Audit and Assurance (AA)

Revision Question Pack

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S. No Question Syllabus Area
1 Ruby Ltd Audit Framework and Regulation
2 Emerald Ltd Audit Framework and Regulation
3 Bark Ltd Audit Framework and Regulation
4 Dower Ltd Planning and Risk Assessment
5 Head Planning and Risk Assessment
6 Glass Ltd Planning and Risk Assessment
7 Recorder Planning and Risk Assessment
8 Loganberry Planning and Risk Assessment
9 Murray Ltd Internal Control
10 Becker Ltd Internal Control
11 Nadal Ltd Internal Control
12 Cherry Internal Control
13 Knowledge Internal Control
14 Raspberry Internal Control
15 Pearl Ltd Audit Evidence
16 Tickam Ltd Audit Evidence
17 Mast Ltd Audit Evidence
18 Cranberry Audit Evidence
19 Pizza Ltd Review and Reporting
20 Lesley and Co Review and Reporting
21 Gavin Ltd Review and Reporting
22 Bullfinch Review and Reporting

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 Audit Framework and Regulation

Ruby Ltd

You are an audit manager at a medium sized firm of accountants. One of the partners has asked for your
help in evaluating a potential new audit client that has recently approached your firm.

You have been presented with the following information about Ruby Ltd;

Ruby Ltd has changed auditors 3 times in the last seven years. The last firm of auditors resigned a few
weeks ago, the reason given by Ruby Ltd was a dispute over fees.

Ruby operates in the diamond trade and has a number of overseas suppliers with whom they have
established long-term relationships.

The managing director of Ruby Ltd has told you that the audit needs to be done quickly in order to provide
audited financial statements for the bank.

Ruby Ltd has applied for a large bank loan and the bank requires the accounts before a final decision can
be made on whether or not to lend the money.

The managing director has also informed you that there is no finance director at present. The last one left
three months ago due to ill health and no replacement has been found as yet.

Two of the audit staff members at your firm have told you that they have family members that work at Ruby
Ltd.

As well as the audit of Ruby Ltd, there is the potential to obtain additional work.
You have been asked to help with maintaining the accounting records and the preparation of the financial
statements as a short term solution to staff shortages currently being experienced by Ruby Ltd.

Ruby Ltd is also asking for some advice on a potential takeover of a rival company.

Required

a) Discuss the difference between a rules based approach and principles-based approach to setting
ethical standards and state which one of these is adopted by the ACCA Code of Ethics.
(6 Marks)

b) Identify and explain the ethical or quality issues relating to the audit of Ruby Ltd and suggest any
relevant safeguards that may be used to address the issues.
(14 Marks)

(Total 20 Marks)

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 Emerald Ltd

Emerald Ltd designs luxury cars. It is not listed and all the shares are owned by 10 private investors, with
no one owning more than a 10% stake.

There are no non-executive directors and the executive directors are all shareholders. The executive
directors are very successful at present, with a "hands on" approach to running the business.

Emerald Ltd wishes to expand and will require finance in order to do so, but the finance director has
recently left the company so any new finance application has been delayed until a replacement has been
found. This is partly due to the reluctance of the bank to lend, based upon unreliable financial information.

There is an internal audit function that is appointed by, and reports to, the board. The chief internal auditor
is unhappy about the level of support and direction received from the board and has suggested that an
audit committee should be established.

The board is considering this. If an audit committee is set up, the board has suggested that it comprises 3
members, two drawn from the current board and one new, non-executive role.

a) Compare and contrast the roles of internal and external auditors.

(8 marks)
b) Discuss the benefits to Emerald Ltd of establishing an audit committee.
(12 Marks)

(Total 20 Marks)

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 Bark Ltd

a) Describe the situations where an external auditor can, or must, disclose confidential information
about a client.
(8 Marks)

You are the auditor of Bark Ltd and are currently preparing the engagement letter for the year end 31
December 2017.

Bark Ltd has grown rapidly over the last three years and is now one of your biggest clients.

Bark Ltd has been an audit client for the last 8 years and a range of services has been provided for the
whole time, including audit, tax advice and management consultancy.

The audit staff members are the same as in the previous year, apart from two new audit juniors. One has
told you that they used to work for Bark Ltd and the other has told you that their father is the finance
director.

It is tradition for the directors of Bark Ltd to take all of the audit staff out for a meal at the end of the audit as
a" thank you" for all the hard work that is always done by the audit staff.

b) Identify and explain the ethical threats that exist for the audit of Bark Ltd and suggest ways of
safeguarding against these risks.
(12 Marks)

(Total 20 Marks)

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 Planning and Risk Assessment

Dower Ltd

a) Explain FOUR reasons why auditors plan their work.

