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Approval Number: ******* |
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THE UNIVERSITY OF NEW SOUTH WALES Auditor Reasoning on Preanalytical Audit Procedure |
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You are invited to participate in a study aimed at examining auditors' judgments in pre-analytical procedures. You were selected as a possible participant in this study because you have completed audit training as part of your degree and/or job experience.
You will be asked to examine some audit evidence collected in response to an unexpected fluctuation in total sales as part of a preliminary analytical procedure process. You will be required to provide an analysis of the client's explanation for the unexpected fluctuation.
Any information that is obtained in connection with this study and that can be identified with you will remain completely confidential and will not be disclosed (except as required by law). We plan to publish the results in an academic journal but, in any publication, only aggregate results are reported so that the results cannot be identified with any individual or organization.
The following task will take approximately 30 minutes to complete. In the final stage of the task, you will need to justify your misstatement likelihood judgment. Specifically, you will need to document why you made the misstatement likelihood judgment at the level you chose.
Your decision whether or not to participate will not prejudice your future relations with The University of New South Wales. If you decide to participate, you are free to withdraw your consent and to discontinue participation at any time without prejudice.
Complaints may be directed to the Ethics Secretariat, The University of New South Wales, SYDNEY 2052 AUSTRALIA (phone 9385 4234, fax 9385 6648, email ethics.sec@unsw.edu.au). Any complaint you make will be treated in confidence and investigated promptly, and you will be informed of the outcome.
If you have any questions please feel free to contact either of us (details below) and we will be happy to answer them.
Sincerely Dr Sarah Kim Australian School of Business UNSW Sydney NSW 2052 Phone: (2) 9385 5844 Sarah.Kim@unsw.edu.au |
Yichelle Zhang Australian School of Business UNSW Sydney NSW 2052 Phone: 0433 015 528 Yichelle.Zhang@unsw.edu.au |
The invitation email sent to you includes this form.
THE UNIVERSITY OF NEW SOUTH WALES | PAGE #3 |
GENERAL INSTRUCTIONS
In the following task, you will be asked to create a working paper to analyse evidence items relevant to an identified unexpected fluctuation in the client's total sales and make a judgement on the likelihood of misstament. For the purpose of this study, please assume your role as a junior auditor.
In the final stage of the task, you will also be asked to
justify in your likelihood of misstatement judgment. Specifically, you will need to provide reasons why you made the likelihood of misstatement judgment
at the level you chose. This justification, as well as your work paper, will be reviewed by the researcher. Please be aware that you may be contacted by a reviewer of your workpaper via email in regards to your justifications.
PLEASE PROCEED TO NEXT PAGE WHEN READY.
THE UNIVERSITY OF NEW SOUTH WALES | PAGE #4 |
BACKGROUND INFORMATION
Audit Engagement Information
You have been assigned to an audit team completing the 2012 year-end financial report audit of PCWorld Pty Limited (PCWorld). Your firm has audited the company for the past two years, issuing unqualified opinions in both years.
Client Background Information
Founded in 1990, PCWorld is a thriving domestic manufacturer of computer related products, including computer processors, monitors, and scanners. By 1999, it had established itself as a major player in the competitive computer related product industry.
Strategy
PCWorld invests heavily in R&D. Continuously producing high-quality and innovative products are one of its key success factors in the industry.
Industry
Beginning in 2008 through to 2010, the computer-related products industry went into a slump, during which time, price competition became fierce as firms tried to sell their accumulated inventories. In late 2010, the industry began to recover. The industry demands in 2011 were higher than most financial analysts had predicted.
Sales
In 2011-2012, PCWorld's total sales have increased consistent with the industry trend. This increasing trend has continued throughout 2012. PCWorld's uncompleted orders (i.e., order backlog) as at 30 June 2012, on the other hand, has decreased by $10.2 million relative to 30 June 2011. The order backlog represents 22% of annual sales.
Market Share
The overall computer-related product industry market has expanded by 2% in 2011-2012. In 2010-2011, PCWorld held a market share of 20%. The company's management has indicated that the company's market share has increased to 23% in 2011-2012.
Unexpected Sales Variance
Following is your analysis of PCWorld's 2012 sales:
Audited 2011 Total Sales | $176,890,000 |
Add: 2% increase in the national market | $3,538,000 |
Estimated 2012 Total Sales | $180,428,000 |
Unaudited 2012 Total Sales | $191,354,000 |
Unexpected Variance | $10,926,000 |
An unexpected increase is identified in the client's total sales account.
