FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
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You are the audit manager at KPMG & Coopers a medium-sized audit firm undertaking the audit for
the year ended 30 June 2018 of Vesta Tech Ltd, an electronic component manufacturer located in
Sydney. During the planning stage of the audit you discovered that one of Vesta Tech Ltd’s major
suppliers went bankrupt one month ago, causing major product shortages. To overcome the problem,
Jonathon Marshall, the husband of the finance director, Nimat Marshall provided electronic
components to Vesta Tech Ltd through his private company. There is no formal agreement in place
with Jonathon Marshall, however, the goods are being provided at competitive prices. You are
concerned about the electronic components that Jonathon Marshall’s company is supplying, because
his products are new to the market and you have heard some of Vesta Tech Ltd’s staff complaining
that they are of poor quality.
The board has informed you that although sales have been strong this year, Vesta Tech Ltd has
suffered significant cash flow problems because a major debtor, Mimosa Ltd, is experiencing financial
difficulties. As a result, Mimosa Ltd is taking well over 120 days to pay outstanding amounts, despite
Mimosa Ltd’s terms of trade being payment within 30 days. Mimosa Ltd makes up 40 per cent of Vesta
Tech Ltd’s sales and the board has been reluctant to take any action that might adversely affect those
sales. As a result, Vesta Tech Ltd has had to increase its dependency on its line of credit, and this has
caused it to temporarily breach the debt to equity ratio required in its loan covenant with WestPac
Bank Ltd.
The management of CGL is currenttly reviewing the structure of its audit committee to ensure that it
complies with the requirements of the ASX Corporate Governance Principles and Recommendations.
However, the board is confused by the reference in the ASX Corporate Governance Principles and
Recommendations to both independent directors and non-executive directors, as they thought that
they were the same thing. As a result, they have sought your advice concerning the structure of their
audit committee.
Required:
a) Identify two key account balances at risk of material misstatement. 
b) For each account balance identify the key assertion at risk. 
c) Explain why the account balance and assertion are at risk. 
d) Describe one (1) substantive test of detail that you would undertake for each account to address
the assertion and risk identified.

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