Seminar 10 - Substantive Test of Transactions and Balances I

School: Nanyang Technological University - Course: ACC 2104 - Subject: Accounting

Seminar 10: Substantive Tests of Transactions and Balances I Question 1 Part A: You are the audit manager in charge of the financial statement audit for Wonderful Paradise Ltd ("the Company") for the financial year ending 31 December 20x2. The Company manufactures and distributes a range of home and kitchen appliances and counts several major retail stores as its customers. It has been in the business for 15 years and was listed on the Singapore Exchange five years ago. You have just reviewed the audit planning memo prepared by the audit senior for this engagement, Chin Ching Chye. Below is a selected extract from Ching Chye's planning memo: Extract: In January this year, an independent director of the Company, Ms. Lisa Kam, suddenly resigned from the board of directors (BOD). As she was also a member of the audit committee (AC), the BOD has appointed the Finance Director, Ms. Sylvia Sim-Lim, who recently joined the Company, to replace Ms. Kam on the AC. The AC chairperson, Mr. Peter Sim-Lim, a non-executive director who recently retired as an audit partner from another audit firm, believes that the AC remains effective given that both he and Sylvia have high levels of accounting expertise. Moreover, the remaining member of the AC is an independent director who has many years of industry experience. Thus, he believes that the company is in compliance with the Companies Act's requirement regarding the composition of the AC. We concur with the AC chairperson's view and conclude that the AC remains effective. Required: Identify and explain any deficiencies in Ching Chye's professional judgments and any additional factors that Ching Chye should consider. Deficiencies Identified: 1)The newly appointed AC member, Ms. Slyvia Sim-Lim is a Finance Director -When you have a finance director on the AC, it is difficult for others to speak their mind or give opinions (finance director oversees financial statements) so the finance director should not be part of the Audit Committee 2)Close relationship between the Sim-Lims -Familiarity threat and or self-interest threat -Highly likely that both have a familial relationship with each other, which can interfere with the exercise of independent judgement Additional Factors to Reconsider:

1)Ms. Lisa Kam suddenly resigned from the board of directors and audit committee -Advisable to look further into the resignation as it could indicate disagreement with management Slyvia Sim-Lim has years of experience (strong accounting background) so we don't need to bring up the fact that she just recently joined the AC and could potentially not have enough knowledge → only a point to bring up if Slyvia came from a non-finance role or do not have finance experience