BAO5524 PROFESSIONAL AUDITING – CF

Posted on December 22, 2021 by Cheapest Assignment

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Conflict, War, Migration and Climate Change

Biofuel Solutions Ltd (BSL) is a continuing client of your firm for the last five years. You have been assigned to the audit of BSL replacing your supervisor, Jodie Baxter. The
replacement resulted from the periodical rotation of lead auditors as required by s. 324DA of he Corporations Act. You have been advised by Jodie that past audits have run smoothly and the financial reports of BSL have always been unqualified. You are currently planning the annual 31 December 2018 audit. You have obtained the following information from the past working papers and review of the audited financial reports for the years ending 31 December 2016 and 2017:

• Biofuel Solutions Ltd is an industrial biotechnology company listed on the Australian Securities Exchange since 2013. Prior to listing, it was a privately held company involved in the research work towards creating an economically viable alternative to petroleum. The founders of BSL are Justin Fasola and Paul King who are both highly qualified scientists.
• Justin, the Chief Executive Officer and the Chairman of BSL, has more than 20 years of combined experience as a business leader and expert in the global fuels industry.,  Paul, the Chief Operating Officer, heads the Research and Development Division of BSL and has over a 12 years of experience researching bacterial physiology and genetics. • BSL’s head office, factory and two warehouses are located in Western Australia.
• The main product of BSL is algae fuel for use in ground and air transportation. However, the technology to produce algal fuel is expensive and increasing production to the point where such fuel would be cost-competitive with petroleum products has proved slower and more expensive than anticipated.
• Like other companies in the industry, BSL uses its technology to create personal-care products and raw materials for chemical companies. Higher gross margin in these products funds the production of algae fuel.
• BSL received $600 million and $500 million in loans from federal and state government agencies in June 2013. The terms of the loan required interest to be paid annually and the principal to be paid on 30 June, 2018. In March 2016, a lawsuit was filed against BSL by a rival biofuel company. The lawsuit alleges that BSL infringed on its patent for one of the biofuel chemical products.
• In 2015, BSL installed a new accounting system specifically designed to accommodate all of BSL’s accounting and reporting requirements. Both your firm and BSL’s internal audit division reviewed the system prior to implementation and found it to be satisfactory. BSL Ltd is your firm’s largest client and has the most complex accounting system that the audit department has had to deal with. The first year in which the new system was operating your firm engaged an expert to assist in the development of specialised audit software that was to be significantly relied upon during the audit. This software is still used and is now maintained by your firm’s IT audit department. Your audit team has completed a ‘walk-through’ of the procedures involved in the purchases and payments cycle to confirm and understand the procedures. The following is a summary of the procedures they have documented:

1 The warehouse manager is responsible for placing orders for chemical ‘ingredients’. Because of the bulk quantity discounts, he will usually place an order for three months’ ingredients when there is one month of ingredients left. He is able to  determine how much the company uses in manufacture each month by reviewing the inventory records held at the warehouse.

2 To order, the warehouse manager contacts any of the approved suppliers and places an order over the phone. No record is kept of the conversation, nor does the warehouse manager require any approval. To make sure he doesn’t reorder in error he ‘ticks’ the inventory ledger and writes the date of order next to the product number.

3 When goods are received, the warehouse assistants check the delivery note against the ingredient coming in and then let the deliverer pump the ingredient into the company’s storage tank. At no point do they check the actual quantity received. The warehouse assistant then gives the delivery note to the warehouse manager. The warehouse manager will then post a journal entry to the inventory system by keying the entry to the terminal.

4 When the journal is accepted, the computer will generate a journal number. The warehouse manager writes the journal number onto the delivery note and sends it to the accounts payable clerk at head office. The accounts payable clerk files the note by supplier.

5 The accounts payable clerk at head office receives all supplier invoices. On receipt of the invoice, the clerk checks the details to the delivery note received from the warehouse. If there are no discrepancies, she will prepare a cheque requisition for the amount of the invoice and forward the cheque requisition, with the invoice and delivery note attached, to the financial controller for authorisation. If the payment is over $20 000 the financial controller must forward the requisition to the MD for authorisation.

6 The financial controller and/or MD signs the cheque requisition to indicate authorisation and forwards the documentation to the banking clerk who keys the payment into the general ledger (the journal posted by the system is Dr Creditor; Cr Bank). Once the journal is accepted by the system, the system generates a journal number, which the banking clerk writes on the cheque requisition. She then files the cheque requisition together with supporting documentation by cheque requisition number.

7 All cheques are printed and signed (counter stamped) by the computer. When they have been printed, they are returned to the banking clerk who checks the details and then sends them to the supplier. In September 2018, Charlie Smith, an employee working in the internal audit department of BSL contacted you to discuss accounting issues of concern. He provided following details to you in strict confidence. He had discussed these concerns with the manager of his department with no consequence. These concerns were:

• the cost allocation method for determining the value of work-in-progress and finished inventory was inaccurate and inappropriate. As a result, revenue figures for each of the three preceding years’ financial reports had been materially misstated.
• short-term debts payable within 12 months have been classified as non-current debts in the financial reports for 2017 and 2018. BSL has provided you with financial reports for the years ended 31 December, 2017  (audited) and 2018 (draft) (BSL_FinST.xls). (Your team has calculated some key ratios based on these financial reports.)

Your team has gathered following additional information relevant to the audit of Biofuel Solutions Ltd (BSL) for the year ended 31 December 2018.
• Since the end of the last financial year (31 December 2017), BSL has replaced their software to support their non-current assets business processes. You have been advised of the following facts about the software replacement:

The former software, called ‘AssetManagement’, was developed in-house by the programmers employed at BSL. It has been operating for over 4 years with on-going modifications to reflect changes to the non-current asset business processes of the company.

● AssetManagement was used by two employees who had the responsibility for performing all the tasks associated with the recording of all additions, disposals, changes to depreciation rates, asset life details and other information regarding the description and location of the non-current assets.
● The replacement software is an off-the-shelf package called QuickAssets. No modifications have been made to the package. The software was implemented on 1 September 2018. Both non-current assets personnel were trained in the new software and the changes to the business procedures surrounding the non-current asset operations.
● In the month of October 2018, both non-current assets personnel left the company. To date only one person has been recruited and has been in the role since 5 December 2018.
• This master file is updated for additions, improvements, revaluations, deletions and depreciation. A batch-input batch-processing system is used for updating the non- current assets master file.

• Ann Fasola, the Chief Financial Officer of BSL, has provided you with a data file, BSL_PPL.xls. This data file is an extract of the non-current assets master file of BSL.

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