ACCA

Paper F8 (INT & UK)

Audit and Assurance Revision Mock Examination

June 2013

Question Paper

Time Allowed 15 minutes Reading and planning

3 hours Writing

ALL FIVE questions are compulsory and MUST be attempted.

Do NOT open this paper until instructed by the supervisor.

During reading and planning time only the question paper may be annotated. You must NOT write in your answer booklet until instructed by the supervisor.

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This is a blank page.

Question 1 starts on page 4.

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ALL FIVE questions are compulsory and MUST be attempted

1 You have been assigned to the audit of Glenco Ltd for the year ending 31

March current year. The principal activities of the company include the

assembly, sale, servicing and hiring out of excavators used in the building and

construction industry.

Components and Assembly

The excavators are assembled from components brought in from suppliers,

most of which are located overseas.

Finished Excavators

Cost records are maintained for each model of completed excavator, detailing

costs of components and direct labour. For inventory valuation purposes, a

percentage is allocated to cover overheads. Work in progress at any time is

not material.

The managing director who started the business five years ago is very keen to

innovate and is constantly striving to enhance the existing range of

excavators and develop new models

Retail and Hiring Operations

In addition to its assembly plant, Glenco has six trading outlets each of which

has a retailing, servicing and hiring out section.

The excavators used in the hire section are treated as non-current assets

while available for hire. They generally have a useful life of two years for

hiring out purposes, after which they are transferred to inventory in the retail

section where they are sold at heavily discounted prices.

Inventory Counting

Inventory comprises:

● Components used in the assembly of excavators and as spare parts for

the servicing and repairing of customer excavators.

● Finished goods consisting of a range of models of excavators.

● Excavators transferred to retail inventory from the hire section.

Historically the company has ascertained the inventory figure for the year-end

accounts by undertaking a full physical count of components and finished

excavators. During the year, the company introduced an inventory control

system consisting of computerised inventory records supported by continuous

counting of the components. Due to the fact that the system is new however,

there will still be a full count of components and finished excavators this year-

end.

Required:

(a) (i) Identify the ways in which Glenco’s inventory of

components and finished excavators may be overstated;

(5 marks)

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(ii) Outline the audit procedures you would undertake in order

to obtain evidence that Glenco Ltd’s inventory is not

overstated. For each procedure, explain the purpose of that

procedure. (10 marks)

(b) Explain the value of a written management representation as a

source of audit evidence in respect of the verification of the

inventory of Glenco, and comment on the reliability of such

evidence. (4 marks)

It is intended that the computer system will hold the following data for each

component:

● Component code

● Description

● Location in warehouse

● Cost

● Quantity on hand

(c) Describe the controls that you would expect to exist over the

standing data on the new computerised inventory system.

(5 marks)

The internal audit department will provide you with documentation on the

computerised inventory systems at Glenco. The documentation provides

details of the software and shows how transactions are processed through the

inventory system.

(d) Explain the factors you will consider before placing reliance on

this documentation during your audit. (6 marks)

(30 marks)

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2 The conclusion of an audit report is expressed in terms of positive

(reasonable) or negative (limited) assurance.

(a) Distinguish between positive and negative assurance. (2 marks)

Last year, inherent risk at your client was assessed as high because the

business was judged to be vulnerable to a likely recession. This year, such a

consideration is less important and inherent risk is judged to be lower.

(b) Explain the effect that the reduction in inherent risk will have on

overall audit risk. (2 marks)

(c) Explain why it is necessary for auditors to prepare working

papers. (2 marks)

(d) List FOUR items that you would expect to find in auditors

working papers. (4 marks)

(10 marks)

3 Alpha plc, a listed company, operates a policy of putting its audit and related

services out to tender every five years. Following submissions from a number

of firms of accountants, the audit committee of Alpha plc recommended that

your firm be appointed to provide the following services.

● The Statutory audit.

● An independent review of the interim accounts, which will be circulated

to the shareholders together with your firm’s independent review report.