(5 Marks)

b) Explain what analytical procedures are and give THREE examples of how they could be used at
the planning stage of an audit.
(5 Marks)

Dower Ltd is a builder merchant, selling largely to trade customers in the north of England and has been an
audit client of your firm for the past 5 years. You have been asked to help plan this year's audit and have
discovered the following:

Dower Ltd has installed a new computer system during the year in order to deal with the increased volume
of transactions. They also completed the construction of an extension to the existing warehouse that will
double the storage capacity. This was required due to the rapid expansion that is being experienced due to
an upturn in the building trade. Dower Ltd have recently applied for a bank loan to help with further
expansion, but the bank require audited financial statements to be available before they will make a
decision on the extra funding.

The directors of Dower Ltd are all paid a bonus that is based upon the sales volumes achieved during the
year. This year sales volume has increased by 30% and will result in a record bonus being paid. A large
amount of the business carried out by Dower Ltd is cash based, due to the fact that lots of customers run
very small businesses and prefer to deal in cash. Dower Ltd has a fleet of delivery vans that are quite old
and need replacing but, due to all spare cash being spent on the building extension, the vans will not be
replaced for the next two years at least.

Dower Ltd is being sued by a customer, who claims that they were injured by a ladder that fell on them
whilst they were buying goods at the warehouse just before the end of the year. As well as a large number
of cash customers, Dower Ltd has some big account customers who are given 30 days credit. Traditionally,
all have paid on time but this year some customers have begun to pay late.

c) From the above information, identify and explain the inherent risk factors that are relevant for
Dower Ltd.
(10 marks)

d) Briefly describe Detection Risk and explain THREE ways in which it would be possible to
DECREASE detection risk, giving an example of each one that could be relevant for Dower Ltd.
(7 Marks)

e) Briefly explain the difference between quantitative and qualitative materiality.

(3 Marks)

(Total 30 Marks)

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 Head

a) Explain the three elements of audit risk that comprise overall audit risk.
(6 Marks)

Head is a charitable organisation that was established in 1975. Its main aim is to help children form under
privileged backgrounds take part in a range of sporting activities.

The charity is run under strict guidelines, including a stipulation that expenditure cannot be more than 20%
of income each year.
Income is all form voluntary donations and comes from three major sources;

- Cash collected by volunteers in major shopping complexes.

- Cheques sent in to the head office.

- Donations from wealthy individuals who often stipulate how the money can be spent.

The taxation of charities in this jurisdiction are complex with only certain expenses being allowable for tax
purposes and specific rules relating to the difference between capital and revenue expenditure.

b) Identify and explain the inherent risk factors that relate to Head and the effect that these will have
on the audit approach.
(16 Marks)

c) Explain why Head may have a weak control environment.

(8 Marks)

(Total 30 Marks)

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 Glass Ltd

a) List the purposes of working papers.

(3 Marks)

You have just been promoted to the role of audit manager and, as part of your new responsibilities; you are
in charge of the audit of Glass Ltd. Glass Ltd is an opticians with 50 stores located all across the UK.

b) List the documentation that would be useful to you in familiarising yourself with all aspects of
Glass Ltd and explain briefly what you expect each document to tell you.
(8 Marks)

You are now approaching the end of the audit, so you are in the process of reviewing the audit working
papers. You are currently reviewing the working paper below;

Client name: Glass Ltd Year end: 31 Dec

Prepared by:
Reviewed by: WT

Assertion: The purchase day book is correct.

Method: 15 purchase orders were selected and details were traced to goods received notes, purchase
invoices and the purchase day book.

The sample was selected from a numerically sequenced purchase order system. Details of the specific
items selected are on a separate schedule.

Results: Details for 5 orders could not be found. This turned out to be because these orders were
cancelled.

Conclusion: All purchase orders are recorded correctly.

c) Identify and explain the weaknesses in the above working paper.

(9 Marks)

(Total 20 Marks)

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 Recorder

Recorder Communications Co (Recorder) is a large mobile phone company which operates a network of
stores in countries across Europe. The company’s year end is 30 June 2014. You are the audit senior of
Piano & Co. Recorder is a new client and you are currently planning the audit with the audit manager. You
have been provided with the following planning notes from the audit partner following his meeting with the
finance director.

Recorder purchases goods from a supplier in South Asia and these goods are shipped to the company’s
central warehouse. The goods are usually in transit for two weeks and the company correctly records the
goods when received. Recorder does not undertake a year-end inventory count, but carries out monthly
continuous (perpetual) inventory counts and any errors identified are adjusted in the inventory system for
that month.

