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f8 RQB 15 Sample PDF
f8 RQB 15 Sample PDF
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ACCA
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ACCA
PAPER F8
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2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
(i)
No responsibility for loss occasioned to any person acting or refraining from action as a result of any
material in this publication can be accepted by the author, editor or publisher.
This training material has been prepared and published by Becker Professional Development
International Limited:
16 Elmtree Road
Teddington
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United Kingdom
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No part of this training material may be translated, reprinted or reproduced or utilised in any form either
in whole or in part or by any electronic, mechanical or other means, now known or hereafter invented,
including photocopying and recording, or in any information storage and retrieval system without
express written permission. Request for permission or further information should be addressed to the
Permissions Department, DeVry/Becker Educational Development Corp.
Acknowledgement
Past ACCA examination questions are the copyright of the Association of Chartered Certified
Accountants and have been reproduced by kind permission.
(ii)
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
CONTENTS
Question
MULTIPLE CHOICE QUESTIONS (Section A)
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Answer
1
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1001
1001
1002
1003
1003
1004
1004
1005
1005
1006
1006
1007
1007
1008
1008
1009
1009
1010
1010
1011
1011
1012
1012
1013
1013
1013
1014
1014
1015
1015
1016
1016
1017
8
13
10
11
8
8
10
6
9
8
8
11
8
8
13
9
8
7
10
8
8
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8
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8
10
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9
9
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8
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2
3
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7
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33
Questions indicated ** are not exam style but provided for further revision of areas of the syllabus.
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
(iii)
Page
Answer
43
1018
10
43
43
1018
1020
10
10
44
44
45
46
1022
1023
1024
1025
10
10
10
10
46
46
1026
1028
10
20
47
48
1029
1030
10
10
49
1031
20
49
50
51
52
1034
1036
1038
1041
20
20
20
10
53
53
1042
1044
10
20
54
54
1046
1048
10
10
(Section B)
AUDIT AND OTHER ASSURANCE ENGAGEMENTS
1
2
3
AUDIT APPOINTMENT
8
9
DOCUMENTATION
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10
11
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4
5
6
7
CORPORATE GOVERNANCE
AUDIT PLANNING
12
INTERNAL CONTROL
17
18
Internal control
Bestwood Engineering (ACCA D98)
AUDIT MATERIALITY
19
20
(iv)
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
Page
Answer
54
55
56
1049
1051
1052
20
10
10
57
1054
20
TESTS OF CONTROL
Tinkerbell II (ACCA J11 adapted)
27
28
57
59
1056
1058
20
20
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AUDIT EVIDENCE
24
60
61
1062
1063
20
10
61
61
1065
1066
10
10
62
1067
10
63
1069
10
63
63
64
1070
1071
1072
10
20
10
64
65
65
66
1073
1074
1075
1076
10
10
10
20
67
67
1078
1080
20
20
ANALYTICAL PROCEDURES
29
30
Analytical procedures
Planning analytical procedures (ACCA J02 adapted)
ACCOUNTING ESTIMATES
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AUDIT SAMPLING
33
34
35
WRITTEN REPRESENTATIONS
36
37
38**
39**
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(v)
Page
Answer
68
69
1081
1083
20
10
70
70
72
1084
1087
1089
20
20
10
NON-CURRENT ASSETS
42
43
WW (ACCA J06)
JonArc I (ACCA D07 adapted)
INVENTORY
Trent Textiles (ACCA Pilot 1997)
Smoothbrush (ACCA J10 adapted)
MistiRead II (ACCA J07 adapted)
44
45
46
72
74
74
1090
1093
1094
20
10
10
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47**
48
49
74
75
1095
1097
20
10
75
76
76
1098
1099
1101
10
20
20
77
77
78
1104
1104
1106
10
20
20
79
80
81
82
82
1109
1110
1112
1113
1114
10
20
10
10
10
83
84
84
1116
1117
1118
10
10
20
85
85
86
86
1120
1121
1122
1123
10
10
10
10
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AUDIT FINALISATION
58
59**
60
61
62
Dylan
Sharp
ZeeDiem (ACCA D08 adapted)
Humphries I (ACCA D11 adapted)
Humphries II (ACCA D11 adapted)
GOING CONCERN
66
67
68
69
(vi)
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
Page
Answer
87
88
88
1124
1125
1126
10
10
10
89
1128
20
INTERNAL AUDIT
70
71
72
RECENT EXAMINATIONS
73
June 2012
1A
Pear International I (adapted)
[internal control, substantive procedures]
1B
Pear International II (adapted)
[external audit, internal audit)
2**
Planning and sampling
3
Orange Financials (adapted) [ethics]
4
Pineapple Beach Hotel
[evidence, substantive procedures, documentation]
5A
Strawberry Kitchen Designs (adapted)
[going concern]
5B** Serious concerns (adapted)
[going concern]
1131
20
91
91
92
1134
1136
1137
10
10
10
92
1138
20
93
1141
10
94
1143
December 2012
1A
Lily Window Glass I (adapted) [inventory]
1B
Lily Window Glass II (adapted) [CAATs]
2**
External audits [external audit, internal control]
3
Sunflower Stores [evidence, risks, internal audit]
4
Rose Leisure Club [ethics, substantive procedures]
5A
Written and oral representations (adapted)
5B
Violet & Co (adapted) [audit finalisation]
95
96
96
97
98
98
99
1144
1146
1147
1149
1152
1154
1155
20
10
10
20
20
10
10
June 2013
1
Fox Industries (adapted) [internal control,
deficiences, substantive procedures]
2**
Independence and objectivity [ethics, going concern]
3
Kangaroo Construction [materiality, audit risks]
4
Bush-Baby Hotels (adapted) [fraud, internal audit]
5
Panda (adapted) [subsequent events]
100
101
101
102
103
1157
1161
1163
1166
1168
20
10
20
10
10
104
1170
20
105
105
106
106
107
1173
1174
1177
1180
1181
10
20
10
10
10
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90
December 2013
1
Minty Cola (adapted)
[audit risks, substantive procedures]
2**
Audit procedures [tests of controls,
substantive procedures, audit evidence]
3
Oregano [internal control]
4A
Salt & Pepper I (adapted) [audit report]
4B
Salt & Pepper II (adapted) [ethics]
5
Paprika (adapted) [audit report]
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
(vii)
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Answer
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6
6
7
7
8
9
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19
SPECIMEN EXAM
Multiple Choice Questions
Hazard
Balotelli Beach Hotel
Savage & Co
Torres Leisure Club
Walters
Garcia International
Marking Scheme
20
10
10
10
10
20
20
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1
2
3
4
5
6
(viii)
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
1.1
A users satisfaction with the reliability of an assertion being made by another party
(1 mark)
In any assurance engagement there are three parties involved: the responsible party, the
practitioner and the user.
1.2
In respect of the given subject matter which party prepares the subject matter?
1.3
Responsible party
Practitioner
User
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A
B
C
(1 mark)
Based on our review, nothing has come to our attention that causes us to believe that the
accompanying financial statements do not give a true and fair view in accordance with
International Financial Reporting Standards.
Which of the following BEST describes the type of assurance provided by this
statement?
Positive assurance expressed negatively
Negative assurance expressed positively
High level of assurance expressed negatively
Limited level of assurance expressed negatively
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A
B
C
D
1.4
(2 marks)
The level of assurance given by an assurance engagement will depend on the type of
engagement. Assurance levels are often described as being either:
(1)
(2)
(3)
(4)
Absolute
Reasonable
Limited
Zero
What level of assurance would normally be given to an audit of financial statements and
what level of assurance to a review of financial statements?
A
B
C
D
1 and 4
2 and 4
1 and 3
2 and 3
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(2 marks)
The assurance provider should not believe anything that management tells him
The assurance provider should not believe anything that management tells him,
without obtaining supporting evidence
The assurance provider should apply a questioning mind to the information and
evidence he obtains
The assurance provider should be prudent and always assume the worst outcome in
cases of uncertainty
(2 marks)
(8 marks)
EXTERNAL AUDIT
2.1
2.2
PL
A
B
C
D
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A
B
C
D
2.3
Who is ultimately responsible for ensuring that the annual financial statements of a
listed company are prepared in accordance with IFRS and relevant legislation?
A
B
C
D
2.4
The auditors
The board of directors
The company secretary
The listing exchange
(2 marks)
A
B
C
D
(2 marks)
OECD
IFRS Foundation
IFAC
WTO
(2 marks)
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2.6
(2 marks)
Directors
Members
Legal authorities
To require from company officials any information and explanations on any matter
whatsoever
To report to any legal authority any matter the auditor considers that authority needs
to know
(2 marks)
(13 marks)
CORPORATE GOVERNANCE
3.1
3.2
(1 mark)
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2.7
All of them
3 and 6 only
1, 3 and 6 only
1, 2, 5 and 6 only
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A
B
C
D
2.5
(1 mark)
The following are statements that could be made about corporate governance:
(1)
(2)
(3)
(4)
(5)
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
3.4
True
False
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A
B
Rights of shareholders
Board responsibilities
Auditors accountability and remuneration
Risk management and internal control
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(1 mark)
3.6
(2 marks)
Under corporate governance it is illegal for the Chief Executive Officer to also act as the
Chairman of the Board.
Is this statement true or false?
3.5
(2 marks)
3.3
1, 4 and 5
1, 2 and 5
1, 2 and 3
2, 3 and 5
(2 marks)
It offers the internal auditors a direct, formal link with the executive directors
It provides effective and informed oversight to help ensure confidence in highquality financial reporting
(2 marks)
(10 marks)
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4.1
Which of the following best describes the Conceptual Framework of the Code of Ethics
for Professional Accountants?
It identifies all threats faced by professional accountants and the safeguards they
must implement
It assists professional accountants, through a set of rules, to identify the threats they
face and the action that must be taken
4.2
Panama & Co is an audit firm with 30 similar medium-sized audit clients, none of which are
listed. The firm has been asked to take on the role of internal auditor of one of its clients and
would be responsible for implementing its own recommendations.
A
B
C
4.3
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Which of the following is the most appropriate safeguard that should be applied by
Panama & Co?
Assign different personnel to the audit teams
Ensure that the combined fee threshold is not exceeded for the clients
No safeguards are possible; hence the engagement should be declined
(1 mark)
Talland &Co is the external auditor of Huntley Co, a retailer. The managing partner has been
called to a meeting with the board of directors of Huntley Co. At that meeting the firm has
been asked if it can provide the following non-audit services.
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Huntley Co plans to implement a new sales system. The board proposes that Talland & Co
takes on a consultancy project to evaluate several possible systems, advise on which system
should be selected, and oversee the installation of the new system.
Which of the following threats would arise from the above scenario, if the project was
accepted by Talland & Co?
A
B
C
D
4.4
Advocacy
Familiarity
Self-review
Intimidation
(2 marks)
Helena & Co is an eight-partner assurance firm which has been asked to consider taking on
the statutory audit of two separate companies:
(1)
Titania Co, a listed company, requires the assurance firm to prepare, as well as
audit, the financial statements.
(2)
The finance director of Puck Co, an unlisted company, is the brother of one of the
partners of the assurance firm.
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
(2 marks)
The directors of Exit Co, a large unlisted company, have decided to issue an annual
environmental and corporate social responsibility report as they wish to follow best corporate
governance practice. They have asked the companys auditors Stu & Co to provide an
assurance report on the new report. If accepted, the annual fees from Exit Co would be
slightly less than 15% of Stu & Cos gross annual fee income.
4.5
Which of the following safeguards would be the most appropriate for Stu & Co to now
implement?
4.7
(2 marks)
Which of the following statements best expresses the auditors duty of confidentiality to
his client in respect of information acquired in the course of professional work?
A
The auditor should only reveal confidential client data after having received consent
from the board of directors to do so
The auditor must supply any client data requested of him by a shareholder at the
annual general meeting
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4.6
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A
B
C
D
The auditor should never reveal client confidential data unless it is essential to the
understanding of a modified audit report
The auditor should reveal certain client confidential data if he believes that he has a
legal right or duty to do so
(2 marks)
Hugh, a chartered certified accountant, has recently set up in business as an auditor. He has a
few clients already and is looking to expand.
Which of the following potential assignments would Hugh be able to accept?
An offer from Hughs father to take over the audit of the company of which he is
managing director
An offer to carry out an annual audit for a fee which represents 5% of Hughs total
fee income
(1 mark)
(11 marks)
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AUDITOR APPOINTMENT
5.1
(2)
(3)
(4)
(5)
A
B
C
D
3, 4 and 5
1, 2 and 3
1, 3 and 4
2, 3 and 5
(2 marks)
A potential client has asked a firm to act as auditor to his company and wants the audit to
commence immediately as the financial statements are required by the bank.
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5.2
(1)
Which of the following procedures should an auditor carry out as soon as practicable
after accepting a new audit appointment?