The independent review will be restricted to making enquiries of

management, applying analytical procedures to the financial information

and assessing whether the accounting policies and presentation have

been consistently applied.

● Consultancy services in respect of the implementation of a new financial

information technology system.

Your firm has not previously acted for Alpha plc but does act as an auditor for

one of its major competitors.

Required:

(a) Explain the professional and ethical issues that should have been

identified by your firm in relation to the provision of services,

outlined above and state the safeguards that should be put in

place in order to address these issues. (14 marks)

(b) Comment on the level of assurance that will be provided by the

report on the interim accounts, and explain how and why it

differs from the level of assurance provided by the statutory

audit report on the annual financial statements. (6 marks)

(20 marks)

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4 You are at the meeting for a new audit client, Northern Liquids Ltd, which has

grown rapidly and has a 30 June year-end. The financial statements have not

been audited in previous years due to the company’s revenue and assets

falling below the statutory audit thresholds. However, the company’s bankers

have requested that an audit is undertaken on the financial statements for the

year end 30 June current year. The company has requested an increase in its

overdraft facility in order to fund high levels of inventory required to meet

increasing demand for its products.

The company buys liquid chemicals in bulk, repackages them into smaller

containers and sells the liquids in much smaller quantities. Some of the

liquids are mixed together, and raw materials in the mixing process form work

in progress (WIP). The company uses a standard costing system to value

finished products and WIP. The company has only six suppliers (two of whom

are based overseas), but over 100 customer accounts.

The managing director, Mr. Fimble, does not understand why it is necessary

for him to discuss some of the items on the agenda for the audit planning

meeting, such as compliance with laws and regulations and understanding the

business.

However, he is pleased that you have raised the matter of internal controls.

He is worried that a recently recruited a salesman may be selling goods at

less than their minimum mark-up, in order to get his bonus, which is based

upon the level of sales he has achieved. At a mark-up of less than 34%,

there is a risk that the company loses money on the sale, because the margin

is not then sufficient to cover the repackaging costs.

Required:

(a) Explain why it is important for auditors to plan and to have an

understanding of the business when planning an audit. (10 marks)

(b) Identify and explain, from the circumstances described above,

the audit risks associated with Northern Liquids Ltd. (10 marks)

(20 marks)

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5 Described below are situations that have arisen in three audit clients of your

firm. The year-end in each case is 30 September.

Vista plc

Vista plc, a supplier of retail display equipment, has included in its income

statement, immediately below profit after tax, an exceptional loss of $3.7

million on the sale of a trade investment. The accounting treatment is not in

accordance with accounting standards, which require the loss to be taken into

account in arriving at the profit or loss before taxation.

The pre-tax profit of Vista plc for the year ended 30 September is $694,000.

Expo Ltd

Expo Ltd exports a significant amount of its products and has a major

distribution centre in an overseas country where there has been a military

coup. As a result of travel restrictions imposed by the military junta, it was

not possible for your firm to attend the-year end physical inventory count.

The inventories at the overseas distribution centre at 30 September

represented 75% of Expo Ltd’s inventories.

Pharm plc

Pharm plc, a company engaged in the manufacture of pharmaceutical

products, has extensive interests in an overseas country, which requires

pharmaceutical products to be registered. The regulatory situation in that

country is undergoing considerable change and Pharm does not expect to

obtain drug registration as quickly as originally anticipated. After carrying out

an appropriate review, the directors have decided that Pharm plc has enough

resources to continue for the next 12 months. Additional funding will be

required from that point but the directors believe that this can be achieved by

way of a share issue within the next 12 months.

The directors have included a note to the accounts explaining the situation.

Required:

(a) Describe the audit procedures that an auditor should carry out to

try and ascertain whether an entity is a going concern. (6 marks)

(b) In respect of the situations outlined above, reach a conclusion on

whether or not you would modify each audit report. Give

reasons for your conclusions and describe the potential effects

on each audit report. (14 marks)

(20 marks)