DEPARTMENT OF ACCOUNTING, FINANCE & ECONOMICS
| 3102AFE Auditing | |
| Audit Assignment 1 – Client Acceptance (Individual) | |
| Due Date: | 4 pm on 25 August 2021 |
| Weighting: | 20% |
| Total Marks: Word limit: | 25 1000 – 1500 |
| Submission: | Submit (in MS Word) through the ‘Audit Assignment 1 Submission’ link in the Assessment folder. |
General Instructions to answer the assignment
- You must answer the question in the context of the case and not provide a general discussion.
- Marking the assignment will consider grammar, sentence construction and logical flow of arguments. References are NOT required.
- Maximum word limit is 1500 words. Use 12-point font in either Times New Roman or Arial font. Approximate word limits have been provided per question as a rough guide, however the word limit for the overall assignment must not exceed 1500 words. Assignments that exceed this limit by more than 10% will be penalized.
- Include a title page that includes assignment heading, course name (3102AFE), your name, student number and total number of words.
- An indication of the marks to be allocated per question is provided on the assignment rubric.
- Please ensure that you also complete the electronic assignment cover sheet before submitting your assignment.
Required:
Refer to the Makaro Ltd case on the next page and answer the questions that follow.
CASE STUDY: MAKARO LTD
The client: Makaro Limited
Makaro Ltd, an ASX listed freight and logistics company, is based in Toowoomba. Started in September 2012 by siblings, Martin, Karen and Robert Giles, it has taken advantage of the surrounding agricultural and mining activities that require transportation of products out of the region, as well as the strategic location on the Melbourne to Brisbane freight route. Prior to forming the company, Martin had worked for Aurizon Ltd, gaining valuable experience in the logistics industry and had developed a reputation as a visionary. He has been the Chief Executive Officer (CEO) of Makaro Ltd since its inception. Karen had worked as a Project Manager for a mining services company previously and utilises her strong leadership skills in her role as Chief Operating Officer COO). Robert, a Chartered Accountant, is a former Audit Partner at a mid-tier audit firm and fills the role of Chief Financial Officer (CFO). The financial year of Makaro Ltd ends on 30 June each year.
The external auditors: Michael Stephen & Partners (MSP)
Michael Stephen & Partners (MSP) is a medium-sized audit firm providing audit, advisory and taxation services to a number of mostly Queensland-based clients. John Michael and Andrew Stephen are the founding partners of the firm, with an additional forty-three partners in MSP. The audit firm regularly provides training days to ensure their staff can maintain their continuing professional development (CDP) hours necessary to substantiate their ongoing professional memberships. This may include partners updating staff on new accounting standards as and when they are released, or additional training on emerging technologies such as cryptocurrency or audit data analytics. Training on new accounting standards and exposure drafts is mandatory for all audit staff.
Makaro Ltd has been a client of MSP since the company was formed in 2012. John Michael, the senior partner of Michael Stephen & Partners, grew up in Toowoomba and attended Toowoomba Grammar School along with Martin and Robert Giles. Robert and John graduated in the same year and went on to study Commerce together in Brisbane. As they have remained good friends, John has never participated in any of the audits of Makaro Ltd.
For the June 2021 (FY2021) audit, Andrew Stephen is the Engagement partner, while the audit manager is Sandie Gemmell. Sandie is originally from Melbourne and on a recent site visit to the client told Robert that she has not seen her family since Christmas 2019 before COVID hit. Even when the borders opened briefly earlier in the year, she was tied up in
Gladstone on an audit and could not get time off. Every time she has been able to take leave it seems to be when another Victoria lockdown is in place. Robert sympathised and indicated that as a logistics company they have fallen under the ‘circuit breaker’ restrictions that enable them to continue to operate normally throughout Victoria. He suggested “Look, between you and me, assuming this audit goes smoothly, perhaps I can pull some strings to get you on board one of our freight vehicles if the borders remain shut. Here’s my business card – give me a call when the audit is wrapped up.” Sandie is very eager to see her family as her twin sister recently gave birth to her first nephew, nevertheless she felt uncomfortable about the offer of assistance and discussed it with Andrew.
Luke Asher is part of the audit engagement team for the Makaro Ltd audit, working with Sandie on the audit in 2020. Luke’s grandfather recently passed away and, as the only surviving member of the family, inherited his modest estate. Luke has established that part of this estate is an investment of 10 000 shares in Makaro Ltd. Luke has brought this to the attention of Andrew and is currently evaluating his options.
Background and understanding of the client entity
During April 2021, Makaro installed a new off-the-shelf asset management system to manage their fleet of vehicles and related plant and parts. This system replaced a system that had been developed in-house, as the old system could no longer keep up with the company’s broader reporting requirements. Makaro Ltd’s information technology (IT) department, together with the consultants from the software company implemented the new manufacturing costing system. Key operational staff from Makaro Ltd, together with consultants from the software supplier were significantly engaged in the selection, testing, training and implementation stages. Several customized modifications were made and therefore Makaro has asked MSP to provide an estimate of the valuation of the software system.
REQUIRED:
- Discuss the threats to Michael Stephen & Partners’ independence and identify appropriate actions (safeguards) Michael Stephen & Partners should consider to mitigate the threats, so as to ensure its partners and staff comply with the independence requirements of APES 110 Code of Ethics for Professional Accountants. Present your answer in tabular format as follows:
| Threat | Action (addressing threat) | |
| 1. | ||
| 2. | ||
| … |
Note: If one issue creates more than one threat, show it as multiple issues. Within the threat box in the above matrix, you are required to explain why the issue creates the specific threat indicated and, in the action box, identify any recommended action(s) that would reduce this threat to an acceptable level. If you believe that a particular threat is already at an acceptably low level, you should indicate this in the ‘action’ box, by stating that no further action is required.
(Approximately 500 -800 words)
- Assume that Andrew Stephen has been the engagement partner on the Makaro Ltd audit for five consecutive years (excluding the FY2021 audit). (Approximately 300 words)
- Explain, with reference to s324 of the Corporations Act, 2001 (Cth) and APES 110 Code of Ethics for Professional Accountants what the relevant rules and regulations stipulate regarding the long association that this scenario would suggest.
- Discuss, with reference to APES 110 Code of Ethics for Professional Accountants, the specific threats that this long association could give rise to.
- Based on the requirements of the Corporations Act, 2001 (Cth) and APES 110 Code of Ethics for Professional Accountants, make appropriate recommendations regarding the continuance of Andrew Stephen as engagement Partner for the 2021 audit of Makaro Ltd.
- Evaluate the professional conduct of Michael Stephen & Partners and its other members in terms of the APES 110 Code of Ethics for Professional Accountants. You do not need to discuss any threats to independence, but rather focus your discussion on the evidence that indicates how the auditors have complied with and/or breached the fundamental principles contained within APES 110 Code of Ethics for Professional Accountants. (Approximately 400 to 600 words)
Notes:
- Please use the latest version of the Code of Ethics, which can be found in the course site.
- For parts 2 and 3, where applicable, be specific in your answer in terms of both the source of rules (i.e. include reference to specific sections and/or sub-sections of the regulations,
e.g. APES 110 s400.5) and in terms of what the rules stipulate about the issue you are discussing.
SUGGESTED FORMAT FOR ANSWERS:
- You are not required to provide an introduction, nor a conclusion.
- Please do not define audit concepts, such as threats or safeguards. Instead, ensure that you apply the concepts to the case information, and refrain from simply providing generic statements.
- Answer each question separately.
- Where appropriate, you should make use of headings and sub-headings to structure your answers.
- You may use dot points; however, you should still use full sentences within these points.