During the year the company introduced a bonus based on sales for its sales persons. The bonus target
was based on increasing the number of customers signing up for 24-month phone line contracts. This has
been successful and revenue has increased by 15%, especially in the last few months of the year. The
level of receivables is considerably higher than last year and there are concerns about the creditworthiness
of some customers.

Recorder has a policy of revaluing its land and buildings and this year has updated the valuations of all land
and buildings.

During the year the directors have each been paid a significant bonus, and they have included this within
wages and salaries. Separate disclosure of the bonus is required by local legislation.

Required:

(a) Describe FIVE audit risks, and explain the auditor’s response to each risk, in planning the audit
of Recorder Communications Co.
(10 marks)
(b) Explain the audit procedures you should perform in order to place reliance on the continuous
(perpetual) counts for year-end inventory.
(3 marks)
(c) Describe substantive procedures you should perform to confirm the directors’ bonus payments
included in the financial statements.
(3 marks)

The finance director of Recorder informed the audit partner that the reason for appointing Piano & Co as
auditors was because they audit other mobile phone companies, including Recorder’s main competitor. The
finance director has asked how Piano & Co keeps information obtained during the audit confidential.

Required:

(d) Explain the safeguards which your firm should implement to ensure that this conflict of interest
is properly managed.
(4 marks)
(20 marks)

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 Loganberry

You are an audit senior of Loganberry & Co and are planning the audit of Blackberry Co for the year ending
31 March 20X8. The company is a manufacturer of portable music players and your audit manager has
already had a planning meeting with the finance director. Forecast revenue is $68.6m and profit before tax
is $4.2m.

She has provided you with the following notes of the meeting:

Planning meeting notes

Inventory is valued at the lower of cost and net realisable value. Cost is made up of the purchase price of
raw materials and costs of conversion, including labour, production and general overheads. Inventory is
held in three warehouses across the country. The company plans to conduct full inventory counts at the
warehouses on 2, 3 and 4 April, and any necessary adjustments will be made to reflect post year-end
movements of inventory. The internal audit team will attend the counts.

During the year, Blackberry Co paid $1.1m to purchase a patent which allows the company the exclusive
right for three years to customise their portable music players to gain a competitive advantage in their
industry. The $1.1m has been expensed in the current year statement of profit or loss. In order to finance
this purchase, Blackberry Co raised $1.2m through issuing shares at a premium.

In November 20X7, it was discovered that a significant teeming and lading fraud had been carried out by
four members of the sales ledger department who had colluded. They had stolen funds from wholesale
customer receipts and then to cover this, they allocated later customer receipts against the older
receivables. These employees were all reported to the police and subsequently dismissed. As a result of
the vacancies in the sales ledger department, Blackberry Co decided to outsource its sales ledger
processing to an external service organisation. This service organisation handles all elements of the sales
ledger cycle, including sales invoicing and chasing of receivables balances and sends monthly reports to
Blackberry Co detailing the sales and receivable amounts. Blackberry Co ran its own sales ledger until 31
January 20X8, at which point the records were transferred to the service organisation.

In December 20X7, the financial accountant of Blackberry Co was dismissed. He had been employed by
the company for nine years, and he has threatened to sue the company for unfair dismissal. As a result of
this dismissal, and until his replacement commences work in April, the financial accountant’s
responsibilities have been adequately allocated to other members of the finance department. However, for
this period no supplier statement reconciliations or purchase ledger control account reconciliations have
been performed.

In January 20X7, a receivable balance of $0.9m was written off by Blackberry Co as it was deemed
irrecoverable as the customer had declared itself bankrupt. In February 20X8, the liquidators handling the
bankruptcy of the company publicly announced that it was likely that most of its creditors would receive a
pay-out of 40% of the balance owed. As a result, Blackberry Co has included a current asset of $360,000
within the statement of financial position and other income in the statement of profit or loss.

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Required:
(a) Describe Loganberry & Co’s responsibilities in relation to the prevention and detection of
fraud and error.
(4 marks)

(b) Describe EIGHT audit risks and explain the auditor’s response to each risk in planning the
audit of Blackberry Co.

Note: Prepare your answer using two columns headed Audit risk and Auditor’s response
respectively.
(16 marks)

(20 marks)

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 Internal Control

Murray Ltd

a) List and briefly describe the major component parts of an internal control system.
(5 Marks)

b) Give TWO examples of control objectives and TWO related control activities for each of the
following stages in a sales system;

- Order
- Despatch
- Invoicing
(12 Marks)

Murray Ltd sells sports equipment to the general public and has asked you for help in improving the system
for monitoring and controlling purchases.

