UNIVERSITY OF SOUTHAMPTON MANG3015W1

SEMESTER 2 EXAMINATIONS 2017-18

AUDITING

DURATION: 120 MINUTES (2 HOURS)

This paper contains SIX questions.

Answer THREE questions in total.

If you attempt more questions than required, only the required

number of answers will be marked. Please strike through any
answers that you do not wish to be marked. If you do not do this
the marker will mark the answers in the order that they appear in
your exam booklet(s).

An outline marking scheme is shown in brackets to the right of each

question.

Only University approved calculators may be used.

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Answer THREE questions.

1. This question relates to the ICAEW False Assurance film

(which you have been using during this module).

Required:

(a) Explain the concept of Going Concern, identify the

responsibilities of both D-Merton Plc’s directors and
auditors in respect to whether D-Merton’s financial
statements should be prepared on a Going Concern basis.
[30 marks]

(b) Using the examples from the ICAEW False Assurance film,
critically appraise whether D-Merton Plc should continue to
prepare their accounts on a Going Concern basis.
[50 marks]

(c) Identify and explain TWO threats to independence that

occur in the relationship between D-Merton and their
auditors TSYL. For each threat identified provide a possible
safeguard that would help alleviate that threat.
[20 marks]

2. This question relates to the UWE Audit Simulation (which you

have been using during this module).
Surbitons Solicitors provided a confirmation that Sheridan AV
had completed the purchase of a new warehouse at the Dock,
Brigstowe for £750,000 during the year.

Required:

(a) Explain the concept of materiality within the context of an

audit and provide evidence that would support a statement
that the purchase of the warehouse is a ‘material
acquisition’ for Sheridan AV.
[20 marks]

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(b) Identify and explain which audit assertions are relevant for
the testing of Property, Plant and Equipment.
[40 marks]
(c) Using examples, identify and explain:

(i) Why it is unlikely that the audit team from Alexander

Gold Financial Services would seek to use test of
controls to audit the purchase of the new warehouse.
[20 marks]

(ii) FOUR substantive audit tests that Alexander Gold

Financial Services are likely to use to audit the
purchase of the new warehouse.
[20 marks]

3. International Standard on Auditing (UK and Ireland) 500 Audit

Evidence states:

“The objective of the auditor is to design and perform audit

procedures in such a way as to enable the auditor to obtain
sufficient appropriate audit evidence to be able to draw
reasonable conclusions on which to base the auditor’s opinion.”
Required:
(a) Discuss the factors that should be taken into account in
order to determine whether the evidence obtained by the
auditor meets this requirement.
[50 marks]

(b) Using examples evaluate the main methods of obtaining

sufficient and appropriate audit evidence.
[30 marks]

(c) Explain the purpose of a Management Representation

Letter and suggest why it is a crucial piece of audit
evidence.
[20 marks]

TURN OVER
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4. You are a recently qualified accountant, and have decided to

utilise your spare time to help a friend set up a new business.

Fluffy Friends is a pet grooming service which has ten pet

groomers covering areas across Hampshire. Each employee
has a van and equipment provided by Fluffy friends, the vans
were a significant outlay for the business, so the employees are
currently only paid the minimum wage.

All appointments are taken centrally either online or over the

phone with the pet groomers responsible for obtaining
payment, delivering the service and the sale of sundry items
(pet shampoos, brushes and treats etc).

The company’s bookkeeper/accountant is unqualified, and has

asked for your advice as to how they can ensure that all sales
revenue is properly recorded.

Required:
(a) Discuss why Fluffy Friends should try to implement
appropriate internal controls even though it does not
require an audit.
[25 marks]

(b) Explain the problems and limitations a small business such

as Fluffy Friends faces in introducing internal controls.
[25 marks]

(c) Recommend internal controls that Fluffy Friends could

implement to ensure that all revenue is properly recorded,
identifying the advantages and disadvantages of each
suggestion.
[50 marks]

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5. You are the senior in charge of the audit of Itchen Ltd., a

manufacturing company. You are using directional testing, and
are testing assets for overstatement. As part of your audit of
trade receivables and prepayments you have decided to check
the receivables ledger balances. As there are a large number of
customers, many with small balances, you will need to select a
sample.

Required:

(a) Discuss when it is necessary to confirm year end balances

directly with the customer, rather than utilising any testing
already performed by the client.
[20 marks]

(b) Explain how you will determine which customer balances to

select, and how you will verify any reconciling items.
[20 marks]

(c) Explain which other procedures you will carry out in relation
to trade receivables.
[30 marks]

(d) Discuss the following statement:

“It is more important for the auditor to check that liabilities

are not materiality understated as opposed to overstated”.
[30 marks]

TURN OVER

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6. You are required to write an essay on an area of current

interest within auditing. The topic chosen must not be one that
has been covered within the course and could therefore be
examined in any depth elsewhere on the paper. It must also not
be a topic you have explored within your dissertation. You were
advised to obtain approval for the topic prior to the examination.
You may still answer the question if you did not obtain
approval, but may find your chosen topic is not acceptable. If
this is the case you may not be awarded any marks for your
answer.

Please commence your answer with your chosen title.

This question will be marked flexibly, but as a guideline marks

are likely to be allocated as follows:

Introduction and explanation of the issue.

[20 marks]

An assessment of any theories, arguments and research

relevant to the topic. This section should include your own
opinions.
[65 marks]

Conclusion.
[15 marks]

END OF PAPER

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