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5.3
5.4
Communicate with the previous auditor to see if there is any professional reason
why the appointment should not stand
Ensure that he is not disqualified in any way from acting as auditor under local
legislation
(1 mark)
Which of the following factors would be most likely to cause an auditor to decline a new
audit engagement?
A
The auditor is unable to perform substantive procedures before the year end
The prospective client has already completed its physical inventory count (2 marks)
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(1 mark)
(8 marks)
DOCUMENTATION
6.1
6.2
True
False
(1 mark)
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A
B
The use of standardised working papers may improve the efficiency with which the audit file
is prepared and reviewed. However, the extent to which a standardised approach is desirable
will vary from audit to audit and will be more appropriate for some forms of documentation
than others.
For which document would a standardised approach be particularly appropriate?
An engagement letter
An annual bank confirmation letter
An audit programme
Written representations from management
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A
B
C
D
6.3
A
B
C
6.4
(2 marks)
Ensures the completeness of the audit working papers by the placing of a standard
programme on each section of the audit file
Facilitates briefing, delegation, supervision, review and quality control of the audit
work
(2 marks)
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Auditors working papers are conventionally divided into current and permanent files for both
convenience and control.
Which of the following is most likely to appear on the permanent audit file as opposed to
the current audit file?
A
B
C
D
(2 marks)
(8 marks)
7
AUDIT PLANNING
7.1
What document usually forms the basis of the audit team briefing?
7.2
(1 mark)
(1 mark)
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7.3
An engagement letter
An audit planning memorandum
An audit programme
PL
A
B
C
7.4
A list of disclosure and other requirements which must be met in order to ensure
compliance with IFRS, statutes and listing rules
A list of general instructions on the audit firms methods of auditing in each area
and the firms general procedures
A clear set of detailed instructions on the work to be carried out by audit staff
(2 marks)
It helps the auditor to properly organise and manage the audit engagement, so that it
is performed in an effective manner
It provides assurance to the auditor that the risk of a material misstatement in the
financial statements will be reduced
It facilitates the direction and supervision of audit team members and the review of
their work
(2 marks)
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Which of the following should an auditor consider when developing an overall audit
strategy?
A
Whether the allowance for sampling risk exceeds the achieved upper precision limit.
Whether the inquiry of the clients solicitor identifies any litigation, claims, or
assessments not disclosed in the financial statements
A
B
C
D
PL
7.6
(10 marks)
8.1
Which component of audit risk should be considered if an entity has few employees in its
accounting department?
Inherent
Control
Detection
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A
B
C
8.2
(1 mark)
To understand an entity, auditors use various sources of information. Such sources include:
(1)
(2)
(3)
(4)
(5)
Which THREE would be the best sources of information about a companys financial
systems?
A
B
C
D
10
1, 2 and 4
3, 4 and 5
1, 3 and 5
1, 2 and 3
(2 marks)
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
8.4
That the companys control system will fail to detect and correct material errors in
the processing of transactions
That the auditors substantive procedures will not detect and correct material errors
which exist in the financial statements
A client high-tec company has financial problems, a dominant chief executive, poor internal
control and unusual transactions.
What are all of these factors indicative of?
(2 marks)
PL
A
B
C
D
8.3
(6 marks)
INTERNAL CONTROL
9.1
Which TWO of the following are reasons why organisations need to have effective
systems of control?
Managing going concern risk
Maximising its profitability
Managing its assets and liabilities
Cutting down the time needed for the audit
Complying with laws and regulations
A
B
C
D
2 and 3
1 and 3
1 and 5
4 and 5
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(1)
(2)
(3)
(4)
(5)
9.2
(2 marks)
Authorisation of transactions
Preparation of financial statements
Custody or handling of assets
Budgetary control
Recording of transactions
A
B
C
D
1, 3 and 5
1, 2 and 3
1, 2 and 5
3, 4 and 5
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
(2 marks)
11
ISA 315 Identifying and Assessing the Risks of Material Misstatement through Understanding
the Entity and Its Environment states that an internal control system in an organisation
consists of five components: the control environment, the entitys risk assessment process, the
information system, control activities and monitoring of controls.
Which component would include the review by a senior financial manager of monthly
bank reconciliations produced by her assistant?
A
B
C
(1 mark)
9.4
Control environment
Control activity
Monitoring of controls
(1)
(2)
(3)
(4)
(5)
PL
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A
B
C
D
9.5
(2 marks)
The auditors preliminary evaluation of the internal control system of a company is that it is
effective in ensuring the completeness and accuracy of the accounting records because the
company has implemented multiple controls, including good segregation of duties. However,
the auditor is aware that the effectiveness of the companys internal controls is limited by the
possibility of collusion.
What level of reliance on internal controls and what types and extent of testing would
the auditor normally plan to carry out?
A
B
C
D
12
Level of reliance
on controls
low
moderate
high
low
Extent of
tests of control
nil
reduced
extensive
extensive
Extent of
substantive procedures
extensive
reduced
reduced
extensive
(2 marks)
(9 marks)
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AUDIT MATERIALITY
10.1
The external auditor of Aaron Co has set a planning materiality threshold of $40,000 and a
performance materiality of $30,000. The audit testing approach to the following financial
statement items is being considered:
(1)
(2)
Harry, a director of Aaron Co, owes $1,000 to the company (borrowed during the year).
Sundry income of $35,000
10.3
Neither 1 nor 2
Both 1 and 2
1 only
2 only
PL
A
B
C
D
10.2
(2 marks)
As an audit team member with two years of experience, you were assigned to carry out a
substantive test on directors expenses. The result of the test showed that in several cases
involving the same director, the Chief Financial Officer (CFO) had authorised the over
payment of his expenses. Each expense item was less than the performance materiality level.
What action should be taken?
Draw conclusion
Discuss with a senior member of the audit team
Extend sample
Discuss with the CFO
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A
B
C
D
10.4
10.5
(2 marks)
Its omission or disclosure would reasonably influence the decisions of a user of the
financial statements
(2 marks)
The materiality level calculated at the planning stage should NOT be revised during later
stages of the audit.
Is this statement true or false?
A
B
True
False
(1 mark)
(8 marks)
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13
11.1
The auditor of Woodferns Agencies Co is facing a legal claim for negligence. It is alleged
that a fraud was perpetrated by the manager at one of the smallest of the companys 80
branches. The auditor had not visited that branch for three years as he had adopted a
rotational testing approach. As a consequence the fraud had gone undetected for two years.
What is the auditors BEST defence against the claim?
An up-to-date letter of engagement which points out to the directors that the audit
should not be relied upon to detect all frauds which may exist
Case law judgements which indicate that an auditor should not be held responsible
for ingeniously laid frauds
(2 marks)
Which of the following procedures is NOT likely to result in the discovery of possible
non-compliance with laws and regulations?
A
B
C
(1 mark)
A material fraud was discovered at Conner Co shortly after the auditor had presented an
unmodified audit report to the annual general meeting. His standard letter of engagement
indicated that he would plan the audit so as to have reasonable expectation of detecting
material misstatements in the financial statements resulting from errors or fraud, but also
stated that the primary responsibility for the prevention and detection of fraud lay with
management.
SA
M
11.3
Audit documentation shows that the audit was carried out in accordance with
International Standards on Auditing
PL
11.2
Which of the following statements most accurately reflects the likelihood of the auditor
being held liable for the failure to find the fraud?
14
He is likely to be held liable if he has not designed specific tests to look for fraud in
all areas of the accounting records
He is unlikely to be held liable because the engagement letter specifically stated that
management were responsible for the prevention and detection of fraud (2 marks)
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
An auditor has discovered a $10,000 wages fraud by a director of a listed company. The
amount is not material in relation to the financial statements of the company and the auditor
has determined that the fraud does not constitute money laundering.
To whom does the auditor have a primary duty to report this matter to?
A
B
C
(1 mark)
Which of the following items of information that comes to an auditors attention would
be most likely to suggest non-compliance with laws and regulations?
A
The clients failure to develop adequate internal controls that prevent or detect
unauthorised purchases
PL
11.5
(2 marks)
(8 marks)
12
TESTS OF CONTROL
12.1
SA
M
(1)
(2)
(3)
12.2
Password protection
Back-up procedures
Authorisation
One-for-one checking
(2 marks)
The sales ledger system includes a sequence check on pre-numbered sales input
documents received from the sales department
Access to the computer facility is via a locked door and is restricted to selected
personnel who are issued with a personal key
(2 marks)
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
15
12.5
When planning the audit of the purchases cycle, which of the following internal controls
should the auditor test in order to ensure that liabilities are not understated?
A
Goods inwards records (GRNs) are matched to invoices and regularly reviewed for
items in respect of which no invoice has been received. An authorised list of
unmatched GRNs is produced at the end of each month
Invoices are matched with copy purchase orders and authorised before being
recorded in the purchases day book
12.4
Reviewing cash payments after the year end for unrecorded liabilities
Evaluating whether a liability was recorded at the proper amount
Interviewing and observing appropriate personnel to determine segregation of duties
(1 mark)
PL
12.3
Which of the following internal controls is most likely to contribute to the auditors
confidence that all sales have been recorded in the accounts?
Matching pre-numbered sales invoices to despatch notes
Sales manager authorising all invoices before they are issued
Matching pre-numbered despatch notes to invoices
Preparing and following up an aged receivables analysis by someone independent of
the sales ledger function
(2 marks)
SA
M
A
B
C
D
12.6
An auditor has identified the financial controllers review of the bank reconciliation as a
control to test. In connection with this test, the auditor interviews the financial controller to
understand the specific data reviewed on the reconciliation. In addition, the auditor verifies
that the bank reconciliation is properly prepared by the accountant and reviewed by the
financial controller as evidenced by their respective sign-offs.
Which of the following types of audit procedures do these actions illustrate?
A
B
C
D
16
(2 marks)
(11 marks)
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
13.1
During the audit of a new client numerous weaknesses have been identified. The auditor is
considering the content and format of his report to management (letter of weakness).
Which of the following best summarises the auditors approach to the report?
Report only major points to be dealt with by directors, leaving less important items
to be discussed informally with members of the clients staff
Report only those matters which potentially have a material effect on the true and
fair view shown by the financial statements, indicating that this should not be
regarded as a comprehensive statement of all weaknesses that exist
Issue separate reports for each area to the executive directors with specific
responsibility in those areas
(2 marks)
13.3
Include all matters of sufficient importance identified, but structure the letter to take
account of the varying levels of significance of matters included
PL
13.2
Professional scepticism
Performance materiality
Professional judgement
SA
M
13.4
(1 mark)
An immaterial fraud carried out by a senior manager had not been detected by the
internal control system
Transactions in which directors have financial interests are not being scrutinised by
the audit committee
No action has been taken to address a significant deficiency reported during the
audit of the previous year
(2 marks)
As a number of deficiencies within the sales cycle are individually not significant, there is no
requirement to discuss or report any of them to those charged with governance.
Is this statement TRUE or FALSE?
A
B
True
False
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
(1 mark)
17
An indication of areas in which the client can assist in improving audit efficiency.
Constructive feedback on business systems, risk systems and risk management.
Details of the audit work carried out to detect deficiencies.
Details of additional extensive work that could have been carried to try and detect
further significant deficiencies.
A
B
C
D
1 and 2 only
1 and 3 only
1, 2 and 4 only
2, 3 and 4 only
(2 marks)
13.5
(8 marks)
SERVICE ORGANISATIONS
14.1
Alhare Co uses a service provider to produce its payroll. Originating documents are kept by
Alhare and regularly reconciled (i.e. through control totals and reviews/re-computation of
data sent to and received from the service provider). Audit approach options available to the
auditor include:
PL
14
Assess the design and implementation of the service providers controls relevant to
the payroll processing
(2)
(3)
(4)
SA
M
(1)
Which of the following would be the most likely approach taken by the auditors of
Alhare concerning the service provider?
A
B
C
D
14.2
1 only
3 only
1 and 2 only
3 and 4 only
(2 marks)
A finance company uses a service provider to process its high volume, complex transactions.
Which of the following circumstances is most likely to affect the auditors ability to form
his opinion?
18
Failure of service provider staff to identify exceptions in output and bring them to
the attention of management
Refusal of permission to evaluate and test controls at the service provider (2 marks)
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
An auditor is auditing the financial statements of Aloe Co. Aloe uses a service provider to
process its payroll. The auditor of the service provider recently issued a report on the design,
implementation and effectiveness of the service providers internal controls.
Which of the following procedures should the auditor of Aloe perform with respect to
the assurance report issued by the service providers auditor?
14.4
(2 marks)
A
B
C
D
It is common practice for the auditor of a service company to provide a Type 1 or Type 2
report to be used by the auditors of that service companys clients.
What is the main difference between a Type 1 and Type 2 report?