The following details are available on the current purchases system;

Purchase orders are raised by all staff at Murray Ltd. There is no central ordering system so staff record
orders on handwritten purchase orders.

When goods are received, they are placed straight into inventory on the shop floor, ready for sale. The
goods received notes are created and matched, where possible, to the original purchase order.

The goods received notes are then passed to the accounts department who match the goods received
notes against the invoices when they are received by the accounts clerk.

The accounts clerk then allocates a nominal ledger code to the invoice, posts it onto the computerised
accounting system and prints out a list of suppliers to be paid.

If a new supplier is used, the accounts clerk is able to create a new supplier on the purchase ledger.

The finance director is supposed to review the payments listing and access the bank account to authorise
the payments but, due to time pressure, the accounts clerk has been doing this as well for the last four
months of the year.

c) Describe the current weaknesses in the purchases system, explaining the consequences of each
weakness. Please assume that the only controls that exist are mentioned in the question.
(10 Marks)

d) BRIEFLY describe the basic content and format of a Management Letter.

(3 Marks)

(Total 30 Marks)

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 Becker Ltd

Becker Ltd is a DIY store that specialises in garden and agricultural products. It sells to both trade and
domestic customers. Becker Ltd has no internal audit department or audit committee.

The most successful area of business for Becker Ltd is the seed division. Most seed sales are online via
the company website.

Customers order using a unique product code and provide their credit or debit card details onto a secure
server. Order details are then transferred manually onto the inventory control and sales system. Each order
is given a random code based upon the name of the person who input it onto the system.

A two part packing list is produce in the warehouse and the packets of seeds are taken from the correct
storage bin in the warehouse. One copy is sent out with the seeds and the other copy is sent to the
accounts department, who update the system to show that the goods have been despatched. The
customer's credit card is then charged with the full amount.

Bad debts are currently running at 4% of sales for the seed division.

Finally, the computer system checks that each credit card charge has order details on file to confirm that
the charge was made correctly.

a) In relation to the seed division, prepare, in a form suitable for inclusion in a Report to
Management then following information;

- The weaknesses in the sales system.

(5 Marks)
- The possible effect of each weakness.
(5 Marks)
- A recommendation to address each weakness.
(5 Marks)

(Presentation 2 Marks)

b) Briefly describe the information that should be included in a covering letter that usually
accompanies a Report to Management.
(4 Marks)
c) Describe the possible benefits to Becker Ltd of having an internal audit department.
(5 Marks)
d) List FOUR responsibilities of an audit committee.
(4 marks)

(Total 30 Marks)

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 Nadal Ltd

Nadal Ltd is a construction company with a large proportion of its workforce being paid in cash on a weekly
basis. The following information is available concerning the current wages system;

 Hours are recorded using a clocking in/out system. Each employee enters a unique code into a
keypad upon arrival and leaving the premises.

 Each site has a foreman who has a record of all employees and can issue temporary numbers for
new employees.

 Any overtime is calculated by the computerised wages system and is then added to the standard
pay.

 The two staff members in the wages department at head office make amendments to the
computerised system to account for illness and holidays. The same two staff members set up and
maintain employee’s records.

 The computerised wages system calculates all deductions made from gross pay and a list of net of
net cash payments to employees is produced.

 Cash is delivered to the wages office on each site by secure courier.

 Two staff members make up the wage packets along with a handwritten note confirming the amount
of gross pay. Each site foreman then hands out the pay packets to the employees.

a) Identify and explain the weaknesses in the wages system of Nadal Ltd.
(8 Marks)

b) For each weakness, suggest an internal control activity that would help to overcome the
weakness.
(8 Marks)

Nadal Ltd believes that the current computerised wages system needs updating and wishes to obtain some
advice form an external consultant on the matter.

c) Explain the factors that should be taken into account by Nadal Ltd when selecting an external
consultant.
(6 Marks)

d) Assuming the external auditors of Nadal Ltd were to provide the external advice, briefly describe
the ethical issues that would occur.
(4 Marks)

e) Compare the responsibilities of internal and external auditors for the prevention and detection of
fraud.
(4 Marks)

(Total 30 Marks)

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 Cherry

Cherry Blossom Co (Cherry) manufactures custom made furniture and its year end is 30 April. The
company purchases its raw materials from a wide range of suppliers. Below is a description of Cherry’s
purchasing system.

