Certificate in Accounting and Finance Stage MOCK Examinations

The Professionals’ Academy of Commerce

Suggested Solution and Marking Plan

Audit and Assurance

Q.1 (a)

(i) Source: ACCA Dec 2015 Q2

(ii) Marking plan: 1 mark for any of the following points

(iii) Solution

Engagement letters
Engagement letters for recurring/existing clients should be revised if any of the following factors are
present:
– Any indication that the entity misunderstands the objective and scope of the audit, as this
misunderstanding would need to be clarified.
– Any revised or special terms of the audit engagement, as these would require inclusion in the
engagement letter.
– A recent change of senior management or significant change in ownership. The letter is signed by a
director on behalf of those charged with governance; if there have been significant changes in
management they need to be made aware of what the audit engagement letter includes.
– A significant change in nature or size of the entity’s business. The approach taken by the auditor
may need to change
to reflect the change in the entity and this should be clarified in the engagement letter.
– A change in legal or regulatory requirements. The engagement letter is a contract; hence if legal or
regulatory changes
occur, then the contract could be out of date.
– A change in the financial reporting framework adopted in the preparation of the financial statements.
The engagement
letter clarifies the role of auditors and those charged with governance, it identifies the reporting
framework of the financial
statements and if this changes, then the letter requires updating.
– A change in other reporting requirements. Other reporting requirements may be stipulated in the
engagement letter;
hence if these change, the letter should be updated.

Q.1 (b)

(i) Source:

(ii) Marking plan: 0.5 marks for any of the following points

(iii) Solution

Matters to be included in an audit engagement letter

– The objective and scope of the audit;
– The responsibilities of the auditor;
– The responsibilities of management;
– Identification of the financial reporting framework for the preparation of the financial statements;
– Expected form and content of any reports to be issued;
– Elaboration of the scope of the audit with reference to legislation;
– The form of any other communication of results of the audit engagement;
– The fact that some material misstatements may not be detected;
– Arrangements regarding the planning and performance of the audit, including the composition of the
audit team;
– The expectation that management will provide written representations;
– The basis on which fees are computed and any billing arrangements;
– A request for management to acknowledge receipt of the audit engagement letter and to agree to the
terms of the
engagement;
– Arrangements concerning the involvement of internal auditors and other staff of the entity;
– Any obligations to provide audit working papers to other parties;
– Any restriction on the auditor’s liability;
– Arrangements to make available draft financial statements and any other information;
– Arrangements to inform the auditor of facts which might affect the financial statements, of which
management may
become aware during the period from the date of the auditor’s report to the date the financial
statements are issued.
 Q.2 (i) & (ii)

(i) Source: ACCA Dec 2015 Q1

(ii) Marking plan: 0.5 marks for one threat and one safeguard

(iii) Solution
 Q.3 (a) & (b)

(i) Source: Suggested Audit Mock for Spring 2016 attempt (Sir Jafar version) Q

(ii) Marking plan: As per the relevant marking plan

(iii) Solution: As per the relevant solution

 Q.4

(i) Source: ACCA Dec 2015 Q4

(ii) Marking plan: 0.5 marks for any of the following points

(iii) Solution
 Q.5 (a) (i) & (ii) and (b)

(i) Source: ACCA Dec 2015 Q6

(ii) Marking plan: 1 marks for any of the following points

(iii) Solution

(a) (i) Inventory count procedures

Before the count

– Review the prior year audit files to identify whether there were any particular warehouses where
significant inventory issues arose last year.
– Discuss with management whether any of the warehouses this year are new, or have experienced
significant control issues.
– Decide which of the 12 warehouses the audit team members will attend, basing this on materiality
and risk of each site.
– Obtain a copy of the proposed inventory count instructions, review them to identify any control
deficiencies and if any are noted, discuss them with management prior to the counts.

During the count

– Observe the counting teams of Andromeda to confirm whether the inventory count instructions are
being followed correctly.
– Select a sample of inventory and perform test counts from inventory sheets to warehouse aisle and
from warehouse aisle to inventory sheets.
– Confirm the procedures for identifying and segregating damaged goods are operating correctly, and
assess inventory for evidence of any damaged or slow moving items.
– Observe the procedures for movements of inventory during the count, to confirm that all movements
have ceased.
– Obtain a photocopy of the completed sequentially numbered inventory sheets for follow up testing
on the final audit.
– Identify and make a note of the last goods received notes and goods despatched notes for 31
December in order to perform cut-off procedures.
– Discuss with the internal audit supervisor how any raw materials quantities have been estimated.
Where possible, reperform the procedures adopted by the supervisor.
(ii) Research and development
– Obtain and cast a schedule of intangible assets, detailing opening balances, amount capitalised in the
current year, amortisation and closing balances.
– Agree the opening balances to the prior year financial statements.
– Agree the closing balances to the general ledger, trial balance and draft financial statements.
– Recalculate the amortisation charge for a sample of intangible assets which have commenced
production and confirm it is line with the amortisation policy of straight line over five years.
– For the five new projects, discuss with management the details of each project along with the stage
of development and whether it has been capitalised or expensed.
– For those expensed as research, agree the costs incurred to invoices and supporting documentation
and to inclusion in profit or loss.
– For those capitalised as development, agree costs incurred to invoices and confirm technically
feasible by discussion with development managers or review of feasibility reports.
– Review market research reports to confirm Andromeda has the ability to sell the product once
complete and probable future economic benefits will arise.
– Review the disclosures for intangible assets in the draft financial statements are in accordance with
IAS 38 Intangible Assets.

