ACCA

Advanced Audit & Assurance

(AAA)
Course Exam 1
Questions

Exam

Time allowed: 1 hour and 38 minutes

Both questions are compulsory and must be attempted

SEPT 19/DEC 19/MAR 20/JUN 20

EDITION
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Advanced Audit and Assurance (AAA)

Course Exam 1 – Questions

Question 1
Buy Fair
You are a manager working for Roddick & Co, a firm of Chartered Certified Accountants specialising
in providing professional services to businesses in both the voluntary sector and developing
economies.
One of the firm's audit clients is Buy Fair, a small listed company whose objective is to promote fair
trade and fight poverty. It is associated with a charitable organisation, Just Fair, which holds one
ordinary B share in Buy Fair and has significant powers vested in it by virtue of the constitution of Buy
Fair. Such rights include a right of controlling vote on all matters of strategy.
You have just received the following email from Buy Fair's Chief Executive, Anita Martin:

From: anitamartin@buyfair.com
To: auditmanager@roddick&co.co.uk
Date: 14th January 20X8
Subject: Risks!!!
Hi there
We are mad busy at the moment following all the refinancing and need to get a handle on our risks for
some sort of disclosure to the City – we are told by our investment bank that the usual process is to
get someone like you to do this for us?
Can you provide us with a list of our 'business risks' please? We will need them identifying and
describing so we are not only aware of what they are but also why they are risks to us and our
investors.
I understand there are 'engagement' related issues associated with this, but that you have already
agreed these with Chris, our FD. Please just send me a list identifying and describing our business
risks and we'll take it from there.
Many thanks
Anita

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You review the permanent file for Buy Fair and establish the following financial information:

Client Overview Report: Buy Fair financial situation

In the financial year to 30 June 20X7, Buy Fair undertook a share restructure and floated on the stock
exchange. In the restructure, 20,500 ordinary A 50c shares were bought back by the company and
exchanged for 10,250 ordinary $1 shares. A further 40,750 $1 ordinary shares were sold on the stock
exchange for $15 per share. The new issue was fully subscribed.
Buy Fair's results show an increase on the previous year. Revenue is $14,080,905 (20X6:
$11,898,427) and profit before tax is $612,042 (20X6: $354,000). The cash raised by the flotation
enabled the company to pay off some long-term debts and still shows an improvement in its cash-in-
hand figure.

You also find the following operational report on Buy Fair which helps to increase your knowledge of
the company:

Client Overview Report: Buy Fair operations

Buy Fair has two main product divisions: food and gifts. Food includes a wide range of products,
including tea and coffee, rice and pasta, cocoa and various chocolate products, and various mueslis
and cereal bars. Gifts includes a wide-ranging combination of craft products from around the third
world, including items made from wood, fabrics and paper.
The company has three main sources of revenue: mail order catalogue, supermarkets and personal
selling via agents. In the past, the income from these three sources has been fairly comparable. In
20X7, the personal selling revenue has seen a large decrease and the income from mail order (which
includes sales made through Buy Fair's new website) has increased substantially. Personal selling is
carried out by individuals who receive a discount on items purchased from Buy Fair, which they then
sell on to family and friends.
Buy Fair sometimes makes advanced payments to suppliers as is common practice amongst fair
trade ventures. Due to Buy Fair's expansion policy and the number of new producers it has forged
links with in the year, the figure for advanced payments in the company's financial statements is much
bigger than it has been in previous years, at $756,234 (20X6: $356,199).

Required
(a) Respond to Anita Martin's email providing her with the required information. (12 marks)
Note. Within the mark scheme for this requirement, there are 2 professional marks for the layout
and tone of the email response. You do not need to address any engagement or self-review
issues for this piece of work.
(b) Identify and describe the principal audit risks presented by the audit of Buy Fair and for each one
describe the effect that it will have on the audit plan for the year ended 30 June 20X7.
(12 marks)
(c) Briefly outline how the audit team might make use of analytical procedures in the Buy Fair audit
for the year ended 30 June 20X7, and discuss any issues associated with using analytical
procedures arising in that year. (6 marks)
(Total = 30 marks)

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Question 2
Ennios
You are the manager responsible for the quality of the audits of new clients of CLC, a firm of
Chartered Certified Accountants. You are visiting the audit team at the head office of Ennios Co, a
client of your firm. The audit team comprises Stephanie Jones (Audit Supervisor), Paulo Kye (Audit
Senior) and Jack Dowty and Betty Tao (trainees). The company provides food hygiene services which
include the evaluation of risks of contamination, carrying out bacteriological tests and providing advice
on health regulations and waste disposal.
Ennios's principal customers include food processing companies, wholesale fresh food markets
(meat, fish and dairy products) and bottling plants. The draft accounts for the year ended 30
September 20X7 show revenue of $20 million (20X6 $24 million) and total assets of $6.5 million
(20X6 $6 million) including land and buildings owned by the company.
You have summarised the findings of your visit and review of the audit working papers relating to the
audit of the financial statements for the year to 30 September 20X7 as follows:
(a) Ennios's purchase clerk, Pat Evans, keeps $2,500 cash to meet sundry expenses. The audit
programme shows that counting it is 'outstanding'. Paulo Kye has explained that when Betty was
sent to count it she reported back, two hours later, that she had not done it because it had not
been convenient for Pat Evans. Betty Tao had instead been explaining to Jack Dowty how to
extract samples for the audit. Although Pat Evans had later announced that she was ready to
have her cash counted, Paulo Kye decided to postpone it until later in the audit. This is not
documented in the audit working papers. (4 marks)
(b) During the year, Ennios acquired Rover Co, which provides extra capacity for bacteriological
testing during peak periods. Rover Co will be consolidated into the financial statements once its
own audit has been completed by its existing auditor. There is a working paper on file, signed by
Paulo Kye, stating 'Rover Co has a "Big 4" auditor so there will be no problems here'. (4 marks)
(c) The main office building where Ennios carries out all its testing has just been revalued by the
company's Finance Director, Mike Boldon, according to a note on the file from Stephanie Jones.
The audit supervisor has noted that the new value of $1.5 million ($1.2 million in 20X6) has been
calculated despite the current property market reporting similar buildings in the same area falling
in value by around 20% over the last 12 months. She queried this with Mike Boldon but was
reassured that as this was a result of 'a temporary wobble in market conditions' it was more likely
that the true value of the building was always going to increase due to the buoyancy of the food
hygiene industry and the attractive location of the offices. The file comment is 'no further action
required – client evidence satisfactory'. (8 marks)
(d) The Managing Director of Ennios, Dionne Wilton, has advised your firm that, because of the
confidentiality of the directors' salaries, the appropriate records will only be made available to the
partner-in-charge and not to you or the rest of the audit team. Stephanie Jones has made a note
on the permanent file saying 'partner to chase – satisfactory'. (4 marks)
Required
Comment on the implications of each of these findings for CLC's practice management and quality
control policies and procedures. Where appropriate suggest actions that you would expect to see on
file. The marks available are shown beside each scenario.
(Total = 20 marks)

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