When production supervisors require raw materials, they complete a requisition form and this is submitted
to the purchase ordering department. Requisition forms do not require authorisation and no reference is
made to the current inventory levels of the materials being requested. Staff in the purchase ordering
department use the requisitions to raise sequentially numbered purchase orders based on the approved
suppliers list, which was last updated 24 months ago. The purchasing director authorises the orders prior to
these being sent to the suppliers. When the goods are received, the warehouse department verifies the
quantity to the suppliers despatch note and checks that the quality of the goods received are satisfactory.
They complete a sequentially numbered goods received note (GRN) and send a copy of the GRN to the
finance department.

Purchase invoices are sent directly to the purchase ledger clerk, who stores them in a manual file until the
end of each week. He then inputs them into the purchase ledger using batch controls and gives each
invoice a unique number based on the supplier code. The invoices are reviewed and authorised for
payment by the finance director, but the actual payment is only made 60 days after the invoice is input into
the system.

Required:

In respect of the purchasing system of Cherry Blossom Co:

(i) Identify and explain FIVE deficiencies; and

(ii) Recommend a control to address each of these deficiencies.

Note: The total marks will be split equally between each part.

(10 marks)

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 Knowledge

a) Define the ‘three Es’ of a value for money audit.

(3 marks)

b) ISA 230 Audit Documentation requires auditors to prepare audit documentation for an audit of
financial statements on a timely basis.

Required:

Describe FOUR benefits of documenting audit work.

(4 marks)

c) ISA 530 Audit Sampling applies when the auditor has decided to use sampling to obtain sufficient
and appropriate audit evidence.

Required:

Define what is meant by ‘audit sampling’ and explain the need for this.
(3 marks)
(10 marks)

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 Raspberry

Raspberry Co operates an electric power station, which produces electricity 24 hours a day, seven days a
week. The company’s year end is 30 June 20X8. You are an audit manager of Grapefruit & Co, the auditor
of Raspberry Co. The interim audit has been completed and you are reviewing the documentation
describing Raspberry Co’s payroll system.

Systems notes – payroll

Raspberry Co employs over 250 people and approximately 70% of the employees work in production at the
power station. There are three shifts every day with employees working eight hours each. The production
employees are paid weekly in cash. The remaining 30% of employees work at the head office in non-
production roles and are paid monthly by bank transfer.

The company has a human resources (HR) department, responsible for setting up all new joiners. Pre-
printed forms are completed by HR for all new employees and, once verified, a copy is sent to the payroll
department for the employee to be set up for payment. This form includes the staff member’s employee
number and payroll cannot set up new joiners without this information. To encourage staff to attend work on
time for all shifts, Raspberry Co introduced a discretionary bonus, paid every three months, for production
staff. The production supervisors determine the amounts to be paid and notify the payroll department. This
quarterly bonus is entered into the system by a clerk and each entry is checked by a senior clerk for input
errors prior to processing. The senior clerk signs the bonus listing as evidence of undertaking this review.

Production employees are issued with clock cards and are required to swipe their cards at the beginning
and end of their shift. This process is supervised by security staff 24 hours a day. Each card identifies the
employee number and links into the hours worked report produced by the payroll system, which
automatically calculates the gross and net pay along with relevant deductions. These calculations are not
checked.

In addition to tax deductions from pay, some employees’ wages are reduced for such items as repayments
of student loans owed to the central government. All employers have a statutory obligation to remit funds
on a timely basis and to maintain accounting records which reconcile with annual loan statements sent by
the government to employers. At Raspberry Co student loan deduction forms are completed by the relevant
employee and payments are made directly to the government until the employee notifies HR that the loan
has been repaid in full.

On a quarterly basis, exception reports relating to changes to the payroll standing data are produced and
reviewed by the payroll director. No overtime is worked by employees. Employees are entitled to take 28
holiday days annually. Holiday request forms are required to be completed and authorised by relevant line
managers, however, this does not always occur.

On a monthly basis, for employees paid by bank transfer, the senior payroll manager reviews the list of
bank payments and agrees this to the payroll records prior to authorising the payment. If any errors are
noted, the payroll senior manager amends the records.

For production employees paid in cash, the necessary amount of cash is delivered weekly from the bank by
a security company. Two members of the payroll department produce the pay packets, one is responsible
for preparing them and the other checks the finished pay packets. Both members of staff are required to
sign the weekly payroll listing on completion of this task. The pay packets are then delivered to the
production supervisors, who distribute them to employees at the end of the employees’ shift, as they know
each member of their production team.

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Monthly management accounts are produced which detail variances between budgeted amounts and
actual. Revenue and key production costs are detailed, however, as there are no overtime costs, wages
and salaries are not analysed.

Required:
(a) In respect of the payroll system for Raspberry Co:

(i) Identify and explain FIVE KEY CONTROLS which the auditor may seek to place reliance
on; and

(ii) Describe a TEST OF CONTROL the auditor should perform to assess if each of these key
controls is operating effectively.

