Audit & Assurance Past Paper 2015 Sep/Dec

1. Identify and explain FIVE ethical threats which may affect the independence of Pink
Partners & Co’s audit of Golden Finance Co.

 The finance director is the sister-in-law of the audit engagement partner and hence
there is a family relationship. There is a familiarity and self interest threats as the
audit partner and the finance director both hold senior positions and therefore are able
to influence the outcome of the audit. The audit engagement partner should be
removed, and an alternative partner appointed.
 A member of the audit team being seconded to Golden will pose a self-review threat
as they will be auditing work they have prepared. The request should be politely
decline or the team member should be removed from the audit of Golden.
 Two members of the audit team have significant loans owing to the company. If either
of the loans has any preferential terms, then this would present a self-interest threat.
The terms of the loan should be reviewed to ascertain whether they are in any way
preferential. If not, no further action is required. If they do the two members should be
removed from the audit team.
 Pink’s taxation department providing services to Golden poses a self-interest threat as
the total fees represent a significant proportion of Pink’s income and the firm could
become overly reliant on Golden. Pink should assess the fees and if they are likely to
be a significant amount over 15% of the income then they should decide which
engagement they will decline.
 Pink representing Golden with negotiations to resolve some outstanding issues is a
potential advocacy threat where the firm pay promote an opinion on behalf of Golden
such that the independence of the firm is compromised. Pink should politely decline
the offer to represent in the negotiations of the tax.
 The audit team attending the football match could be a self-interest or familiarity
threat as the acceptance is not permitted as it is seen as significant. This offer should
be politely declined as it is significant in value.

2.
a. Identify and explain TWO factors which would indicate that an engagement letter
for an existing audit client should be revised.
1. A recent change of senior management as they need to be made aware of what
the audit engagement letter includes.
2. A significant change in nature or size of the entity. The approach taken by the
auditor may need to change to reflect the change and this should be clarified in
the engagement letter.
3. A change in the financial reporting framework adopted in the preparation of
the financial statements. As this is mentioned in the letter this may need
updating.
b. List SIX matters which should be included within an audit engagement letter.
1. The objective and scope of the audit
 2. The responsibilities of the auditor
3. The responsibilities of management
4. The expectation that management will provide written representations
5. Identification of the financial reporting framework for the preparation of the
financial statements
6. Arrangements to make available draft financial statements and any other
information
c. Identify FIVE sources of information relevant to gaining an understanding of
Milky Way Technologies Co and describe how this information will be used by
the auditor.
1. Prior year financial statements, this provides information in relation to size as
well as the key accounting policies, disclosure notes and whether the audit
opinion was modified or not.
2. Discussions with the previous auditors, this provides information on key
issues identified during the prior year audit as well as the audit approach
adopted.
3. Discuss with management, this provides information in relation to the
business, any important issues which have arisen or changes to accounting
policies from the prior year.
4. Review of board minutes, this provides an overview of key issues which have
arisen during the year and how those charged with governance have addressed
them.
5. Financial statements of competitors, this will provide information about their
competitors in relation to their financial results and their accounting policies
and will be important in assessing their performance in the year and going
concern review.
6. Current year budgets and management accounts, provides relevant information
for the year to date and it will help the auditor during the planning stage for
preliminary analytical review.

3.
a. Explain FIVE potential indicators that Mercury Motoring Co is a going concern.
During the year a number of Mercury’s significant customers have exeriend a fall in sales
hence they have purchased fewer items Mercury. There is a risk that if Mercury’s customers
continue to reduce the level of their purchases, this will reduce Mercury’s sales and future
cash flows.
Mercury has paid some of its suppliers later than usual and hence some of them have
withdrawn credit terms meaning the company must pay cash on delivery. This puts additional
pressure on the company’s cash flow. This is because the company has to pay for good in
advance but it may not receive cash from its receivables until some time later.
One of Mercury’s main suppliers is threatening legal action to recover the sums owing, if this
occurs then Mercury will have legal costs in addition to the amounts already owed and this
will further increase the pressure on cash flows.
The company’s current ratio has fallen below 1 to 0.9 for the time. The current ratio is
showing that the current assets are not sufficient to pay the current t liabilities. This is another
indication of worsening liquidity position of the company.
Mercury has produced a cash flow forecast to 30 June 2016 and this shows net cash flows
until May 2016. If this company continues to have cash outflows, then it will put further
pressure on the company’s cash flows and there is the risk that it will start to run out of
available cash.
Mercury has a significant loan which is due for repayment in full by 30 September 2016. The
company has nine months to raise the 203 million and with falling levels of sales and
negative cash flows forecast until May 2016 it is difficult to see how they will be able to raise
alternative finance to pay this amount.
Mercury is facing a possible change in legislation which will result in one of its top product
lines becoming obsolete. Whilst this is only a possible change in law, if it does come into
force then the inventory for this product may have to be scrapped, resulting in a large write
off and possible reduced sales, profit and cash flows.

b. Describe the audit procedures which you should perform in assessing whether Mercury
Motoring Co is a going concern.
1. Obtain a written representation confirming the directors’ view that Mercury is a going
concern.
2. Review post year end management accounts to assess if in line with cash flow forecast.
3. Discuss with the finance director whether the level of sales from its existing customers has
increased or if any new customers have been obtained.
4. Discuss with management the basis for their going concern review and request that hey
extend their cash flow forecast by three months to 30 September 2016.
5. Perform a sensitivity analysis on the cash flows to understand the margin of safety the
company has in terms of its new cash in/out flows.
6. Discuss with the directors whether they have contacted any banks for finance to assess
whether they have any other means of repaying the loan of 2.3m due in September 2016.
7. Evaluate management’s plans or future actions, including their contingency plans in
relation to ongoing financing and planes for generating revenue and consider the feasibility of
these plans.
4.Describe FIVE audit risks, and explain the auditor’s response to each risk, planning the
audit of Venus Magnets Co.
The increase in asset lives and decrease in
depreciation may pose a risk that this
reduction has occurred in order to achieve
profit targets and in this case plat and
machinery is overstated.
Due to staff availability the company is
planning to undertake a full year-end audit
count days before the year end and then
adjust for movements to the year end. There
is a risk that these adjustments may not be
done accurately then the year end inventory
could be under or overstated.
A fire damaged inventory such that it has
been written down from 0.9m to 0.2m
which is its scrap value. If the good remain
unsold after the year end, there is a risk that
the scrap value is overstated, and inventory
overvalued.
An insurance claim for 0.7m has been
submitted and the proceeds included within
profit or loss. The company has not received
a reply from the insurance company, and
this therefore represent a possible
contingent asset. With no response to date,
the inclusion of this sum overstates profit
and receivables.
The bank reconciliations for October and
November both contain unreconciled
amounts, and the finance director believes
the overall differences to be immaterial.
This could represent large errors which net
off to a small amount and this could result
in bank balances being under or overstated.
A directors’ bonus scheme was introduced
which is based on achieving a target profit
before tax. There is a risk the directors
might feel under pressure to manipulate the
results through the judgements take or using
provisions.
The finance director has requested that the
audit commence earlier than normal as he
wishes to report results earlier. A reduction
Discuss with the directors the rationale for
any extension of asset lives and reduction of
depreciations rates, they should also revise
the useful life of a sample of assets
compared to how often these assets are
replaces, as this provides evidence of the
useful life of assets.
The audit team should increase the extent of
inventory cut off testing at the year end.
They should also review the year-end
inventory adjustment listing in detail and
supporting documentation obtained for all
adjusting items.
Review whether any good were sold post
year end and at what value, this should
assess whether the attributed scrap value is
reasonable. If none have been sold discuss
with management, the possibility of further
write downs.
Discuss with management whether any
response has been received from the
insurance company and review the related
correspondence. If virtually certain, the
treatment adopted is correct. If not,
management should be requested to remove
it from profit and receivables.
Discuss this issue with the finance director
and request that the December
reconciliation is fully reconciled. The
reconciling items should be tested in detail
and agreed to supporting documentation.
Throughout the audit the team should be
alert to this risk and maintain professional
skepticism.
The timetable should be confirmed with the
finance director. If it is to be reduced then
consideration should be given to performing
 in the audit timetable will increase detection
risk and place additional pressure on the
team in obtaining sufficient and appropriate
evidence.
an interim audit in late December or early
January this would then reduce the pressure
on the final audit. The team needs to
maintain professional skepticism and be
alert to the increased risk of errors
occurring.

5.a. Identify and explain FIVE internal control Strengths in Bronze Industries Co’s payroll
system.
1. Factory staff are each issued a sequentially numbered clock card which details their
employee number and name . This should ensure that employees are only paid for the hours
they have worked and that the payroll records record completely all employees as any gaps in
the sequence would be identified.
2. The payroll system automatically calculates gross and net pay along with any statutory
deductions being incorrect as there is a reduced risk of errors occurring.
3. A sample of the calculations made by the automated system is checked by the payroll
supervisor to ensure the system is operating effectively; this tests the automated controls
within the system.
4. Bronze has a human resource department which is responsible for setting up new
permanent employees and leavers. Having a segregation of roles between human resources
and payroll departments reduces the risk of fictitious employees being set up and also being
paid.
5. The discretionary bonus is communicated in writing to the payroll department. As this is in
writing rather than verbal, this reduces the risk of the bonus being recorded at an incorrect
amount in the payroll records.
6. For employees paid by bank transfer, the list of the payments is reviewed in detail and
agreed to the payroll records prior to authorizing the bank payment. This reduces the risk of
fraudulent payments being made through the creation of fictitious employees and other
employees being omitted from the payment run.
b. Identify and explain SIX internal control DEFICIENCIES in Bronze Industries Co’s
payroll system and provide a RECOMMENDATION to address each of these deficiencies.
Employees swipe their cards at the The clocking in and out process should be
beginning and end of the eight-hour shift; supervised by a responsible official to
this process is not supervised. This could prevent one individual clocking in multiple
result in several employees being swiped in employees.
a present when they are not. This will result
in a substantially increased payroll cost for
Bronze.
Employees are entitled to a 30-minute break Employees should be allocated set break
and do not need to clock out to access the times and there should be a supervisor
dining area. Employees could be taking present to ensure that employees only take
excessive breaks resulting in a decrease in
productivity and an increase payroll costs.
Although there is a human resources
department, appointments of temporary
employees are made by factory production
supervisors. They can appoint unsuitable
employees and may not carry out all the
required procedures for new joiners. This
could result in these members not receiving
the correct pay and relevant statutory
deductions.
Overtime reports which detail the amount of
overtime worked are sent out quarterly by
the payroll department to productions
supervisors for review. These reports are
reviewed after the payments have been
made which could result in unauthorized
overtime or amounts being paid incorrectly
and Bronze’s payroll cost increasing.
Production supervisors determine the
amount of the discretional bonus to be paid
to employees. Production supervisors are
not senior enough to determine this as they
could pay extra bonuses to friends or family
members.
The bonus is input by a clerk into the
payroll system. There is no indication that
this input process is reviewed. This could
result in input errors or the clerk could
fraudulently change the amounts leading to
incorrect bonus payments.
The payroll manager review the bank
transfer listing prior to authorizing the
payments and also amends the payroll
records for any changes. There is a lack of
segregation of duties as it is payroll team
which processes he amounts and the payroll
manager who authorizes payments. The
manager could fraudulently increase the
amounts to be paid to certain employees,
process this payment as well as amend the
records.
A payroll clerk distributes cash pay packets
to employees without requesting proof of
identity. Even if most employees are known
to the clerk, there is a risk that without
identity check wages could be paid to
incorrect employees.
breaks they are entitled to.
All appointment of staff whether temporary
or permanent, should only be made by the
human resources department.
All overtime should be authorized by a
responsible official prior to payment being
processed by the payroll department. This
authorization should be evidenced in
writing.
The bonus should be determined by a more
senior individual such as the production
director and this should be communicated in
writing to the payroll department.
Once the clerk has input the bonus amounts,
all entries should be double checked against
the written confirmation from the
production director by another member of
the team to identify any amounts entered
incorrectly.
The payroll manager should not be able to
process changes to the payroll system as
well as authorize payments. The
authorization of the bank transfer listing
should be undertaken by an individual
outside of the payroll department such as
the finance director.
The payroll clerks should be informed that
all cash wages can only be paid upon sight
of the employees’ clock card and
photographic identification as this confirms
proof of identity.
 c. Describe substantive ANALYTICAL PROCEDURES you should perform to confirm
Bronze Industries Co’s payroll expense.
 Compare the total payroll expense to the prior year and investigate any significant
differences.
 Review monthly payroll charges, compare this to the prior year and budgets and
discuss with management any significant variances.
 Compare overtime pay as a percentage of factory normal hours pay to investigate
whether it is at a similar level to the prior year and within an acceptable range.
Investigate any significant differences.
 Perform a proof in total of total wages and salaries, incorporating joiners and leavers
and any pay increase. Compare this to the actual wages and salaries in the financial
statements and I investigate any significant differences

6.Explain FOUR factors which influence the reliability of audit evidence.

