Part 1
You have been assigned as audit senior to the audit of Universal Magazines Pty Ltd (Universal).Your firm has recently been appointed as auditors and this is the first time you have been on the audit.
Your engagement partner and the assistant auditor conducted an interim audit five months before this year end. There were no major issues at the interim audit and the assistant informs you that she thinks that the results of the audit are applicable for the full year.
The owners (i.e. shareholders) of the magazine are a private equity firm and have specified that audits should be undertaken. The company commenced business on day one of the current financial year when it purchased the business from its former owners. They have plans to merge the company with other publishing interests and list the merged entity on the Australian Stock Exchange in two or three years time. As an incentive to perform, the editor and senior staff have been given the right to take up shares in the new entity at a highly discounted price when it is listed subject to meeting their KPIs (key performance indicators) each year until the listing.
The magazine is a monthly giveaway and it is distributed in six areas of Melbourne. Its revenueconsists of advertising by local businesses. The sales director and her staff actively pursue sales
opportunities in each area.
Articles written by locals largely consist of reports on upcoming community events.
The Managing Director (MD) generally attempts to convince the local writers that the resultant publicity for their community event means that the article should be written for free. Most of the time he
is successful, and only about half the magazinesâ articles are paid for. Prior to the equity partners taking over the magazine, any paid articles or photographs were treated as expenses to be written off as they were accrued or paid.
After the private equity firm took over the magazine, the firm insisted that all paid articles provided by external writers for upcoming issues would be considered as inventory until used in the
magazine and that they be valued at cost. If an article cannot be used after purchase (i.e. the restaurant for which a review was written has closed), then it is considered to be impaired and its value is written down.
The MD accumulates articles so that he always has a âbankâ of articles available for the next edition.
Advertising is mostly sold in three or six edition bundles. Occasionally there are a few one-off monthly advertisements, especially from seasonal businesses.
The magazine offers a discount to advertisers if they place orders early and the discount increases the earlier the order is placed (i.e. a bigger discount is offered if an advertiser wants an ad in next yearâs magazine than if they want an ad in next monthâs magazine).
Responsibility for invoicing the advertiser and recording the details lies with whichever member of the sales team lands the advertiser.
The company has an experienced bookkeeper who has been with the company for five years.
The financial director of the private equity firm, who is also a director of the company, regularly visits the company and conducts a few compliance procedures of his own. He has no formal audit
programs for this work but he has made his reports available to your audit team. He has told your engagement partner that he expects your firm to ensure that the year-end closing is accurate and
complete.
Required:
(a) Provide two (2) account balances and assertions at risk in this scenario.
(b) Explain whether you should accept the advice of your assistant auditor to accept the results of the
interim audit as applicable for the whole year
Part 1
You have been assigned as audit senior to the audit of Universal Magazines Pty Ltd (Universal).Your firm has recently been appointed as auditors and this is the first time you have been on the audit.
Your engagement partner and the assistant auditor conducted an interim audit five months before this year end. There were no major issues at the interim audit and the assistant informs you that she thinks that the results of the audit are applicable for the full year.
The owners (i.e. shareholders) of the magazine are a private equity firm and have specified that audits should be undertaken. The company commenced business on day one of the current financial year when it purchased the business from its former owners. They have plans to merge the company with other publishing interests and list the merged entity on the Australian Stock Exchange in two or three years time. As an incentive to perform, the editor and senior staff have been given the right to take up shares in the new entity at a highly discounted price when it is listed subject to meeting their KPIs (key performance indicators) each year until the listing.
The magazine is a monthly giveaway and it is distributed in six areas of Melbourne. Its revenueconsists of advertising by local businesses. The sales director and her staff actively pursue sales
opportunities in each area.
Articles written by locals largely consist of reports on upcoming community events.
The Managing Director (MD) generally attempts to convince the local writers that the resultant publicity for their community event means that the article should be written for free. Most of the time he
is successful, and only about half the magazinesâ articles are paid for. Prior to the equity partners taking over the magazine, any paid articles or photographs were treated as expenses to be written off as they were accrued or paid.
After the private equity firm took over the magazine, the firm insisted that all paid articles provided by external writers for upcoming issues would be considered as inventory until used in the
magazine and that they be valued at cost. If an article cannot be used after purchase (i.e. the restaurant for which a review was written has closed), then it is considered to be impaired and its value is written down.
The MD accumulates articles so that he always has a âbankâ of articles available for the next edition.
Advertising is mostly sold in three or six edition bundles. Occasionally there are a few one-off monthly advertisements, especially from seasonal businesses.
The magazine offers a discount to advertisers if they place orders early and the discount increases the earlier the order is placed (i.e. a bigger discount is offered if an advertiser wants an ad in next yearâs magazine than if they want an ad in next monthâs magazine).
Responsibility for invoicing the advertiser and recording the details lies with whichever member of the sales team lands the advertiser.
The company has an experienced bookkeeper who has been with the company for five years.
The financial director of the private equity firm, who is also a director of the company, regularly visits the company and conducts a few compliance procedures of his own. He has no formal audit
programs for this work but he has made his reports available to your audit team. He has told your engagement partner that he expects your firm to ensure that the year-end closing is accurate and
complete.
Required:
(a) Provide two (2) account balances and assertions at risk in this scenario.
(b) Explain whether you should accept the advice of your assistant auditor to accept the results of the
interim audit as applicable for the whole year