Details of the controls tested during the service providers annual audit
Details of any modification made to the auditors report on the financial statements
Details of the controls tested which relate to the control objectives stated in the
description of the service providers clients function
(2 marks)
PL
(8 marks)
AUDIT EVIDENCE
SA
M
15
15.1
15.2
A
B
C
15.3
(1 mark)
During the course of an audit, the auditor may use the following documents:
(1)
(2)
(3)
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
19
1 only
1 and 2 only
1, 2 and 3
(1 mark)
Sufficiency of audit evidence depends, among other things, on the risk of misstatement.
Which of the following would increase this risk, and so indicate that more evidence
should be collected for sufficiency?
The use of audit staff who are unfamiliar with the client
(2 marks)
Select sales delivery notes and check the details with the related sales invoices
Select sales invoices and check the details with the related sales orders
Select sales invoices and check the details with the related sales delivery notes
Select sales orders and check the details with the related sales invoices
(2 marks)
Growers Co is a garden centre with 20 locations employing over two hundred people. To cope
with the current and expected future annual increase in transactions, Growers has
implemented a centralised computer system linked to processing and checkout terminals at
each centre. The new system will significantly improve the timing and quality of the
management control information. A well-qualified and experienced internal audit team was
also recently appointed.
SA
M
15.6
The knowledge that the audit working papers will be reviewed by an independent
external technical body
PL
15.5
What area of the external audit will see an increased emphasis on obtaining audit
assurance?
A
B
C
D
15.7
(2 marks)
Which of the following types of evidence would an auditor be most likely to examine to
determine whether internal controls are operating as designed?
A
B
C
D
20
Walk-through testing
Controls testing
Substantive testing of transactions
Substantive testing of balances
(2 marks)
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
(1 mark)
What assertion is an auditor testing when the auditor gathers evidence to detect sales
made after the end of the year that have been recorded before year end?
A
B
C
Cut-off
Accuracy
Completeness
(1 mark)
15.8
(13 marks)
ANALYTICAL PROCEDURES
16.1
At which of the following audit stages is the auditor least likely to use analytical
procedures?
A
B
C
16.2
PL
16
Planning
Review and evaluation of internal control
Final review of financial statements
(1 mark)
For what purpose will the external auditor most likely use analytical procedures at the
planning stage of the audit?
To determine the extent of substantive procedures which will be necessary during
the audit
SA
M
16.3
To identify areas of potential audit risk or new developments to give direction to the
audit
To assess the adequacy of the performance of the entity and the efficiency and
effectiveness of its operations
(1 mark)
A review of the revenues and expenses in the detailed profit and loss account of a
company, involving investigation of significant variations in comparison with the
equivalent figures for the previous year, is most likely to detect which of the following
significant problems?
A
The fact that a line of inventory has become obsolete during the year and should be
written off
The fact that the costs of some exceptional repairs to the companys premises have
not been included in the profit and loss account
Failure to make a provision for volume discounts which have been introduced this
year for certain customers
(2 marks)
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
21
Hardware Co has a fixed mark-up of 50% on cost. The external auditors analytical review of
the current financial statements has revealed a gross profit margin of 40% of sales.
What could this indicate?
A
B
C
D
(2 marks)
As the new auditor of Elm Co (a listed company) you note that the companys gross profit
percentage as per the draft accounts has fallen from 30% in the previous year to 20% in the
current year.
16.5
Errors in computation led to opening inventory being overvalued and the company
has also increased sales as a result of a marketing drive based on undercutting
competitors
Errors in computation led to opening inventory being undervalued and margins have
fallen as a result of the entry into the market of a major new competitor
Errors in computation have caused opening inventory to be undervalued and this has
been compounded by the inclusion for the first time (so as to comply with IAS 2) of
indirect overheads in the closing inventory valuation
(2 marks)
PL
Errors in computation led to opening inventory being overvalued and this has been
compounded by the inclusion for the first time (so as to comply with IAS 2) of
indirect overheads in the closing inventory valuation
SA
M
16.6
A
B
C
(9 marks)
17
ACCOUNTING ESTIMATES
17.1
17.2
(1 mark)
22
(1 mark)
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
Which of the following is NOT a factor that may influence estimation uncertainty?
A
B
C
D
17.5
(2 marks)
Management judgement
Observable or unobservable inputs
The length of any forecast period
The auditors professional judgement
17.4
(2 marks)
PL
17.3
(1 mark)
(8 marks)
18
18.1
Which of the following statements is NOT correct concerning the auditors use of the
work of a specialist?
The specialist should have an understanding of the auditors use of the specialists
findings
The client should have an understanding of the nature of the work to be performed
by the specialist
The auditor should obtain an understanding of the methods and assumptions used by
the specialist
(2 mark)
SA
M
18.2
Which of the following statements is correct concerning an auditors use of the work of
an appraiser in assessing the value of a clients intangible assets?
A
The auditor is not required to understand the objectives and scope of the appraisers
work
The client is required to consent to the auditors use of the appraisers work
If the appraiser is not independent of the client, the auditor may still be able to use
the appraisers work
(2 marks)
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
23
The only difference between a managements expert and an auditors expert is that the
managements expert is an employee of the company and the auditors expert is an employee
of the auditor.
Is this statement true or false?
A
B
18.4
True
False
(1 mark)
In using the work of an audit expert, an auditor referred to the experts findings in the
auditors report.
The client is not familiar with the professional certification, personal reputation, or
particular competence of the auditors expert
The auditor understands the form and content of the experts findings in relation to
the representations in the financial statements
PL
(7 marks)
AUDIT SAMPLING
19.1
As part of the audit testing to satisfy the audit objective Receivables are not overstated, the
audit senior of a manufacturing company plans a receivables confirmation.
SA
M
19
19.2
A random sample selected from the population of individual customers used during
the year
A sample selected from the population of individual customers used during the year,
with a bias towards those having the highest value of transactions in the year
A random sample selected from the population of customers year end balances
A sample selected from the population of customers year end balances, with a bias
towards large balances
(2 marks)
24
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
(1)
(2)
(3)
(4)
(5)
(6)
The higher the entity risk the greater the sample size
The bigger the population the bigger the sample size
The lower the acceptable detection risk the lower the sample size
The higher the tolerable error the lower the sample size
The higher the expected error the lower the sample size
The more effective the stratification the lower the sample size
A
B
C
D
2, 3, 5 and 6 only
2 and 5 only
1, 4 and 6 only
2, 3 and 5 only
19.5
(2 marks)
19.4
Block selection
Systematic selection
Haphazard selection
PL
19.3
(1 mark)
An auditor selects a sample using the total value of trade receivables as the population. The
sample is selected as follows:
Which of the following statements, in respect of this form of sample selection, is the most
accurate?
The basis of sample selection is more suited to the detection of understatement
errors than overstatement errors
The basis of selection would be ineffective where errors occur in the population on
a systematic basis
The basis of selection may be preferred when the book population under
examination has a highly-skewed value distribution
The basis of selection ensures that all errors in excess of $10,000 will be detected
(2 marks)
SA
M
19.6
In addition to evaluating the frequency of deviations in tests of controls, the auditor should
also consider the qualitative aspects of deviations.
Which of the following would be most likely cause the auditor to consider the broader
implications of a deviation?
A
B
C
D
(2 marks)
(10 marks)
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
25
WRITTEN REPRESENTATIONS
20.1
To define clearly the extent of the auditors responsibilities and provide written
confirmation of the terms of the auditors acceptance of appointment
20.2
In the course of auditing a company an auditor will receive verbal representations from
management for which independent evidence is not available.
To ensure that the directors formally accept their responsibility for providing such
information to the auditor
To enable the auditor to escape legal liability for any misstatement in the accounts
To reduce the extent of the alternative procedures which the auditor would
otherwise have to undertake
(2 marks)
Which of the following would the auditor generally expect to be referred to in the
written representations from management?
SA
M
20.3
PL
On what basis should the auditor seek written confirmation of these representations
from the directors?
20.4
Confirmation from the directors that they will remedy any serious weaknesses in
controls reported by the auditors
Confirmation of the respective responsibilities of the auditors and the company for
tax work
Details of any material subsequent events or confirmation that there have not been
any
(1 mark)
The management of Relic Co has refused to provide the auditor with a written management
representation that the auditor considers essential in relation to the impairment of a material
asset.
Which of the following best describes the impact of this refusal?
A
B
C
D
26
Prima facie evidence that the financial statements are not presented fairly
An illegal act by the directors
Grounds for an opinion modified on the basis of material misstatement
Grounds for an opinion modified on the basis of insufficient audit evidence
(2 marks)
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
A
B
C
D
31 January
28 February
4 March
24 April
What is the most appropriate date for an auditor to obtain a signed written
representation from management?
(2 marks)
(8 marks)
21.1
How does the auditor use test data in computer assisted audit techniques?
A
B
C
21.2
PL
21
(1 mark)
A large manufacturer has a computerised open-item sales ledger, holding 2,000 customer
accounts. The principal files within the system are the customer master file, sales ledger file,
and transactions history file.
SA
M
What audit test could be assisted by a computer enquiry from the sales ledger files
against the customer master file?
A
B
C
D
21.3
(2 marks)
During the final audit of Colossus, a large multi-national listed conglomerate, it is suspected
that systematic errors that have occurred within the integrated computer system are a result of
mainframe programming inadequacies.
Which tests are most likely to confirm these suspicions?
A
The use of test data together with a review of general controls over systems
development and implementation
File dumps at intervals, with manual recreation and comparison with actual output
Special computer audit programs to ensure the completeness of input and used to
simulate programmed controls
(2 marks)
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27
A
B
C
D
21.5
Auditors
program
Clients
program
Auditors
data
Clients
data
(2 marks)
Which of the following could be established by test data processed by the payroll module
of a computerised accounts system?
A
B
C
21.4
(1 mark)
PL
(8 marks)
22
NON-CURRENT ASSETS
22.1
Which of the following describes how an assurance provider would check the existence
assertion for a non-current asset?
A
B
C
(1 mark)
The auditor of Kirby Co is currently planning the audit approach in respect of the containers
in which goods are delivered to customers. There is no charge to customers for the
containers, which remain the property of Kirby Co and must be returned. For production line
convenience, suppliers are also required to use these containers when supplying components.
The containers are expensive and have an average estimated useful life of three years.
Container records identify each container separately and record their current location.
SA
M
22.2
22.3
(1 mark)
What evidence will inspecting the share certificate, contract note and statutory records
of an unquoted investment provide to the auditor?
A
B
C
D
28
(2 marks)
Which of the following audit procedures provides the most relevant evidence to verify
the carrying amount of a companys fleet of cars?
A
B
C
22.4
Existence
Rights and obligations
Valuation and allocation
Presentation and disclosure
(2 marks)
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
Pillbox Co makes and sells medical equipment and has a sizeable research and development
unit. The directors have identified three material applied research projects whose results they
hope will be developed into viable products. They have therefore capitalised the expenditure
on these projects and will amortise it over three years. The accounts fully disclose the
treatment adopted.
What form should the audit report take?
Unmodified
(2 marks)
(8 marks)
INVENTORY
23.1
Which of the following forms of evidence is the most reliable where an auditor is unable
to physically inspect inventory held by an agent on a sale or return basis?
PL
23
A certificate obtained directly by the auditor from the agent detailing the inventory
held on the clients behalf
An analysis of cash received from the agent after the year end substantiating the
year-end inventory level
(1 mark)
SA
M
23.2
In order for a continuous inventory counting system to provide satisfactory evidence of yearend inventory levels it is essential that management maintains adequate inventory records and
investigates and corrects all material differences between the inventory records and the
physical counts.
How often must the inventory be counted?
A
B
C
D
23.3
(2 marks)
What is the primary assertion tested by the auditor when he attends an inventory
count?
A
B
C
23.4
Existence
Control
Valuation
(1 mark)
An auditor analysing inventory turnover rates would NOT obtain evidence about which
of the following management assertions?
A
B
C
D
Existence
Rights and obligations
Completeness
Valuation and allocation
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
(2 marks)
29
An audit objective is stated as to ensure that all inventory on hand is reflected in the
inventory balance at the reporting date.
Which of the following management assertions should the auditor test?
A
B
C
D
(2 marks)
(8 marks)
24.1
In order to gather sufficient, appropriate evidence, the auditor may make use of external
confirmations. These may take the form of being a positive or negative request.
24
PL
A positive confirmation request for trade receivables always asks respondents to reply to the
auditor indicating whether or not they agree with the information provided.
Is this statement true or false?
A
B
24.2
True
False
(1 mark)
During their interim audit the auditors discover that there is often a delay between goods
being delivered to customers and the subsequent raising of a sales invoice.
SA
M
Which test is most likely to establish the extent of any understatement of receivables at
the year end?
