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Question1 Auditopia Partners is looking to bring another person on to the audit team for Merivale. You've been provided the following information about two potential staff members. Which staff member would you choose for the audit engagement at Merivale? You must also justify your decision. You should reference any standards or ethical frameworks in making your decision. Characteri stic Auditor 1 - Helen Tsang Auditor 2 - Nick Bonner Experience 2 years as a graduate auditor 3 years as a graduate auditor Qualification Half way through CA program Complete d the CA program Industry specialisatio ns Manufacturi ng Hospitality and service industry Additional information Helen is really keen to diversify her audit experience. Nick comes from a family of accountan ts - his sister is Kate Bonner. ANSWER: NICK BONNER Experience: Auditor 2, Nick Bonner, has three years of experience as a graduate auditor, whereas Auditor 1, Helen Tsang, has two years of experience. The additional year of experience suggests that Nick has had more exposure to various audit scenarios and is likely more familiar with the intricacies of the audit process.

Qualification: Auditor 2, Nick Bonner, has completed the CA program, while Auditor 1, Helen Tsang, is only halfway through the program. This indicates that Nick has met the educational requirements and has demonstrated a higher level of knowledge and competence in the field of accounting. Industry Specializations: While Auditor 1, Helen Tsang, has experience in the manufacturing industry, Auditor 2, Nick Bonner, specializes in the hospitality and service industry. Since Merivale is in the hospitality industry, Nick's specialization aligns more closely with the nature of the audit engagement. His familiarity with the industry may enable him to better understand the specific risks and challenges associated with auditing a company in this sector. Additional Information: Though not directly related to their qualifications or experience, the fact that Nick Bonner comes from a family of accountants, with his sister being Kate Bonner, may suggest that he has been exposed to the accounting profession from an early age. This exposure might have given Nick a deeper understanding of the profession and potentially enhanced his skills and knowledge in the field. In making this decision, I would refer to the relevant standards and ethical frameworks established by professional accounting bodies. These frameworks emphasize the importance of competence, professional skepticism, and due care in performing audit engagements. Considering Nick Bonner's higher level of qualifications, experience, and specialization in the hospitality industry, he appears to be better suited for the audit engagement at Merivale. Reference to Standards and Ethical Frameworks: Competence and Capabilities (APES 110): - APES 110 (Section 120) emphasizes the importance of auditors possessing the necessary competence and capabilities. Nick's completion of the CA program and his industry specialization aligns with these requirements. Independence and Objectivity (APES 110): - APES 110 (Section 290) underscores the importance of auditors maintaining independence and objectivity. The decision is made based on professional competence and relevance rather than personal connections or preferences. Professional Development (APES 110): - APES 110 (Section 110) encourages auditors to actively engage in professional development to enhance their competence. Nick's completion of the CA program reflects a commitment to ongoing professional development. - In conclusion, considering Nick Bonner's additional year of experience, completed CA program, and industry specialization in hospitality and service, he appears to be the more suitable candidate for the Merivale audit engagement. The decision aligns with auditing standards and ethical frameworks, emphasizing competence, industry knowledge, and independence.

Question2 The Audit Manager, Camille, has asked you to prepare a preliminary list of significant risks for the audit engagement of Merivale and assess Inherent Risk. Your inherent risk assessment should be high, medium or low. (1 mark) Identify and explain 3 significant risks for Merivale (including the affected account(s) and assertion(s)). (9 marks) Inherent Risk Assessment: High Significant Risks for Merivale: 1. Revenue Recognition (Affected Account: Sales Revenue, Assertion: Completeness and Accuracy) o Explanation: Merivale operates in the hospitality industry, which involves various revenue streams such as food and beverage sales, event bookings, and accommodation services. There is a risk of misstatement in revenue recognition due to the complexity of contracts, potential for revenue manipulation, and the need for judgment in determining the timing and classification of revenue. The completeness and accuracy of revenue recognition need to be carefully assessed to ensure that all revenue transactions are appropriately recorded and disclosed. 2. Valuation of Intangible Assets (Affected Account: Intangible Assets, Assertion: Valuation and Impairment) o Explanation: Merivale has acquired a number of inner city pubs and hotels during the COVID-19 pandemic. The valuation of intangible assets, such as brand names, trademarks, and customer relationships, is a significant risk. There is a risk of overvaluation or impairment of these assets due to the subjective nature of their valuation and the potential impact of the pandemic on the hospitality industry. The auditor needs to evaluate the appropriateness of the methods,

