UNIVERSITY OF SOUTHAMPTON MANG3015W1

SEMESTER 2 EXAMINATIONS 2015-16

AUDITING

DURATION: 120 MINUTES (2 HOURS)

This paper contains SIX questions.

Answer THREE questions in total.

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. You are planning the audit of Portsmouth Ltd., a distributor of

electro-mechanical products to the building industry.
Inventory is counted on a cyclical basis (i.e. spread out over
the year, with some items counted every day) and
management report that this is a very efficient means of
dealing with this very substantial component. There are no
plans in place to make any changes in respect of the year
end count and a full count will not be not carried out at the
year end.

Required:

(a) Identify and explain THREE financial statement

assertions that are most relevant to inventory.
[20 marks]

(b) Apart from attending a count during the year, explain

what other procedures could be undertaken to obtain
evidence to help form an opinion as to whether inventory
is free from material misstatement.
[20 marks]

(c) Identify and explain the procedures you would carry out
whilst present at a year-end stock count.
[30 marks]

(d) Discuss, with examples, how the physical nature of

inventories can present problems for auditors.
[30 marks]

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2. Hayling Ltd. is a manufacturer of taps and sinks. Goods are

obtained by placing a purchase requisition with the
centralised purchasing department. Most purchases are
made from approved suppliers, with discounts from their list
price being negotiated annually. Goods are delivered to a
single stockroom, with adjacent Goods Inwards area and
deliveries are recorded on Goods Received Notes (GRNs).

Supplier invoices are processed by Purchase Ledger staff

and payments are processed by a Cashier, all specialised
staff within the Accounts department. The cashier usually
works to a payment list, approved by the Financial Controller.
Suppliers also submit monthly statements.

Although Hayling Ltd has a computerised accounts system, it

is not integrated with other functions and staff depend on
physical documents (requisitions, purchase orders, etc.) for
much of their information.

Required:

(a) Without specific reference to the scenario above,

describe the five components of an effective internal
control system.
[35 marks]

(b) Briefly identify and explain the inherent limitations of

internal control.
[15 marks]

(c) With reference to the scenario above, recommend FIVE

control activities that Hayling Ltd could implement and
then use each to illustrate a different inherent limitation of
internal control. You should also explain how each
control might be tested by an auditor.
[50 marks]

TURN OVER

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3. Pacioli & Co. will shortly commence the audit of Hampton Ltd,
an existing client, for the year ended 30 April 2016. The audit
manager and partner have just met with the Finance Director
and Managing Director of Hampton.

At the end of the meeting the Finance Director noted that he

is currently recruiting a credit controller. He asked if your firm
could provide staff to provide interim cover for this position for
a couple of months whilst he completed this recruitment. This
person would also be required to update some account
records from the fourth quarter, when the accounts payable
clerk had been unwell and had fallen behind in processing
paper work.

An audit senior from your firm recently left the firm to take up
a financial accounting position at Hampton Ltd. The Finance
Director has been impressed by their work and is sure that
one of your staff would be able to help with resolving the
issues which he is facing in Accounts Receivable.

Since the meeting the audit manager has determined that

£10,000 of the prior year £40,000 audit fees have yet to be
paid.

Another client company, involved in the transport of

radioactive waste, has recently breached environmental
regulations and appears to have concealed some overseas
income. Pacioli & Co has been approached, informally, by
the tax authorities and by the Office for Nuclear Regulation.
They have both asked for information about the company.

Required:

(a) Explain the issues an audit firm must consider before

accepting an audit role for a new client.
[50 marks]

(b) Discuss any issues that you think the audit partner, in the
scenario above, should consider with regard to ethical
considerations and any safeguards she might apply.
[50 marks]

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4. With reference to relevant case law and provisions of the

Companies Act 2006, discuss the extent to which auditors
can be held responsible for losses incurred by those who rely
on their pronouncements when making decisions.
[100 marks]

5. You are leading the audit of Shoreham Ltd, whose

provisional results for the past year are:

Revenue £44 million

Profit before tax £2 million
Total assets £2 million

So far the only misstatements you have identified are in

inventory value and these total £80,000.

Required:

(a) Analyse the factors which give rise to the requirement for
the use of the materiality concept during an audit and
explain the different types of materiality which may be
used in an audit.
[60 marks]

(b) Explain whether you would consider the misstatements,

in the scenario above, to be material.
[40 marks]

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.

[100 marks]
END OF PAPER
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