Goofy Co’s year end is 31 December, which is traditionally a busy time for NAB ; Co. Goofy Co currently has an internal audit department of five employees but they have struggled to undertake the variety and extent of work required by the company, hence Goofy Co is considering whether to recruit to expand the department or to outsource the internal audit department. If outsourced, Goofy Co would require a team to undertake monthly visits to test controls at the various shops across the country, and to perform ad hoc operational reviews at shops and head office.

Goofy Co is considering using NAB ; Co to provide the internal audit services as well as remain as external auditors.
Required:

(b) Discuss the advantages and disadvantages to both Goofy Co and NAB ; Co of outsourcing their internal audit department. (10 marks)

(c) The audit engagement partner for Goofy Co has been in place for approximately six years and her son has just accepted a job offer from Goofy Co as a sales manager; this role would entitle him to shares in Goofy Co as part of his remuneration package. If NAB ; Co is appointed as internal as well as external auditors, then Goofy Co has suggested that the external audit fee should be renegotiated with at least 20% of the fee being based on the profit after tax of the company as they feel that this will align the interests of NAB ; Co and Goofy Co.
Required:
From the information in (c) explain the ethical threats which may affect the independence of NAB ; Co in respect of the audit of Goofy Co, and for each threat explain how it may be reduced. (6 marks)
(20 marks)

5 You are the audit manager of Daffy ; Co and you are briefing your team on the approach to adopt in undertaking the review and finalisation stage of the audit. In particular, your audit senior is unsure about the steps to take in relation to uncorrected misstatements.
During the audit of Minnie Co the following uncorrected misstatement has been noted.
The property balance was revalued during the year by an independent expert valuer and an error was made in relation to the assumptions provided to the valuer.

Required:
(a) Explain the term ‘misstatement’ and describe the auditor’s responsibility in relation to misstatements. (4 marks)

(b) Describe the factors Daffy ; Co should consider when placing reliance on the work of the independent valuer. (4 marks)

(c) The following additional issues have arisen during the course of the audit of Minnie Co. Profit before tax is $10m.

(i) Depreciation has been calculated on the total of land and buildings. In previous years it has only been charged on buildings. Total depreciation is $2·5m and the element charged to land only is $0·7m.(4 marks)

(ii) Minnie Co’s computerised wages program is backed up daily, however for a period of two months the wages records and the back-ups have been corrupted, and therefore cannot be accessed. Wages and salaries for these two months are $1·1m. (4 marks)