Note: Prepare your answer using two columns headed Key control and Test of control
respectively. The total marks will be split equally between each part.
(10 marks)

(b) Identify and explain FIVE DEFICIENCIES in Raspberry Co’s payroll system and provide a
recommendation to address each of these deficiencies.

Note: Prepare your answer using two columns headed Control deficiency and Control
recommendation respectively.
(10 marks)

The finance director is interested in establishing an internal audit department (IAD). In the company she
previously worked for the IAD carried out inventory counts, however, as this is not relevant for Raspberry
Co, she has asked for guidance on what other assignments an IAD could be asked to perform.

Required:
(c) Describe assignments the internal audit department of Raspberry Co could carry out.
(5 marks)

Raspberry Co deducts employment taxes from its employees’ wages on a weekly/monthly basis and pays
these to the local taxation authorities in the following month. At the year end the financial statements will
contain an accrual for income tax payable on employment income.

Required:
(d) Describe the substantive procedures the auditor should perform to confirm the year-end
accrual for tax payable on employment income.
(5 marks)

(30 marks)

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 Audit Evidence

Pearl Ltd

a) List and briefly describe the methods of obtaining evidence as stated in ISA 500.
(7 Marks)

Pearl Ltd is a construction company that has a large amount of Property, Plant and Equipment. There are
20 buildings located all over the north of England. Pearl Ltd had a large fleet of motor vehicles, some of
which are leased. There is also a considerable amount of plant of various sizes and values.

b) With specific reference to Property, Plant and Equipment, for each of the methods of obtaining
evidence that have been briefly described in a), explain TWO audit procedures for EACH of the
methods described.
(14 Marks)

c) List and describe the main audit procedures that would confirm the reasonableness of the
depreciation policy adopted by Pearl Ltd for the Motor Vehicles.
(5 marks)

d) Briefly discuss the potential impact on the audit report assuming that Pearl Ltd did not maintain
a plant register.
(4 Marks)

(Total 30 Marks)

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 Tickam Ltd

You are the external auditor of Tickam Ltd (T) which is a large transport company.

T is a public listed company with a year -end of Dec 31.

The company has grown rapidly over the last few years and now has a fleet of 600 vehicles that it hires out
to customers for anything from one day to three months.

Approximately 30 vehicles are on the premises of T at any one time, usually because they are being
repaired. The rest will be out with customers. The company maintains a full plant register in order to keep
track of all of the vehicles.

Customer bookings are received both on line and via the telephone. The credit status of the customer is
confirmed, as well as the availability of the relevant vehicle, using specialist vehicle management software
(VMS).

The booking is then entered into the VMS and a confirmation e mail sent to the customer, although some
bookings are still confirmed by telephone.

The booking is then automatically transferred to the receivables ledger and an invoice is raised.

There is a standard price list that is used to determine the invoice values and invoice copies are then sent
to customers - hard copy invoices for telephone orders and email copies for the email orders.

a) List and describe the audit procedures to be carried out in order to verify the sales figure in the
financial statements of T Ltd.
(15 marks)

b) List and describe the audit procedures to be carried out in order to verify the Vehicles figure
included as part of the non -current assets of T Ltd.
(15 Marks)

(Total 30 Marks)

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 Mast Ltd

You are the audit manager for Mast Ltd who is a book retailer. The company owns one large warehouse
which can contain up to 2 million books of up to 150,000 different titles.

Mast Ltd has about 100,000 customers. Customers place orders via the internet and books are despatched
on the day the order is received. Customers can return books within 30 days as long as they are in mint
condition.

Due to the volume of transactions, Mast Ltd maintains a perpetual inventory system using a standard
computer software package. You have relied upon the software package for the last 5 years and have not
yet found any errors within the software.

The internal audit department of Mast Ltd carries out random checks on the inventory system.

You are currently working with a junior member of staff on the inventory audit of Mast Ltd.

a) Explain the advantages to Mast Ltd of having a perpetual inventory system.

(5 Marks)

b) Explain the audit procedures that should be performed in order to confirm that the perpetual
inventory system is operating effectively. Each procedure should be briefly described, along with a
reason for doing it.
(12 Marks)

The audit junior has also asked for some ethical guidance.

c) List and briefly describe the fundamental principles that are included in the ACCA ethical code of
conduct.
(5 Marks)

During the course of your initial audit planning, you notice that the letter of engagement has been returned
and has not been signed by the directors of Mast Ltd.

When questioned, the directors have said that they are unable to allow you access to certain documents
that relate to a new website that is being developed due to its confidential nature.

