ACCA MOCK A

AUDIT AND ASSURANCE

MARCH 21

Time allowed
3 hours and 15 minutes
All questions are compulsory and MUST be attempted
This paper is divided into two sections:
Section A: 3 objective test case questions
5 questions worth 2 marks per case
Section B: 2 × 20 mark questions (mainly scenario based)

IPRO EDUCATION
Q1 B
The audit team have previously been offered a 15% discount on luxury home
appliances from BJ Electronics which will potentially have a high value. As only goods
with a trivial and inconsequential value can be received, if the same discount is again
offered, it will constitute a self-interest threat.

Q2 D
As the audit senior is involved in preparation of financial statements so if he performs
the audit then he will review his own work, this is an example of self review threat as
a safe guard the audit senior should be removed from the audit team.
Q3 A
The fee income from BJ Electronics is 19% of Steve & Co's total fees. If, after
accounting for non-recurring fees such as the secondment, it remains at this
percentage of total fees on a recurring basis there is likely to be a self interest threat
because of undue dependence on this client. Where recurring fees exceed 15% for
listed companies, objectivity is impaired to such an extent that mandatory safeguards
are needed according to the ACCA Code of ethics and conduct (ACCA Code).
Q4 C
The partner and finance director of BJ have been on holiday together and appear to
have a longstanding close relationship. This results in a familiarity and self interest
threat.

Q5 B
Outstanding fee is an example of intimidation threat in this case the audit firm may
not be robust enough when disagreement with management due to the fear of
recovery of the outstanding fee. In this case the audit firm should seek a legal advice
to know their rights in this particular situation.

Q6 1 and 3 only
There is no suggestion of any issue that would cause the auditor to consider
resigning. The audit team should be fully briefed and advised to be vigilant. The
finance director should also be advised that their assistance is likely to be requested
by the audit team in the absence of a financial controller.
Q7 OPTIONS 2, 3 AND 5
Lack of supplier statement reconciliations can mean misstatements within
payables and accruals go undetected. As controls are not effective in this area,
increased substantive testing will need to be performed. The auditor should not
perform the reconciliations as this is the responsibility of Hawk. There is no need
to send requests for confirmations if the client has received a supplier statement.
The issue relates to the client not reconciling the statement to their own ledgers.

Q8 Option 4
It would not be appropriate or professional for the auditor to discuss the claim with
The financial controller, especially when legal proceedings are ongoing.
Q9 D
Gross profit margin
The ratio has decreased from 26% to 17% which indicates that website sales may
not be completely recorded. If sales had not occurred, the revenue balance would
be overstated and the gross profit margin would increase. If revenue had been
recognised too early, the revenue balance would be overstated and the
gross profit margin would increase. Payables payment period The ratio has
decreased from 75 to 40 days which indicates understatement of payables i.e.
payables may not be completely recorded. Suppliers withdrawing credit terms is a
business risk, not an audit risk. If purchase invoices have been recorded twice, the
payables balance would be overstated and the payables payment period would
increase. Receivables collection period The ratio has increased from 29 to 38 days
which indicates that receivables may be overvalued. Extended credit terms may
have been given to customers is not an audit risk. If receivables are not completely
recorded, the receivables balance would be understated and the receivables
collection period would decrease.

Q 10 Option 2
As the analytical procedures are being performed at the planning stage using the
most recent management accounts of Hawk Co, the financial statement figures are
not being tested. Analytical procedures at the planning stage are performed to
help identify areas of potential risk and to obtain an understanding of the client.
When the draft financial statement figures are available, substantive analytical
procedures can be used to help detect material misstatements.
Q 11 C
IAS 16 permits non-current assets to be revalued. However, if an item of property,
plant and equipment is revalued, the entire class of property, plant and equipment
to which that asset belongs must be revalued. Xono Co is therefore entitled to
revalue the restaurant, but they will also need to revalue all of them if it is to
comply with IAS 16. The revaluation does constitute a change of accounting policy,
so disclosures do need to be reviewed. Under IAS 16, all non-current assets used by
the entity should be depreciated, Repairs and maintenance costs should be
expensed as incurred, not capitalised.