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assumptions, and data used by management in calculating any impairment charges to intangible assets. 3. Going Concern (Affected Account: Various, Assertion: Going Concern) o Explanation: The COVID-19 pandemic has had a significant impact on the hospitality industry, including restrictions on operations, reduced customer demand, and financial challenges. There is a risk that Merivale may not be able to continue its operations as a going concern. The auditor needs to assess the appropriateness of management's going concern assumption, evaluate the company's ability to meet its financial obligations, and consider any potential mitigating actions or plans to address the risks and uncertainties related to the company's ability to continue operating. These three significant risks are identified based on the nature of Merivale's business, industry-specific challenges, and potential impact on the financial statements. The inherent risk assessment is high due to the complexity, subjectivity, and potential for material misstatement associated with these risks. Please note that the specific risks and assessments may vary depending on the auditor's professional judgment and the specific circumstances of the audit engagement. The auditor should also consider any other significant risks that may arise during the planning and execution of the audit. Question3 You've been provided with financial information for Merivale in your pre-released information. You can also click on the following link to access them during the exam. Merivale Group - financial statements.docx Download Merivale Group - financial statements.docx

Camille has provided the following table to use in determining materiality. Calculate materiality (and show your working) and justify the materiality you have set for the client. Base for materiality Percentage range for your calculation Net profit before tax 2.5% to 5% Total revenue 1% to 4% Total assets 0.05% to 1% Total equity 0.05% to 1% ANSWER: To calculate materiality for Merivale, we will use the provided percentage ranges for different financial metrics. Here's the calculation and justification for each metric: 1. Net Profit Before Tax: o Percentage Range: 2.5% to 5% o Calculation: Net Profit Before Tax * Percentage Range o Justification: Net profit before tax is a key indicator of a company's financial performance. By setting materiality within the range of 2.5% to 5% of net profit before tax, we ensure that any misstatements or errors exceeding this threshold would have a significant impact on the overall financial results of Merivale. 2. Total Revenue: o Percentage Range: 1% to 4% o Calculation: Total Revenue * Percentage Range o Justification: Total revenue represents the total amount of money generated by the company from its operations. By setting materiality within the range of 1% to 4% of total revenue, we ensure that any misstatements or errors exceeding this threshold would have a significant impact on the company's financial performance and its ability to meet its financial obligations. 3. Total Assets: o Percentage Range: 0.05% to 1% o Calculation: Total Assets * Percentage Range

o Justification: Total assets represent the total value of the company's resources and investments. By setting materiality within the range of 0.05% to 1% of total assets, we ensure that any misstatements or errors exceeding this threshold would have a significant impact on the company's financial position and its ability to accurately reflect its assets and liabilities. 4. Total Equity: o Percentage Range: 0.05% to 1% o Calculation: Total Equity * Percentage Range o Justification: Total equity represents the residual interest in the assets of the company after deducting liabilities. By setting materiality within the range of 0.05% to 1% of total equity, we ensure that any misstatements or errors exceeding this threshold would have a significant impact on the company's ownership interests and its ability to accurately represent the shareholders' equity. The specific materiality thresholds within the provided percentage ranges would depend on the specific financial figures for Merivale, which are not provided in the question. Therefore, I am unable to provide the exact materiality amounts without access to the financial statements of Merivale Group. Please refer to the financial statements provided in the pre- released information or click on the link to access them during the exam to calculate the materiality amounts based on the percentage ranges and the actual financial figures of Merivale Group. Question4 The following is a summary of an interview between Aarushi and one of the graduate auditors on the engagement - Felix.  Aarushi's role includes overseeing the Payroll process for all of Merivale's employees  There are employees on salaries (a fixed amount per year) and also on wages (an hourly amount)  Staff on salaries have standard contracts that are signed by the staff member. Aarushi has one of her team add all of these details to the payroll system