This will result in your audit work being restricted.

d) Describe the actions you will take as a result of the directors failing to sign the letter of
engagement.
(8 Marks)

(Total 30 Marks)

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 Cranberry

You are an audit manager of Cranberry & Co and you are currently responsible for the audit of Gooseberry
Co, a company which develops and manufactures health and beauty products and distributes these to
wholesale customers. Its draft profit before tax is $6·4m and total assets are $37·2m for the financial year
ended 31 January 20X8. The final audit is due to commence shortly and the following matters have been
brought to your attention:

Research and development

Gooseberry Co spent $1·9m in the current year developing nine new health and beauty products, all of
which are at different stages of development. Once they meet the recognition criteria under IAS® 38
Intangible Assets for development expenditure, Gooseberry Co includes the costs incurred within intangible
assets. Once production commences, the intangible assets are amortised on a straight line basis over three
years. Management believes that this amortisation policy is a reasonable approximation of the assets’
useful lives, as in this industry there is constant demand for innovative new products.

Depreciation
Gooseberry Co has a large portfolio of property, plant and equipment (PPE). In March 20X7, the company
carried out a full review of all its PPE and updated the useful lives, residual values, depreciation rates and
methods for many categories of asset. The finance director felt the changes were necessary to better
reflect the use of the assets. This resulted in the depreciation charge of some assets changing significantly
for this year.

Bonus
The company’s board is comprised of seven directors. They are each entitled to a bonus based on the draft
year-end net assets, excluding intangible assets. Details of the bonus entitlement are included in the
directors’ service contracts. The bonus, which related to the 20X8 year end, was paid to each director in
February 20X8 and the costs were accrued and recognised within wages and salaries for the year ended
31 January 20X8. Separate disclosure of the bonus, by director, is required by local legislation.

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Required:
(a) Describe substantive procedures the auditor should perform to obtain sufficient and
appropriate audit evidence in relation to Gooseberry Co’s research and development
expenditure.
(5 marks)

(b) Describe substantive procedures the auditor should perform to obtain sufficient and
appropriate audit evidence in relation to the matters identified regarding depreciation of
property, plant and equipment.
(5 marks)

(c) Describe substantive procedures the auditor should perform to obtain sufficient and
appropriate audit evidence in relation to the directors’ bonuses.
(5 marks)

During the audit, the team discovers that the intangible assets balance includes $440,000 related to one of
the nine new health and beauty products development projects, which does not meet the criteria for
capitalisation. As this project is ongoing, the finance director has suggested that no adjustment is made in
the 20X8 financial statements. She is confident that the project will meet the criteria for capitalisation in
20X9.

Required:
(d) Discuss the issue and describe the impact on the auditor’s report, if any, should this issue
remain unresolved.
(5 marks)

(20 marks)

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 Review and Reporting

Pizza Ltd

Below is an extract from a draft audit report for Pizza Ltd. Pizza Ltd has been experiencing some issues
this year and the extract below is the proposed opinion and basis of opinion for the current financial year.

The main two issues relate to a provision and a depreciation calculation.

The depreciation calculation has been misstated by $5m and the provision for the same amount has been
omitted from the financial statements. Both items are considered to be material.

The draft audit report extract is as follows;

Opinion

"We have audited the financial statements for Pizza Ltd for the year to 31 December 2017. In our opinion,
the financial statements do not give a true and fair view of the state of the company affairs and have not
been prepared in accordance with International Accounting Standards. This is due to a non-current asset
misstatement and a provision omission."

Basis of Opinion

"An audit is an independent examination and certification of the financial statements of Pizza Ltd for the
year. We will confirm that the financial statements are accurate. We will also confirm the accuracy of the
estimates and judgements made by the directors of Pizza Ltd as part of the financial statement
preparation."

a) Explain the type of audit modification that is currently being adopted for Pizza Ltd.
(4 Marks)

b) Explain whether or not this type of modification is the most appropriate one for the specific
circumstances of Pizza Ltd.
(4 Marks)

c) Identify any shortcomings of the wording and information that is included in the basis of opinion
section of the draft audit report.
(8 Marks)

d) Define and explain a Key Audit Matter.

(4 Marks)

(Total 20 Marks)

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 Lesley and Co

a) Briefly explain the difference between a hot and cold review and the benefits of each one.
(5 Marks)

You are an audit manager for Lesley and Co and you are responsible for some of the internal review work
that your firm carries out on a selection of audit clients before the audit reports are signed.

You have been presented with the five following situations. Audit work has been completed in all cases
and a draft audit has been produced. Your job is to assess the reasonableness of the proposed report in
each case.

i) Sapling Ltd has been experiencing difficulties with its computer system during the year. Two months’
worth of sales records were lost and no alternative method of verification has been possible.