- Increased when it is obtained from independent sources outside the entity
- Increased when the related controls imposed by the entity, including those over its
preparation and maintenance, are effective.
-Audit evidence in documentary form, paper, electronically or other medium is more reliable
than evidence obtained orally.
-Audit evidence provided by original documents is more reliable than audit evidence
provided by photocopies, the reliability of which may depend on the controls over their
preparation and maintenance.
- Obtained directly by the auditor is more reliable than audit evidence obtained indirectly.

b. Describe audit procedures you would perform during the audit of Andromeda Industries
Co:
1. BEFORE the inventory counts
- Review the prior year files to identify whether there were any particular warehouses where
significant inventory issue arose last year.
- Discuss with management whether any of the warehouses this year are new, or have
experience 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 inventory counts
  Observe the counting teams to confirm whether the inventory count instructions are
being followed.
 - Select a sample of inventory and perform test counts from inventory sheets to
warehouse aisle and from warehouse aisle to inventory sheets.
 Obtain a photocopy of the completed sequentially numbered inventory sheets for
follow up testing on the final audit.
 Observe the procedures for movements of inventory during the count, to confirm that
all movement have ceased.
In relation to research and development expenditure
 Obtain a schedule of intangible assets detailing opening balances amount capitalized
in the current year, amortization and closing balances.
 Agree opening balances to prior year financial statements
 For those expensed as research agree the costs incurred to invoices and supporting
documentation and to inculsion in p&l
 For those capitalized as development, agree costs incurred to invoices and confirm
technically feasible by discussion with development managers or review of feasibility
reports.
C. Discuss the issue and describe the impact on the audit report, if any, if the issue remains
unresolved.
One of the projects Andromeda has developed in the year does not meet the recognition
criteria under IAS 38 but has been included within intangible assets. This project is research
expenditure and should be expensed to profit and loss.
PBT = 980,000/8.3M = 11.8% = Material
If management does not amend the financial statements a qualified except for opinion will be
given since it is material but not pervasive, in the basis of opinion paragraph which comeafter
the opinion paragraph the auditor will explain the misstatement and explain the impact on the
financial statement.
ACCA Audit and Assurance 2016

16 a.
Narrative notes consist of a written description of the system; they would detail what occurs
in the system at each stage and would include any controls which operate at each stage.
Advantages
 They are simple to record; after discussion with staff members, these discussions are
easily written up as notes.
 They can facilitate understanding by all members of the audit team, especially mor
ejunir members who might find alternative methods too complex.
Disadvantages
 Thye may prove to be too cumbersome, especially if the system is complex or
heaving automated.
 This method can make it more difficult to identify missing internal controls as the
notes record the detail but do not identify control exceptions clearly.
Questionnaires contain a list of questions and are used to assess whether controls exist or the
effectiveness of the controls in place.
Advantages
 They are quick to prepare, which mean they are a timely method for recording the
system.
 They ensure that all controls present within the system are considered and recorded;
hence missing controls or deficiencies are clearly highlighted by the audit team.
Disadvantages
 It can be easy for the staff members to overstate the level of controls present as they
are asked a series of questions relating to potential controls.
 A standard list f questions may miss out unusual or more bespoke control used by the
company.
Flowcharts are graphic illustration of the internal control system for the sales ystem. Lines
usually demonstrate the sequence of events and standard symbols are used to signify controls
or documents.
Advantages
 It is easy to view the system in its entirety as it is all presented together in one
diagram.
 Due to the use of standard symbols for cotrols, it can be effective in identifying
missing controls.
Disadvantage
  They can sometimes by difficult to amend, as any amendments may require the whole
flowchart to be redrawn.
 There is still the need for narrative notes to accompany the flowchart and hence it can
be time-consuming.
B. Identify and explain SEVEN deficiencies in the sales system of Heraklion Co and provide
a recommendation to address each of these deficiencies.
New customers’ creditworthiness is asses by New customers should complete a credit
a sales person who sets the credit limit, application which should be checked
which is authorized by the sales director. through a credit agency with a credit limit
The sales staff have sales targets and hence set. Once authorized by the sales director,
may suggest that new customers are credit the limit should be entered into the system
worthy simply to meet their targets. This by a credit controller.
could result in sales being made to poor
credit risk.
Sales staff have discretion to grant sales All discounts to be granted to customers
discounts to customers of up to 10%. This should be authorized in advance by a
could result in a loss of revenue as they may responsible official, such as the sales
award unrealistic discounts simply to meet director, if not practical then the supervisors
sales targets. The discounts granted by sales of the sales staff should undertake this role.
staff are note being reviewed and could
result in unauthorized discounts allowed.
Sales staff are able to make changes to the Sales staff should not be able to access the
customer master data file, in order to record master file to make amendments. Any such
discounts allowed and these changes are not amendments should be restricted so that
reviewed. There is a risk that these only supervisors and above can make
amendments could be made incorrectly in a changes. An exception report of changes
loss of sales revenue or overcharging of made should be generated and review by a
customers. The sales staff are not senior responsible official.
enough to be given access to changing the
master file data as this could increase the
risk of fraud.
Inventory availability does not appear to be Prior to the salesperson finalizing the order,
checked by the salesperson at the time the the inventory system should be checked in
order is places. In addition, Herakin Co order for an accurate assessment of the
markets itself on being able to dispatch all availability of goods to be notified to
orders within three working days. There is a customers.
risk that where good are not available the
customer would not be made aware f this
prior to placing their order, leading to
unfulfilled orders and customer
dissatisfaction which would impact the
company’s reputation.
Customer orders are recorded on a two-part The order form should be amended to be at
pre-printed form, one copy is left with the least four-part. The third part of the order
customer and one with the sales person. The should be sent to the warehouse department
sales department of Herakin Co does not and the fourth sent to the finance
hold these orders centrally and hence would department.
not be able to monitor if orders are being
 fulfilled one a timely basis. This could
result in a loss of revenue and customer
goodwill.
Customer orders are given a number based Sales orders should be sequentially
on the salesperson’s own ID. These numbered, on a regular basis, a sequence
numbers are not sequential. Without check of orders should be undertaken to
sequential numbers, it is difficult for them identify any missing orders.
to identify missing orders and to monitor if
all orders are being dispatched in a timely
manner, leading to a loss of customer
goodwill.
The salesperson is given responsibility to A credit controller should be appointed and
chase customers directly for payment once it should be their role, rather than the sales
an invoice is outstanding for 90 days. This person, to chase any outstanding sales
is considerably more than the company’s invoices which are more than 30 days old.
credit terms of 30 days which will lead to
poor cash flow.

c) In relation to the payroll fraud, identify and explain THREE controls Heraklion Co should
implement to reduce the risk of this type of fraud occurring again and, for each control,
describe how it would mitigate the risk.
The HR department should initiate the This control introduces segregation of duties
process for setting up new joiners by asking as in order to set up employees both the HR
new employees to complete a joiner’s form and Payroll departments are involved.
which will be approved by the relevant Without collusion with an HR employee,
manager and HR. This request should then the payroll supervisor would be unable to
be forwarded to the payroll department, who set up fictitious employees.
should set up the employee.
Where possible, employees who are related This should reduce the risk of related staff
should not be allowed to undertake colluding and being able to commit fraud.
processes which are interrelated whereby
they can breach segregation of duty control
for key transaction cycles. A regular review
of job description of related employees
should be carried out by HR.
A count should be undertaken of the number This would identify if there are extra
of employees in each department of employees on the payroll system, which
Heraklion Co; this should be reconciled to could then be investigated further.
the number of employees on the payroll
system.

D) Describe substantive procedures the auditor should perform to obtain sufficient and
appropriate audit evidence in relation to Heraklion Co’s revenue.
- Compare the overall level of revenue against prior years and budget and investigate any
significant fluctuations.
- Obtain a schedule of sales for the year broken down into the main product categories and
compare this ot the prior year breakdown and for any unusual movements discuss with
management.
- Calculate the gross profit margin and compare this to the prior year and investigate any
significant fluctuations
- Select a sample of sales invoices and agree the sales price back to the price list.
- Select a sample of credit notes raised, trace through to the original invoice and ensure the
invoice has been correctly removed from sales.

17. a) Describe substantive procedures you should perform to obtain sufficient, appropriate
audit evidence relation to the above three matters.
Revaluation of PPE
 Obtain a schedule of all PPE revalued during the year and cast to confirm
completeness and accuracy of the revaluation and agree to trial balance and financial
statements.
 Agree the revalued amounts to the valuation statement provided by the valuer
 Agree the revalued amounts for these assets are included correctly in the non-current
assets register.
 Recalculate the depreciation charger for the year to ensure that for the assets revalued
during the year, the depreciation was based on the correct valuation and was for 12
months.
 Review the financial statements disclosures relating ot the revaluation to ensure they
comply with accounting standards.

Inventory Valuation
 Obtain a schedule of all raw material, finished goods and wip inventory and cast to
confirm completeness and accuracy of the balance and agree to tb and financial
statements
 Review the financial statements disclosures relating to inventory and wip to ensure
they comply with the accounting standards.
 Obtain the breakdown of WIP and agree a sample assessed during the count to the
wip schedule agreeing the percentage completion as recorded at the inventory count.
 For a sample of inventory items obtain the relevant cost sheets and confirm raw
material costs to recent purchase invoices, labor costs to time sheets or wage records
and overheads allocated are of a production nature.
 Review agreed inventory reports and identified any slow moving goods, discuss with
management why these items have not been written down or if an allowance is
required.
  For defective chemical compound E243, discuss with management their plans for
disposing of these goods, and why they believe these goods have a NRV of $400,000.
Bank Loan (Short term non current liabilities)
- Agree the opening balance of the bank loan to the prior year financial statements.
- Review bank correspondence to identify whether any late payment penalties have been
levied and agree these have been charged to P&L account as a finance charge.
- Obtain direct confirmation at the year end from the loan provider of the outstanding
balance, agree confirmed amounts to the financial statements.
- Agree closing balance of the loan to the draft financial statements.
b) Describe the procedure which the auditor of Elounda Co should perform in assessing
whether or not the company is a going concern.
- Obtain cah flow forecase ad review the cash in and outflows, assess the assumptions for
reasonableness and discuss the findings with management to understand if the company will
have sufficient cash flows to meet liabilities as they fall due.
- Discuss with management their ability to settle the next installment due for repayment to the
bank and the lumpsum payment of 800k in jan 2007 and ensure these have been included in
the forecast
- Enquire of the lawyers as to the existence of litigation and claims, if any exist then consider
their materiality and impact on the going concern basis.
- Review the post year end board minutes to identify any other issues which might indicate
financial difficulties for the company.
- Obtain a written representation confirming the directors’ view that Elounda Co is a going
concern.