24.3
30
Comparing goods despatch notes issued shortly after the year end with sales records
Comparing goods despatch notes issued shortly before the year end with sales
records
Comparing sales invoices issued shortly before the year end with goods despatched
notes
The auditor of Lydney Co reviews the receivables ledger at the planning stage for the year
end audit and determines that it comprises a large number of small balances, with a few larger
balances, which are settled, on average, in two months. As in previous years, the reporting
deadline is one month after the year end. Internal controls are considered to be effective and
the error rate is expected to be low.
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
Request a sample of customers to confirm the balance on their account at the year
end
Trace a sample of invoices and cash receipts through the system to the customers
accounts
Review cash received after the year end and agree to customer balances
How would an auditor trace transactions if the objective of the auditors tests of details
is to detect possible understatement of sales?
A
B
C
24.5
(2 marks)
PL
24.4
(1 mark)
The managing director of a client company has refused to allow the auditor to write to a major
customer who is on the list of receivables selected for direct confirmation, as the customer is a
close personal friend who may be offended by the request.
In these circumstances the auditors next step would be to
Indicate that his refusal constitutes a restriction of scope which will lead to a
modification of the audit opinion
SA
M
with
similar
Perform the confirmation on the other receivable balances selected and search for
alternative audit evidence to confirm the balance of that customer
(2 marks)
(8 marks)
25
25.1
The financial statements of a manufacturing company do not disclose a loan of $1,500 made
to a director during the year and repaid in full before the year end. The companys profit for
the year was $2million.
What reference, if any, should be made to this matter in the audit report?
A
B
C
D
25.2
No reference is necessary
As an except for opinion, giving details of the loan (lack of evidence)
As an except for opinion, giving details of the loan (material misstatement)
An adverse opinion, giving details of the loan
(2 marks)
What is a key source of audit evidence for the issue of ordinary shares?
A
B
C
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
(1 mark)
31
A company uses the services of a company secretary agent to deal with all regulatory issues
relating to share capital including maintenance of the share register, share issues and statutory
returns.
What written confirmation should the auditor obtain from the companys agent?
A
B
C
D
(2 marks)
25.4
Which of the following assertions is the auditor testing with this procedure?
Valuation
Understandability and classification
Existence and occurrence
Completeness
PL
A
B
C
D
(2 marks)
(7 marks)
26
26.1
Which of the following procedures would be the most appropriate for verifying the
interest accrued on borrowings?
Confirming the interest rate with the lender
Vouching the payment of interest on the borrowings
Recalculating the interest accrued on the basis of outstanding amount, interest rate
and period to which it relates
(1 mark)
SA
M
A
B
C
26.2
Obtaining annual bank confirmation letters and receivable confirmation letters are standard
audit procedures. The two forms of letterhead mostly used are:
(1)
(2)
Clients letterhead
Auditors letterhead.
On whose letterhead are bank letters and receivable confirmation letters sent?
A
B
C
D
26.3
(2 marks)
32
Both on 1
1 for the bank letter, 2 for the receivable confirmation
1 for the receivable confirmation, 2 for the bank letter
Both on 2
Cash in bank
Trade finance
Accounts receivable
(1 mark)
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
Farnham Co has a bank overdraft of $450,000, secured by a floating charge over its inventory.
It also has a deposit with the same bank of $200,000. The bank confirmation letter states that
the bank has the right to off-set these balances, and has set an overall net borrowing limit on
the company of $300,000. The finance director has disclosed these amounts as secured
overdraft $250,000 under current liabilities, with no further description in the notes other
than the nature of the security.
What steps, if any, should the auditor take in respect of this matter?
Insist upon classification of $200,000 under current assets and $450,000 under
current liabilities
Insist that the company discloses in the notes the full amount of the overdraft and
that it is in breach of its borrowing limit
Accept the treatment but include added emphasis in the audit report explaining that
these amounts have been off-set, and disclosing the overdraft limit
(2 marks)
PL
26.5
During the audit of a companys year-end bank reconciliation, the auditor discovered that a
material amount of cheques to pay the companys suppliers were drawn and recorded in the
books just before the year end. The cheques were sent out two weeks after the year end.
What action should be taken by the auditor?
Not seek to make any adjustment to the amount of trade payables or bank balance in
the accounts
Confirm when the cheques were cleared before deciding if any adjustment is
necessary
Request the company to adjust the amount of trade payables and bank balance by
the total of the cheques
Request the company to adjust the amount of trade payables and bank balance by
the total of the above cheques which remain unpresented at the completion of the
audit
(2 marks)
SA
M
(8 marks)
27
27.1
27.2
During the course of their interim audit of a company, the auditors establish that purchases
may be understated because goods received at the end of one month are often not invoiced by
suppliers until the following month.
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
33
A detailed year-end inventory count in those areas where cut-off inadequacies are
suspected
Comparing goods received notes for the last few days of the financial year with the
purchase ledger records and accruals (goods received not yet invoiced)
Reconciling suppliers statements as at the year end date with purchase ledger
records
(2 marks)
Which of the following documents would NOT assist the auditor in his audit of
unrecorded liabilities at a year end?
A
B
C
27.4
PL
27.3
(1 mark)
In accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets there are
four elements to the accounting treatment of provisions, contingent liabilities and contingent
assets:
(1)
(2)
(3)
(4)
Remote
Possible
Probable
Virtually certain
SA
M
Which of the following relates to the situation where only a disclosure is required?
A
B
C
D
27.5
(2 marks)
Which of the following tests of details would be most effective in determining whether
accounts payable have been misstated?
A
B
C
D
27.6
1 only
4 only
2 and 3 only
1 and 4 only
What is the appropriate population to select from when using confirmations to provide
evidence about the completeness assertion for accounts payable?
A
B
C
D
(2 marks)
(10 marks)
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2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
28.1
It may be common for a professional firm to both prepare and audit the financial statements of
small businesses and not-for-profit organisations.
Which of the following procedures would NOT be acceptable for the auditor of a small
business to carry out as part of the accounting and auditing functions?
Entering details of non-current assets into the books and records from purchase
invoices
(2 marks)
Which of the following is the best way to compensate for the lack of adequate
segregation of duties in a small organisation?
A
B
C
28.3
Disclosing lack of segregation of duties to the external auditors during the annual audit
Replacing personnel every three or four years
Greater management oversight
(1 mark)
PL
28.2
(1 mark)
SA
M
28.4
True
False
A
B
C
D
28.5
Cash
Receivables
Administration expenses
Liabilities
(2 marks)
Which statement on internal controls is the most relevant for small entities?
A
There is a greater need for formal internal controls since segregation of duties will
be weaker
The same need for formal internal controls is required since the directors personal
involvement is counteracted by weaker segregation of duties
There is less need to depend upon formal internal controls since the lower number
of transactions will reduce the likelihood of unreliable records and other
information
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
35
AUDIT FINALISATION
29.1
Which of the following statements is NOT true regarding the auditors responsibility for
subsequent events?
The auditor has no active responsibility to make continuing inquiries after the date
of the auditors report
The auditor has an active responsibility to make continuing inquiries between the
date of the financial statements and the date of the auditors report
The auditor has an active responsibility to make continuing inquiries between the
date of the financial statements and the date on which sufficient appropriate
evidence has been obtained
(2 marks)
The auditor has an active responsibility to make continuing inquiries between the
date of the auditors report and the date the financial statements are issued
There are many elements within an audit that ensure the audit is completed effectively and
efficiently. Four such elements are:
(1)
(2)
(3)
(4)
PL
29.2
What are the two most important elements relating to audit finalisation?
1 and 2
2 and 3
3 and 4
1 and 4
SA
M
A
B
C
D
29.3
(2 marks)
ISA 560 Subsequent Events sets out the auditors responsibilities for the period between the
year end and the annual general meeting (AGM).
What action is the auditor required to take after signing the audit report and before the
AGM?
29.4
36
Obtain a representation from the directors that no material events after the reporting
period have occurred in that period of time
Search for evidence of events after the reporting period that may cause him to
change his opinion
Consult with the directors on any events after the reporting period of which he
becomes aware which might have led him to give a different opinion
None, since his responsibilities cease after the audit report is signed
(2 marks)
The chairmans report in the accounts of Table Co (a listed company) for the year ended 31
December states that the companys trading resulted in a profit before tax of $5 million. The
profit and loss account and directors report, however, state that the company made an
operating profit for the year of $5 million but a net loss after taxation of $7 million. The
auditor considers that the information given in the chairmans report is inconsistent with the
financial statements, but is unable to persuade the chairman to amend his report.
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
Which of the following procedures would an auditor most likely perform to obtain
evidence about the occurrence of subsequent events?
A
B
C
29.5
(9 marks)
30.1
Torte Co has not complied with certain aspects of an applicable financial reporting standard.
The auditor concurs with the departure in that if Torte Co had applied all aspects of the
standard, the companys financial statements would not have shown a true and fair view. It
has not been disclosed as a departure from an applicable financial reporting standard in the
accounting policy note.
PL
30
Modified opinion for material misstatement over truth and fairness and noncompliance with disclosure requirements
SA
M
30.2
Unmodified opinion with an Emphasis of Matter paragraph referring to the nondisclosure of the departure from the financial reporting standard
(2 marks)
During the audit of Tiny Co, a small company with shares totally owned by the directors, it
has become apparent that the system of internal controls is not sufficiently reliable for audit
purposes.
What form should the audit report take?
A
Be modified unless there is adequate evidence that control has been exercised
through the close involvement of the directors
(2 marks)
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37
The accounts of Jay Co include a material receivable that management believe will be paid
and does not require any allowance. The auditors do not believe that any part of the balance
will be paid.
What form should the audit opinion take?
A
B
C
PL
A
B
C
D
30.5
(1 mark)
30.4
Disclaimer
Adverse
Except for
(2 marks)
An auditor considers that his work has been deliberately frustrated by management to such an
extent that he has been unable to carry out a proper audit because management has prevented
him from gathering sufficient appropriate evidence for accounts receivable, inventory and
liabilities.
What action should the auditor take?
Issue an adverse opinion
Issue a disclaimer of opinion or resign and ensure that the reasons are made known
to shareholders in a written statement
SA
M
(2 marks)
(9 marks)
31
GOING CONCERN
31.1
38
The fact that such modification would lead to the appointment of a receiver or
liquidator
The repayment of a substantial bank loan which is due 18 months after the end of
the reporting period
(2 mark)
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
Give an unmodified report on the grounds that the negotiations with the bankers are
incomplete and that a modified report may prejudice their outcome
Refuse to give a report unless the accounts are prepared on the basis that the
company may no longer be a going concern
(2 marks)
PL
31.3
The chief executive officer is due to retire within six months of the year end
Escalating employee strikes at a major supplier of key raw materials
Adverse key financial ratios for the first time
No cash flow forecast for the next 12 months has been produced
Operating losses have continued to grow
Cash flows have moved from being positive in the prior year to negative this year
SA
M
Which of the above matters would be considered by the auditor during his planning of
the audit as indicators of potential going concern difficulties?
A
B
C
D
31.4
(2 marks)
A
B
C
31.5
All of them
2, 3, 5 and 6 only
1, 3, 4 and 6 only
3, 4, 5 and 6 only
Plans to discuss with lenders the terms of all debt and loan agreements
Postponement of research and development expenditures
Plans to strengthen internal controls over cash disbursements
(1 mark)
There is no need for the auditor to consider going concern matters beyond the assessment
period of one year from the end of the reporting period.
Is this statement true or false?
A
B
True
False
(1 mark)
(8 marks)
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INTERNAL AUDIT
32.1
The scope and objectives of the internal audit function vary widely and depend on the size
and structure of the entity and the requirements of its management.
Which THREE of the following functions could internal audit perform and be
considered an independent function of management?
A
B
C
D
1, 3 and 5
2, 4 and 5
3, 4 and 5
1, 3 and 4
(2 marks)
Which of the following would NOT be considered to be within the scope of a value for
money audit?
A
B
C
Unnecessary spending
Revenue opportunities
Management financial controls
(1 mark)
A companys internal audit function have been asked, as part of the scope of a wide ranging
investigation to improve results, to establish relevant benchmarks to compare the performance
of a number of departments across a range of relevant indicators.
SA
M
32.3
PL
32.2
(1)
(2)
(3)
(4)
(5)
What type of assignment will the internal audit function be carrying out?
A
B
C
D
32.4
40
(2 marks)
Under what circumstances could an internal audit function be carried out by the entitys
external auditor?
A
When any threats to the external auditors objectivity have been reduced to an
acceptable level
When the internal audit functions have no direct impact on the financial statements
(2 marks)
(7 marks)
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
33.1
At the commencement of their first audit of Hove Co the new auditors ascertain that the
company has its own flowcharts and detailed systems manual, which have been prepared by
the internal audit department.
How should the auditors normally proceed?
Accept the companys systems documentation and evaluate the controls by means
of an internal control questionnaire
Design and carry out compliance tests on controls shown by the companys systems
documentation
Which of the following is true about the auditors use of an internal auditor and a
specialist?
