f8 2days live online revision class
TRANSCRIPT
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ACCA F8 Audit & Assurance (INT)
June2014
Live Online 2 Days Revision Note
Tutor: Steve Harris
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Lesco Group Limited, April 2015
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or
transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or
otherwise, without the prior written permission of Lesco Group Limited.
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Past Examination Questions Analysis
Q1:Pilot paper: Substantive procedures on trade payables and purchases; use of CAATs
DEC2007: Purchases system; inventory system and count
June2008: Internal control questionnaires; tests of controls on sales system;
receivables' confirmation
DEC2008: Wages system; analytical procedures; audit evidence
June2009: Audit planning; audit risk; analytical procedures; audit procedures
(receivables)
DEC2009: Audit planning; audit procedures; risk assessment; auditing inventory
June2010: Audit risk assessment; controls over perpetual inventory system;
substantive
DEC2010: Significant deficiencies; purchasing system deficiencies; auditing trade
payables; internal audit assignments
June2011: Tests of controls (sales system); auditing receivables and revenue; controls
to prevent fraud
DEC2011: Payroll system deficiencies; auditing payroll charge; considering laws and
regulations; provisions, reliance
June2012 sales system; procedures on PPE; review engagement; internal and external
audit+ISA610
DEC2012 inventory/ procedures relating to CAATs +ad+disad
June2013 purchase system/ISA260/audit procedure on payable and cash balance
DEC2013 Audit risks; audit procedures(Examiner just switched Q1 & Q4 around, no big
deal!!!)
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Q2:
Pilot paper: Engagement letter, audit evidence; audit reports
DEC2007: ACCA's Code of Ethics and Conduct; going concern
June2008: Audit evidence; representations; tests of controls
DEC2008:Expert; rights of auditors; assertions relating to tangible non-current assets
June2009: Audit sampling; audit evidence (assertions); audit report term
DEC2009:Audit evidence (reliability); communication with those charged with governance
June2010: Elements of an assurance engagement; materiality
DEC2010: True and fair presentation; status of ISAs; audit documentation
June2011:Internal control questionnaires and narrative notes; engagement letters
DEC2011: Components of internal control; elements of the auditors report
June2012: ISA 300 Planning benefits of audit planning; ISA 530Audit Sampling methods;
audit report opinion types
DEC2012 rights of auditors/ ISA315-4control activities/ limitation of external audit
June2013 ethical threats/going concern/emphasis of matter paragraph
DEC2013:test of control/substantive testing; audit evidence reliability; FS review
procedures
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Q3:
Pilot paper: Threats to independence; corporate governance and audit committees
DEC2007: Internal audit; petty cash
June2008: Analytical procedures; bank confirmation letter
DEC2008: Professional ethics; internal audit
June2009:CAATs; evaluating internal audit work
DEC2009: Understanding the entity and its environment; non-current assets (control
environment and completeness)
June2010: Test of controls and substantive procedures; deficiencies in a cash cycle;
procedures to verify bank balance
DEC2010: Preconditions for an audit; understanding the entity; Using ratios to assess
audit risk
June2011: Audit procedures; audit risks and responses
DEC2011: Components of audit risk; audit risks and responses; auditing inventory
June2012: ISA250 responsibilities in fraud; ethics; audit committee
DEC2012: ISA315-5source of information to understand company/ audit risk/ factors to
establish internal audit department
June2013:materiality/ audit planning-analytical procedure/audit risks
DEC2013:sales system procedures; sales system control objectives; sales system
weaknesses and improvement.