18 a)
 Helping the auditor to devote appropriate attention to important areas of the audit.
 Helping the auditor to identify and resolve potential problems on a timely basis.
 Helping the auditor to properly organize and manage the audit engagement so that it is
performed in an effective and efficient manner
 Assisting where applicable in coordination of work done by experts.
 Assisting in the selection of engagement team members with appropriate levels of
capabilities and competence to respond to anticipated risks and the proper assignment
of work to them.
B) Describe SIX audit risks and explain the auditor’s response to each risk, in planning
the audit of Sitia Sparkle.
Sitia Sparkle Co purchases their goods The audit team should undertake detailed
from suppliers in Afirca and the goods are cut-off testing of purchase of goods at the
in transit for up to three weeks. At the year year end and the sample GRNs from
end there is a risk that the cut-off of
inventory, purchases and payables may
not be accurate and may be
under/overstated.
Research costs should be expensed to
profit or loss and development costs to be
capitalized as an intangible asset. If the
company has incorrectly classified
research costs as development
expenditure, there is a risk the intangible
asset could be overstated, and expense
understated.
The costs include purchase price,
installation, and training costs, it should
only include purchase prices and
attributable costs. Therefore, PPE and
profits are overstated.
The bonus scheme for senior management
and directors of Sitia Sparkle Co has been
changed; it is now based on the value of
year-end total assets. There is a risk that
management might be motivated to
overstate the value of assets through the
judgement taken or through the use of
releasing provisions.
The finance director of Sitia Sparkle Co
believes that an allowance for receivable
is excessive and unnecessary and therefore
has not provided for it at the year end and
has credited the opening balance to P&L.
There is a risk that receivable will be
overstated; some balance may be
irrecoverable and so will be overstated if
not provided for.
A new general ledger system was
introduced in May 2006 and the old
systems were run in parallel until August.
There is a risk of the balances in May
being misstated and loss of data if they
have not been transferred from the old
system completely and accurately.
The purchase ledger of Sitia Sparkle Co
was closed on 8 August rather than at the
year end 31 July. There is a risk that the
cut-off may be incorrect with purchases
and payable over or understated.
before and after the year end relating to
goods from suppliers in Africa should be
increased to ensure that cut-off is
complete and accurate.
Obtan a breakdown of the expenditure and
verify that it relates to the development of
the new products. Undertake testing to
determine whether the costs relate to the
research and development state.
Obtain a breakdown of the 0.9
expenditure and undertake testing to
confirm the level of training csts which
have been included within non-current
assets. Discuss the accounting treatment
with the finance director and the level of
any necessary adjustment to ensure
treatment is in accordance with the
accounting standard.
Throughout the audit, the team will need
to be alert to this risk and maintain
professional skepticism.
Discuss with the finance director the
rationale for not maintaining an allowance
for receivables ad releasing the opening
provision.
The auditor should document and test the
new system. They should review any
management reports run comparing the
old and new system during the parallel run
to identify any issues with the processing
of accounting information.
The audit team should undertake testing
of transactions posted to the purchase
ledger between 1 and 8 August to identify
whether any transactions relating to the
2007 year end have been included or any
 2006 balances removed.

c) Describe the audit supervisor’s responsibility in relation to supervising and reviewing

the audit assistants’ work during the audit of Sitia Sparkle Co.
Supervision
During the audit of Sitia Sparkle Co, the supervisor should keep track of the progress of the
audit engagement to ensure that the audit timetable is met and should ensure that the audit
manager and partner are kept updated of progress.
The competence and capabilities of individual members of the engagement team should be
considered, including whether
they have sufficient time to carry out their work, whether they understand their instructions
and whether the work is being
carried out in accordance with the planned approach to the audit.
In addition, part of the supervision process should involve addressing any significant matters
arising during the audit of Sitia
Sparkle Co, considering their significance and modifying the planned approach appropriately.
The supervisor would also be responsible for identifying matters for consultation or
consideration by the audit manager or
engagement partner of Sitia Sparkle Co.

Review
The supervisor would be required to review the work completed by the assistants and
consider whether this work has been
performed in accordance with professional standards and other regulatory requirements and if
the work performed supports the conclusions reached and has been properly documented.
The supervisor should also consider whether all significant matters have been raised for
partner attention or for further
consideration and where appropriate consultations have taken place, whether appropriate
conclusions have been
documented.
Audit and Assurance Dec 2022

Describe the five components of an entity’s system of internal control.

 Control Environment - Includes the governance and management of functions and the
attitudes, awareness and actions of those charged with governance concerning the
entity’s internal controls.
 Control Activities – Policies and procedures which help ensure h management
directives are carried out. There are activities designed to precent, detect and correct
errors.
 Information Systems - Procedures and records designed and established to initiate,
record, process and report entity transactions and to maintain accountability for the
related accounts.
 Monitoring of controls – A process to assess the effectiveness of internal control
performance over time. It involves assessing on a timely basis and taking necessary
remedial actions.
 Risk assessment process – Includes how management identifies business risk relevant
to the preparation of financial statements in accordance with the entity’s applicable
financial reporting framework.
Identify and Explain five deficiencies and recommend a control to address each of these
deficiencies.
The transfer process is The transfer of hours Review a sample of the
automated so there are no worked should be check by staff’s pay and ensure it was
checks over this transfer. a senior member and signed. checked by a senior official.
There is a risk that the
incorrect information can be
transferred and staff being
over or under paid which
can lead to loss of employee
satisfaction.
If any changes to the payroll The supervisor should make Review a sample of
data are required, the payroll the changes and the director amendments made over the
clerk makes the amendment. should review these period to ensure that the
The payroll clerk is not changes. proper officials made them
senior enough to make and that they were reviewed.
amendments, and errors can
be made to the data.
Fraudulent payments being
made to friends or family.
By the year end IA will only IA should do checks Ensure that the IA
have completed the throughout the year to department went to the
comparison at one factory ensure that what is on the warehouses and for those
and one warehouse. There is books is physically there. they were not present at do a
a risk that some non-current counts and also Do a sample
assets recorded might not be of the asset register
there physically or may not reconciled to what is
 be of good quality and need
to be written off.
The finance director reviews
the total amount of the bank
payments list and authorizes
it. There is a risk that some
transactions may be
incorrect, net off or that
suppliers are being paid
incorrectly.. or than sums
are paid to fictious suppliers.
The company reconciles the
account with activity
monthly and the other three
accounts every three
months. There is a risk that
errors or signs of fraud may
not be spotted on a time
enough basis.
The broken-down payments
list should be reviewed
before authorization and
signed off. The finance
director should agree the
amounts paid to suppose
documentation, as well as
reviewing the supplier
names to identify any
duplicates or any unfamiliar
names.
All bank accounts should be
reconciled monthly to
ensure there are no errors
and if there are errors there
should be corrected and
signed by a senior official.
physically there to ensure it
is complete.
A sample of the supplier’s
payments lists should be
reviewed to supporting
documentation to ensure
completeness and
signatures.
A sample of the
reconciliations for the four
bank accounts should be
checked to ensure they are
being done on a monthly
basis and being reviewed.

C) Bank Balances

 Obtain a bank confirmation letter from the bank for all its bank accounts.
 Obtain the year-end bank reconciliation and cast to ensure mathematical accuracy.
 Agree the balance per the bank reconciliation statements to the year end bank
confirmation and bank statements.
 Review the cash book and bank statements for any unusual or large items.
 Agree the list of bank balances to the bank reconciliation to ensure completeness.

D)
Fred Johnson, who is currently the chief
executive, took over the chair role. If he has
both roles, he will have too much power.
The chair recently wrote to all shareholders
to inform them that any questions or
comments they have could only be raised at
the company’s AGM. This could result in
the board making decisions which are not in
line with the wishes of the major
shareholders.
Non-executive director’s remuneration
Fred Johnson should resign as the Chair and
only carry out the role of executive. A non-
executive should be appointed to fill the
chair’s roles.
Regular engagement with shareholders
should be made such as meetings to update
shareholders on the company’s position and
to hear their requests on the company.
They should not be paid based on the
should no be based on pre-determined profit company’s performance, they should be
targets as their pay should not be based on paid based on time committed and
how the company performs as this would responsibilities of the role.
reduce their independence.

A) Explain the PURPOSE of an audit engagement letter and list FOUR items which
should be included in an audit engagement letter.

The audit engagement letter outlines the nature of the contract between the audit firm
and the audit client. Its purpose is to minimize the risk of misunderstanding of the
terms of the engagement between the auditor and the client and it confirms acceptance
of the engagement.
Scope
Identification of the applicable financial reporting framework being used
Time frame of the audit
Expectation that management will provide all needed information affecting financial
statements
The auditor’s responsibilities
Management’s responsibilities
Arrangements to make available draft financial statements

B) Using the table below, calculate the following TWO ratios, for BOTH years to assist
you in planning the audit of Magpie Co. operating profit margin and payable payment
period.

Operating Profit Margin 2005 – 0.40/22.0 – 1.8% 2004 1.2/26.0 = 4.6%

Payables payment period 2005 – 1.9/10/9x365 = 64 days 2004 3.2/14.5x365 =81
days.
C) Using the information provided and the ratios calculated, describe SEVEN audit risks
and explain the auditor’s response to each risk in planning the audit of Magpie Co.

Magpie Co is a new client for Crow &
Co. This means that the audit team is not
familiar with the accounting policies,
transactions and balances of Magpie and
therefore will be an increased detection
risk on the audit.
During the year, the company has spent
0.7m on refurbishing its stores. This
expenditure has been recognized as PPE
in the statement of financial position.
There is a risk that some items of
revenue expenditure may have been
capitalized which would mean that PPE
Crow & Co should ensure it has suitably
experienced persons on the team and
that adequate time is allotted to obtain
an understanding of the company and
the risk of material misstatement.
Obtain a schedule of costs which have
been capitalized as part of the
refurbishing. Review supporting
documentation such as invoices to
establish that they are capital in nature.
is overstated, and expenses understated.
During the year a sales system was The auditor should fully document and
installed but it was not felt necessary to test the new systems. They should also
run the old and the new parallel. perform substantive tests over the
Opening balances from the old systems opening balances to ensure they have
may not have been transferred correctly. been correctly transferred from the old
In addition, further errors could have system.
arisen if there are issues with the
operation of the new system. As a result,
sales and receivables may be misstated.
Daily cash taking reports sent to head Discuss with the directors whether these
office show an increasing number of cash shortages may be indicative of
cash shortages at each store when fraud. The audit team should apple
comparing the contents of the cash professional skepticism throughout the
registers to the reports. The differences audit recognizing that fraud may have
have not been investigated or reconciled arisen as a result of the cash shortages.
as they are only small amounts. There is
a risk that these discrepancies are the
result of fraud, and several small
amounts can become material when
grouped. An increase in control risk
arises when internal controls detect a
problem but it is being ignored.
The payables ledger clerk has carried Review the supplier statement of
out supplier statement reconciliations reconciliation and discuss with he
and a number of supplier statements payables ledger clerk why they have
indicate a higher balance is owing by the been included as reconciling items on
company than is shown on the payable the supplier statement reconciliation
ledger. The differences have been rather than being investigated.
included as reconciling items rather than
being investigated and the payables
period has decreased from 81 to 64
days. There is a risk that cut off may be
incorrect resulting in trade payables,
cost of sales and expenses being
understated.
Inventory of 0.1m has been noted as Discuss with the finance director
being damaged due to containing whether the damaged inventory will be
contaminated soil. In addition, the written down to its NRV and agree this
inventory holding period has increased write down to the final inventory
from 28 days to 54 days meaning the valuation.
company is retaining inventory longer
than the prior year. If the contaminated
soil is not written down to its net
realizable value, inventory will be
overstated and cost of sales understated.
A) Describe substantive procedures the auditor should perform to obtain sufficient and
appropriate audit evidence in relation to the COMPLETENESS of Pacific Co’s trade
payables and accruals.