A
The auditor must assess the competency of both the internal auditor and the
specialist
A specialist may be related to the client, but an internal auditor may not
The auditor may share responsibility for the audit report with an objective and
competent internal auditor, but may not share such responsibility with a specialist
(1 mark)
During the course of his work, the external auditor performs many procedures. Three such
procedures are:
SA
M
33.3
Ascertain and record the systems independently to confirm the accuracy of the
companys systems documentation
PL
33.2
(1)
(2)
(3)
What procedures could the work of the internal auditor impact upon?
A
B
C
D
33.4
1 and 2 only
1 and 3 only
2 and 3 only
1, 2 and 3
(2 marks)
Which of the following would the external auditor most likely be able to utilise the work
of the internal auditor?
A
B
C
Existence of contingencies
Valuation of intangible assets
Existence of non-current asset additions
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
(1 mark)
41
For which of the following judgments may an independent auditor share responsibility
with an entitys internal auditor who is assessed to be both competent and objective?
A
B
C
D
Materiality of
misstatements
Yes
No
No
Yes
Evaluation of
accounting estimates
No
Yes
No
Yes
(2 marks)
SA
M
PL
(8 marks)
42
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
Auditors are frequently required to provide assurance for a range of non-audit engagements.
Required:
(b)
(5 marks)
(5 marks)
(10 marks)
Question 2 CONOY
PL
Conoy Co designs and manufactures luxury motor vehicles. The company employs 2,500 staff and
consistently makes a net profit of between 10% and 15% of sales. Conoy Co is not listed; its shares are
held by 15 individuals, most of them from the same family. The maximum shareholding is 15% of the
share capital.
The executive directors are drawn mainly from the shareholders. There are no non-executive directors
because the company legislation in Conoy Cos jurisdiction does not require any. The executive
directors are very successful in running Conoy Co, partly from their training in production and
management techniques, and partly from their hands-on approach providing motivation to employees.
The board are considering a significant expansion of the company. However, the companys bankers
are concerned with the standard of financial reporting as the financial director (FD) has recently left
Conoy Co. The board are delaying provision of additional financial information until a new FD is
appointed.
SA
M
Conoy Co does have an internal audit department, although the chief internal auditor frequently
comments that the board of Conoy Co do not understand his reports or provide sufficient support for his
department or the internal control systems within Conoy Co. The board of Conoy Co concur with this
view. Anders & Co, the external auditors have also expressed concern in this area and the fact that the
internal audit department focuses work on control systems, not financial reporting. Anders & Co are
appointed by and report to the board of Conoy Co.
The board of Conoy Co are considering a proposal from the chief internal auditor to establish an audit
committee. The committee would consist of one executive director, the chief internal auditor as well as
three new appointees. One appointee would have a non-executive seat on the board of directors.
Required:
Serena VDW Co has been trading for over 20 years and obtained a listing on a stock exchange five
years ago. It provides specialist training in accounting and finance.
The listing rules of the stock exchange require compliance with corporate governance principles, and
the directors are fairly confident that they are following best practice in relation to this. However, they
have recently received an email from a significant shareholder, who is concerned that Serena VDW Co
does not comply with corporate governance principles.
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
43
The executive directors remuneration is proposed by the finance director and approved by the
chairman. They are paid an annual salary as well as a generous annual revenue related bonus.
Since the company listed, the directors have remained unchanged and none have been subject to reelection by shareholders.
Required:
(5 marks)
(b)
PL
(a)
(10 marks)
(b)
SA
M
(a)
(4 marks)
A waste disposal company has breached tax regulations, environmental regulations and
health and safety regulations. The auditor has been approached by the tax authorities, the
government body supervising the award of licences to such companies and a trade union
representative. All of them have asked the auditor to provide them with information about
the company. The auditor has also been approached by the police. They are investigating a
suspected fraud perpetrated by the managing director of the company and they wish to ask
the auditor certain questions about him.
Required:
(6 marks)
(10 marks)
Question 5 STARK
You are a manager in the audit firm of Ali & Co; and this is your first time you have worked on one of
the firms established clients, Stark Co. The main activity of Stark Co is providing investment advice
to individuals regarding saving for retirement, purchase of shares and securities and investing in tax
efficient savings schemes. Stark is regulated by the relevant financial services authority.
44
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
In an initial meeting with the finance director of Stark Co, you learn that the audit team will not be
entertained on Stark Cos yacht this year as this could appear to be an attempt to influence the opinion
of the audit. Instead, he has arranged a balloon flight costing less than one-tenth of the expense of
using the yacht and hopes this will be acceptable. The director also states that the fee for taxation
services this year should be based on a percentage of tax saved and trusts that your firm will accept a
fixed fee for representing Stark Co in a dispute regarding the amount of sales tax payable to the taxation
authorities.
Required:
Explain the ethical threats which may affect the auditor of Stark Co.
(b)
For each ethical threat, discuss how the effect of the threat can be mitigated.
(5 marks)
PL
(a)
(5 marks)
(10 marks)
Question 6 LV FONES
You are the audit manager of Jones & Co and you are planning the audit of LV Fones Co, which has
been an audit client for four years and specialises in manufacturing luxury mobile phones.
SA
M
During the planning stage of the audit you have obtained the following information. The employees of
LV Fones Co are entitled to purchase mobile phones at a discount of 10%. The audit team has in
previous years been offered the same level of staff discount.
During the year the financial controller of LV Fones was ill and hence unable to work. The company
had no spare staff able to fulfil the role and hence a qualified audit senior of Jones & Co was seconded
to the client for three months. The audit partner has recommended that the audit senior work on the
audit as he has good knowledge of the client. The fee income derived from LV Fones was boosted by
this engagement and along with the audit and tax fee, now accounts for 16% of the firms total fees.
From a review of the correspondence files you note that the partner and the finance director have
known each other socially for many years and in fact went on holiday together last summer with their
families. As a result of this friendship the partner has not yet spoken to the client about the fee for last
years audit, 20% of which is still outstanding.
Required:
(a)
Explain the ethical threats which may affect the independence of Jones & Cos audit of
LV Fones Co.
(5 marks)
(b)
(5 marks)
(10 marks)
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45
(b)
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:
PL
(a)
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)
(10 marks)
SA
M
The directors of Melton Manufacturing have asked your firm to act as the companys statutory auditor
for the next financial year. They will be asking their existing auditors to resign as they say they do not
provide a cost effective service.
Required:
(a)
Describe the steps an audit firm should perform prior to accepting a new audit
engagement.
(5 marks)
(b)
Briefly describe the main contents of a letter of engagement which you should send to
the directors of Melton Manufacturing.
(5 marks)
(10 marks)
Question 9 BONDI
You are a partner with a firm of Chartered Certified Accountants that has been invited, by the board of
directors, to accept nomination as external auditors to Bondi. Bondi operates a number of car
dealerships and has grown rapidly over the past two years through an aggressive take-over strategy.
You are aware that the companys existing auditors, a much smaller firm, modified their last auditors
report. Over lunch with a number of your firms partners, the companys finance director maintained
that their existing auditors could not cope with the audit of a company their size and, in particular, were
not equipped to audit the recently installed sophisticated computer accounting program. He also
suggests that they need a firm of your reputation in order to reassure the market as they intend to seek a
public listing within two years.
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2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
(ii)
The newly installed computer accounting system is unreasonably complicated. Bondi claims
this is necessary because of the need to maintain records to justify the companys claims for
volume rebates, and bonuses under the complex incentive schemes by which car
manufacturers reward dealers.
(iii)
The auditors have no evidence of deliberate misrepresentation by the directors but audit staff
were hindered in their audit work by a less than helpful attitude by senior management who
adopted an aggressive stance whenever a query was raised.
PL
(i)
Further, the existing auditor mentioned that the finance director was constantly phoning the partner
claiming the audit staff were incompetent and accusing them of wasting his time asking unnecessary
questions.
At a partners meeting a majority of partners accepted the story that the existing auditors were out of
their depth and that their complaints were merely an attempt to cover up their own shortcomings. Your
firm accepted nomination and was duly appointed as auditors.
Required:
State factors the partners should have considered for and against accepting nomination.
(7 marks)
(b)
Detail the matters to which you should pay particular attention in obtaining the
required knowledge of the business and in developing your audit plan.
(7 marks)
(c)
During the first audit your firm discovers that the reason for the complexity of the computer
system is to falsify records in order to reduce the amount of tax payable to the government.
SA
M
(a)
(6 marks)
(20 marks)
Question 10 SPECS4YOU CO I
ISA 230 Audit Documentation establishes standards and provides guidance regarding documentation in
the context of the audit of financial statements.
Required:
(a)
(b)
You have recently been promoted to audit manager in the audit firm of Trums & Co. As part
of your new responsibilities, you have been placed in charge of the audit of Specs4You Co, a
long established audit client of Trums & Co. Specs4You Co sells spectacles; the company
owns 42 stores where customers can have their eyes tested and choose from a range of
frames.
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
(3 marks)
47
Page xxxxxxx
PL
You are the audit manager in charge of the audit of Specs4You Co, a long-standing audit client. The
company sells spectacles through 42 retail outlets. The time is now towards the end of the audit and
you are reviewing working papers produced by the audit team. An example of a working paper you
have just reviewed is shown below:
Prepared by
Reviewed by CW
Date
Date 12 June
Audit assertion: To make sure that the purchases day book is correct.
Method: Select a sample of 15 purchase orders recorded in the purchase order system. Trace details to
the goods received note (GRN), purchase invoice (PI) and the purchase day book (PDB) ensuring that
the quantities and prices recorded on the purchase order match those on the GRN, PI and PDB.
SA
M
Test details: In accordance with audit risk, a sample of purchase orders were selected from a
numerically sequenced purchase order system and details traced as stated in the method. Details of
items tested can be found on another working paper.
Results: Details of purchase orders were normally correctly recorded through the system. Five
purchase orders did not have any associated GRN, PI and were not recorded in the PDB. Further
investigation showed that these orders had been cancelled due to a change in spectacle specification.
However, this does not appear to be a system weakness as the internal controls do not allow for changes
in specification.
Conclusion: Purchase orders are completely recorded in the purchase day book.
Required:
Explain why the working paper shown above does not meet the standards normally expected of a
working paper.
Note: You are not required to reproduce the working paper.
48
(10 marks)
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
(ii)
The company installed a new computerised inventory control system which has operated from
1 November 2013. As the inventory control system records inventory movements and current
inventory quantities, the company is proposing:
to use the inventory quantities on the computer to value the inventory at the year
end; and
not to carry out an inventory count at the year end.
PL
(i)
You are aware there have been reliability problems with the companys products, which have
resulted in legal claims being brought against the company by customers, and customers
refusing to pay for the products
(iv)
The sales increase in the 10 months to 30 April 2014 over the previous year has been
achieved by attracting new customers and by offering extended credit. The new credit
arrangements allow customers three months credit before their debt becomes overdue, rather
than the one-month credit period allowed previously. As a result of this change, receivables
age has increased from 16 to 41 months
SA
M
(iii)
(v)
The chief financial officer and purchasing manager were dismissed on 15 January. A
replacement purchasing manager has been appointed but it is not expected that a new chief
financial officer will be appointed before the year end of 30 June 2014. The chief accountant
will be responsible for preparing the financial statements for audit.
Required:
(a)
Describe the reasons why it is important that auditors should plan their audit work.
(5 marks)
(b)
Describe FIVE audit risks and explain the auditors response to each risk in planning
the audit of Bridgford.
(15 marks)
(20 marks)
Explain the term audit risk and the three elements of risk that contribute to total
audit risk.
(4 marks)
The EuKaRe charity was established in 1960. The charitys aim is to provide support to children from
disadvantaged backgrounds who wish to take part in sports such as tennis, badminton and football.
EuKaRe has a detailed constitution which explains how the charitys income can be spent. The
constitution also notes that administration expenditure cannot exceed 10% of income in any year.
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
49
Cash collected by volunteers asking the public for donations in shopping areas;
(ii)
(iii)
Donations from generous individuals. Some of these donations have specific clauses attached
to them indicating that the initial amount donated (capital) cannot be spent and that the
income (interest) from the donation must be spent on specific activities, for example,
provision of sports equipment.
The rules regarding the taxation of charities in the country EuKaRe is based are complicated, with only
certain expenditure being allowable for taxation purposes and donations of capital being treated as
income in some situations.
Required:
Identify areas of inherent risk in the EuKaRe charity and explain the effect of each of
these risks on the audit approach.
(12 marks)
(c)
Explain why the control environment may be weak at the charity EuKaRe.
PL
(b)
(4 marks)
(20 marks)
Question 14 REDSMITH
In agreeing the terms of an audit engagement, the auditor is required to agree the basis on
which the audit is to be carried out. This involves establishing whether the preconditions for
an audit are present and confirming that there is a common understanding between the auditor
and management of the terms of the engagement.