(b) Audit reports

One of the projects Andromeda has developed in the year does not meet the recognition criteria under
IAS 38 Intangible Assets for capitalisation but has been included within intangible assets. This is
contrary to IAS 38, as if the criteria are not met, then this project is research expenditure and should be
expensed to profit or loss rather than capitalised.

The error is material as it represents 11·8% of profit before tax (0·98m/8·3m) and hence management
should adjust the financial statements by removing this project from intangible assets and charging it
to profit or loss instead. The finance director’s argument that the balance is immaterial is not correct.
If management refuses to amend this error, then the audit report will need to be modified. As
management has not complied with IAS 38 and the error is material but not pervasive, then a qualified
opinion would be necessary.
A basis for qualified opinion paragraph would be needed and would explain the material misstatement
in relation to the incorrect treatment of research and development and the effect on the financial
statements. The opinion paragraph would be qualified ‘except for’.

Q.6

(i) Source: ACCA Dec 2010 Q3 (b)

(ii) Marking plan: 0.5 marks for any of the following points

(iii) Solution
 Q.7 (a) to (g)

(a)

(i) Source: ACCA Dec 12 Q5 (a)

(ii) Marking plan: 0.5 marks for any of the following bold points
(iii) Solution

Written representations are necessary information that the auditor requires in connection with the audit
of the entity’s financial statements. Accordingly, written representations are audit evidence.

The auditor needs to obtain written representations from management and, where appropriate, those
charged with governance that they believe they have fulfilled their responsibility for the preparation
of the financial statements and for the completeness of the information provided to the auditor.

Written representations are needed to support other audit evidence relevant to the financial
statements or specific assertions in the financial statements, if determined necessary by the auditor or
required by other International Standards on Auditing.

(b)
(i) Source: ACCA Dec 12 Q5 (b)

(ii) Marking plan: 0.5 marks for any of the following bold points

(iii) Solution
1. A representation from management confirming that overdrafts are complete would be
relevant evidence.
2. Overdrafts are liabilities.
3. Therefore the main focus for the auditor is completeness.
4. With regards to reliability, the evidence is oral rather than written and so this reduces its
reliability. The directors could in the future deny having given this representation, and the
auditors would have no documentary evidence to prove what the directors had said.
5. This evidence is obtained from management rather than being auditor generated, and is
therefore less reliable. Management may wish to provide biased evidence in order to reduce
the amount of liabilities in the financial statements. The auditors are unbiased and so evidence
generated directly by them will be more reliable.
6. External evidence obtained from the company’s banks could be used to confirm the bank
overdraft balances and this would be more independent so more reliable.
(c)

(i) Source: ACCA June 12 Q3 (a)

(ii) Marking plan: 0.5 marks for any of the following bold points

(iii) Solution
An auditor conducting an audit in accordance with ISA 240 The Auditor’s Responsibilities Relating to
Fraud in an Audit of Financial Statements is responsible for obtaining reasonable assurance that the
financial statements taken as a whole are free from material misstatement, whether caused by
fraud or error.

In order to fulfil this responsibility auditors are required to identify and assess the risks of material
misstatement of the financial statements due to fraud.

The auditor will need to obtain sufficient appropriate audit evidence regarding the assessed risks of
material misstatement due to fraud, through designing and implementing appropriate responses.

In addition, the auditor must respond appropriately to fraud or suspected fraud identified during
the audit.

When obtaining reasonable assurance, the auditor is responsible for maintaining professional
scepticism throughout the audit, considering the potential for management override of controls and
recognising the fact that audit procedures that are effective in detecting error may not be effective
in detecting fraud.

To ensure that the whole engagement team is aware of the risks and responsibilities for fraud and
error, ISAs require that a discussion is held within the team.

(d)
(i) Source: ACCA June 12 Q2 (b)

(ii) Marking plan: 1 marks for any of the following methods

(iii) Solution
Methods of sampling in accordance with ISA 530 Audit Sampling:

Random selection – Ensures each item in a population has an equal chance of selection, for example,
by using random number generators or tables.
Systematic selection – This involves having a constant sampling interval, such as every 40th item
being selected, the starting point for testing is determined randomly.

Haphazard selection – Here the auditor selects the sample without following a structured technique.
The auditor must ensure that no conscious bias or predictability arises and this method is not
appropriate when using statistical sampling.

