– Auditing/2022 –

Consider the following independent cases found during the assurance engagement of XYZ Ltd, a large listed manufacturing business with operations in all capital cities of Australia. Recently XYZ has experienced significant operational and industrial relations issues. XYZ Ltd has a balance date of 30 June 20X8.  


XYZ Ltd has been involved in a protracted wages dispute with the employees’ trade union. In July 20X7 the employee’s trade Union launched a class action against XYZ Ltd. In May 20X8 a legal decision was handed down in favour of the plaintiff (the trade union). All XYZ Ltd employees won a back-pay wages dispute amounting to 50% of their current salary levels. Under the terms of the legal judgement, the back-pay amount affects all current employees of XYZ Ltd. Although the Board and Senior Management have agreed to not challenge the court’s decision, in spite of their legal advice, they have not yet made any adjustments to the 30 June 20X8 financial report. This is against the recommendation of the Lead Audit Partner. (1.75 marks)


Over the past twelve months XYZ Ltd has had difficulties obtaining enough raw materials from its normal overseas suppliers. As a result, XYZ has had to seek new suppliers from other locations. A large order of business-critical supplies from an African supplier was shipped FOB (free on board) from Johannesburg, South Africa on 30 June 20X8. The order arrived on 20 July 20X8.However, the purchase is not included in the 30 June 20X8 financial report because the CFO has a difference of opinion with the Lead Audit Partner. (1.75 marks)


On 1 July 2018 the CEO of XYZ Ltd resigned amid allegations of financial reporting manipulation. This was a major embarrassment to the company and was widely reported in the financial media. An internal investigation was performed by the Internal Auditors of XYZ Ltd and it concluded that the bonus and incentive scheme was incorrectly calculated with the effect that the relevant provisions are over-stated. Management has agreed to make the necessary adjustments, but is not prepared to make any disclosure of the issue in the Annual Report because it is concerned about how it would affect the company’s reputation. (1.75 marks)


Given the difficulties that XYZ Ltd has experienced over the past year, the Chairman and Directors of the Board consider it necessary to restore trust and confidence in the company. They are concerned that shareholders will ask embarrassing questions at the upcoming annual general meeting. The draft chairman’s report to go with the financial report has been provided to the auditors. It states that the operating revenue of a particular segment of the company’s overseas operations increased by 80% during the period. On reviewing the figures, you found that operating income increased by only 8%. (1.75 marks)



For each situation, identify the issues, the type of audit opinion required and explain the basis of your answers.