Wednesday, May 6, 2020

Luxury Travel Holidays Ltd

Question: Discuss about the Luxury Travel Holidays Ltd. Answer: Introduction: In the given case, Clarke and Johnson were carrying out the audit of luxury Travel Holidays LTD (LTH), a travel company. Audit partner, Geoff has identified two people Annette and Michael to carry out the audit assignment for the travel company this year. There has been conversation with the audit team on different aspects and accordingly the independence of the auditor has been tested. In a discussion of Chris with the board, it has been highlighted that the management of the company were happy with the last year audit and would like to reappoint the firm to carry out the audit for this year as well. However, the management of the company is of the opinion that they would like to invite Geoff to give a speech at the travel agency seminar to promote the business and attract more investors towards the business. The management clearly highlighted that of Geoff refused to accept the proposal then in that case it would be difficult to carry out the audit assignment. The auditor of a company cannot indulge in any business activity that may let to the promotion of the business activity of the client. The auditor is the face of the stakeholders of the company and they are likely to help them in forming an opinion about the companys financial performance and position and should not be involved in doing any such activity that might affect their primary goals. The management statement of not assigning the audit engagement to Clarke and Johnson, if Geoff refused to accept the proposal of giving speech at the travel agency seminar to promote the business and attract more investors towards the business is unethical and cannot be within the professional guidelines. If in order to get the audit engagement, if Geoff accepts that proposal then in that case he will make compromise with the independence of the audit engagement. In that case, Chris should tell the implication of accepting the proposal to the management and tell them about the audit implications and ethical grounds which they are not supposed to cross. Even after the clarifying, the management does not agree and then in that case, the Clarke and Johnson should take their hands back from the audit engagement. The management of the company, in order to express their sincere thanks towards Clarke and Johnson and their audit partner decides to offer a complimentary 14-day holiday package voucher for four people to the Greek isles for both Geoffs and to his family. All the expenses including accommodation travel etc will be borne by the company. As per the auditing ethical standards, the auditor of the company cannot accepts nay gift or bribe from the management irrespective of determining the intention of the company. It has been proved multiple times that these obligation and gratitude tends to impacts the purpose of the audit going forward and in some or other way, the independence of the audit is being impacted. Thus considering all these points, Clarke and Johnson and their audit partner should not accept the proposal of accepting the complimentary 14-day holiday package voucher from the company. Even if the proposal would be offering the holiday package at discounted price, then also the same would have been assumed to cross the lines of auditor independence. In that case, CJ should tell the implication of accepting the proposal to the management and tell them about the audit implications and ethical grounds which they are not supposed to cross. The auditor on simpler note should express their gratitude for the offer and should not accept the offer. Further, the auditor at times of accepting the audit engagement should mention in their proposal that they would not accept any kind of gift or commentary sort of thing directly or indirectly from the management of the company. Clarke and Johnson were carrying out the audit of luxury Travel Holidays LTD (LTH), a travel company. Audit partner, Geoff has identified Annette and Michael to carry out the audit assignment for the travel company this year. Michaels father was the financial controller in luxury Travel Holidays LTD (LTH). He was responsible for preparing the financial report for the company. In the given case, being the family member of the audit assistant was holding a dominant position in the company that has been audited, and then in that case, the audit assistant should to be given the responsibility of audit for the client. In that case, there is always a possibility that that the audit independence will be compromised at the stake of family relation. Thus, in the given case, once Clarke and Johnson is aware about the relation of Michael with luxury Travel Holidays LTD (LTH), he should not be asked to carry out the audit work and some other audit assistant should be deputed in this case. As a safe guard, the audit company should get a letter signed from the audit assistants well in advance about their interest in the audit engagement. It might be through shares or any of their family members working and holding a respectable position in the audit engagement. Clarke and Johnson were carrying out the audit of luxury Travel Holidays LTD (LTH), a travel company. Audit partner, Geoff has identified Annette and Michael to carry out the audit assignment for the travel company this year. Annette has carried out a temporary assignment where he helped luxury Travel Holidays LTD (LTH) with the tax calculations and was involved in preparing accounting entries that will be reflected in the 30 June 2015 financial report. He was of the opinion that being the tax work has been carried out by him or under his supervisions, thus not much audit work is required In this case, CJ should ensure that being Annette has been involved with the tax calculations; he should not