(e)
(i) Source: Self

(ii) Marking plan: 1 marks for any of the following points

(iii) Solution
 assess the competence, capabilities and objectivity of the expert
 obtain an understanding of the expert’s field of expertise, sufficient to allow the auditor to
determine the nature, scope and objectives of the expert’s work and evaluate the adequacy of
that work
 agree terms of engagement with the expert
 evaluate the adequacy of the expert’s work

(f)
(i) Source: Self

(ii) Marking plan: 1 marks for any of the following points

(iii) Solution

Indicators that a person or entity might be a dominant party include:

 the party vetoing significant business decisions of the entity
 significant transactions being referred to the party for final approval
 little or no debate among management in respect of business proposals made by the party
 transactions involving the party (or its close family members) are rarely independently reviewed
or approved.
(g)
(i) Source: Self

(ii) Marking plan: 1 marks for any of the following points

(iii) Solution
Physical controls that help safeguard IT equipment might include:
 Fences, doors and door-locks
 Alarms
 Surveillance video
 Cables that allow a user to lock a laptop to a desk to prevent a casual thief stealing the laptop
 Fingerprint readers to log-in to a system
 Lockable briefcase

Q.8 (a) to (c)

(a)
(i) Source: Self

(ii) Marking plan: 1 marks for any of the following points

(iii) Solution
Suitable controls may be as follows:
 Despatch notes or Goods Delivery Notes (GDNs) should be numbered
sequentially, and should be attached to a copy of a specific customer order.
The GDN should be signed by an authorised member of the despatch staff.
Sequential numbering of GDNs allows a check to be made that all
deliveries can be accounted for.
 Customers should sign a delivery note for the receipt of goods, as
confirmation of receipt.
 The signed delivery note should be attached to a copy of the despatch note
and customer order. Copies of these documents should be transferred to
the accounts department after despatch, so that a sales invoice can be
produced.
 Each sales invoice should be linked to a copy of the despatch note and
customer order or produced automatically from them.
 Sales invoices should be sequentially numbered or the system should
allocate sequential numbers to documents.
 There should be a segregation of duties, and the individuals who despatch
goods should not be the same as those who prepare sales invoices or
process the customer orders.
 Credit notes should be sequentially numbered and authorised.
 There should be periodic checks by someone in the accounts staff on the
accuracy of invoices or strong IT controls to ensure the accuracy of
invoices.

(b)
(i) Source:

(ii) Marking plan: 0.5 marks for any of the following points

(iii) Solution

Start

Order is
received

Customer Cr. Card

provides details are
correct info processed

Customer Are
emailed for details
correct info OK
 Customer
address is
obtained and
processed

Customer Customer
provides emailed for
correct info confirmation

Customer
Are
emailed for
details
correct info
OK

Sales invoice
printed and
packed with order
to be shipped

End

(c)
(i) Source: Self

(ii) Marking plan: 0.5 marks for any of the following points

(iii) Solution
(i) Preventive
(ii) Detective
(iii) Detective
(iv) Corrective
(v) Preventive
(vi) Corrective
Q.9 (a) & (b)

(i) Source: ICAP Spring 2014 Q3

(ii) Marking plan: 1.75 marks for any of the following points

(iii) Solution
(a)
Bank confirmation contains details such as facilities, securities, additional banking relationships,
trade finance, derivative and commodity trading and custodian arrangements. These information are
not available in bank statement. Moreover, the bank confirmation is supposed to be received directly
from the bank whereas the bank statement has been received through the client.
We need to determine whether a response to a positive confirmation is necessary to obtain
sufficient appropriate audit evidence related to bank balance as at December 31, 2013.
If it is concluded that the response to bank confirmation is not necessary then we would perform
alternate audit procedures to obtain sufficient appropriate audit evidence relating to details not
provided by the bank.
If we are unable to obtain sufficient appropriate audit evidence from alternative audit procedures or
if we conclude that the response to the bank confirmation is necessary and we are unable to obtain
bank confirmation , then it will constitute a scope limitation. Accordingly, we would qualify the audit
report or issue a disclaimer of opinion depending on the materiality and pervasiveness of the matter.

(b)
The request by management for sending negative confirmation requests is not appropriate as these
are usually sent when population comprises of large number of small account balances.
The reason provided by the management for not sending confirmation request to three debtors is
not appropriate.
In view of the above, we would ask the client to send positive confirmation request.
If the client refuses to send positive confirmation, we would evaluate the implications of the
refusal on the risk of material misstatement, including the risk of fraud and on the nature timing and
extent of other audit procedures.
Perform alternative audit procedures designed to obtain relevant and reliable audit evidence.
If we are unable to obtain sufficient appropriate audit evidence form alternative audit procedures or
if we conclude that the confirmation is necessary and we are unable to obtain confirmation from the
debtors, then it will constitute scope limitation. Based on the materiality and pervasiveness of the
matter, we would issue a qualified or disclaimer of opinion as appropriate.