SA
M
(a)
Required:
Describe the process the auditor should undertake to assess whether the
PRECONDITIONS for an audit are present.
(3 marks)
(b)
List FOUR examples of matters the auditor may consider when obtaining an
understanding of the entity.
(2 marks)
(c)
You are the audit senior of White & Co and are planning the audit of Redsmith Co for the
year ended 30 September 2014. The company produces printers and has been a client of your
firm for two years; your audit manager has already had a planning meeting with the finance
director. He has provided you with the following notes of his meeting and financial statement
extracts.
Redsmiths management were disappointed with the 2013 results and so in 2014 undertook a
number of strategies to improve the trading results. This included the introduction of a
generous sales-related bonus scheme for their salesmen and a high profile advertising
campaign. In addition, as market conditions are difficult for their customers, they have
extended the credit period given to them.
The finance director of Redsmith has reviewed the inventory valuation policy and has
included additional overheads incurred this year as he considers them to be production
related. He is happy with the 2014 results and feels that they are a good reflection of the
improved trading levels.
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21
45
16
09
16
30
23
12
PL
Required:
ACTUAL
2013
$m
180
(100)
80
(40)
40
Inventory
Receivables
Cash
Trade payables
Overdraft
DRAFT
2014
$m
230
(110)
120
(75)
45
Calculate FIVE ratios, for BOTH years, which would assist the audit senior in
planning the audit; and
(5 marks)
(ii)
From a review of the above information and the ratios calculated, explain the
audit risks that arise and describe the appropriate response to these risks.
(10 marks)
SA
M
(20 marks)
Question 15 ABRAHAMS
Abrahams Co develops, manufactures and sells a range of pharmaceuticals and has a wide customer
base across Europe and Asia. You are the audit manager of Nate & Co and you are planning the audit
of Abrahams Co whose financial year end is in two months time, on 31 January. You attended a
planning meeting with the finance director and engagement partner and are now reviewing the meeting
notes in order to produce the audit strategy and plan. Revenue for the year is forecast at $25 million.
During the year the company has spent $22 million on developing several new products. Some of
these are in the early stages of development whilst others are nearing completion. The finance director
has confirmed that all projects are likely to be successful and so he is intending to capitalise the full
$22 million.
Once products have completed the development stage, Abrahams begins manufacturing them. At the
year end it is anticipated that there will be significant levels of work in progress. In addition the
company uses a standard costing method to value inventory; the standard costs are set when a product is
first manufactured and are not usually updated. In order to fulfil customer orders promptly, Abrahams
Co has warehouses for finished goods located across Europe and Asia; approximately one third of these
are third party warehouses where Abrahams just rents space.
In September a new accounting package was introduced. This is a bespoke system developed by the
information technology (IT) manager. The old and new packages were not run in parallel as it was felt
that this would be too onerous for the accounting team. Two months after the system changeover the IT
manager left the company; a new manager has been recruited but is not due to start work until January.
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
51
(b)
Using the information provided, identify and describe FIVE audit risks and explain the
auditors response to each risk in planning the audit of Abrahams Co.
(10 marks)
(c)
PL
(a)
(4 marks)
(20 marks)
Question 16 DONALD
SA
M
You are the audit senior and you have started planning the audit. Your manager has asked you to have
a meeting with the client and to identify any relevant audit risks so that the audit plan can be completed.
From your meeting you ascertain the following:
In order to expand their flight network, Donald Co will need to acquire more airplanes; they have
placed orders for another six planes at an estimated total cost of $20m and the company is not sure
whether these planes will be received by the year end. In addition the company has spent an estimated
$15m on refurbishing their existing planes. In order to fund the expansion Donald Co has applied for a
loan of $25m. It has yet to hear from the bank as to whether it will lend them the money.
The company receives bookings from travel agents as well as directly via their website. The travel
agents are given a 90-day credit period to pay Donald Co, however, due to difficult trading conditions a
number of the receivables are struggling to pay. The website was launched last year and has
consistently encountered difficulties with customer complaints that tickets have been booked and paid
for online but Donald Co has no record of them and hence has sold the seat to another customer.
Donald Co used to sell tickets via a large call centre located near to their head office. However, in May
they closed it down and made the large workforce redundant.
Required:
Using the information provided, describe FIVE audit risks and explain the auditors response to
each risk in planning the audit of Donald Co.
(10 marks)
52
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(b)
Explain and compare the use of internal control questionnaires and internal control
evaluation questionnaires in obtaining an understanding of internal control.
(6 marks)
(a)
(10 marks)
PL
Bestwood Engineering, a privately owned incorporated business, manufactures components for motor
vehicles and sells them to motor vehicle manufacturers and wholesalers. It has sales of $10 million and
a profit before tax of $400,000.
The company has a new chief executive (CEO) who inherited this role from his father. He has not
worked in the company before, has little financial background and has therefore asked your advice on
controls in the companys purchases and accounts payable system.
SA
M
Bestwood Engineering has separate accounts, purchasing and goods received departments. Most
purchases are required by the production department, but other departments are able to raise
requisitions for goods and services. The purchasing department is responsible for obtaining goods and
services for the company at the lowest price which is consistent with the required delivery date and
quality, and for ensuring their prompt delivery.
The accounts department is responsible for obtaining authorisation of purchase invoices before they are
input into the computer which posts them to the accounts payable ledger and the general ledger. The
accounting records are kept on a microcomputer and the standard accounting software was obtained
from an independent supplier. The accounting software maintains the accounts payable ledger,
accounts receivable ledger, general ledger and payroll. The company does not maintain inventory
records, as it believes the costs of maintaining these records outweigh the benefits.
Required:
(a)
(b)
Describe the controls the accounts department should exercise over obtaining
authorisation of purchase invoices before posting them to the accounts payable ledger.
(6 marks)
(c)
Explain how controls over the purchase of services (e.g. gas, electricity, telephone,
repairs and short-term hire of equipment and vehicles) from raising the purchase
requisition to posting the invoice to the accounts payable ledger, might differ from the
procedures for the purchase of goods, as described in your answers to parts (a) and (b)
above.
(6 marks)
(20 marks)
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You are an audit manager in Ron & Co. One of your existing audit clients, MistiRead Co, is a
specialist publisher of crime fiction.
During your preliminary audit planning you note that the engagement letter has been returned
unsigned by the directors of MistiRead. When asked to explain their action, the directors
indicate that they cannot allow you access to information on the companys new website
development as this contains various trade secrets. You will not, therefore, be able to perform
audit procedures on the research and development expenditure incurred on the website and
included in non-current assets.
Required:
Briefly explain the actions you should take as a result of the directors not signing the
engagement letter.
(4 marks)
Amongst matters required to be considered by the auditor when planning the audit in
accordance with the requirements of ISA 300 Planning an Audit of Financial Statements is
materiality. Materiality is further the subject of ISA 320 Materiality in Planning and
Performing an Audit.
Required:
PL
(b)
Explain the concept of materiality and how materiality is assessed when planning the
audit. Your answer should include consideration of materiality at the overall financial
statement level and in relation to individual account balances.
(6 marks)
SA
M
(10 marks)
ISA 230 Audit Documentation deals with the auditors responsibility to prepare audit
documentation for an audit of financial statements.
Required:
(b)
(4 marks)
ISA 320 Materiality in Planning and Performing an Audit provides guidance on the concept
of materiality in planning and performing an audit.
Required:
(6 marks)
(10 marks)
One of your audit clients, Tye Co, provides petrol, aviation fuel and similar oil-based products to the
government of the country it is based in. Although the company is not listed on any stock exchange, it
does follow best practice regarding corporate governance regulations. The audit work for this year is
complete, apart from the matter referred to below.
54
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The responsible party, which is the organisation responsible for preparing the
subject matter to be reviewed.
The practitioner (i.e. an accountant) who is the professional who will review the
subject matter and provide the assurance.
A second element is a suitable subject matter. The subject matter is the data that the
responsible party has prepared and which requires verification.
PL
Suitable criteria are required in an assurance engagement. The subject matter is compared to
the criteria in order for it to be assessed and an opinion provided.
Appropriate evidence has to be obtained by the practitioner in order to give the required level
of assurance.
An assurance report is the opinion that is given by the practitioner to the intended user and the
responsible party.
(b)
SA
M
Financial statements are produced by management which give a true and fair view of the
entitys results. The auditor in reviewing these financial statements gives an opinion on the
truth and fairness of them.
Although there is no definition in the International Standards on Auditing of true and fair it is
generally considered to have the following meaning:
True Information is factual and conforms with reality in that there are no factual errors. In
addition it is assumed that to be true it must comply with accounting standards and any
relevant legislation. Lastly true includes data being correctly transferred from accounting
records to the financial statements.
Fair Information is clear, impartial and unbiased, and also reflects plainly the commercial
substance of the transactions of the entity.
Answer 2 CONOY
1018
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
The audit committee can raise awareness of the need for good internal control systems simply by being
present in Conoy and by educating the board on the need for sound controls. Improving the internal
control climate will ensure the need for internal controls is understood and reduce control errors.
PL
Conoys internal auditors currently report to the board of Conoy. As previously noted, the lack of
financial and control expertise on the board will mean that external auditor reports and advice will not
necessarily be understood and the board may rely too much on external auditors
If Conoy reports to an audit committee this will decrease the dependence of the board on the external
auditors. The audit committee can take time to understand the external auditors comments, and then
via the non-executive director, ensure that the board take action on those comments.
Appointment of external auditors
SA
M
At present, the board of Conoy appoints the external auditors. This raises issues of independence as the
board may become too familiar with the external auditors and so appoint on this friendship rather than
merit.
If an audit committee is established, then this committee can recommend the appointment of the
external auditors. The committee will have the time and expertise to review the quality of service
provided by the external auditors, removing the independence issue.
Corporate governance requirements best practice
Conoy does not need to follow corporate governance requirements (the company is not listed).
However, not following those requirements may start to have adverse effects on Conoy. For example,
Conoys bank is already concerned about the lack of transparency in reporting.
Establishing an audit committee will show that the board of Conoy is committed to maintaining
appropriate internal systems in the company and providing the standard of reporting expected by large
companies. Obtaining the new bank loan should also be easier as the bank will be satisfied with
financial reporting standards.
Given no non-executives independent advice to board
Currently Conoy does not have any non-executive directors. This means that the decisions of the
executive directors are not being challenged by other directors independent of the company and with
little or no financial interest in the company.
The appointment of an audit committee with one non-executive director on the board of Conoy will
start to provide some non-executive input to board meetings. While not sufficient in terms of corporate
governance requirements (about equal numbers of executive and non-executive directors are expected)
it does show the board of Conoy is attempting to establish appropriate governance systems.
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
1019
1020
(b)
Recommendation
PL
SA
M
(a)
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(b)
Recommendation
PL
SA
M
(a)
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
1021
Corporate governance
Corporate governance is the system by which companies are directed and controlled.
According to the UK Corporate Governance Code the purpose of corporate governance is to
facilitate effective, entrepreneurial and prudent management that can deliver the long-term
success of the company.
Corporate governance considers the responsibilities of directors, how the board of directors
should be run and structured, the need for good internal controls and the relationship with
external auditors.
It is important for companies to consider good corporate governance principles as often it is
management or those charged with governance who run the company, but the owners are the
shareholders and they are not involved in the running of the business.
PL
For these shareholders their only opportunity to raise concerns is at the annual general
meeting, which only occurs once a year and often attendance is low.
Shareholders need to ensure that their needs are taken into account by management, and that
there is a process in place for them to be informed how the business is operating.
Response to requests
It is not unusual in practice for various bodies to request information from auditors
informally because it relieves them of the obligation to obtain the necessary
statutory authorities which may be time consuming or difficult.
Auditors must not disclose information without the consent of the client or unless
the necessary statutory documentation is provided by the person(s) requesting the
information.
SA
M
(b)
1022
Unless the auditor has reason to believe that there is a statutory duty not to inform
the client that an approach has been made, the client should first be approached to
see if consent can be obtained, and to see if the client is aware of the investigations,.
The auditor should ensure that the client is aware of the fact that voluntary
disclosure may work in the clients favour in the long run, but if the client refuses,
the auditor should inform the client if the auditor has a statutory duty of disclosure.
Auditors should consider taking legal advice in all of the cases described.
Where auditors are made aware of potential actions against the client that may have
an effect on the financial statements, they must consider the effect on the audit
report. If the client is aware of the investigation, auditors will be able to seek audit
evidence to support any necessary provisions or disclosures in the financial
statements.
The auditors should consider whether the suspected fraud relating to the managing
director relates to the company and affects the financial statements and their
assessment of inherent risk.
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
The power of the police to demand information is sometimes less clear and auditors
and clients should take care to ensure that the appropriate authorities are in place.
Those sections of the police investigating serious frauds usually have more powers
than the general police. It is unlikely that trade union representatives have any
statutory powers to demand information.