 Calculate the payable payment period for Pacific Co, compare to prior years and
investigate any significant differences, in particular any decrease this year due to
inclusion of the payment run on 1 June.
 Review the journal entry processed to correct the misstatement of trade payables due
to the payment run to ensure all errors have been included.
 Select a sample of purchase invoices received around the year end. Ascertain through
reviewing goods received notes, if the goods were received pre or post year end. If
post year end, then confirm that they have been excluded from the ledger.
 Compare the total trade payables or significant supplier balances and good received
not invoiced accrual against prior year and investigate any significant differences.
 Compare the list of accruals this year to the prior year to identify any missing items or
unusual fluctuations and discuss with management.
B) Describe substantive procedures the auditor should perform to obtain sufficient and
appropriate audit evidence in relation to Pacific Co’s provision for the legal claims.
 Discuss with directors how the mislabeling of ingredients have occurred and whether
it is likely that any other customers have been affected.
 Inspect board minutes to ascertain whether payment is probable.
 Review correspondence with Pacific Co’s lawyers or with the clients permission
contact the lawyers and obtain confirmation regarding the claim to assess whether a
provision should be recognized and whether the amount of the provision is material.
 Review correspondence or discuss with lawyers the likelihood and amount of other
potential future claims.
 If evidence indicates that it is only possible that the claim will be successful, inspect
the financial statement for contingent liability disclosures.
 Obtain a written representation from management confirming their view that they
have an obligation at the year end in respect of the claim and that it is appropriate to
include a provision.
C) Describe SUBSTANTIVE ANALYTICAL procedures the auditor should perform to
obtain sufficient and appropriate audit evidence in relation to Pacific Co’s revenue.
 Compare the overall level of revenue against prior years and discuss the reasons for
the 9.4% increase with management and agree to supporting documentation.
 Compare the overall level of revenue to the budget for the year and investigate any
significant fluctuations.
 Calculate the gross profit margin for Pacific Co and compare this to the prior year and
investigate any significant fluctuations.
 Obtain a schedule of sales for the year broken down into the eight product lines and
compare this to the prior year breakdown to understand what impact the new products
have has on revenue. For any unusual movements, discuss with management.
D) Discuss the issue and describe the impact on the auditor’s report. If any should this
issue remain unresolved.
The financial statements contain a provision for legal claims of 0.5m, however, audit
work has identified that the provision should be 0.8m, hence the provision is understated
and profits overstated by 0.3m. The argument that the provision is a reasonable estimate
is not valid.
The error of 0.3m represents 7.3% of PBT (0.3/4.1) and hence is a material matter.
If the finance director refuses to increase the provision, the audit opinion will be modified
due to a material misstatement. As provisions are understated and the error is material but
not pervasive, a qualified opinion would be necessary.
A basis for qualified opinion paragraph would be needed after the opinion paragraph and
would explain the material misstatement in relation to the understated provision for the
legal claims and the effect on the financial statements. The opinion paragraph would be
qualified “except for”.
 June 2022 CBE Paper

Question 1

A) Describe the PRECONDITION for an audit that Bannock & Co should have
establishes prior to accepting the audit of Esk Co.
Bannock & Co should determine whether the financial reporting framework to be
applied by Esk Co in the preparation of its financial statements is acceptable.
Obtain the agreement of the management of Esk Co that they acknowledge and
understand their responsibility;
 For the preparation of the financial statement in accordance with he applicable
reporting framework
 For the design and implementation of internal controls which management considers
necessary to enable Esk Co to prepare financial statements which are free from
material misstatements
 To provide Bannock Co with access to all information which is relevant to the
preparation of financial statements such as records documentation and other matters.
B) Using the table below, calculate the following FOUR ratios for BOTH years, to
assist you in planning the audit of Esk Co: gross profit margin, inventory holding
period, receivable collection period and payable payment period.

2005 2004
Gross profit margin 8.4/22.5 = 27.2% 7.6/19.9 = 27.6%
Inventory holding period 8.3/22.5 x 365 = 135 6.4/19.9 x 365 = 117
days days
Receivables collection 7.2/30.9 x 365 = 85 days 4.9/27.5 x 365 = 65 days
period
Payable payment period 2.4/x 22.5x 365 = 39 3.5/x22.5x 365 = 64
days days

C) Using the information provided and the ratios calculated describe EIGHT audit
risks and explain the auditor’s response to each risk, in planning the audit of Esk
Co.

Esk Co is a new client which means Bannock Co should ensure they

that Bannock & Co does not have any assigned suitably experiences team
experience with how they do their members to the audit of Esk Co.
financial statements, transactions, and Enough time should be assigned for
business. There is a increased team members to get a better
detection risk. understanding of the company and the
risks of material misstatement.
Esk Co has borrowed 2.5 m from the The audit team should recalculated the
bank under a five year loan. If the loan split between non current and current
is not allocated correctly between non- liabilities to ensure the classification is
current and current liabilities, this correct in accordance with relevant
would lead to a classification error accounting standards and local
with liabilities being misstated. legislation.
A batch of invoices was miscoded and The audit team should discuss with
was not recorded as trade payables. management the matter relating to the
Investigation are still ongoing to miscoded invoices with management
identify whether there are any other to understand how the issue
batches of miscoded invoices. The arose ,where the miscoded invoices
payables payment period has has been originally posted to and
decreased from 64 days to 39 days. whether all invoices have now been
There is a risk that there are other correctly posted.
batches of miscoded invoices. If these
are not identified and corrected by the
year end, purchases and trade payable
will be understated.
Inventory of 1.1m was damaged as The audit team should discuss with
result of the fire and has not been management the process for
replaced. The inventory balance has identifying damaged inventory items
increased by 1.9m in the year and the following the fire and review the
inventory holding period has increased outcome of the inventory count to
from 117 days to 135 days. The agree that the items identified have
increase in inventory and the holding been written off correctly.
period is inconsistent with the loss of
inventory as a result of the fire. There
is a risk that the damaged inventory
has not been fully written off and
remain within closing inventory or
that there is other slow-moving
inventory which has not been
identified. Inventory might be
overstated and cost of sales
understated as a result.
An additional bonus is payable to The audit team should remain alert to
sales staff in the quarter to 31 August the risk of fictitious sales and sales
2005 which gives an incentive to being recorded in the wrong period.
achieve sales targets in that period. They should extend cut-off testing
This increases the incentive for staff to around the year end and review the
create fictitious sales or to record sales level of return or orders cancelled post
in the incorrect period in order to year end.
achieve the additional bonus. There is
an increased risk that revenue and cost
of sales overstated as a result of the
fictitious sales.
Trade discounts offered to regular For a sample of sales, they should
customers have been separately recalculated the discount and review
accounted for as an expense. Trade the breakdown of revenue and cost of
discounts should be offset against sales to agree that discounts have been
revenue. There has been an increase in accounted for correctly.
revenue but the gross profit margin
has fallen slightly. There is a risk that
revenue and cost of sales are
overstated as a result of the accounting
 treatment adopted.
Esk Co credit control manager has Extend post-year end cash receipts
been off work since December 2004 testing and a review of the aged
and has been replaced by an receivables ledger to be performed to
inexperienced manager. The assess valuation. Discuss with
receivables collection period has management the credit control
increased from 65 days to 85 days, procedures in place and the process for
indicating that they are not collecting identifying and following up on aged
debts as efficiently in the current year. and irrecoverable debts.
There is risk that trade receivable are
overstated as amounts will not be
collected from customers.
Esk Co is under tac investigation The audit team should obtain and
relating to sales tax and it is likely that review documentation from tax
the company will be required to pay a consultant and assess the likelihood
penalty and fine of 0.6m. Therefore, a and amount of penalties and fined to
provision should be recognized as be paid.
there is a probable outflow of
resources because of a past event. Esk
Co has not recognized a provision
does not have any disclosure has been
made. There is a risk that provision is
understated and that disclosure are
inadequate

D) Describe substantive procedures the auditor should perform to obtain sufficient

and appropriate audit evidence in relation to Esk Co’ s trade receivables.
- Review total trade receivables balances to prior year and look for any fluctuations
- Review total trade receivables to budget for the year and prior year and look for
any unusual differences
- Review a listing of the company’s trade receivable to check for any entries posted
in the incorrect period or any unusual sales made compared to the prior year to
boost the chance of a bonus.
- Compare trade receivables ledger to supporting documentation such as sales
invoices and dispatched notes so insure they match.
- Obtain a breakdown of the receivables listing cast and agree the total to the TB/
receivables ledger control account.
- Select a sample of goods dispatch notes from before the ear end, agree to sales
invoices and to inclusions in the year-end receivable ledger.
- Recalculate the allowance for trade receivables and compare any potential
irrecoverable balances to assess if the allowance is adequate.
- Select a sample of trade receivables from the listing and prepare a receivable
circularization.

A) Describe FOUR matters the auditor may consider in determining whether a deficiency
in internal control is significant.
 - The amounts exposed to the deficiencies
- The volume of activity which has occurred or could occur in the account balance
or class of transaction exposed to the deficiency.
- The cause and frequency of the exceptions identified as a result of the deficiencies
in the controls.
- The interaction of the deficiency with other deficiencies in internal control.
B) In respect of SALE system of Whittaker Co
- Identify and explain THREE DIRECT CONTROLS on which the auditor may
seek to place reliance; and Describe a TEST OF CONTROL the auditor should
perform to assess if each of these direct control is operating effectively.

The new sales system was The audit team should

fully tested prior to its
implementation and the new
and old systems are being
run parallel until the year
end with internal audit
performing checks on the
output and following up on
any discrepancies. This
reduces the risk that data is
lost or data is not processed
correctly and if there are any
issues with the system they
can be spotted in a timely
manner. This reduces the
risk of processing errors and
misstatements in the
accounting records.
The credit limit set by the
automated system is
checked by the sales director
who evidences her review.
This reduces the risk of lost
of revenue by doing
business with low rating
customers.
The receivables ledger clerk
performs a monthly review
of the aged receivables
listing and identifies those
aged more than 30 days
which are followed up with
the relevant customers by
the credit control
department. This helps with
identifying irrecoverable
debts and ensuring that there
review the procedures being
made during the testing of
the two systems and agree
that there are acceptable and
that any issues were dealt
with and resolved in a
timely manner.
The audit team should
review the customers and
ensure that they all are
assigned credit limits and it
has been check and signed
by the sales director.
The auditor should review
the aged receivables listings
to check for evidence that is
was reviewed and signed by
the receivables clerk and
also check to ensure that
those with more than 30
days were in fact sent to the
credit control department.
They should also discuss
with management how these
are accounted for are recorded.
accordingly.
C) Identify and explain FIVE DEFICIENCIES in Whittaker Co’s PAYROLL and BANK
systems and provide a control recommendation to address each of these deficiencies.
When additional staff are required at
short notice, joiners forms are not
completed. Instead, they are added to
payroll following email notification
from the production supervisor. The
production supervisor may not include
all the relevant details on the email to
payroll. This could result in the
temporary employees not receiving the
correct pay or not being paid on time
resulting in a loss of employee goodwill.
Staff are paid overtime on a monthly
basis but the overtime worked reports
are only reviewed every quarter after the
overtime has been paid. There is a risk
that employee are being paid for hours
they haven’t worked which increases
expenses or there are not paid for all
hours worked leading to loss of
employee goodwill.
No checks are performed on the
monthly payroll calculations. There is a
risk that any system errors which occur
during the payroll processing would not
be identified and persons being paid
more or less which can either lead to
higher costs or loss of employee
goodwill.
The bonuses were input into the system
and a number of employees
subsequently notified the payroll
department of errors in their pay. It
appears that bonuses were input without
any additional review from a supervisor.
This increased risk of errors arising
within payroll.
The reconciling items on the bank
reconciliation are only investigated by
the financial controller if the sum of
reconciling items is significant. There is
a risk that there might be errors within
the sum which could be net off by each
A joiner form should be completed for
all new staff whether temporary or
permanent. The authorized joiner form
should then be sent to payroll on the day
the employee commences employment.
Payroll should then sign the form as
being actioned. They should not set up
employees without this form.
The production supervisor should
review and authorize overtime worked
reports before they are passed to payroll.
This will ensure that the correct times
worked are paid to the correct
employees.
Review a sample of employees’ gross to
net pay workings and compare these
calculations to the system. Any
discrepancies should be investigated.
The bonuses should be reviewed to agre
they are in line with documentation
provided by HR. The bonuses should be
inputted by one clerk and checked by
someone else for errors. Any changes
should be authorized by a senior
member.
The reconciling items should be
reviewed by the financial controller on a
weekly basis, even if they are not
significant and they should evidence
their review by way of signature.
 other.
A) Describe substantive procedures the auditor should perform to obtain sufficient
and appropriate audit evidence in relation to Spinach Co’s Revenue.

