You are an audit manager at Hall & Associates, who have been approached to conduct the audit of Computer Games Ltd (CGL), a manufacturer of interactive computer games, for the year ended 30 June 2019. Hall & Associates has not previously audited CGL’s financial report, although it has undertaken other types of engagements for CGL. Last year CGL hired Hall & Associates to assist in the redesign of CGL’s accounting software to ensure that internal controls over internet sales were adequate to ensure the confidentiality of customer data and accuracy of recording. The new software was implemented at the beginning of the current year and appears to be working satisfactorily. As part of this year’s audit, you expect to review the internal controls at CGL, including the controls within the IT systems. As part of CGL’s financing arrangements with its bank, Easymoney Ltd, it has a loan covenant that stipulates that the quick asset ratio cannot be less than 1:1 or Easymoney Ltd has the right to withdraw all funding. The board has advised you that CGL’s quick asset ratio is currently at 0.9:1 due to industrial action holding up the sale of goods imported from overseas. The board has asked you to ignore this temporary breach of the loan covenant, explaining that CGL is a stable and financially sound company, and that the ratio will return to a positive level on resolution of the industrial dispute. The board has indicated that unnecessarily disclosing this within the audit report would force it to reconsider its plans to use your audit firm for other engagements. As a result of CGL’s current cash flow difficulties, the board has requested that Hall & Associate’s audit fee for 2019 be paid in CGL shares. The board has indicated that the market value of the shares will equate to the value of the audit fee charged by Hall & Associates. The management of CGL is currently reviewing the structure of its audit committee to ensure that it complies with the requirements of the SEC Code of Corporate Governance. However, the board is confused by the reference in the SEC Code of Corporate Governance Principles 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.
You are an audit manager at Hall & Associates, who have been approached to
conduct the audit of Computer Games Ltd (CGL), a manufacturer of interactive
computer games, for the year ended 30 June 2019.
Hall & Associates has not previously audited CGL’s financial report, although it
has undertaken other types of engagements for CGL. Last year CGL hired Hall
& Associates to assist in the redesign of CGL’s accounting software to ensure
that internal controls over internet sales were adequate to ensure the
confidentiality of customer data and accuracy of recording. The new software
was implemented at the beginning of the current year and appears to be
working satisfactorily. As part of this year’s audit, you expect to review the
internal controls at CGL, including the controls within the IT systems.
As part of CGL’s financing arrangements with its bank, Easymoney Ltd, it has
a loan covenant that stipulates that the quick asset ratio cannot be less than
1:1 or Easymoney Ltd has the right to withdraw all funding. The board has
advised you that CGL’s quick asset ratio is currently at 0.9:1 due to industrial
action holding up the sale of goods imported from overseas. The board has
asked you to ignore this temporary breach of the loan covenant, explaining that
CGL is a stable and financially sound company, and that the ratio will return to
a positive level on resolution of the industrial dispute. The board has indicated
that unnecessarily disclosing this within the audit report would force it to
reconsider its plans to use your audit firm for other engagements.
As a result of CGL’s current cash flow difficulties, the board has requested that
Hall & Associate’s audit fee for 2019 be paid in CGL shares. The board has
indicated that the market value of the shares will equate to the value of the audit
fee charged by Hall & Associates.
The management of CGL is currently reviewing the structure of its audit
committee to ensure that it complies with the requirements of the SEC Code of
Corporate Governance. However, the board is confused by the reference in the
SEC Code of Corporate Governance Principles 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.
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