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PLEASE PROCEED TO NEXT PAGE WHEN READY.
THE UNIVERSITY OF NEW SOUTH WALES | PAGE #5 |
MANAGEMENT EXPLANATION, MARKET SURVEY AND PRESS SUMMARIES
When you raised the matter of the unexpected increase in total sales with Mrs Campbell, PCWorld's CFO, her response was as follows.
Management Explanation
"Although the company experienced some difficulties in sales during the industry slump, we did not cut back on Research and Development. Thanks to our brilliant product development and marketing teams, the launch of the X007 scanner in February this year was a great success. The X007 scanner has been very well received by the market. We have received several very large and unexpected orders since its launch."
When you have researched for relevant financial press and undertaken market survey, the results were as follow.
Financial Press (2011-2012)
1. The total demand for computer-related products has grown again, but a great part of it comes from demands for replacements, upgrades, or enhancements for existing equipment rather than sales of new systems.
2. Following the successful launch of X007 scanner in February, PCWorld announced its intention to issue more shares to fund its future Research and Development in scanners.
Market Survey
The most recent market survey conducted by a well-respected independent research company reports that two products stood out as market leaders. PCWorld's widescreen monitor and ProcessorKing's (one of PCWorld's competitors) processors were clear leaders in the market. The report mentions that competition is fierce and no other products standout in the market.
PLEASE PROCEED TO NEXT PAGE WHEN READY.
THE UNIVERSITY OF NEW SOUTH WALES | PAGE #6 |
INTERVIEWS WITH MANAGERS
When you interviewed the client's managers, their responses were as follows.
Interview with Peter Robertson, Head of Product Development Team
"Most of the company's Research and Development has been devoted to the development of the X007 scanner.
We also just completed and have taken to market our widescreen monitors. With a much higher resolution, I'm sure our customers won't be disappointed."
Interview with Jack Smith, Sales Manager
"Yes, the demand for the X007 scanners has been great, especially from our computer manufacturing customers. For example, one of our computer manufacturing customers signed a contract with us in February for 2,000 new scanners. They negotiated with us again for the purchase of another 6,000 units.
The market for computer monitors? Our wide screen monitors did really well last year. Our new widescreen monitors are really impressive, too. Although they have just been released on the market, we've already received lots of orders."
Interview with Bob Wood, Production Manager
"No, we have not expanded our plant capacity although our sales are increasing. We've got quite a bit of stock that has built up and the sales people could push those out first."
PLEASE PROCEED TO NEXT PAGE WHEN READY.
THE UNIVERSITY OF NEW SOUTH WALES | PAGE #12 (FINAL) |
FINAL QUESTIONNAIRE
In order to help us interpret the results of this study, please answer the following questions:
6. In the final stage of the task, what type of justification were you expected to provide?I needed to justify my
judgment process. Specifically, I needed to document how carefully
I considered each piece of evidence item and how I consolidated this information.
I needed to justify my
misstatement likelihood judgment. Specifically, I needed to document
why I made the likelihood of misstatement judgment at the level I chose.
7. While preparing your written analysis, to what extent did the fact that you were required to explain your reasonings at the last stage put you under pressure?
8. Are you a student or an auditor?Student
Auditor
9. Have you completed an audit course as part of your degree or work training?No.
Yes.
10. Have you undertaken analyticial procedure as part of your audit course or as a professional?No.
Yes.
11. Your WAM (average grade) in your Bachlor's degree is/wasPass
Credit
Distinction
High Distinction
12. Please briefly document one evidence, amongst others, as to how carefully you have considered each piece of evidence item and how you consolidated this information.
Please reflect on your usual behaviour and reply to the remaining questions. Please as honest as possible when answering these questions.
13. Compared to an average person, to what extent do you try to understand the reason for other people's behaviour?
14. Compared to an average person, how much do you enjoy trying to determine if what you read or heard is true?
15. Compared to the average person, how often do you notice inconsistencies in others' explanations?
16. Compared to the average person, how important is it to you that you have considered all or most of the available information before making a decision?
17. Think about a typical task at work. How confident do you usually feel about your judgment?