- Cast a listing of revenue and agree to the general ledger, TB and draft financial
statements.
- Compare the total revenue to the previous year’s total revenue and assess any
significant fluctuations
- Calculate the current year’s gross profit margin compare to the previous year to
check for any significant differences.
- Obtain a listing of revenue and compare it to the supporting documentation to
ensure accuracy in the journals/ accounts.
- Review the companies aged receivables listing to check to make sure how fast
customers are paying their orders.
- Review a sample of the sales order invoices to the goods dispatched notes to
inclusion in the sales day book and revenue accounts in the general ledger to
confirm completeness.
- Select a sample of dispatch notes both pre and post year end and follow these
through to sales invoices in the correct accounting period to ensure that cut-off has
been correctly applied.
B) Describe the audit procedure the auditor should perform as part of the audit of
Spinach Co BEFORE and DURING the inventory 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,
whether any significant changes have occurred this year with regards to inventory
items or if warehouses experienced significant control issues.
- Decide which of the six warehouses the audit team member 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 notes discuss with management
- Show up to the inventory count and ensure that the procedures are being followed.
- Obtain a listing of the inventory and compare it to the physical inventory to ensure
completeness and quality of stock.
- Review the supervisor over the count and the person doing the count
- Review the process for recording stock movements in the warehouse during the
stock taking and ensuring that it has stopped.
- Compare physical stock to supporting documentation to confirm ownership
- Compare physical stock and listing to the goods received notes and inventory
account for completeness.
- Recalculate the inventory journal entries to ensure that the 9.3m is accurate.
- Review the inventory pre and post year end dispatch and received notes to ensure
cut-off is accurate.
- Check the area where the third party inventory is held to ensure that no inventory
belonging to the company is there, discuss with management what the procedures
are for ensuring that third party inventory is omitted from the counts.
C) Describe substantive procedure the auditor should perform to obtain sufficient and
appropriate audit evidence in relation to Spinach Co’s issue of share capital.

- Review board minutes to confirm of additional shares issued in May 2005 and the
issue price.
- Agree the issue of shares is permitted form a review of any statutory constitution
agreement in place.
- Review legal documentation, correspondence or share issue prospectus to confirm
the details of the share issue.
- Agree the issue of new shares to the share register.
- Inspect the cash book and bank statements for evidence of the amount of cash
received from the share issue.
- Review the disclosure of the share issue in the draft financial statements and
ensure it is in line with relevant accounting standards and local legislation.
D) Describe the factors which the audit engagement partner would have considered in
determining that this issue is a KAM and describe the content of the KAM section
of the auditor’s report for Spinach Co.
As Spinach Co is listed, a key audit matters section will be required in the
auditor’s report. The audit partner would have considered whether the matter was
communicated to those charged with governance as KAM are selected from
matters communicated to those charged with governance. The audit partner would
have also considered the level of risk in relation to the valuation of incentory and
as determining he NRV is an accounting estimate the level of judgement involved.
The audit partner would have also considered whether in their professional
judgement, the matters regarding the valuation of inventory were of most
significance in the audit of Spinach Co’s financial statements for the year ended
31 July 2005.

The KAM section of the auditor’s report should include a reference to the audit
risk in relation to the valuation of inventory and the level of judgement required in
making this assessment. It should detail why this issue was an area of significance
in the audit and therefore determined to be a KAM. It should also explain how the
matter was addresses in the audit and the auditor should provide a brief overview
of the audit procedures adopted as well as detailing that a review was undertaken
of any related disclosures.
December 2021 Paper
1) Describe EIGHT audit risks, and explain the auditor’s response to each risk, in
planning the audit of peach Co.
A new accounting system was The audit team should undertake
introduced in March 2005 and post detailed testing to confirm all balances
implementation testing has not been have been completely and accurately
conducted. There is risk of opening transferred to the new accounting
balances on the new system being system.
misstated and loss of ongoing data if
they have no been transferred from the
old system correctly. Also if the new
system is not operating correctly, there
is a risk of misstatement of accounting
records.
Peach Co has been developing a new A detailed review of the costs
production process and 0.8m was capitalized and supporting
capitalized in the year as development documentation should be carried out to
expenditure. There is a risk that research determine the nature of the expenditure.
costs might be included and recognized
as development expenditure resulting in
overstating intangible assets and
understate research expenses.
Peach Co holds inventory of 227,000 The audit team should discuss with the
that it can no longer sell and they directors their belief that the inventory
believe it can be sold to an international can be sold
customer but there are significant costs
that will incur. There is a risk that the
NRV of the inventory is less than cost
and therefore the inventory is overstated,
and cost of sales understated.
A member of Peach Co’s finance team When testing non-current assets, they
fraudulently purchased assets for should obtain a list of all non-current
personal use. There is a risk that non- assets capitalized in the year and agree
current assets are overstated as they may to the new assets to an authorized
include the personal assets purchased. purchase order. Select a sample of assets
from the non-current assets register t
confirm the existence of the assets and
that they are used in the business.
The directors have not accounted for any The audit team sould review the terms
costs under the new contract for bottles of the contract to understand the
as no amounts are due to be paid until amounts payable and terms of payment.
after the year end. There is a risk that the They should review the goods received
costs incurred to date have not been not invoiced accrual listing to ensure
recognized and therefore costs and that amounts payable to the supplier for
liabilities are understated and profit bottles received have been accrued
overstated. despite not being invoiced.
A previous supplier has launched a legal The audit team should review
claim against Peach Co. The claim has correspondence with Peach Co’s lawyer
 not been settled but Peach Co’s lawyers to understand the likely hood of the
believe that they are likely to have to supplier winning the case and the
pay an estimated 0.3m. As it appears amount of the payments to be made to
probable that Peach Co will have to pay, them.
a provision is required. There is a risk
that provisions and expenses are
understated if the company has not
recognized a liability in respect of this
legal claim.
Peach Co obtained a new interest- The audit team should undertake a
bearing bank loan in the year repayable review of the loan agreement to confirm
over three years. There is a risk that the the details and reperform the company’s
loan has not been correctly allocated calculations to confirm that the loan has
between current and non-current been correctly classified between current
liabilities which would give rise to a and non current liabilities.
classification error and liabilities being
misstated.

B) Describe Apricot & Co’s responsibilities in relation to the prevention and detection
of fraud and error.

- Identify and assess the risks of material misstatement of the financial statements
due to fraud.
- Obtain sufficient appropriate aduit evidence regarding the assessed risk of
material misstatement due to fraud, through designing and implementing
appropriate responses.
- Respond appropriately to fraud or suspected fraud identified during the audit.
- Ensure that the whole engagement team is aware of the risk and responsibilities
for fraud and error (discuss with the team).

C. Identify and explain TWO ethical threats which may affect the independence of
Apricot & Co’s audit of Peach Co and for each threat recommend an appropriate safe
guard to reduce the threat to an acceptable level.

The managing director of Peach Co has Since the weekend away has a
this year suggested that instead of a significant value, this offer should be
meal, all the audit staff and client staff politely declined.
go away for the weekend to a luxury
hotel at Peach Cos Expense. This is a
familiarity and self interest threat, as the
trip and hotel is not in the acceptable
value.
Peach Co has suggested that the audit Apricot Co should not agree to the
fee is renegotiated to be based on a proposed basis for the fees and should
 percentage of Peach Co’s net profit.
This is a contingent fee and leads to a
self-interest threat. If the fee is based on
profits the audit team may feel to allow
incorrect accounting treatments in order
to maximize profits.
communicate with those charged with
governance to explain that the audit fee
needs to reflect the level of work and the
experience of the team required to
obtain reasonable assurance.

D) Describe substantive procedures the auditor should perform to obtain sufficient and
appropriate evidence in relation to Peach Co’s development expenditure.

- Obtain a schedule of capitalized costs within intangible assets, cast it and agree
the closing balance to the general ledger, TB and financial statements
- Obtain a listing of the company’s development expenditure to ensure that no
research expenditure has been incorrectly classified. If so request that
management remove these and include within P&L.
- Check the company’s intangible asset register to ensure that the development
costs have been recorded correctly.
- Compare a sample of capitalized costs to the company’s purchase orders to check
for completeness.
- Discuss with directors the decision to capitalize the costs from 1 November 2004
onwards and assess whether this is based on the project meeting all of the
conditions for capitalization.
- Review the disclosures for intangible assets in the draft financial statements in
order to confirm that they are in accordance with audit standards.

A) Describe the limitations of internal control

- Human error in the design or of application of an internal control

An entity may have adequate internal control process over a particular area of
financial statement. However, human error in applying that control gives rise to an
inherent limitation.
- Circumvention of internal control
Employees may manipulate deficiencies in an entity’s internal control for personal
gain or to conceal fraudulent activity.
- Management override of internal control
Management is in a position of power to override an entity’s internal control
regardless of the strength of the system of internal control. Such management
override could be to conceal information or for personal financial gain.
- Use of judgement on the nature and extent of controls
Professional judgement will be needed to determine the type and extent of internal
controls needed within the company and certain controls may be absent or
ineffective. Systems may be designed to deal with routine transactions and may
therefore be inadequate in respect of non-routine transactions.
B) Identify and explain EIGHT deficiencies in Pomeranian Co’s internal control system
and provide a control recommendation to address each of these deficiencies.
Credit Limits set by the sales director
are only changed when a customer
requests an increase. If credit limits are
not reviewed regularly they could be out
of date, resulting in limits being too high
and therefore sales being made to poor
credit risks or alternatively too low and
therefore losing potential revenue.
Goods dispatch notes are sent to the
finance department on a weekly basis. If
the finance department does no promptly
receive GDNs this could result in goods
being dispatched but being invoiced late.
This could result in revenue cut-off
issues and understated receivables.
The company’s credit controller is
currently on maternity leave for six
months and no one has taken over her
duties. Therefore, during this period no
one has been responsible for monitoring
and chasing aged receivables. There is
an increased risk of irrecoverable
receivables and lead to customers not
paying their outstanding balances on
time or at all leading to reduced cash
flows.
The monthly receivables ledger control
account reconciliation is only reviewed
by the financial controller if there are
any unreconciled differences. There
could be errors that cancel each other
out or it may been incorrectly prepared
or manipulated and this would not be
identified. If the reconciliation is not
reviewed, then this significantly reduces
its effectiveness.
The IA department undertakes physical
verification of assets each year. It is
supposed to verify all assets over a three
year cycle, however in the current year
IA will only complete the relevant
procedures at one factory and one
warehouse. If the non-current assets
register is not physically verified on a
regular basis, there is a risk of assets
being misappropriated or obsolete assets
Credit limits should continue to be set
by the sales director however these
limits should be reviewed and amended
as appropriate on a regular basis by a
responsible official.
The copies of the GDNs should be sent
to the finance department on a more
frequent basis, such as daily.
During the period of the maternity leave
an alternative member of the finance
department should be trained in the
credit control role and assigned
responsibility for reviewing the aged
receivbales listing and following up on
any overdue customers.
The reconciliation should be reviewed
by the financial controller on a monthly
basis , even if there are no exceptions
and the review should be evidenced by
way of signature.
IA should review its programme of
visits to assess if additional resources
could be devoted to ensure that all 11
sites are visited in line with the policy of
three years. During visits any assets
which cannot be located should be
investigated fully to identify where they
could be, if they cannot be located they
should be written off.
 still being included in the register as
there is no check that the assets still exist
in good working order.
The warehouse manager at each of the The inventory should be supervised by
sites is responsible for supervising the an independent person such as a
monthly perpetual inventory counts and member of the IA department.
ensuring that the counting teams are
following their instructions, they may
wish to hide inefficiencies and inventory
discrepancies so that their departments
are not criticized. This could result in
inventory count records being inaccurate
as well as an increase in inventory
frauds.
Access to the master file data for The monthly exception report of
suppliers is available to all those in the changes to the master file should be
purchasing department and the monthly reviewed by a responsible official, who
exception report of the changes to the should evidence this review. Any
master file data is not reviewed. All unauthorized or unexpected changes
members could amend data and should be investigated and appropriate
potentially add new suppliers to the action taken.
payabls ledger system and as the
exception report is not reviewed It is
unlikely that this would be identified.
This leads to an increased risk of fraud
as clerks could add fictitious suppliers
and then place fraudulent orders without
detection.
Purchase invoices are not agreed to the All purchase invoices should be
relevant good received notes prior to matched to both the purchase order and
authorization and input. This could the related GRN. The details should be
result in invoices being paid for goods agreed prior to the invoice being
which were not received, resulting in authorized and logged in the payable
increased costs. ledger.