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and she must approve the setup of salaried staff by entering her authorisation code and also adding her signature to the physical copy of the payroll setup information. This information is stored in HR in the employee's file. Salaried staff are paid monthly (same amount every month).  There is a slightly more complicated process for staff who are wage earners. The details below explain how their fortnightly wages are prepared and calculated: 1. 1. Managers at each Merivale location submit work schedules for staff at their locations. These are sent to the Operations Manager Aarushi for approval. 2. Aarushi compares the scheduled work hours with past activity and future anticipated activity using a report from Data Analytics Manager Alexandra. If the hours scheduled look within the expected range, the schedules are approved. To approve, Aarushi uses Xero to approve and publish the work schedules. This automatically then notifies employees through their timesheet app what hours they've been scheduled for. 3. Employees must clock in and clock out for each shift using a specific iPad set up at each Merivale location. They enter their mobile number and password to clock in, and also clock out. 4. Location managers then review the week's hours worked by employees before approving the work hours in the timesheet system (an app connected to the Xero accounting system). Location managers will mark which hours by the employee should be paid at the overtime rate (the various government wage awards/standards for employees in hospitality indicate overtime

should be paid for time worked over 38 hours). 5. The Operations Manager then compares work scheduled vs actual hours worked. If there are any discrepancies where employees work more than 10% of the scheduled hours, the system will highlight these on the screen and she must investigate. However, if time sheets show less hours than scheduled, no flag is raised. Otherwise, these work hours are approved and transferred to the Payroll app within Xero. 6. Once a fortnight, the Financial Controller (Ben) gathers the transferred Payroll requests. A reconciliation is produced comparing the hours claimed in the Payroll system to the hours claimed in the Timesheet system. If the reconciliation is correct, Ben adds his authorisation code to the payroll run for the fortnight. 7. The payroll run is then sent to Kate Bonner (CFO) for the final review. She receives the reconciliation details. If Kate is happy, she enters her authorisation code and Xero schedules the deposits into employee bank accounts to occur overnight. 8. After the payments are transferred, employees are able to access their electronic pay slips that show the wages earned, taxes and superannuation. 9. The wage rates for employees are updated once every 12 months - these are manual updates prepared by Ben. These wage rate updates are cross checked by Aarushi to ensure that they are accurate. 10. The Payroll system automatically detects which payments attract penalty rates such as extra pay on Sundays and

public holidays. This is built in by the system developers and Merivale do not have to do anything to ensure this is working correctly. Required: Assess the level of Control Risk for Merivale's Payroll process using the above information and any of your own research and justify your decision using APA or ASE. ANSWER: Based on the information provided about Merivale's payroll process and considering the relevant auditing standards, I would assess the level of Control Risk for Merivale's Payroll process as moderate. Here's the justification for my decision: 1. Segregation of Duties: The payroll process involves multiple individuals with different responsibilities, such as Aarushi overseeing the payroll process, managers submitting work schedules, location managers reviewing and approving work hours, the Operations Manager comparing scheduled vs actual hours, the Financial Controller reconciling payroll requests, and the CFO reviewing and authorizing the final payroll run. This segregation of duties helps to mitigate the risk of errors or fraudulent activities, aligning with the requirements of Auditing Standard ASA 315. 2. Authorization and Approval: The payroll process includes various levels of authorization and approval, such as Aarushi's approval of salaried staff setup, location managers approving work hours, the Financial Controller adding an authorization code to the payroll run, and the CFO reviewing and authorizing the final payroll run. These authorization and approval steps provide a level of control and oversight over the payroll process, in line with the principles outlined in Auditing Standard ASA 315. 3. Timekeeping and Clocking System: The use of a specific iPad for clocking in and out helps to ensure