Q 12 B
Existence, classification and presentation are all assertions related to tangible non-
current assets. Completeness and accuracy, valuation and allocation are also
relevant assertions.

Q 13 B
Physically inspecting assets listed in the non-current assets register tests for
existence. Recalculating net book values tests for accuracy

Q 14 A
Material items will require more evidence to support them than immaterial items,
which might be tested by comparative analytical review only. The size of the
account is considered in determining materiality (ie materiality may be determined
as 5% of profit before tax), but the auditor’s judgement regarding the sufficiency of
audit evidence depends on the level of audit risks associated with each account.

Q 15 B
All the options are valid written representations, but only 2 and 4 are required in all
circumstances by ISA 580.
Q 16 (A)(i) Audit risk is made up of the following components:
Audit Risk = Inherent Risk x Control Risk x Detection Risk
Inherent risk is the susceptibility of an assertion about a class of transaction,
account balance or disclosure to a misstatement that could be material either
individually or when aggregated with other misstatements, before consideration of
any related controls.
Control risk is the risk that a misstatement that could occur in an assertion about
a class of transaction, account balance or disclosure and that could be material,
either individually or when aggregated with other misstatements, will not be
prevented, or detected and corrected on a timely basis by the entity's internal
control.
Detection risk is 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.
(A)(ii) Professional judgment
Professional judgment is the application of relevant training, knowledge and
experience in making informed decisions about the appropriate courses of action
in the circumstances of the audit engagement. The auditor must exercise
professional judgment when planning an audit of financial statements.
Professional judgment will be required in many areas when planning. For example
the determination of materiality for the financial statements as a whole and
performance materiality levels will require professional judgment.
Professional judgment will also be required when deciding on the nature, timing
and extent of audit procedures.
B)(i)
Audit risk Audit Risk Response
Rio has recently been appointed as Adopt procedures to ensure opening
auditor. There is a lack of cumulative balances are properly brought
knowledge and understanding of the forward and corresponding amounts
business, which may result in a failure to are correctly classified and disclosed.
identify events and transactions which Review previous auditor's working
impact on the financial statements. papers.
 Audit risk
The directors only work part time at
Handy Car and there is no finance
director. This may promote a weak
control environment, resulting in
undetected errors or frauds
The requirement for customers to
pay 50% on ordering and the
remainder following delivery
could result in revenue
recorded before it should be, if the
deposit is recorded as a sale and not
deferred until
The two year guarantee on the cars
gives rise to a provision, the
measurement of which involves a
high degree judgement, and
therefore carries a risk of
misstatement.
Contractors are required to invoice
at the end of each month but often
there is delay in receiving these.
There is therefore a risk the
company will not accrue for costs,
resulting in incomplete liabilities
and understatement of expenses.
The current year raw materials costs
for materials also in inventory last
year are based on prices at least a
year old. They should be based on
the actual cost or reasonable average
cost.
Audit Risk Response
The controls will need to be documented
and evaluated. If these are weak the level of
substantive testing will need to be increased
accordingly.
Enquire of management the point at which
revenue is actually recognised, and review
the system of accounting
for deposits to ensure they are not
included in revenue until goods
delivered and signed for.
Establish the basis of the amount provided
for and assumptions made by the financial
controller. Re-perform any calculations and
establish the level of warranty costs in the
year.
Review invoices and payments to
contractors after the year end, and if they
relate to work undertaken before the year
end, ensure they are included as
accruals.
For a sample of materials to include the cost
of parts, compare material costs to actual
prices on invoices. Investigate and resolve
any significant differences and evaluate the
potential impact on the inventory
value in the financial statements.1
 The finished goods value is to be
estimated by Mr. Jones, who appears
to be basing his estimate on order
value rather that applying the IAS 2
rule that goods should be valued at the
lower of cost and NRV. This could result
in inventory being overstated in the
financial statements.
For cars awaiting dispatch, establish the
lower of cost and NRV and compare with
the figures provided by Mr. Jones.
Investigate any differences evaluate the
potential impact on the inventory value in
the financial statements.