A) Describe substantive procedures the auditor should perform to obtain sufficient

and appropriate audit evidence in relation to Danube C’s land and buildings.

- Obtain a schedule of all land and buildings, cast and agree to the TB and financial
statements.
- Obtain a listing of the PPE and compare to supporting documentation to ensure
ownership.
- Compare the total PPE to the prior year and check for any significant fluctuations.
- Recalculate the recordings for PPE to ensure that they follow the new policy of
the revaluation model.
- Consider the competence and capability of the valuer, by assessing through
enquiry their qualification, membership of a profession body and experience in
valuing these types of assets.
- Recalculate the valuation of land and building and compare it to the valuers
calculations confirm reasonableness and compliance with standards.
- Review the correspondence between the valuer to see how and why they valued
certain assets the way they did
- For a sample of land and buldings from the non-current assets register, physically
verify to confirm existence.
B) Describe the procedures the auditor should perform in relation to the exceptions
noted during the trade receivables circularization in respect of Nile Co and Congo
Co.
Nile Co
- For the non-response from Nile Co, with the client’s permission, the team should
arrange to send a follow-up confirmation request.
- If there are multiple failed attempts, detailed testing should be done to confirm the
balance owing to Nile. Review after date cash receipts and agreeing to sales
invoices and goods dispatched notes.

Congo Co
- For the response from Congo co, the auditor should investigate the difference of
$14,132 and identify whether this relates to timing differences or whether there
are possible errors in the records of Danube Co.
- If the difference relates to goods in transit, then detais should be agreed to a pre
year end GDN
- Timing such as cash in transit should be agreed to post year end cash receipts in
the cash book.

C) Describe substantive procedures the auditor should perform to obtain sufficient

and appropriate audit evidence in relation to the PROVISION and the
RECEIVABLE arising from the sale of defective goods.
- Review correspondence with the business’s lawyer, with the client’s permission
contact them to obtain their view to see the chances of Kalama Kids co wining
- Discuss with the company’s lawyers whether they think the 3.9m is a good
provision or the possibility of more costs.
- Discuss with management as to whether any other customers have experienced
problems with sales of hoverboards and therefore the likelihood of any potential
future legal claims.
- Review board minutes to establish whether the directors believe that either claim
will be successful or not.
- Ask management to provide written evidence confirming why they think the
lawsuit by Kalama Kids Co is likely to be successful and the claim against
Thames Co is virtually certain and hence a provision and a receivable are required
to be included
- Review the disclosure of the lawsuit and supplier claim in the financial statements
and ensure that it follows the accounting standards.
- View correspondence with respect to the receivable to see if Thames accept
liability and agreed on paying and actually paid the 3.9.
D) Describe the factors which the audit engagement partner would have considered in
determining that this issue is a KAM and Describe the content of the KAM section
of the auditor’s report for Danube Co.

The audit partner would have considered whether the matter was communicated to
those charged with governance as KAM are selected from matters communicated
with those charged with governance. Also whether the issue relating to the claims
was an area of higher assessed risk of material misstatement or a significant risk
and as it is an accounting estimate the level of judgement involved. Whether the
matters regarding the claim and counter claim were of most significance in the
audit of Danube Co’s financial statements for the year ended 31 March 2005
therefore requiring significant auditory attention.

The KAM section of the auditor’s report should provide a description of the issue.
It should detail why this issue was an area of most significance in the audit and
therefore determined to be a KAM. It would include a reference to the audit risk
of completeness of the provision and recognition of the receivable and the level of
judgement required in making this assessment. It should also explain how the
matter was addressed in the audit and the auditor should provide a brief overview
of the audit procedures adopted as well as making a reference to any related
disclosure.

June 2021 Past Paper

A) Describe the following methods for documenting internal control systems and
for each explain a DISADVANTAGE of using this method.

METHOD EXPLAINATION DISADVANTAGE

Narrative notes Written description of a They may prove to be
written description of time consuming and
the internal control cumbersome if the
system. They detail internal control system
what occurs in the is complex.
system at each stage
including related
controls which operate
at each stage.
Internal control They contain a list of Unusual controls may
questionnaires questions for each not be included on a
major transaction cycle. standard questionnaire
They use questions hence may not be
designed to assess identified.
whether internal
controls exist.
B) Identify and explain FOUR KEY CONTROLS in castle courier co’s payroll
system which the auditor may seek to place reliance on and describe a TEST
OF CONTROL the auditor should perform to assess if each of these key
controls is operating effectively.

All staff members are required to For a sample of key cards and data
clock in and out using a sequentially recorded in the clocking-in system,
numbered key card which contains carry out a sequence check to
their unique employee number and identify if there are any gaps in the
name. This ensures that management sequence
can track who clocks in and
employees are paid for hours worked
and that all hours are recorded.
The clocking in process is monitored Review a sample of recordings to
by a camera on entry to the identify who reviewed that week’s
distribution center and video footage footage to ensure it has been
is reviewed by HR every week. This reviewed by a member of the HR
will prevent staff from fraudulently department.
clock in for other employees and
hence employees will only be paid
for actual hours worked.
The payroll clerk confirms the Review a sample of the calculations
transfer of hours and calculations has of gross to net pay for evidence that
been done accurately by the calculations have been
recalculating, for a sample of performed. Confirm the signature of
employees, their gross pay. This the payroll supervisor as evidence
check is also reviewed by the payroll that they have reviewed the report.
supervisor who evidences their
review. This will ensure that errors
do not occur in the automated
transfer and calculations during the
payroll processing. Any errors would
be identified on a timely basis to
prevent salaries being over or under
paid.
The payroll system is password- Attempt to login the payroll system
protected and the payroll manager using a password which should be
changes the password on a monthly out of date. Confirm that the system
basis using a random password has rejected access.
generator. This reduces the risk of
fraud by preventing unauthorized
changes being made to the standing
data and unauthorized access to
sensitive payroll information.

C) Identify and explain SIX DEFICINCIES in Castle Courier Co’s payroll system
and provide a control recommendation to address each of these deficiencies.
Department managers are required Employees should receive written
to approve all employee’s holiday confirmation when their holiday has
forms, however, this does not been approved and should be
always occur. This could result in informed that they will not be able to
employees taking unauthorized take holiday without this
leave which could lead to notification.
operational difficulties if there are
shortages of staff at critical periods.
In addition, payments for untaken
holiday may be made in error as
holiday records may be incorrect.
The financial controller prepares the Once the bank transfer has been
bank transfers for the payroll and prepared by the financial controller,
also authorizes these to be paid. it should be passed to the finance
There is a lack of segregation of director to be reviewed and
duties which increases the risk of authorized for payment. The review
fraud/error as the financial controller and authorization should be evidence
could pay themselves or certain by the finance director.
employees more that they are due
without this being detected.
The payroll clerk amends the payroll The payroll supervisor or a member
and an edit report of changes is of the finance team should review all
produced but this report is not edit reports and agree changes made
reviewed. As the edit report is not to the details on the joiner/leaver
checked, errors made by the payroll forms. Any discrepancies should be
clerk when updating the system will investigated promptly and the
not be identified promptly. This may payroll system updated for any
result in new employees not being errors or omission.
paid at all, errors being made in
payments to new employees or
leavers being paid after they have
left the company. This could lead to
loss of employee goodwill and
errors in accounting records for
wages and salaries.
The HR department is responsible All staff appointments, including
for processing joiners and leavers, temporary staff, should only be
but due to staff illness, the processed by the HR department to
operations manager has processed ensure that the correct procedures
temporary new drivers and notified are followed.
payroll. There is a risk that the
employees may not be set up
correctly in payroll records,
resulting in the late payment of
wages, incorrect statutory
deductions being calculated and
incomplete payroll records.
Only overtime in excess of five All overtime including that below
hours per week needs authorization five hours should be authorized by a
by the operations manager. This responsible official before being
 means that employees could claim to
have worked up to five hours
overtime without authorization
resulting in payments being made to
employees for hours not worked and
additional payroll costs.
Where cash wages are paid, the
driver is only required to provide
their name to collect their pay
packet. Payment of wages without
proof of identity or signature
increases the risk that wages could
be paid to incorrect employees either
in error or due to fraud resulting in a
loss of cash.
processed in the payroll. This
authorization should be evidenced
by signature.
All drivers collecting cash payments
should provide a form of
identification to the finance staff
member before the pay packet is
handed to them. The driver should
also be required to sign for their pay
packet.

D) Describe substantive procedures the auditor should perform to obtain

sufficient and appropriate audit evidence in relation to Castle Courier Co’s
payroll expense.

- Recalculate a sample of payroll records and compare it to that of what is in the

system for accuracy and completeness.
- Compare the total payroll expense to the prior year and assess any significant
fluctuations and discuss with management.
- Recalculate the gross and net pay figures for a sample of employees and agree to
payroll records.
- Review monthly payroll figure this year to the prior year, identify any significant
differences and discuss with management
- Calculate the gross profit margin for the current year and compare to the previous
year and check for significant fluctuations
- Obtain a listing of employee joiner forms and check for authorization by a HR
representative and signature.
- Obtain a listing of the total payroll expense, cast and compare to the TB and
financial statements.
- Review a sample of overtime sheets below five hours and check for authorization
from a responsible official by way of signature.
- Recalculate overtime costs as a percentage of total wages. Compare this to the
prior year
- Agree a sample of individual wages and salaries per the payroll to personnel
records and records of hours worked per clocking in system
- Recalculate holiday pay for a sample of employees and agree to holiday records
and daily rate applied.

A) Describe the PRECONDITIONS required for an audit.

Determine whether the financial reporting framework to be applied in the preparation
of the financial statements is acceptable as it relates to the nature of the entity,
 purpose of the financial statements and whether law or regulation prescribes the
applicable reporting framework.
Obtain the agreement of management that it acknowledges and understands its
responsibilities for the follow :
- Preparing the financial statements in accordance with the applicable financial
reporting framework. Which accounting standards the company is using and if it
relates to the type of business it is in .
- Internal control necessary for the preparation of the financial statements to be free
from material misstatement whether due to fraud or error. The internal control
procedures being taken to prevent errors within financial statements
- Providing the auditor with access to information relevant for the audit and access
to staff within the entity to obtain audit evidence. The agreement to give any
needed information to the auditors which relates to the audit.

