie has some concerns about the quality of the warehouses because if the goods are damaged they could become worthless and the value of ‘goods in transit’ will be overstated. In addition, Suzie has asked Jo Wadley (the partner) for help in choosing an expert to help with valuation aspects of the audit of the derivatives. Jo has provided her with three names of experts in the field, but she has had no personal experience with any of them. Suzie must make a choice and engage the expert soon in order to be sure that the expert opinion will be received in time to complete the audit. Answer the following questions based on the information presented for Cloud 9 in the appendix to this text and the current and earlier chapters. You should also consider your answers to the case study questions in earlier chapters.Required(a) Explain the procedures for engaging component auditors to perform the work on the inventory in China and the United States. (b) Advise Suzie on engaging the derivatives expert. Discuss the qualities the expert must possess. What steps must Suzie perform? What should she tell the expert about the engagement? What must the expert provide to Suzie so that she can be sure she has sufficient appropriate evidence about the derivatives? Can the expert do all the work on derivatives, or must Suzie perform any other procedures.

Question 3

12.33MISSTATEMENTS AND THE AUDIT REPORT Meg Lithgow is the engagement partner of the audit of Champion Securities, an investment company. Most of Champion’s assets and liabilities are financial and their valuation is critical to the assessment of the company’s solvency and profitability. Meg has employed two outside experts to value the financial assets and liabilities because they are extremely complex to value, particularly the energy market derivatives and the instruments traded in foreign markets. In addition, the valuations are highly dependent on market conditions and the specific and detailed requirements of the recently revised accounting standards. Throughout this year’s audit, Meg has had difficulties with the CEO of Champion Securities. He is vehemently opposed to any asset write-downs she has suggested. The CEO has the backing of the chairman of the board and Meg has been unable to get the CEO to listen to her concerns about the valuations of the financial assets and liabilities the company has made. In past years, Meg has had an amicable relationship with both the CEO and the chairman and the audits have run very smoothly. Meg has now realised that this harmonious relationship was mainly due to the boom in the market. It was unlikely that there would be arguments about writing up the value of the company’s assets during these good times. Meg, with the help of the experts, has prepared a summary of the relevant items, detailing the revised values for the assets and liabilities and the associated effects on income and retained earnings. The CEO has dismissed this summary and the audit recommendations with the comment, ‘The market has hit the bottom and is recovering. There is no need to show these write-downs because by the time the financial report is published the values will be back to where they were before the market fell. It is all a waste of time. In fact, I think you are just being difficult to deal with. I think we need an auditor who is a bit more realistic’.Required(a) Discuss the ethical issues Meg faces and explain what she needs to do to comply with APES 110.(b) Explain Meg’s audit report options.(c) Recommend a course of action for Meg.

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