The new workshop is undergoing Obtain a breakdown of the related costs

refurbishment that could result in
inappropriate treatment of capital or
non capital items, potentially
misstating noncurrent assets, or repair
costs in the statement of profit or loss.
and establish which are included as
noncurrent assets and which are treated
as repair costs. Review the nature of
items included in non-current assets to
ensure only capital items included and
review repairs to ensure no capital items
are included.

(B)(ii)
ISA 501 Audit evidence – specific considerations for selected items sets out the
responsibilities of auditors in relation to the physical inventory count. It states that
where inventory is material, auditors shall obtain sufficient appropriate audit
evidence regarding its existence and condition by attending the physical inventory
count. At the count attendance, Rio & Co will need to evaluate management's
instructions and procedures for recording and controlling the result of the physical
inventory count.
They must also observe the performance of the count procedures to assess whether
they are properly carried out.
In addition Rio & Co should inspect the inventory to verify that it exists and look for
evidence of damaged or obsolete inventory. They will also perform test counts to
assess the accuracy of the counts carried out by the company.
(C) Procedures in relation to property valuation and related disclosures
Obtain a copy of the valuer's report and consider the reliability of the valuation
after taking account of:
- Independence/objectivity
- The basis of valuation
- Qualifications
- Experience
- Reputation of the valuer.
Compare the valuation with the value of other similar properties in the locality
and investigate any significant difference.
Re perform the calculation of the revaluation adjustments and ensure the
correct accounting treatment has been applied.
Inspect notes to the financial statements to ensure appropriate disclosures have
been made in accordance with IFRSs.
Q 17 (a)
Audit procedures procurement and purchases system

Procedure Reason for procedure

Obtain a sample of e-mails from the Ensure that all orders are recorded
store manager’s computer. Trace and that the order details are correct.
details to the order database.
Obtain a sample of orders in the order To confirm that all goods ordered
database, record details of the order were received.
and trace to the paper delivery note
filed in the goods inwards department.
For the sample of orders above, To confirm that goods received were
agree to the inventory database. completely and accurately recorded in
the inventory database.
Obtain a sample of paper delivery To confirm that inventory received has
notes and agree to the order been recorded in Centipede Co’s
database and inventory database. accounting system and that liabilities
are therefore not understated.
For a sample of orders in the orders To confirm complete and accurate
database, agree details to the recording of the inventory liability in
payables ledger database, confirming the payables database.
details against the purchase invoice. Note: To ensure goods received have
been recorded as a payables liability
the sample selected from the order
database should be only those orders
that have been received. The invoice
number in the order database is then
noted and traced to the payables
ledger in the purchase database.
Within the purchase database, obtain To confirm that purchase invoice
a sample of invoices recorded in the details have been correctly recorded
purchase day book, agree details of in the payables database.
price and supplier to the purchase
invoice record in the database.
For a sample of purchase invoices in
the
purchase day book, agree details to
the
delivery notes for items on that
invoice
For the sample of purchase invoices
above, agree details to the individual
payables account in the payables
database.
For a sample of supplier invoices,
cast and cross cast invoice price and
quantities confirming price to the
original order.
Select increases in the purchase
daybook and vouch to the order
database.
Using computer-assisted audit
techniques, cast the purchase day
book and agree total of liability
incurred to the general ledger.
To confirm that the purchase liability
has been recorded only for goods
actually received.
To confirm that the liability has been
recorded in the correct payables
account.
To confirm the arithmetical accuracy
of invoices and ensure the company
was charged the correct price for
goods received
To ensure that invoiced goods have
been ordered, confirming the
occurrence assertion.
To confirm the completeness and
accuracy of the liability recorded in
the general ledger.