B) Describe SEVEN audit risks and explain the auditor’s response to each risk in
planning the audit of Corley Appliances Co.
The company has a returns policy Compare the level of post year-end
allowing a customer to return goods returns to the refund liability and discuss
within 28 days of purchase if they are any significant differences with
dissatisfied with the product. The management
company should recognize a refund
liability for goods which are expected to
be returned. If the company has not
correctly accounted for the refund
liability, revenue will be overstated, and
the refund liability understated.
The company provides a six-month Review the calculation of the warranty
warranty on its products which require and assess its reasonableness in light of
defects to be repaired at the company’s the value of claims received.
own costs. The directors have reduced
this provision during the year on the
grounds they feed the products they sell
are built to high standards. The
company does not manufacture the
goods and therefore this is not a
reasonable reason for reductions, hence
if the company has reduced the warranty
provision excessively at the year end,
liabilities and expenses may be
understated.
The company purchases their goods Discuss with management the point at
from its main supplier in Asia and has which inventory is recorded and review
responsibility for goods at the point of the contract with the supplier to verify
dispatch, the goods are in transit for up the requirements in place.
to one month. There is a risk that the
cut-off of purchases may not be accurate
as they may not correctly recognize the
 goods from the point of dispatch. There
is also a risk that inventory and trade
payables are understated at the year end.
The company’s central warehouse and
all 20 branches will be carrying out an
inventory count at the year-end date of
31 August. It is unlikely that the auditor
will be able to attend all sites which
increases detection risk.
Over the last six months, the receivables
collection period has increased from 42
days to 55days and the allowance for
receivables will be at the same level as
the prior year. Some receivables may
not be recoverable and if an additional
allowance for receivable is not included
in the financial statements, receivables
will be overstates and the allowance for
receivables understated.
The payables ledger supervisor was
dismissed in June 2005 due to a fraud.
The value of this fraud has been
recognized as an expense in the draft
statement of P&L. If additional frauds
committed by the payables ledger
supervisor are not discovered, this could
result in expenses being understated and
payables being overstated. Control risk
is also increased if the fraud has gone
undetected for a period.
Since the dismissal of the payable’s
ledger supervisor, purchase invoices
have yet to be logged onto the payables
ledger. There is a risk that the purchases
and trade payables balance at the year
end will be understated if these invoices
are not logged onto the payables ledger
before it is closed for the year.
The audit team should assess which of
the inventory counts they will attend.
This should include the count for the
central warehouse and a sample of
branch which contain the most material
balances of inventory and those which
have historically had exceptions
reported during the inventory.
Discuss with the finance director
whether an additional allowance for
receivables will be required against
balances older than the company’s credit
terms.
Discuss with the finance director the
details of the fraud perpetrated by the
payable ledger supervisor and what
procedures have been adopted to date to
identify and further adjustments which
are needed in the financial statements. In
addition, discuss with the finance
director what additional controls have
been put in place to prevent similar
frauds.
Review the unprocessed invoices file at
the year end to identify any invoices
which relate to the supply of pre-year-
end goods and ensure they have been
properly accrued for in the year-end
financial statements and recognized as a
liability.

C) Define the term professional skepticism and explain TWO examples from the audit of
Corley Appliances Co where the auditor should apply professional skepticism.

Professional skepticism is defined as an attitude which includes a questioning mind,

being alert to conditions which may indicate possible misstatement due to fraud or
error and a critical assessment of audit evidence.
 - As fraud has been committed during the year, the auditor must maintain
profession skepticism recognizing the fact that internal control may be weak,
hence allowing for employee manipulation of such internal control deficiencies.
The auditor must also consider the possibility that other frauds may have taken
place during the year through management override of the entity’s internal
controls.
- The receivables collection period has been increasing over the pas six months, but
the finance director does not envisage that an increase in the allowance for
receivables is required. The auditor must apply professional skepticism in
considering whether management’s assessment of recoverability is reasonable, as
any increase in the allowance will reduce profits.

A) Describe substantive procedure the auditor should perform to obtain sufficient and
appropriate audit evidence in relation to the matters identified regarding the inventory
valuation of Vego Dog products.
- Obtain a list of the total inventory and compare to previous year and check for any
fluctuations
- Recalculate a sample of inventory valuations and compare to financial statements
for completeness and accuracy
- Compare the listing quantity to the physical inventory or inventory count records
and check for quality
- Review the disclosure of inventory disclosure to ensure it is in accordance with
accounting standards
- Obtain and cast the inventory listing and agree the total cost of 2.4m to inventory
records.
B) Describe substantive procedures the auditor should perform to obtain sufficient and
appropriate audit evidence in relation to the receivable balance due from Ellah Co.
- Discuss with management how they plan to account for this possible bad debt and
why no allowance has been made and assess justification
- Review correspondence with Ellah Co to establish if there was a discussion about
payment difficulties and whether Ellah Co intends to fully settle the outstanding
payment
- Review the age of the outstanding debt with Ellah Co and discuss with the credit
controller the circumstances to establish if it has exceeded the agreed credit terms
and consider if an allowance is required.
- Review post year-end receipt from Ellah Co to establish how much of the debt
was recovered by the audit completion date and to assess how much of the year-
end balance remains outstanding
- Inspect board minutes ot identify whether there are any significant concerns in
relation to payments by Ellah Co.
C) Describe substantive procedures the auditor should perform to obtain sufficient and
appropriate audit evidence in relation to the legal claims following the contamination
- Review correspondence or with the client’s permission contact the lawyer to hear
their thoughts on the possibility of the customer winning the case or the
outcomeof the claims
 - Discuss with lawyers the likelihood and amount of potential future claims
- Discuss with management the possibility of any other customers suing with
regards to this contamination
- Review the disclosure for the legal claim in the draft financial statements to
ensure it is in accordance with he financial reporting framework
- Review customer correspondence to establish the details of the claims and the
amounts being claimed.
- Review board meeting to establish detail of the circumstances of the
contamination and to ascertain management’s view as to the likely hood that
existing claim will be successful and the extent of possible future claims
- Obtain written representations from management that there have been no other
contamination incidents and no other product liability claims of which
management are aware and for which provision may be required.
D) Discuss the issue and describe the impact on the auditor’s report of Purrfect Co of
both adequate AND inadequate disclosure of the contingent liability.

PBT – 8.2% material

TA – 2% material
December 2020 Past Paper

A) Explain the benefits of audit planning

- It helps with Devoting appropriate attention to important areas of the audit.
- It helps with the selection of engagement team members with appropriate levels of
capabilities and competence to respond to anticipated risks and the proper
assignment of work to them
- It helps with identifying and resolving potential problems in a timely manner.
- It assists with getting to know the company and giving team members a chance to
learn the company
- Helps to properly organize and manage the audit engagement so that it is
performed in an effective and efficient manner.

B) Describe EIGHT audit risks and explain the auditor’s response to each risk in
planning the audit of Hart Co.
Hart Co is a new client and the audit Morph Co should ensure it has a suitably
team is not familiar with the accounting experienced team assigned to the audit
policies, transactions and balances so and that adequate time is allowed for
therefore, there will be an increase team members to obtain an
detection risk on the audit. understanding of the company and the
risks of material misstatement, including
a detailed team briefing to cover the key
areas of risk.
The directors are paid a bonus based on The audit team should be aware of the
a percentage of profit before tax. There increased risks of manipulation and
is a risk that the directors will try to should assign more experienced audit
overstate the profit, and there fore their members to significant estimates and
bonuses by increasing the revenue and judgmental areas. The team needs to
income recorded and decreasing maintain professional skepticism and be
expenses. alert to the increased risk of
manipulation. Increased testing should
be performed relating to adjusting
journal entries.
Customers pay a 25% deposit on signing During the final audit, the audit team
the contract, it should not be recognized should undertake increased testing over
as revenue immediately and instead the cut-off of revenue and the
should recognized as deferred income completeness of deferred income.
within current liabilities until the
performance obligations as per the
contracts, have been satisfied. There is a
risk that revenue might be overstates
and current liabilities understated.
The audit team will only attend the WIP
counts at five of the 16 sites. As the
audit team is not attending all sites,
detection risk is increased as the team
will be unable to directly obtain
evidence relating to WIP.
Hart Co offers its customers a warranty
at no extra costs, which guarantees the
playgrounds will function as expected
for three years. The provision is
calculated as 2% of revenue in the
current year against 6% in the prior
year, despite there being no changes in
the construction techniques or the level
of claims. There is a risk that the
warranty provision could be
understated, leading to understated
expenses and liabilities.
Hart Co has recognized 0.6m of
research expenditure in P&L with the
remaining 1.2m having been capitalized
as development expenditure. If research
costs have been incorrectly classified as
development expenditure there is a risk
of intangible assets being overstated and
research expenses understated.
Hart Co placed an order for 2.4m of
machinery, paying 1m in advance. The
machinery was due to be received in
July 2005 but will now be delivered post
year end. Only assets which physically
exist at the year end should be
capitalized as PPE. The 1m deposit
should be recognized as a prepayment.
If the deposit of 1m has been capitalized
within PPE then prepayments are
understated and PPE overstated.
Hart’s Co payroll function is outsourced
to an external service organization. A
detection risk arises as to whether
sufficient and appropriate evidence is
available at Hart co to confirm the
completeness and accuracy of control
over the payroll cycle .
The auditor should assess which
inventory counts the team will attend,
mostlikely with the most material WIP
balances or which are assessed as having
the greatest risk of misstatement. For
those not attended, the audit team will
need to obtain and review
documentation relating to the controls
surrounding the counts and any
exceptions notes during the count and
discuss with management any issues
which arise during the count.
The audit team should compare the prior
year provision with the actual level of
claims in the year, to assess the
reasonableness of the judgements made
by management.
The audit team should obtain a
breakdown of the research expenditure
recognized in P&L and of the
development costs capitalized and
review supporting documentation to
determine whether they have been
correctly classified.
Review the non-current asset register to
determine if the 1m paid in advance has
been capitalized and discuss with
management the correct accounting
treatment.
Discuss with management any changes
to the extent of records maintained at
Hart Co since the prior year audit and
any monitoring of control which has
been undertaken by management over
payroll.
C) Describe substantive procedures the auditor should perform to obtain sufficient and
appropriate audit evidence in relation to Hart Co’s directors’ bonuses.

- Obtain a schedule of the directors’ bonus and cast the schedule to ensure its
accuracy. Agree the amount to that disclosed in the financial statements.
- Agree the individual bonus payments to the post year-end payroll records.
- Compare the PBT used in the bonus calculation to the final profit before tax figure
to confirm whether any adjustments is required to the bonus paid and discuss any
differences with management.
- Review the board minutes to identify whether any additional payments relating to
this year have been agreed for any directors.
- Review the disclosures made regarding the bonus paid to directors and assess
whether these are in compliance with local legislation.

D) Explain the safe guards which Morph Co should implement to ensure that this conflict
of interest is appropriately managed.

- Morph Co should consider advising one or both clients to seek additional

independent advice
- Both Hart Co and its competitor should be notified that Morph Co would be acing
as auditors for each company and consent be obtained from management of each
company
- Morph Co must ensure it appoints separate engagement teams, with different
engagement partners and team members to each client.
- Work performed should be reviewed by an appropriate reviewer who is not
involved in the audit to assess whether key judgements and conclusions are
appropriate.
- Regular monitoring of the application of the above safeguards should be
undertake by a senior individual in Morph Co not involved in either audit.

A) For each of the THREE methods identified in the table describe the method
for documenting internal control systems and explain an ADVANTAGE of
using this method.

Description Advantage
Narrative notes Consists of a written Easy to record after
description of the discussion with staff
system. They detail members these
what occurs in the discussion are easily
system at each stage written up as notes.
and include details of
any controls which
operate at each stage.
Flowcharts Flow charts are a With flowcharts it is
diagrammatic easy to view the system
illustration of the in its entirety as it is all
 internal control system. presented together in
Lines usually one diagram
demonstrate the
sequence of events and
standard symbols are
used to signify
controls.
Questionnaires Contain a list of Questionnaires are
questions for each quick to prepare, which
major transaction means they are timely
cycle; ICQs are used to method for recording
assess whether controls the system.
exist whereas ICEQs
assess the effectiveness
of the controls in place.
B) In respect of the internal control system of Swift Co, identify and explain
SEVEN KEY CONTROL which the auditor may seek to place reliance on and
describe a TEST OF CONTROL the auditor should perform to assess if each
of these key control is operating effectively.