(a)
Ethical threats
PL
Answer 5 STARK
SA
M
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1023
Mitigation of threat
Answer 6 LV FONES
Ethical threat
Managing risk
1024
(b)
SA
M
(a)
PL
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
PL
SA
M
Answer 7 GOOFY I
Ethical threat
(a)
Conflict of interest
Safeguards to be adopted to address the conflict of interest of auditing both Goofy and
Mickey:
Both Goofy and Mickey should be notified that NAB & Co would be acting as
auditors for each company and, if necessary, consent obtained.
The use of separate engagement teams, with different engagement partners and team
members; once an employee has worked on one audit such as Goofy then they
would be prevented from being on the audit of Mickey for a period of time. This
separation of teams is known as building a Chinese wall.
Clear guidelines for members of each engagement team on issues of security and
confidentiality. These guidelines could be included within the audit engagement
letters.
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
1025
How reduced
(b)
PL
SA
M
Prior to accepting
Prior to accepting an audit engagement the firm should consider any issues which might arise
which could threaten compliance with ACCAs Code of Ethics and Conduct or any local
legislation. If issues arise then their significance must be considered.
The firm should consider whether they are competent to perform the work and whether they
would have appropriate resources available, as well as any specialist skills or knowledge.
The prospective firm must communicate with the outgoing auditor to assess if there are any
ethical or professional reasons why they should not accept appointment.
1026
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
In addition the audit firm should undertake client screening procedures such as considering
management integrity and assessing whether any conflict of interest with existing clients
would arise.
Further client screening procedures would include assessing the level of audit risk of the
client and whether the expected engagement fee would be sufficient for the level of
anticipated risk.
PL
Letter of engagement
The letter is written on the auditors headed paper and is addressed to the directors
of Melton Manufacturing.
It states the directors responsibilities for keeping proper accounting records and for
preparing financial statements which show a true and fair view.
The directors must make available to the auditor all the records he may reasonably
require, and provide answers to the auditors questions.
The auditor has a duty to report on whether the financial statements show a true and
fair view and comply with any relevant legislation.
Oral or written representations by the directors will be asked for concerning various
matters in the financial statements.
The directors are responsible for preventing and detecting irregularities and fraud.
The audit procedures would be designed so there is a reasonable expectation of
detecting material misstatements in the financial statements. However, the audit
should not be relied upon for detecting all irregularities and fraud that may exist.
Fees are based on the time spent by partners and staff and on the levels of skill and
responsibility involved.
The letter ends by saying that it remains effective until it is replaced, and it asks the
directors to agree the terms of the letter in writing.
SA
M
(b)
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1027
Failure to take action against employee fraud brought to the directors notice by the
auditors is more serious. This fosters a visible culture of unethical behaviour that is
likely to permeate the company and to be shared by other employees. This will
result in a weak control environment.
The impending public listing means that the company is under pressure to show an
improving performance but also means that the work of the auditor will come under
increasing scrutiny. There are always significant risks in accepting an audit under
such terms.
PL
SA
M
(a)
As a larger firm your firm is likely to have the capability of influencing the directors of Bondi
and persuading them of the benefits of a more ethical style of business. This will benefit the
companys shareholders. If your firm rejects the audit they are likely to appoint a less
competent firm. This will not be in the shareholders interest and may discredit the
profession.
(b)
Employee frauds
More information is needed about the alleged employee frauds. In particular the
specific control weaknesses that were exploited and whether any changes have since
been made to the accounting and internal control systems.
The current positions held by the guilty employees and whether they have access to
assets and accounting records. Also, whether they are adequately supervised
especially if a lack of segregation of duties is apparent.
Computer system
1028
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Due to the complicated nature of the system, tests of controls could include the use
of test data or other computer assisted audit techniques.
As the incentive schemes may have accounting implications (e.g. discounts and 0%
finance) the commercial substance as well as the legal form of the transactions with
the manufactures must be understood and the impact on the financial statements
assessed.
Examine the terms of contracts and the strategies adopted by the company for
securing maximum benefit from them.
Misstatement
The matter must be discussed with management. Management must be asked to:
make full provision for all taxes including any penalties for which they are
potentially liable; and
SA
M
PL
(c)
If management refuse, the audit opinion should be modified if the amount of taxes
not provided for is material (qualified except for opinion).
The auditors duty of confidentiality prevents the auditor from raising the matter
with the taxation authorities. Therefore, it may be most appropriate to resign from
the audit if management refuses to put a stop to the malpractice. Any written
statement of circumstances required on ceasing to hold office could allude to the
matter but would need to be carefully worded, probably with legal advice, to avoid
accusing the directors of fraud and exposing the firm to a charge of defamation (i.e.
causing damage to reputation).
Answer 10 SPECS4YOU CO I
(a)
To record the audit evidence resulting from the audit work performed to support the
auditors opinion.
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
1029
Information obtained
Determine the current status of the company including ongoing profitability, ability to meet budget, etc as well as
identifying any potential going concern problems.
(b)
Organisation chart of Spec4You. To identify the key managers and employees in the
company and other people to contact during the audit.
PL
SA
M
Answer 11 SPECS4YOU CO II
Working paper standards
The audit working paper does not meet the standards normally expected in a working paper because:
The page reference is unclear making it very difficult to either file the working paper in the
audit file or locate the working paper should there be queries on it.
It is not clear what the client year end date is the year is missing. The working paper could
easily be filed in the wrong years audit file.
There is no signature of the person who prepared the working paper. This means it is unclear
who to address queries to regarding the preparation or contents of the working paper.
There is evidence of a reviewers signature. However, given that the reviewer did not query
the lack of preparers signature or other omissions noted below, the effectiveness of the
review must be put in question.
The test objective is vague it is not clear what correct means for example, it would be
better to state the objective in terms of assertions such as completeness or accuracy.
1030
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It is not clear how the number for testing was determined. This means it will be very difficult
to determine whether sufficient audit evidence was obtained for this test.
Stating that details of testing can be found on another working paper is insufficient time will
be wasted finding the working paper, if it has, in fact, been included in the audit working
paper file.
Information on the results of the test is unclear the working paper should clearly state the
results of the test without bias. The preparer appears to have used personal judgement which
is not appropriate as the opinion should be based on the facts available, not speculation.
The conclusion provided does not appear to be consistent with the results of the test. Five
errors were found therefore it is likely that there are some systems weaknesses.
(a)
PL
Importance of planning
ISA 300 Planning an Audit of Financial Statements requires that The auditor should plan the
audit work so that the audit will be performed in an effective manner. It goes on to say that
planning means developing a general strategy and a detailed approach for the expected
nature, timing and extent of the audit.
SA
M
Planning will address the appropriate approach to the components of the company,
preliminary risk assessment and materiality assessment. It will include the timing of the audit
work. It will be necessary to agree a timetable with the company of when information will be
available. For example:
The necessary level of skills (both internal and, if necessary, external) will be determined and
staff booked and external experts contracted.
A budget will be prepared which sets the time which should be spent on each aspect of the
audit and the completion dates of each part of the audit.
During the audit, progress will be compared with the audit plan. Any adverse (and
favourable) variances against the plan will be investigated, and the plan amended if it is
considered appropriate.
The requirement to plan an audit ensures senior audit staff have considered the work which is
required to complete the audit, and the timing of that work so that it fits in with the dates
information is available from the company and the review and planned completion dates.
By having a plan, the auditor will take a more considered and efficient approach to the audit,
which will improve the quality of the audit, and thus both minimise the time spent on the
audit and the overall audit risk.
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
1031
Audit risk: The companys sales for 10 months are $130 million, which given an annualised
sales of $156 million, is a 41.8% increase over the previous years. The annualised profit
before tax is $4.8 million, compared with $8 million last year, which is a fall of 40%. It
appears the company is increasing sales at the expense of profits.
(ii)
Audit response: During the audit a detailed breakdown of sales and expenses will be
obtained, discussed with management and tested in order to understand the increases in both
sales and expenses.
PL
Audit risk: Relying only on the new inventory control system to determine the value of yearend inventory may result in a misstatement of the inventory balance that would be detected
only by inventory count.
Audit response: Audit work will have to be carried out on the new computerised inventory
control system. Computer audit specialists within the audit firm will probably have to be
used. It may be appropriate to carry out this work before the year end, so that any problems
with the system can be highlighted and either overcome or allowed for at the year end.
SA
M
Since the company intends not to carry out an inventory count at the year end, the auditor will
have to place considerable reliance on the accuracy of the inventory quantities reported by the
inventory control system. He will need to review and test the new system, check the
changeover and determine from the company how frequently they count the inventory, the
proportion of the inventory counted at each inventory count, and the checks they make to the
inventory quantities on the computerised system and the frequency and size of errors.
This work will have to be concluded before the year end, as, if differences are frequent, it may
be necessary to carry out a full inventory count at the year end.
(iii)
Product reliability
Reliability problems with the companys products could result in the following:
certain inventory being unsaleable, and thus worth less than cost;
legal claims against the company; and
customers not paying for the products.
1032
The difficulty in estimating the costs (i.e. the costs of defending legal claims and
damages which may have to be paid, and the cost of the bad debts).
The risk that there may be more claims and bad debts, which relate to the year under
review, but may not become apparent until after the auditors report is signed.
The value of the faulty inventory held at the year end. The selling price of
inventory sold between the year end and the audit will have to be checked to ensure
it is valued at the lower of cost and net realisable value.
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
Extended credit
Audit risks: The large increase in receivables age has caused a very large increase in
receivables, from $14.7 million (110/12 1.6) at 30 June 2013 to an estimated $53.3 million (156
(i)
/12 4.1) at 30 June 2014.
The increase in the credit period and sales to new customers will result in the following audit
risks:
New customers may be low quality and tend to have a higher risk than existing
ones, thus increasing the risk of bad debts
Increasing the credit period tends to attract customers who are a poor credit risk.
A potential bad debt may not become apparent until after the credit period is being
exceeded.
PL
In addition, the actual age of receivables is 1.1 months in excess of the current credit limit (of
three months) compared with 0.6 months over the credit limit in the previous year. This
indicates there may be problems with collection of receivables from customers and thus an
increase in bad debts.
SA
M
Audit response: The financing of the increase may have come from increased borrowings
which need to be verified. More audit effort and more time after the year end is required to
conclude adequately on recoverability.
(v)
Staff dismissals
Audit risks: The effect of there being no chief financial officer between 15 January and the
year end may mean that financial records and controls may not be as effective as in previous
years. If the chief financial officer prepared the annual draft financial statements in previous
years, does the chief accountant have the skills and experience to prepare this years financial
statements?
In addition the consequences of the company being without a purchasing manager from 15
January until the new purchasing manager was appointed must be considered. There is the
risk that controls during this period will not have operated well, thus increasing the risk of a
fraud.
Audit responses: The reasons for the dismissal of the chief financial officer and purchasing
manager will have to be ascertained. Were they carrying out a fraud? If this was happening,
what are the financial consequences? Is it possible for this type of fraud to recur? Could the
audit firm be liable for not detecting these events? The assessment of inherent risk may be
increased in any areas under their control.
If the dismissed employees are claiming compensation for unfair dismissal and compensation
from the company, the likely outcome from these claims would have to be investigated and an
appropriate provision included in the financial statements.
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
1033
Audit risk
Audit risk is the risk that an auditor gives an inappropriate opinion on the financial statements
being audited. It comprises three elements:
Control risk the risk that a material error could occur in an assertion that could be
material, individually or when aggregated with other misstatements, will not be
prevented or detected on a timely basis by the companys internal control systems.
Detection risk the risk that the auditors procedures will not detect a misstatement
that exists in an assertion that could be material, individually or when aggregated
with other misstatements.
PL
SA
M
(b)
1034
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PL
(c)
There is normally a limited number of staff working in the charity meaning that a full system
of internal control including segregation of duties cannot be implemented. Staff are likely to
be unclear as to their exact responsibilities as they are not formal employees and are not
part of the formal authority structure in the charity.
Volunteer staff
SA
M
Many staff are volunteers and so will only work at the charity on an occasional basis.
Controls will be performed by different staff on different days making the system unreliable.
Lack of qualified staff (human resource issues)
Selection of staff is limited people tend to volunteer for work when they have time and so
they are unlikely to have professional qualifications or experience to implement or maintain
good control systems.
No internal audit department (lack of organisational structure)
Any control system will not be monitored effectively, mainly due to the lack of any internal
audit department. The charity will not have the funds or experience to establish internal audit.
Attitude of the trustees
It is not clear how the charitys trustees view risk. However, where trustees are not
professionally trained or have little time to devote to the charity, then there may be an
impression that controls are not important. The overall control environment may therefore be
weak as other charity workers do not see the importance of maintaining good controls.
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
1035
To assess whether the preconditions for an audit are present the auditor must determine
whether the financial reporting framework to be applied in the preparation of the financial
statements is acceptable. In considering this the auditor should assess the nature of the entity,
the nature and purpose of the financial statements and whether law or regulations prescribes
the applicable reporting framework.