(b)
Audit procedures prior to inventory count attendance
Procedure
– Review prior year working papers
– Contact client to obtain stocktaking instructions
– Book audit staff to attend the inventory counts
– Obtain copy of inventory count instructions from client
– Ascertain whether any inventory is held by third parties
– Obtain last year’s inventory count memo
– Prepare audit programme for the count.
(c)
Weaknesses in counting inventory
Weakness Reason for weakness
Inventory sheets statedCount teams will focus
the on finding that number
quantity of items of items making
expected to be found inundercounting of
the store inventory more likely –
teams stop counting
when ‘correct’ number
of items found.
Count staff were all Count staff are also
drawn from the stores responsible for the
inventory. There could
be a temptation to hide
errors or missing
inventory that they have
removed from the store
illegally.
Count teams allowed to There is a danger that
decide which areas to teams will either omit
count inventory from the count
or even count inventory
twice due to lack of
precise instructions on
where to count.
Count sheets were not Lack of signature
signed by the staff makes it difficult to raise
carrying out the count queries regarding items
counted because the
actual staff carrying out
the count are not
known.
How to overcome
weakness:
Count sheets should
not state the quantity of
items so as not to pre-
judge how many units
will be found.
Count teams should
include staff who are
not responsible for
inventory to provide
independence in the
count.
Each team should be
given a precise area of
the store to count.
All count sheets should
be signed to confirm
who actually carried out
the count of individual
items.
Inventory not marked to As above, there is a Inventory should be
indicate it has been danger that inventory marked in some way to
counted will be either omitted or show that it has been
included twice in the counted to avoid this
count. error.
Recording information Recording in pencil Count sheets should be
on the means that the count completed in ink.
count sheets in pencil sheets could be
amended after the
count has taken place,
not just during the
count. The inventory
balances will
then be incorrectly
recorded
Count sheets for It is possible that the All inventory sheets,
inventory not on the additional inventory including those for
pre-numbered count sheets could be lost as ‘extra’ inventory, should
sheets were only there is no overall be pre-numbered.
numbered when used control of the sheets
actually being used.
Sheets may not be
numbered by the
teams, again giving rise
to the possibility of loss.
Q 18 (a) Problems at BNH due to poor internal controls
I. The local decision making on purchasing may lead to BNH missing out on
discounts that would be available if goods were bought in large quantities. This will
also increase the bargaining power of BNH.
II. Due to the nature of the business the inventory may contain items with short
expiry dates and hazardous substances so good inventory control are very
important.
III. If the local managers are not making good decisions regarding purchasing there
could be stoke outs of certain lines of goods, losing potential sales and future
business if customers decide to shop at other stores with better stocks.
IV. There is a lack of centralization in accounting system. Any error arising on the
stand alone accounting system in each superstore may go undetected and the
management will not have good quality information for decision making.
V. There is no regular system of inventory counting any misappropriation of
inventory may go undetected. The goods are at high risk of being stolen by either
by staff or others.
VI. Management accounts are produced after every six months this reduces their
usefulness. Any fraudulent activity could go undetected for several months before
there is any chance of it being identified by management.

(b) Recommendations to the board of BNH

I. A new computerized accounting system should be implemented integrating
sales, purchase and inventory accounting systems.
Advantage
This would give the board and senior management up to date information about
the inventory levels so that purchases orders can be places on time to avoid stock
outs. This will also help the management to plan for purchasing in medium and
long term.
II. Management accounts should be prepared monthly and reviewed by senior
managers. The accounts
should be prepared separately for each superstore.
Advantage
This will allow managers in the head office and the board to take prompt actions
if any superstore is
not performing well. Lose making goods can also be identified and dropped from
the superstore
range.
III. Sales pricing decisions should be taken centrally.
Advantage
This will help the business maximizing the profit by charging appropriate prices for
products.
IV. There should be regular inventory counts at superstore.
Advantage
Inventory counting is essential for good decisions regarding purchases and sales
prices. It is also important due to the nature of inventory of BNH. This should also
act as a deterrent against any staff pilferage of goods.