Swift Co has a separate human Review the job descriptions of

resources department, which is payroll and HR to confirm the split
responsible for setting up new of responsibilities with regards to
employees. Having a segregation of setting
roles between HR and Payroll
departments reduces the risk of
fictitious employees being set up and
also being paid.
All new employees are assigned a Attempt to add a new joiner to the
unique employee number by HR. payroll system without a unique
The payroll system is unable to employee number, the system should
process new joiners without the reject this addition.
inclusion of the unique number.
As payroll staff are unable to set up
new joiners without the employee
number from the joiner form, it
reduces the risk of fictitious
employees being set up by payroll.
On a monthly basis an exception Select a sample of monthly
report of changes to payroll standing exception reports review for
data is produced and reviewed by evidence of review and follow up of
the payroll manager. This ensures any unexpected changes by the
that any unauthorized amendments payroll manager.
to standing data are identified and
investigated one a timely basis so
that the data used when the payroll is
run is valid and accurate.
 The payroll supervisor selects a Review the monthly payslips
sample of pay slips and recalculates sampled by the payroll supervisor
the gross to new pay calculations, for their signature for evidence the
compares the results to the output review of calculation has been
from the payroll system and undertaken.
investigates any discrepancies. This
reduces the risk that the automated
system generates errs during the
payroll processing. Any errors
would be identified on a timely basis
to prevent wages being over or
underpaid.
Purchase orders up to 5,000 are Select a sample of purchase orders
authorized by the purchasing and review for evidence of
manager and above 5,000 by the authorization in accordance with
purchasing director. This ensures authorization limits. Agree this to
that goods are only purchased which the appropriate signature on the
are required by Swift Co and relate approved signatures list.
to genuine business expenses.
The warehouse department agrees Review a sample of GRNs held in
the receipt of goods from suppliers the warehouse department for
to a copy of the purchase order and signature, as evidence of checks
confirms the quantity and quality of being undertaken on receipt of
the goods received and signs the goods.
goods received notes to evidence the
checks. This ensures that Swift Co is
not recording liabilities and
subsequently paying for the receipt
of inferior quality goods it did not
order.
Supplier statement reconciliations Re-perform a sample of the
are undertaken on a monthly basis reconciliations to ensure that they
and these are reviewed by the have been carried out appropriately
financial controller. This ensures and discrepancies investigated.
that any error in the recording of
purchases and payables are
identified and corrected in a timely
manner and therefore that payables
are complete and accurate.

A) Describe substantive procedures the auditor should perform to obtain

sufficient and appropriate audit evidence in relation to Vega Vista’s
income
- Obtain a listing of the total income , cast to confirm completeness and compare to
tb and financial statements
- Compare the individual categories of income of festival ticket sales, sundry sales
and donations against prior years and investigate any significant differences
- For the annual festival, construct a proof-in-total calculation of the number of
tickers sold, approximately 15,000 multiplies by the ticket price of 35. Compare
 this to the income recorded and discuss any significant differences with
management

B) Describe substantive procedures the auditor should perform to obtain

sufficient and appropriate audit evidence in relation to Canopus Co’s
restructuring provision
- Review the board meetings to understand management’s view on the provision
and that the decision was made in March 2005
- Obtain written representation confirming management discussions in relation to
the announcement of the restructuring and to confirm the completeness of the
provision
- Cast the breakdown of the restructuring provision to ensure it is correctly
calculated and agree the total to the trial balance
- Obtain a breakdown of the restructuring provision and confirm that only direct
expenditure relating to the restructuring is included
- Review the adequacy of the disclosures of the restructuring provision in the
financial statement and assess whether these are in accordance with accounting
standards.
C) Describe substantive procedures the auditor should perform to obtain
sufficient and appropriate audit evidence In relation to Canopus Co’s
bank loans.
- Obtain a schedule of opening and closing loans detailing any changes during the
year. Cast the schedule to confirm its accuracy and agree the closing balnces to
the tb
- For the new loan, review the loan agreement to confirm the amount borrowed, the
repayment terms and the interest rate applicable
- For loans repaid, agree the final settlement amount per bank correspondence t
payments out during the year in the cash book and bank statements. Review the
bank correspondence and loan agreements for confirmation of any early
settlement charges incurred on the loans repaid. Agree that these were charged to
the statement of profit or loss as a fiancé charge.
- Obtain direct confirmation at the year-end from the loan provider of the
outstanding balnces and any security provided. Agree confirmed amounts to the
loans schedule.
- Review the disclosure on non current liabilities in the draft financial statements
and assess whether it is in accordance with accounting standards.
- Confirm that the split of current and non-current loans in the financial statements
is correct.

D) Discuss the issue and describe the impact on the auditor’s report, if any
should this issue remain unresolved.
The restructuring provision of 2.1 million includes $270,000 of costs included did not meet
the criteria for inclusion. Hence by including this amount the provision and expenses for this
year are overstated and profits understated.

Total equity and liabilities 0.27/11.6) 2.3% – material

Hence the finance director should adjust the financial statements by removing this cost from
the provision and instead expensing it to P&L as it is incurred. If the finance director refuses
to amend the error the audit opinion will be modified due to a material misstatement. A basis
for qualified opinion paragraph except for would be included after the opinion paragraph and
would explain the material misstatement in relation to the incorrect treatment of the
restructuring provision and he effect on the financial statement.

A) Explain the PURPOSE of an audit engagement letter and list FOUR items which
should be include in an audit engagement letter.

The purpose of an audit engagement letter is to MINIMIZE THE RISK OF ANY

MISUNDERSTANDING BETWEEN THE AUDITOR and the client, confirm
acceptance of the engagement and forms the basis of the contract by outlining the
terms and conditions of the engagement.

- Objective and scope of the audit

- The responsibilities of the auditor
- The responsibilitie of management
- Arrangements to make available draft financial statements and any other
information
- Identification of the financial reporting framework used in the preparation of the
financial statements
- The fact that some material misstatements may not be discovered
B) Explain WHY the following factors should have been considered by Orange Co prior
to accepting Scarlet Co as a new audit client.
Pre- Explanation
acceptance
factors
The The auditor is required to contact the previous auditors, after
outgoing obtaining permission from Scarlet Co, to ask for all relevant
auditor’s information to the decision as to whether or not the firm should accept
response appointment
Manageme If they have reason to believe that the client’s management lack
nt integrity integrity, there is a greater risk of fraud and intimidation. If there are
serious concerns regarding this, they must not accept the audit
engagement.
Pre- The preconditions confirm that management will use an acceptable
conditions financial reporting framework under which they will prepare the
for an financial statements and confirms that management acknowledges and
audit understands its responsibilities for:
• Preparing the financial statements in accordance with the applicable financial
reporting framework;
• Internal control necessary for the preparation of the financial statements to be
free from material misstatement; and
• Providing the auditor with access to information relevant for the audit and access
to staff within the entity to obtain audit evidence.
Independe The auditor must consider whether there are any threats to
nce and independence and objectivity which cannot be reduced to an
objectivity acceptably low level by the use of appropriate safeguards, such as if
any of Orange & Co’s staff have shares in Scarlet Co or are related to
staff employed at Scarlet Co. If such threats are present and cannot be
sufficiently mitigated, Orange & Co must not accept the audit
engagement.
Resources All audit staff deployed to the audit of Scarlet Co must be capable of
available carrying out the audit in accordance with International Standards on
at the time Auditing (ISAs). If adequate resources will not be available, Orange
of the & Co must not accept the audit engagement.
audit

C) Describe EIGHT audit risks, and explain the auditors response to each risk, in planning the
audit of Scarlet Co.

Scarlet Co is a new client of the firm. The
audit team will be unfamiliar with the
company’s policies, transactions and
balances, hence there will be a increased
detection risk.
Orange Co should assign suitab.ly
experienced team on the audit and allocate
sufficient time for the team members to
become familiar with the new client,
document its systems and controls and

The company’s financial accountant was ill
and a temporary accountant has been
drafted in to help prepare the financial
statements. There is a risk that the
temporary accountant may not be familiar
with the company’s processes and so
error/omissions may go unnoticed.
The year-end financial statements have
to be prepared by the end of September
20X5 in order to secure bank finance
and management wish to report strong
results.
This increases the risk that the directors
may manipulate the financial statements,
by overstating profits and assets and
understating liabilities.
A specialised machine was acquired and staff
members had to be trained in the machine’s use
at a cost of $15,000 which has been capitalised
as part of the cost of the machine. therefore
profits and property, plant and equipment will be
overstated, and expenses understated if the
training costs are not written off to the statement
of profit or loss.
The delivery time of three weeks from
the company’s international supplier is
likely to result in goods in transit at the
year end. The company has advised that
the contract with the supplier means
that Scarlet Co will be responsible for
goods from dispatch and therefore
inventory should be recorded when the
products are sent by the supplier.
There is a risk that inventory is not
recorded on dispatch and therefore
inventory and liabilities are understated
at the year end.
Preliminary analytical procedures indicate
that the receivables collection period has
increased from 38 days to 52 days due to
customers taking longer to pay.
There is a risk that some receivables may
not be recoverable and an allowance for
receivables is required, hence receivables
may be overstated and the allowance for
receivables understated.
understand the risk of material
misstatement.
Discuss with management the technical
competency and experience of the
temporary financial accounting. In addition,
the audit engagement team should ensure
that increased substantive procedures are
undertaken on the material areas of the
financial statements.
The audit engagement team should
maintain professional scepticism
throughout the course of the audit.
Detailed cut-off testing on areas such as
revenue, inventory and payables should be
performed to ensure that cut-off has been
correctly applied and substantive
procedures performed on estimates and
judgements to ensure accuracy.
Discuss the accounting treatment with the
directors and request that an adjustment is
made to ensure appropriate treatment of
the training costs.
Discuss with management the point at
which inventory is recorded and review the
contract with the supplier to verify the
requirements in place.
Extend post year-end cash receipts testing
and perform a review of the aged
receivables listing to assess the valuation of
receivables. Discuss with management the
adequacy of any allowance for receivables.
 The directors have each been paid a Discuss this matter with management and
significant bonus at the year end and review the disclosure in the financial
separate disclosure of this is required in the statements to ensure it complies with local
financial statements by local legislation. legislation.

The directors’ remuneration disclosure will

be incomplete and inaccurate if the bonus
paid is included in the payroll charge for the
year and not separately disclosed in
accordance with the local legislation.
A customer has returned $120,000 of faulty Inspect a copy of the credit note and
goods to the company prior to the year-end confirm an adjustment to revenue and
but a credit note is yet to be issued. receivables has been recorded pre-year
end.
As this sale occurred pre year end there is a
risk that revenue and receivables are
overstated if the credit note is not correctly
recorded prior to the year end.

D) Describe substantive procedures the auditor should perform to obtain sufficient appropriate
audit evidence in respect of the redundancy costs.

Review the board minutes for evidence of the decision to discontinue the brand of chemicals
prior to the year-end.

•
Review supporting documentation to confirm that the decision to discontinue the brand was
notified to the four members of staff prior to the year end.

•
Obtain details of the redundancy calculated by employee, cast the schedule and agree to the
trial balance/financial statements.

•
Recalculate the redundancy provision to confirm completeness and agree components of
the cost to supporting documentation such as employee contracts.

•
Agree the redundancy payments made in July 20X5 to the cash book/payroll records and
compare these to the provision in the financial statements.

•
Obtain a written representation from management confirming the completeness of the
costs.

•
Review the disclosures included in the financial statements to verify they are in compliance
with requirements of IAS 37 Provisions, Contingent Assets and Contingent Liabilities.