The proposed audit opinion reads;

“We are unable to form an opinion on the financial statements of Sapling Ltd due to the loss of data that
has occurred.”

ii) Shrub Ltd has miscalculated the final inventory value of a major line of inventory. The miscalculation is
for $200,000 and the total assets of Shrub Ltd are $25m.

The proposed audit opinion reads;

"Except for the miscalculation of inventory, the financial statements of Shrub Ltd give a true and fair view of
the state of the company's affairs for the year."

iii) Branch Ltd has been sued by a customer for allegedly supplying faulty products. The legal advisers of
Branch Ltd have stated that it is likely that Branch Ltd will be successful in defending the claim.

No mention of this claim has been made in the financial statements. The claim is considered to be material
but is thought to be significant enough to affect the going concern status of Branch Ltd. The claim will not
be settled before the audit report is signed.

The proposed audit opinion reads;

"In our opinion, the financial statements of Branch Ltd give a true and fair view of the state of the company
affairs for the year."

iv) Leaf Ltd is a medium sized manufacturing company. There were issues with the directors of Leaf Ltd
during the audit and they have refused to sign the letter of representation.

The proposed audit opinion reads;

"In our opinion, the financial statements of Leaf Ltd give a true and fair view of the state of the company
affairs for the year."

An emphasis of matter paragraph has been in included in the basis of opinion section that refers to an
uncertainty in relation to this issue.

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v) Twig Plc. has produced an environmental report as part of its annual report for the year. A statement in
the environmental report says that $60m was spent upon sustainability investigations during the year, but
the audit work revealed that the actual expense was $6m, which is the figure that is included in the financial
statements.

The proposed audit opinion reads;

"In view of the seriousness of this misstatement, the financial statements do not give a true and fair view of
the state of the company affairs for the year."

b) For each of the four situations above, comment on the suitability, or otherwise, of the proposed
audit report extracts and suggest an alternative if appropriate (in all cases you should assume that
no further adjustments are going to be made to the financial statements).
(25 marks)

(Total 30 Marks)

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 Gavin Ltd

a) Define “going concern” and briefly discuss the auditor's responsibilities in respect of going
concern.
(4 Marks)
Gavin Ltd provides cleaning services to a wide range of clients.

As an audit senior involved in the audit of Gavin Ltd, you have reported to the engagement partner that
Gavin Ltd is having some financial difficulties. Income has fallen sharply due to adverse publicity as a result
of two court cases. A number of clients have now ceased to use Gavin Ltd.

Also, a senior employee has left, claiming that the company is not investing in new techniques and
materials.

A cash flow forecast has been produced by Gavin Ltd that shows the need for a significant injection of
funds is required within the next 6 months.

b) Describe the audit procedures that should be carried out in order to determine the going concern
status of Gavin Ltd.
(8 Marks)

c) Describe the possible impact on the audit report of Gavin Ltd in the following circumstances;

- The future of Gavin Ltd is uncertain and this uncertainty has been disclosed adequately in the
financial statements.
(5 Marks)

- The future of Gavin Ltd is uncertain but no disclosure has been made in the financial statements.
(5 Marks)

- The directors of Gavin Ltd believe that the company will continue to trade but the auditor does not
agree.
(4 Marks)

d) Concerning the cash flow forecast, define negative assurance and explain how this differs from
the positive level of assurance that is normally given on a set of historic financial statements.
(4 Marks)

(Total 30 Marks)

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 Bullfinch

Part (a)

ISA 700 Forming an Opinion and Reporting on Financial Statements requires auditors to produce an audit
report. This report should contain a number of consistent elements so that users are able to understand
what the audit report means.

Required:

Describe FOUR elements of an unmodified auditor’s report and for each explain why they are
included.
(4 marks)

Part (b)

Bullfinch.com is a website design company whose year-end was 31 October 2014. The audit is almost
complete and the financial statements are due to be signed shortly. Revenue for the year is $11·2 million
and profit before tax is $3·8 million. A key customer, with a receivables balance at the year-end of
$283,000, has just notified Bullfinch.com that they are experiencing cash flow difficulties and so are unable
to make any payments for the foreseeable future. The finance director has notified the auditor that he will
write this balance off as an irrecoverable debt in the 2015 financial statements.

Required:

(i) Explain whether or not the 2014 financial statements require amendment; and
(ii) Describe audit procedures which should be performed in order to form a conclusion on
any required amendment.
(6 marks)
Note: The total marks will be split equally between each part.
(10 marks)

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