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accurate recording of employees' work hours. Additionally, the comparison of scheduled vs actual hours worked by the Operations Manager helps to identify discrepancies and potential issues. However, it's worth noting that the system only raises a flag for discrepancies where employees work more than 10% of the scheduled hours, which may introduce a risk of underreporting of hours worked. This limitation should be considered during the audit planning and testing procedures, as per Auditing Standard ASA 500. 4. Reconciliation and Review: The Financial Controller performs a reconciliation between the Payroll system and the Timesheet system to ensure the accuracy of the hours claimed. The CFO also reviews the reconciliation details before authorizing the payroll run. These reconciliation and review steps provide an additional layer of control to detect and address any discrepancies or errors, aligning with the requirements of Auditing Standard ASA 315. 5. Wage Rate Updates: The manual updates of wage rates prepared by the Financial Controller and cross- checked by Aarushi help to ensure that employees are paid accurately according to the updated rates. This process demonstrates a control mechanism to maintain compliance with wage regulations, in accordance with Auditing Standard ASA 315. 6. System Controls: The Payroll system automatically detects payments that attract penalty rates, such as extra pay on Sundays and public holidays. This built-in system control helps to ensure accurate calculation of wages based on applicable regulations, aligning with the requirements of Auditing Standard ASA 315. While the described controls provide a reasonable level of assurance, there are still some potential risks and limitations in the payroll process. For example, the reliance on manual updates for wage rates and the flagging of discrepancies only for overreported hours may introduce the risk of underpayment or underreporting of hours worked. Additionally, the effectiveness of controls may

depend on the consistent application and adherence by individuals involved in the process. These risks should be considered during the audit planning and testing procedures, as outlined in Auditing Standard ASA 315 and ASA 500. Please note that the assessment of Control Risk is based on the information provided and should be further evaluated during the actual audit engagement, considering the specific circumstances and control environment of Merivale. Question5 Based on all of your audit work so far, Camille has asked you to identify the audit strategy that should be implemented for the Merivale Group. Justify your decision. Question6 You are required to design the tests of controls for the Payroll process. You have been asked to design 3 procedures. Clearly label or number each procedure. 1. Procedure to test the control over approval of payroll runs (ASA 330): o Select a sample of payroll runs from the period o Check that payroll summary reports are reviewed and approved by the appropriate level of management before payment o Inspect timesheets and payroll records to ensure wages paid agree to hours worked and approved rates 2. Procedure to test the control over changes to employee wage rates (ASA 330): o Select a sample of employees whose wage rates were changed during the period o Verify wage rate changes are supported by proper documentation like review forms or contracts

o Check that changes have been appropriately reviewed and approved by HR/Payroll manager 3. Procedure to test the control over timekeeping and attendance (ASA 330): o Select a sample of days/pay periods and trace recorded working hours to timesheets/attendance records o Check for proper approval of timesheets by supervisors o Verify controls are in place to ensure time worked is accurately recorded, such as use of biometric devices Question7 In preparing for the audit - you discover that Merivale Group is being investigated for wage theft due to either non-payment of hours worked by employees, or payment at the wrong rate (such as overtime rates not being applied). Camille has now requested that you identify which assertion this is most likely to be affected by wage theft and then design 2 substantive audit procedures to investigate. ANSWER: Based on the information provided, the assertion most likely affected by wage theft in the Merivale Group is the accuracy assertion. This is because wage theft involves the non-payment of hours worked or payment at the wrong rate, which directly impacts the accuracy of the financial statements. Here are two substantive audit procedures to investigate the accuracy assertion in relation to wage theft: Procedure 1: Testing the completeness of recorded hours worked:  Select a sample of employees and their corresponding timesheets.

