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QUESTIONS

KAPLAN PUBLISHING

1

PAPER P7 (INT) : ADVANCED AUDIT AND ASSURANCE

PROFESSIONAL AND ETHICAL CONSIDERATIONSBIGG BIKESBigg Bikes, a privately-owned company manufactures bicycles and supplies them internationally and through a network of sales outlets throughout the country of Europia. They traditionally manufactured race bikes but have latterly moved into a broad range of bikes to take advantage of the latest trends in the marketplace. In particular, mountain bikes now make up 40% of their sales. They have expanded rapidly over the last two years and are now the major European manufacturer. You are the auditor of Bigg Bikes and have been approached by the directors for advice on corporate governance and internal controls. They are aware that with their rapid growth, their obligations as directors have increased and that they should be taking much more interest in the level of controls within the company. They are also considering establishing an audit committee and would like your advice in this area. You have recently completed the annual audit of Bigg Bikes and are aware that very little has been done to promote sound governance within the company. Required: (a) (b) (c) Explain the role of the directors in relation to corporate governance and controls. (5 marks) Describe the types of controls that should be operated by Bigg Bikes to provide sound governance. (6 marks) Explain the potential role of the audit committee and the factors that Bigg Bikes should consider in making a decision on whether to go ahead with the formation of the committee. (5 marks) Explain how, as part of the normal audit process, the external auditor may assist in the promotion of effective corporate governance within the company. Identify how the auditor would communicate any relevant recommendations. (4 marks) (Total: 20 marks)

(d)

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KAPLAN PUBLISHING

LECTURER RESOURCE PACK QUESTIONS

SEASUN YACHTING AND MARINA (SYM)SYM have a marina on the South Coast and a large sales operation dealing in yachts and speedboats. You are responsible for the audit of SYM and have found some potential causes of concern that could indicate fraudulent activity or financial misconduct within the company. In particular:

30% of the yachts on sale by SYM are supplied through one of the major international boating companies with a special finance arrangement deal. However, SYM have also obtained separate finance on these yachts, which are therefore in effect being double financed. Ten yachts shown as assets by SYM cannot be located, with no explanation other than that they have not been sold. These yachts together are worth approximately $5m. Long delays have occurred in performing reconciliations with the last four months of reconciliations still not completed. At the time of the last reconciliation, material differences had been identified upon which no action appears to have been undertaken. Sales have been overstated by $10m in the current financial statements.

The finance director has been off sick with stress for the last five months and therefore has not been available to discuss any of the issues identified. Required: (a) (b) (c) Explain whether the issues referred to above should be categorised as fraud or error.(5 marks) Discuss the role of management and the role of the auditor in the prevention and detection of fraud and error. (5 marks) Describe what steps you would take to further investigate and then report on the matters referred to above. (10 marks) (Total: 20 marks)

KAPLAN PUBLISHING

3

PAPER P7 (INT) : ADVANCED AUDIT AND ASSURANCE

ETHICSThe ACCAs Rulebook contains a Code of Ethics and Conduct. The Code is applicable to all members and students. If the Code is not complied with then disciplinary action may be taken, which could result in reprimand, fine or exclusion from the Association. Required: (a) (b) (c) Explain why you think the ACCAs five principles of professional conduct are so fundamental to auditing. (5 marks) Explain how a member can demonstrate that he is truly independent in carrying out the work he performs, and why it is important that he should do so. (5 marks) In what circumstances is it permissible to disclose confidential client information? (5 marks) (Total: 15 marks)

