your accounting firm is the auditor of FNU Limited, which is a large public comp

Question

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 firm’s computer audit division, no audit staff was present during the conversion process Required: For each of the situations (i) to (vi): (1) Discuss and explain how the situation may affect your audit plan? (2) Discuss and explain further information you consider necessary to obtain prior to finalising your audit program? (3) According to ISA 315, AN AUDITOR NEEDS TO TAKE CERTAIN STEPS TO UNDERSTAND THE ENTITY AND ITS ENVIRONMENT.OUTLINE THESE KEY STEPS.(5MARKS)

Explanation / Answer

Question 1. Since at the time of conversation, no audit staff was parsented over there, then there is a lack of knowledge about the accounting and reporting system of entity and also not aware about the internal controls.it may lead to risk of material misstatement.

in this case its very necessary to obtain the knowledge about the entity's information system, without it the audit programm will be ineffective.

Questiion 2. Before finalising the audit programm, an auditor should satisfy himself that the audit programm should cover all aspeck of entity's opeation and is communsurate with the size and nature of its business.

The auditor should obtain all kind of information from entity's management about its business process, internal controll and all other significan matter which may effect significantly its audit openion.Auditos should discuss with the management about its business activities, its policy and procedures, shoud also observe and inspect its business activities to determin the size if audit sample. He shoud visit the entity's premises and plant to get an overview of business process.   

Question 3. The Auditor shoud take following steps to understand the ENTITY AND ITS ENVIRONMENT:

1. Enquiries of management and others within in the entity.

2. Analytical procedures

3. Observation and Inspection

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