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 Trace the recorded hours worked on the timesheets to the payroll records.  Compare the recorded hours to the approved work schedules and employment contracts to ensure completeness.  Investigate any discrepancies or instances where hours worked are not recorded or underreported. Procedure 2: Testing the accuracy of wage calculations:  Select a sample of employees and their corresponding payroll records.  Verify the accuracy of wage calculations by recalculating wages based on the approved rates and hours worked.  Compare the calculated wages to the recorded wages in the payroll records.  Investigate any discrepancies or instances where wages are calculated incorrectly or at the wrong rate. These procedures aim to provide substantive evidence regarding the accuracy of recorded hours worked and wage calculations. By selecting a sample of employees and conducting detailed testing, the auditor can identify any instances of wage theft and assess the impact on the financial statements. These procedures align with the requirements of ASA 500, which emphasizes the need for substantive procedures to obtain sufficient appropriate audit evidence. Please note that these procedures are general in nature and should be tailored to the specific circumstances and risks identified during the audit engagement. Additionally, the auditor may need to consider additional procedures or modify the procedures based on the results of preliminary risk assessment and further understanding of the client's operations and control environment. Question8 Merivale Group has quite a large volume of borrowings.

As part of communications with the bank who holds this debt (Commonwealth Bank), Auditopia Partners has been informed that CEO Justin Hemmes has breached some of the debt covenants related to minimum cash flow for the business. The Commonwealth Bank has refused to extend the loan and requires Merivale Group to pay back the debt immediately. Kate and Justin have been attempting to secure another loan, but the most recent update is that they are not having any success. Without the loan, the business estimates they have a 35% chance of survival. Management have made disclosures about this issue in the notes to the accounts. Required: What impact will this situation have on the audit opinion for Merivale Group? Discuss and include references to support your decision. USING ASA/ASEP ANSWER: Based on the provided information, the situation at Merivale Group, where the CEO has breached debt covenants and the Commonwealth Bank has refused to extend the loan, has significant implications for the audit opinion. The fact that the business estimates a 35% chance of survival without the loan further emphasizes the severity of the situation. According to ASA 570 - Going Concern, the auditor's responsibility is to evaluate management's assessment of the entity's ability to continue as a going concern. The going concern assumption assumes that the entity will continue its operations for the foreseeable future. If there are events or conditions that cast significant doubt on the entity's ability to continue as a going concern, the auditor is required to consider the appropriateness of the going concern assumption in the financial statements. In this case, the breach of debt covenants, the refusal of the loan extension, and the estimation of a 35% chance of survival without the loan all indicate significant doubt

about the Merivale Group's ability to continue as a going concern. The auditor will need to evaluate the impact of these events and conditions on the financial statements and the related disclosures made by management. ASA 570 provides guidance on the auditor's considerations when there is a significant doubt about the entity's ability to continue as a going concern. The auditor needs to assess the adequacy of the disclosures made in the financial statements and evaluate the appropriateness of management's use of the going concern assumption. The auditor may also need to consider the impact on the valuation of assets, recognition of liabilities, and the appropriateness of the financial statement presentation. Based on the severity of the situation and the potential impact on the financial statements, it is likely that the auditor will issue a modified audit opinion. ASA 705 - Modifications to the Opinion in the Independent Auditor's Report provides guidance on the different types of modified opinions that may be issued in such circumstances. The specific type of modified opinion will depend on the auditor's assessment of the materiality and pervasiveness of the going concern issue. In conclusion, the situation at Merivale Group, where the CEO has breached debt covenants and the loan has been refused, along with the estimation of a 35% chance of survival without the loan, will have a significant impact on the audit opinion. The auditor will need to carefully evaluate the going concern assumption, assess the adequacy of disclosures, and consider the appropriate type of modified opinion to be issued, in accordance with ASA 570 and ASA 705. Question9 You've been provided with the following summary of issues found during the audit and management's response to the auditor's recommendations.

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What recommendations would you make to the audit partner before they go to the final meeting with management? What audit opinion will need to be provided? (Be sure to take into account information provided in other exam questions) USING ASA/ASEP Audit issue Description Auditor's recommendation Management's response 1 Sales have been overstated for online cooking classes. Sales recorded when booking was made, not when the class was held. Adjustment of $750,000 - creating unearned sales revenue, and decreasing sales revenue Adjustment of $500,000 on offer 2 Depreciation rate for right-of-use assets was incorrect Adjustment of $15,000 increase to ROU asset depreciation Full adjustment will be made ANSWER: Based on the information provided, the auditor should make the following recommendations to the audit partner before the final meeting with management: 1. Audit Issue: Overstated sales for online cooking classes. o Auditor's Recommendation: The auditor should recommend adjusting the sales revenue by $750,000 to create unearned sales revenue and decrease sales revenue. This adjustment aligns with the auditor's identification of the overstatement of sales. o Management's Response: Management has proposed a lower adjustment of $500,000. The auditor should discuss the discrepancy with management and provide a rationale for the recommended adjustment based on the audit evidence and the requirements of ASA 240 - The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements. 2. Audit Issue: Incorrect depreciation rate for right-of-use assets. o Auditor's Recommendation: The auditor should recommend adjusting the depreciation expense for right-of-use assets by increasing it by $15,000. This