4

KAPLAN PUBLISHING

LECTURER RESOURCE PACK QUESTIONS

ETHICS AND OF PROFESSIONAL CONDUCT(a) It can be argued that integrity, objectivity and independence are important at both the individual practitioner level and also at the national professional body level. At the practitioner level, one is concerned with the conduct and attitudes of the individual accountant whilst at the national level, the image and integrity of the profession are of paramount importance. Required: Explain the role that practitioners play in the maintenance of professional integrity, objectivity and independence. (7 marks) (b) The following notes relate to the personal files of two student accountants undertaking training in an accounting firm: File Note 1 The student was asked by an audit senior whether she had taken her ACCA final stage professional examinations in June 1998. She replied that she had not taken the examinations but was planning to take the examinations in December 1998. The student in fact did take the examinations in June 1998 but did not wish to disclose the fact in case she failed the examinations and lost her reputation as having passed the examinations at the first attempt. The audit senior has formally complained about the conduct of the student. The student subsequently passed the June examinations. (7 marks) File Note 2 The student has consistently completed his assigned tasks below the budgeted hours allocated to those audit tasks. The audit senior has no tangible proof that the tasks have not been carried out but suspects that this may be the case or alternatively time spent on the audit work is not being recorded. The audit senior has reported his suspicions to the audit partner. (6 marks) Required: Discuss the implications of the above file notes and how each of the matters should be dealt with by the audit partner. Please note that the mark allocation is shown after File Notes 1 and 2 above. (Total: 20 marks)

KAPLAN PUBLISHING

5

PAPER P7 (INT) : ADVANCED AUDIT AND ASSURANCE

POLITICAL COMMENTATORSPolitical commentators have pointed out in recent years instances of where the auditor may appear not to be independent. An example of this lack of independence could be deemed to be the situation where the accounting firm provides audit services and other services such as consultancy advice to a client. In these circumstances objectivity may be threatened by undue dependence on a client. However, an issue which may well gain in prominence is that of the hiring by audit clients of personnel who were formerly employed by their independent auditors. Where an audit partner or other senior audit staff member is employed by a client on leaving the audit firm, there is an element of risk that the objectivity of future audits may be impaired. There may be a public perception that the auditor of a company cannot be independent, where former employees of the audit firm are employed in senior positions. Required: (a) (b) (c) Discuss the advantages to a client of their auditor moving to undertake employment as a senior executive in their company. (6 marks) Discuss the ethical problems associated with a former audit partner becoming the financial director of the audit firms principal client. (6 marks) Describe the current ethical guidance designed to deal with the problems associated with the auditor accepting a senior position with the firms principal client, discussing any additional safeguards which could be introduced. (8 marks) (Total: 20 marks)

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KAPLAN PUBLISHING

LECTURER RESOURCE PACK QUESTIONS

STYLUSStylus is a medium-sized engineering company with sales revenues of $12 million and a workforce of 150 employees. Frazer and Company have been the auditors of Stylus for four years. Stylus is one of a number of clients that have been referred to Frazer and Company by Coultard bank. The bank receives a commission from Frazer and Company of 10% of the first year's audit fees for these referrals. During the early stages of the final audit for the year ended 30 September 1999 the following issues arose: Taylor, a publicly listed company, is a major customer of Stylus. At 30th September 1999 the work-in-progress and trade receivables of Stylus contain $1.2 million and $800,000 respectively relating to contracts with Taylor. Frazer and company are also the auditors of Taylor and, acting in this capacity, they are aware that Taylor is in severe financial difficulties and will be unable to carry on trading much longer. As a consequence it is likely that Taylor will not be able to pay the amount it owes Stylus nor be able to accept the work that it has on order and currently in progress with them. The materiality of the above amounts is such that the losses that Stylus would sustain may put its going concern status in doubt. Until very recently Stylus had not paid the audit fee and expenses for the year ended 30th September 1998. An associated company to the practice, Frazer Consulting, provides most of the staff of the internal audit department at Stylus in a consultancy capacity. Again a considerable amount of fees for this work were unpaid. In view of the possibility that Stylus may itself soon be in financial difficulties, the partners of Frazer and Company had insisted that before any further work was taken all amounts due to the practice must be paid together with a payment on account for the current year. A similar action was taken by the directors of Frazer Consulting. Bankers drafts were obtained from the directors of Stylus and these were presented

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