be given the task of auditing the tax computation and should be used in other areas for audit purposes. Being there should always be two different persons carrying out the task of preparer and checker, CJ should take care of this well in advance. As a safeguard, the areas of audit should be well bifurcated among the audit assistants well in advance so as to avoid any last minute hassle. The audit planning and methods to be used should be well discussed and documented. In the given case, the Crampton has been appointed to carry out the audit work for Mining supplies LTD (MSL) for the year ended 30 June 2015. The company is engaged in selling mining equipment and spare parts to mining companies across Australia. It has several operational units which have been engaged in warehousing the equipments and providing after sales services for the goods that has been sold. In order to provide the maintenance services, the company uses contracted mobile mechanics which travel to the customers location to carry out all maintenance services. The customer is billed for the services that are outside the warranty period. The billing amount includes all the cost factors which include the cost of the part, service cost and the travel cost of the person. From the perspective of audit, there is few business risk that is required to be managed by the auditors considering the nature of the business that has been carried out by MSL In relation to the purchase of equipment and spare parts there are certain associated business risk which needs to be taken care by the auditors. The first business risk is the managing the inventory level for the company at the end of the financial year. The inventory i.e. the spares pares of the machines and the there equipments are lying at multiple locations. Thus to console the inventory at the year end and to test the completeness and identify the ownership of the goods at the yearend levels tends to be a business risk. In this case, the auditor is require to be carry out cut off test levels at major warehouse locations and ensure that the inventory is booked in the right period and there has been no over or under valuation of the inventory. Further, the inter unit transfers should also be ignored at times of considering the inventory at the period end. Another attached business risk in these case would be identifying the aged inventory for the company which may include some old equipment that are not in line with the current technology and some old spare part whose equipments are no longer in use. These inventories can inflate the inventory which currently needs to be scraped and written off from the balance sheet. The auditor is required to carry out necessary valuation technique to determine the correct valuation of the goods. The auditors in this case based on the prior period experience should carry out necessary audit planning steps to test the completeness and accuracy of the inventory levels of the company. The attached audit risk in this case would be the inventory levels to be inflated and the correct position and performance of the company is not determined. This may affect the users of the financial statements as well. As result of the about risk, the accounts that will be impacted will be as follows: Closing Inventory Cost of goods sold Purchases Another attached business risk is identifying the warranty cost that needs to be booked in the profit and loss account. Considering the nature of the product that has been sold in by the company, although the goods has been sold and the attached risk of the goods has been transferred to the buyer but still the product that has been sold by the company carries warranty for certain period. Under which if the equipment stops functioning or there has been some problem in any of its spare parts within the warranty period the same will be replaced or corrected by the company irrespective to the location where the equipment is functioning. Thus in that case, the company is required to book some provision in the books for the sale of the equipment that has been made in the current period so as to ensure that all the relevant cost that are pertaining to the sales of the current period are booked in the same period itself. In this case, it is a big business risk identifying the correct or some what near provision amount for the warranty so that there is no undue impact on the profit and loss account. Same is the risk with the auditors to test on the amount of provision that has been made in by the management in the books for booking the expected warranty amount. This is the risk to identifying whether the provision that has been made is sufficient for the upcoming warranty cost or not. For this the company as well the auditor is required to analyze the prior period expectations and the provision that has been made and the expected actual expenditure that has been booked in the books in correspondence to the provision that has been made. Further, the completeness of the settlement exercise needs to be tested by the auditors as well on timely basis. As result of the about risk, the accounts that will be impacted will be as follows: Provision of Warranty Warranty expenses References ICAEW, The provision of non-audit services to audit clients, Viewed on 14th Feb 2017, Retrieved from https://www.icaew.com/en/technical/ethics/auditor-independence/provision-of-non-audit-services-to-audit-clients ICAEW, Auditor independence approach, Viewed on 14th Feb 2017, Retrieved from https://www.icaew.com/en/technical/ethics/auditor-independence/auditor-independence-approach PSAA, Management of auditor independence issues, Viewed on 14th Feb 2017, Retrieved from https://www.psaa.co.uk/supporting-the-transition/procurement-and-appointment-of-auditors/management-of-auditor-independence-issues/

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