PL
In addition the auditor must obtain managements agreement that it acknowledges and
understands its responsibility for the following:
Providing the auditor with access to all relevant information for the preparation of
the financial statements, any additional information that the auditor may request
from management and unrestricted access to persons within the entity from whom
the auditor determines it necessary to obtain audit evidence.
SA
M
If the preconditions for an audit are not present, the auditor should discuss the matter with
management. Unless required by law or regulation to do so, the auditor must not accept the
proposed audit engagement in the following circumstances:
(b)
If the auditor has determined that the financial reporting framework to be applied in
the preparation of the financial statements is unacceptable; or
1036
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
2014
Gross margin
Operating margin
Inventory days
Receivable days
Payable days
Current ratio
Quick ratio
(ii)
12
/23
/23
21
/11 365
45
/23 365
16
/11 365
66
/25
(66 21)/25
45
2013
522%
196%
70 days
71 days
53 days
26
18
Audit risk
/18
/18
16
/10 365
30
/18 365
12
/10 365
69
/12
(69 16)/12
4
444%
222%
58 days
61 days
44 days
58
44
(c)
Response to risk
SA
M
PL
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
1037
Response to risk
PL
SA
M
Answer 15 ABRAHAMS
(a)
Tutorial note: The requirement to this part is general. The scenario of Abrahams is only
relevant from part (b) which starts Using the information provided ....
Inherent risk
1038
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
Detection risk
PL
The risk that the procedures performed by the auditor to reduce audit risk to an acceptably
low level will not detect a misstatement that exists and that could be material, either
individually or when aggregated with other misstatements. Detection risk is affected by
sampling and non-sampling risk. Factors which can result in an increase include:
Inadequate planning.
Inappropriate assignment of personnel to the engagement team.
Failing to apply professional scepticism.
Inadequate supervision and review of the audit work performed.
Incorrect sampling techniques performed.
Incorrect sample sizes.
Tutorial note: Only one example for each component of risk was required for full marks.
Audit risks and responses
SA
M
(b)
Audit risk
Audit response
1039
SA
M
PL
Audit risk
1040
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
PL
Substantive procedures
Audit response
(i)
Send a letter requesting direct confirmation of inventory balances held at year end
from the third party warehouse providers used by Abrahams regarding quantities
and condition.
Attend the inventory count (if one is to be performed) at the third party warehouses
to review the controls in operation to ensure the completeness and existence of
inventory.
Inspect any reports produced by the auditors of the warehouses in relation to the
adequacy of controls over inventory.
(ii)
Discuss with management the basis of the standard costs applied to the inventory
valuation, and how often these are reviewed and updated.
Review the level of variances between standard and actual costs and discuss with
management how these are treated.
Obtain a breakdown of the standard costs and agree a sample of these costs to actual
invoices or wage records to assess their reasonableness.
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(c)
Audit risk
Answer 16 DONALD
Audit risk
Audit response
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Audit response
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Donalds website has encountered difficulties Extended controls testing to be performed over
with recording sales, this could lead to errors in the sales cycle to assess the extent of the errors.
Detailed testing to be performed over
relation to completeness of income.
completeness of income.
Review the cut-off of customer refunds around
the year end to ensure that sales are complete and
accurate.
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Donald is closing its call centre and making the Discuss with management the status of the
workforce redundant; as it has announced this to redundancy programme and review and
the staff then under IAS 37 Provisions, recalculate the redundancy provision.
Contingent Liabilities and Contingent Assets a
redundancy provision will be required for any
staff not yet paid at the year end.
Tutorial note: Only five audit risks and responses were required.
Answer 17 INTERNAL CONTROL
(a)
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ISA 315 requires the auditor to understand internal control by considering the
design and implementation of relevant controls to assess the potential risk of
material misstatements.
The auditor must then consider whether the risks are of the type and magnitude that
could result in a material misstatement of the financial statements.
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Use of questionnaires
As well as flowcharting systems and compiling narrative notes, auditors will use
questionnaires (e.g. ICQs internal control questionnaires and ICEQs internal
control evaluation questionnaires) as a framework for understanding the design of
internal controls.
ICQs comprise a series of questions for each control cycle (e.g. sales, purchases,
wages) that are designed to identify if particular internal controls exist (and if they
do not, then a possible area of weakness) for example:
PL
(b)
Professional judgement has to be used to identify those controls that relate to the
entitys objective of preparing financial statements that give a true and fair view and
the management of risk that may result in a material misstatement in the financial
statements.
Questions are framed such that a No answer indicates a weakness and would
highlight potential problems in segregation of duties, controls or management
supervision.
ICEQs go further than ICQs in that they are designed to assess whether errors or
fraud are possible. The questions asked are more open and principles-based than
the closed form (rules-based) of ICQs. They are also closely related with control
objectives, for example:
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How does the client ensure that goods are only sent to customers who can
pay?
How does the client ensure that goods are only accepted if the correct
ordering procedures have been followed?
How does the client ensure that payments are only made for goods and
services received and required by the company?
How does the client ensure that amendments to the standing payroll data
are relevant and accurate?
Each question can relate to more than one client as they are open and each client
may have different relevant controls that meet the question requirement.
Alternatively, an ICEQ can be specifically tailored to each client.
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The answers will describe the nature and extent of the controls in operation. The
auditor can then assess the control design and whether or not to rely on them (i.e.
they can form the basis of the control testing programme).
For all goods ordered, there should be a purchase requisition from a user department. The
purchasing department should not be permitted to raise purchase requisitions as this would
create a weakness in the division of duties.
PL
The purchasing department should check the purchase requisition is for goods the user
department is authorised to buy or consume. If the value of the order is substantial, the
purchasing department should ensure there is a need for such a large order by checking
current inventory levels and future orders to determine whether so large a quantity or value is
required.
The purchase requisition should use a standard form and be signed by an authorised signatory.
The purchasing department should order the goods from an authorised vendor. Where there is
a choice of vendor or a new vendor is required, the purchasing department should obtain the
product from the vendor who provides the product or service at the best price, quality and
delivery.
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The purchasing department should raise the purchase order which should be signed by the
purchasing manager. For large value purchases, a director may be required to sign the
purchase order. The purchase order should be sent to the vendor, the goods received
department, the user department and the accounts department.
The purchasing department should ensure the goods are received on time. This may require
them to contact the vendor a week before the expected delivery date to ensure they are
received on time, and allow action to be taken if the delivery date is later than specified on the
purchase order.
When the goods are received the purchasing department should receive a copy of the goods
received note (GRN) from the goods received department. They should record the goods
received against the order.
The purchasing department may be part of the system which authorises purchase invoices.
They should check the goods on the invoice are consistent with the purchase order/GRN and
the price per unit is correct.
The purchasing department should be informed about short deliveries (i.e. the quantity of
goods received is less than on the purchase order or advice note) and when there are quality
problems. From this information, they can contact the vendor so that corrective action is
taken. Also, such details may be helpful in determining whether the vendor should be used
for future orders
The purchasing department should be informed of situations when goods or services are
received but no purchase order has been raised. With this information, the purchasing
department should contact the offending department and ensure that in future a purchase
order is raised for all the goods they order.
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The accounts department will either match the purchase invoice to the goods received note
and delivery note or ask the goods received department to check and authorise the purchase
invoice.
The purchasing department will be asked to confirm the goods are as described on the
purchase order and the price per unit is correct.
The user department may be asked to authorise the purchase invoice.
PL
An appropriate responsible official will be asked to finally approve the purchase invoice.
Provided these checks are satisfactory, the accounts department should input the invoice
details into the computer which will post it to the accounts payable ledger and the general
ledger.
An independent person should check monthly supplier statements against the balances on the
accounts payable ledger. Differences between these two balances should be investigated for
correction of possible error or omission.
(c)
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Procedures over receiving services are inherently different to those over receiving goods.
For some types of service there may be no system for raising purchase orders (e.g. electricity,
gas, water and telephone charges). However there should be a system for reviewing these
costs, by comparing them with the previous year (or period), with budget and with amounts
charged by alternative vendors. In this way, the company can ensure these services are
received at the most economical cost.
For receipt of all other services, before the service is obtained, a purchase requisition could be
raised by the user department, and the purchasing department should raise a purchase order.
In emergency situations, it may be acceptable to raise a purchase requisition and order after
the service has been received (e.g. the repair of a vehicle which has broken down).
There should be a system whereby action is taken when no purchase order has been raised for
a service which has been received.
The major controls over validity and cost of services (e.g. advertising, training, etc) will be
monitoring and control over cost:
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(b)
Engagement letter
Discuss the matter again with the directors in an attempt to reach a suitable
compromise.
Remind the directors that statutory audits require the directors to make all the
necessary information and explanations available to the auditor.
Explain that lack of information on the website will result in a limitation in scope of
the audit work.
Further explain that because the lack of evidence appears to relate to a material
amount that the auditors report will have to be modified with an except for
qualification due to the lack of information and the possibility of misstatement of
non-current assets.
Finally note that auditor may have to decline to continue to act for MistiRead unless
suitable terms of engagement can be agreed.
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(a)
Concept of materiality
Financial statements are materially misstated when they contain errors or irregularities whose
effect, individually or in the aggregate, is important enough to prevent the statements from
being fairly presented. In this context, misstatements may result from misapplication of
applicable accounting standards, departures from fact, or omissions of necessary information.
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ISA 320, Materiality in Planning and Performing an Audit, requires auditors to consider
materiality when determining the nature, timing and extent of audit procedures. In
complying with this requirement ISA 320 recommends that auditors make preliminary
judgements about materiality levels in planning the audit at the following levels:
the financial statement level, because the auditors opinion on fair presentation
extends to the financial statements taken as a whole;
the account balance (assertion) level, because the auditors verify account balances in
reaching an overall conclusion that the financial statements are fairly presented;
The overall level of materiality and the nature of account balances enable auditors to
determine which account balances to audit and how to evaluate the effects of misstatements
in financial information as a whole. Materiality at the account balance level assists auditors
in determining what items in a balance (or transactions class) to audit and what audit
procedures to undertake (e.g. whether to use sampling or analytical procedures). Performance
materiality determines a level of materiality above which all items should be tested.
Overall financial statement level
There may be more than one level of materiality relating to the financial statements. For the
statement of comprehensive income, materiality could be related to revenue or to profit
(usually before tax). For the statement of financial position, materiality could be based on
shareholders equity, assets or liability class totals.
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ISA 320 offers no guidance for determining this relationship but, where an item has an effect
on profit, widely used parameters are:
Other commonly used bases, and materiality thresholds expressed as a percentage of that
base, are as follows.
Base
Sales
Net profit
Total assets
Equity (net assets)
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Qualitative considerations
Account balance materiality is the minimum misstatement that can exist in an account
balance for it to be considered materially misstated. In making judgements about materiality
at the account balance level, the auditors must consider the relationship between it and
financial statement materiality. This consideration should lead the auditors to plan the audit
to detect misstatements that may be immaterial individually but that may be material to the
financial statements taken as a whole when aggregated with misstatements in other account
balances.
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It may be the overall financial statement materiality, the individual materiality for specific
classes of transactions, balances and disclosures that are key to the users or a separate lower
level calculated to take into account the possibility of undetected material misstatements.
Answer 20 DOCUMENTATION AND MATERIALITY
PL
Provides evidence of the auditors basis for a conclusion about the achievement of
the overall objective of the audit.
Provides evidence that the audit was planned and performed in accordance with
ISAs and applicable legal and regulatory requirements.
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(a)
(b)
Materiality
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Review prior year working papers to determine whether a similar situation occurred
last year and ascertain the outcome at that stage.
Discuss the matter with the directors to obtain reasons why they believe that market
value should be used for the inventory this year.
Warn the directors that in your opinion, aviation fuel should be valued at the lower
of cost or net realisable value (that is $15/barrel) and that using market value will
result in a modification to the audit report.
If the directors now amend the financial statements to show inventory valued at
cost, then consider mentioning the issue in the weakness letter and do not modify
the audit report in respect of this matter.
If the directors will not amend the financial statements, quantify the effect of the
disagreement in the valuation method the sum of $630,000 is material to the
financial statements as Tyes loss is decreased from a small loss to a loss of
$130,000 although net assets decrease by only about 03%.
Obtain written representations from the directors of Tye confirming that market
value is to be used for the emergency inventory of aviation fuel.
If the directors will not amend the financial statements, draft the relevant sections of
the audit report, showing a qualification on the grounds of disagreement with the
accounting policy for valuation of inventory.
PL
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(a)
(b)
(i)
The external auditor is primarily responsible for the audit opinion on the financial statements
following the international auditing standards (ISAs). ISA 240 The Auditors Responsibilities
Relating to Fraud in an Audit of Financial Statements is relevant to audit work regarding
fraud.
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