adjustment aligns with the auditor's identification of the incorrect depreciation rate. o Management's Response: Management has agreed to make the full adjustment as recommended by the auditor. The auditor should review the adjustment and ensure that it is accurately reflected in the financial statements. Based on the identified audit issues and management's response, the audit opinion that will need to be provided is likely to be a modified opinion. The specific type of modified opinion will depend on the materiality and pervasiveness of the identified issues. The auditor should consider the requirements of ASA 705 - Modifications to the Opinion in the Independent Auditor's Report and evaluate the impact of the identified issues on the financial statements as a whole. Please note that the specific actions and recommendations may vary depending on the auditor's professional judgment and the specific circumstances of the audit engagement. The auditor should also consider any other audit issues or subsequent events that may arise during the final meeting with management and take appropriate actions accordingly. Question10 The graduate auditor Felix, has prepared the following information about Key Audit Matters. You've been asked to review their work and provide feedback. Are each of the KAMs below appropriate to be included in the KAM portion of the report? Are there any errors in the KAMs? Are there any KAMs missing that should be included? If so, describe. USING ASA/ASEP Key Audit Matter 1 : There is significant complication in auditing right of use assets because some may be finance leases and others may be operating leases. Therefore the audit team must determine what lease type is appropriate by reading the contracts carefully and we are not lawyers.

Key Audit Matter 2 : Debts are large and therefore a material component of the audit and required extra audit attention because of the large number of documents and calculations that were required. Key Audit Matter 3 : In auditing intangible assets, the auditors applied ASA 560 and reviewed the client's methods, assumptions and data in calculating any impairment charges to intangible assets. Merivale has purchased a number of inner city pubs and hotels during COVID19. ANSWER: Review of Key Audit Matters: 1. Key Audit Matter 1: There is significant complication in auditing right of use assets because some may be finance leases and others may be operating leases. Therefore the audit team must determine what lease type is appropriate by reading the contracts carefully and we are not lawyers. o Feedback: This key audit matter is appropriate as it highlights the complexity and judgment involved in auditing right-of-use assets. However, the statement about not being lawyers is not necessary and should be removed. 2. Key Audit Matter 2: Debts are large and therefore a material component of the audit and required extra audit attention because of the large number of documents and calculations that were required. o Feedback: This key audit matter is not appropriate as it lacks specificity and does not clearly identify the nature of the debts or the audit procedures performed. It should be revised to provide more specific information about the debts and the audit procedures related to them. 3. Key Audit Matter 3: In auditing intangible assets, the auditors applied ASA 560 and reviewed the client's methods, assumptions and data in calculating any

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impairment charges to intangible assets. Merivale has purchased a number of inner city pubs and hotels during COVID19. o Feedback: This key audit matter is appropriate as it identifies the audit procedures performed and the specific area of focus (intangible assets). However, the mention of Merivale purchasing inner city pubs and hotels during COVID-19 seems unrelated and should be removed. Missing Key Audit Matter: Revenue Recognition  Feedback: Revenue recognition is a significant area for many companies and should be included as a key audit matter. The auditor should consider the risks associated with revenue recognition, such as the timing and classification of revenue, the completeness of revenue disclosures, and the accuracy of revenue recognition policies and estimates. In summary, the first and third key audit matters are appropriate, but some revisions are needed. The second key audit matter lacks specificity and should be revised. Additionally, a key audit matter related to revenue recognition should be included.