Part A- 42% Your accounting firm is the auditor of FNU Limited ,which is a large public company whose year-end

is 30 June 2010. FNU operates three divisions: entertainment, hospitality, and tourism and leisure. Each division is run as a separate business, with its own accounting system and management team. While planning the audit of FNU, you become aware of the following independent and material situations: Entertainment division (i) The entertainment division owns the largest chain of cinemas in Australia. Owing to changes in technology in the USA, movie distributors will shortly begin releasing films using a recording system that is incompatible with the movie projectors used by FNU. Approximately 70 per cent of the movies the entertainment division screens are sourced from the USA. The movie projectors currently have an estimated useful life of four years. FNU has sufficient financial resources to purchase and install new movie projectors without interrupting cinema operations. (ii) In March 2010 the entertainment division introduced a new general ledger system. Apart from a few teething problems the system seems to be functioning well and now produces a range of management reports that were not previously available. Owing to an oversight by your firms computer audit division, no audit staff were present during the conversion process. Hospitality division (iii) The hospitality division is involved in a luxury hotel development on an island in Indonesia. The project is currently around 60 per cent complete, and FNU is carrying around $70 million of work in progress related to the project in its balance sheet. The global economic uncertainty has cast doubts on the future of the project, with estimates of hotel patronage and revenue falling on a weekly basis. (iv) Under the terms of its bank loan the hospitality division must maintain three key financial ratios at set levels or risk the loan being immediately recalled. Owing to the downturn in the hospitality industry, the division is currently in breach of two of these ratios. The directors are currently negotiating the loan terms with the bank, arguing that although the hospitality division is in breach, overall FNUs ratios are within set limits. Tourism and leisure division (v) The tourism and leisure division manages three ski lodges in Victoria on behalf of a private investor. In March 2010 unusually heavy rains caused land slippage, which badly affected the foundations of these lodges. Preliminary reports suggest that the lodges will have to be demolished and rebuilt. The private investor is taking legal action against FNU, claiming that a lack of proper maintenance work caused the slippage.

(vi) Approximately 30 per cent of the divisions revenue comes from organising and selling tour packages to travel agents. The tour packages are tailored to the needs of tourists from Britain, Ireland and Greece. Selected travel agents are given a certain number of packages, which they allocate to customers once a deposit is paid. On account of the economic downturn in Europe, travel agencies are experiencing late cancellation rates of around 50 per cent. Although the customers are liable for the full cost of the tour for cancelling on short notice, FNU has found it is unable to collect most of the money owing as the customers simply lack the capacity to pay. Required: For each of the situations (i) to (vi): (1) discuss and explain how the situation may affect your audit plan? iii)
Its a tricky issue and makes it very imperative . its essential to compute the percentage mix of sales made to new parties developed during the period under review and also compute the opportunity loss due to non-development of prospective parties as customers. To identify the reasons for non development of these parties into customers. This may, further, be correlated with the expenses incurred during foreign tours conducted by the marketing personnel. Also required to study the system of order acceptance and invoicing and to report deficiencies in internal control, if any, along with suggestions for improvement. To study the system of order acceptance and invoicing and to internal control, if any, along with suggestions for improvement. To check the complaints and rejections during the period under review. Following aspects are to be checked in details: a) Nature of various complaints and percentage thereof. Reasons for frequent report deficiencies in

complaints of similar nature to be looked into. b) To study the role and follow up done by the Quality Assurance Department in

respect of various complaints received during the period. c) To check whether there has been any major rejection, both, in domestic and

overseas market, identify the reasons for the same and follow up action taken in this respect. d) To study the various reports prepared for monitoring and reporting the

complaints and rejections during the period under review. If not reported in the MIS, to suggest a proper reporting format.

iv)
To check the bill wise details of Sundry Creditors and to check the correctness of the outstanding balance with reference to the accounting vouchers. To check the accounting for acceptance of materials against L/C. as per the terms of reference. To work out product/division wise as well as total contribution. Reasons for variance in the contribution are to be analysed and reported. To see the concept of Budget and the targets set for the financial year. Check whether there is any revision in the same and the basis of such revision. See the performance level reporting done to the management and report the variance. To analyse the reasons for variation in net profit vis a vis projections. To scrutinise the Ageing Report of Debtors and see that all the credit entries have been adjusted against the corresponding debits. To report the deficiencies observed in the Ageing Report. To check that payment to suppliers is made

To report the lack in follow up action by the marketing personnel for overdue Debtors. Also to report cases where further sales are made to the customers who have huge outstanding overdue balance as on the date of further sales.

v) To identify the major expense accounts and compare the same with the target as well as the expense during the corresponding period in previous year. To identify the Internal Control weakness and report the same along with suggestions for improvement. To carry out a detailed analysis of all the major expense and to make analytical reporting of the expenses with suggestions for cost control. To check the expense vouchers and to report.

a) b)

Such cases where the expenses are beyond the rules of the company, and Cases of abnormal expenditures, be it by amount or by nature.

To Vouch the legal and professional expenses and check whether any important suit is pending with implication thereof and current status. Because a negligence is alleged , it is important to assess whether there is any real lapses in the maintenance which led to the break downand can it be established with the help of the above mentioned.

For this the followings can be done: To check the calculation of interest charged by the Banks and other financial institutions. To report the penal interest charged by the banks and other financial institutions. To see the quantum of cash withdrawal and utilization thereof. To see whether the Cash Management System facility offered by various banks is utilized or not and how the time is saved in transferring the realization to the Central Collection center. To check the costing System: a) b) c) vi) To study the system for approval and acceptance of orders and to give suggestions for improvement.To check the order acceptance with price list, if any, and to report the financial impact of sales below the price list. Because of the presence of potential mismanagement by the agents and non reporting of revenue generation if any a substantial check and balance is required to be put in place. It shall be designed in such a way that it plugs the capacity of the agents and third parties to veil such collections in the future. Probably a software be developed to integrate all the agents and third parties so that whatever is being done by them can be directly recorded by the accounts department and part of the internal control. To study the system of order acceptance and invoicing and to report deficiencies in internal control, if any, along with suggestions for improvement. (2) Discuss and explain further information you consider necessary to obtain prior to finalising your audit program?
1. Checking of samples sent to various customers and parties: to check whether samples are sent to all the parties with special reference to the parties whose demand is substantial and payment term are also good. 2. To make available sales invoices to be able to check with price list, orders and contracts. further to test check calculation of sales invoices. To be able test check delivery challans, dispatch register/challans and stock register. 3. To be made available to Check Debit Note/Credit Note raised during the period and to verify the justification for raising such Debit Note/Credit Note.

To comment on the existing Costing System. To see the use of costing system in each department. To do variance Analysis.

4. Availability of the Contract/Agreement with the agents / sales representatives and other third parties etc. 5. Random checking of delivery with reference to terms and conditions of purchase orders and whether liquidated damages if applicable have been recovered from the defaulting parties.

6. To check the debit balance lying in the name of Suppliers and ascertain the reasons for the same to report any further advances given to the parties with whom advances already exists on the date of fresh advance.