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Q4:
Pilot paper: Deficiencies in wages system; fraud; use of an external consultant
DEC2007: CAATs; auditing around the computer
June2008: Internal audit and outsourcing
DEC2008: Audit risk; inherent risk; control environment
June2009: Internal audit; corporate governance
DEC2009: Interim and final audit; reliance on internal audit work; other assurance
engagements
June2010: Ethical threats and safeguards; audit engagement acceptance
DEC2010: Value for money audit; operating environment strengths for NFPO; auditing
non-current assets
June2011:Conflict of interest; outsourcing internal audit; ethical threats and safeguards
DEC2011: Corporate governance; confidentiality and disclosure
June2012: assertions listed/ audit procedures on inventory/ audit procedures ondepreciation and IAS37 working paper items
DEC2012: 5ACCA principles/ procedures on payables;receivables;reorganization;
June2013:procedure on PP&E/ internal audit
DEC2013: factors considered before acceptance of audit; precondition; engagement
letter content; ethical risks theory.
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Q5:
Pilot paper: Events after the year-end and impact on audit report
DEC2007: Non-compliance with accounting standards; audit reports
June2008: Going concern; negative assurance
DEC2008: Events after the reporting period
June2009: Inventory; fraud; professional ethics
DEC2009: Assertions relevant to accounts payable; internal controls (purchases);
contingent liabilities and reporting
June2010: Going concern; audit reporting
DEC2010: Auditing accounting estimates; written representations; audit reporting
June2011: Misstatements; impact of audit issues on the auditors report
DEC2011: Subsequent events; audit reporting
June2012: analytical procedures can be used(3stages) going concern /audit report
DEC2012: written representation
June2013: Assurance engagement content/ subsequent events
DEC2013: Opening balance; work performed before relying on expert; audit report
correction.(This is surprising)
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Exam strategy and Exam advice:
Before examination:
1, go through the revision 1 video first;
2, go through the following questions (please firstly write down your answer and then
compare to my video.)
3, if you have time pelase also go through questions in the tuition class.
During Examination:
1, During 15minutes of actual reading time pls write down the deadline for each
question and each requirement (using 2minutes).
2, Start from Q1.
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Questions Based Revision
Q1 revision
Tips:
In the coming sitting theres equal opportunity for 4systems to come up in Q1, eg, sales,
purchases, wages + inventory
So Im intending to go through these 4 in the revision.
Topics covered in these 4 questions:
1, inventory system + CAATs
2, payroll system+ substantive procedure on provision +ISA610
3, sales system+ substantive procedure on PPE+ISA610again+internal auditors
4, purchase system + substantive procedure on payable + other assignment
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1, DEC2012 Q1 inventory system
Lily Window Glass Co (Lily) is a glass manufacturer, which operates from a large production
facility, where it undertakes continuous production 24 hours a day, seven days a week. Also
on this site are two warehouses, where the companys raw materials and finished goods are
stored. Lilys year end is 31 December.
Lily is finalising the arrangements for the year-end inventory count, which is to be
undertaken on 31 December 2012.
The finished windows are stored within 20 aisles of the first warehouse. The second
warehouse is for large piles of raw materials, such as sand, used in the manufacture of
glass. The following arrangements have been made for the inventory count:
The warehouse manager will supervise the count as he is most familiar with the inventory.
There will be ten teams of counters and each team will contain two members of staff, one
from the finance and one from the manufacturing department. None of the warehouse staff,
other than the manager, will be involved in the count.
Each team will count an aisle of finished goods by counting up and then down each aisle. As
this process is systematic, it is not felt that the team will need to flag areas once counted.
Once the team has finished counting an aisle, they will hand in their sheets and be given a
set for another aisle of the warehouse. In addition to the above, to assist with the inventory
counting, there will be two teams of counters from the internal audit department and they
will perform inventory counts.
The count sheets are sequentially numbered, and the product codes and descriptions are
printed on them but no quantities. If the counters identify any inventory which is not on
their sheets, then they are to enter the item on a separate sheet, which is not numbered.
Once all counting is complete, the sequence of the sheets is checked and any additional
sheets are also handed in at this stage. All sheets are completed in ink.
Any damaged goods identified by the counters will be too heavy to move to a central
location, hence they are to be left where they are but the counter is to make a note on the
inventory sheets detailing the level of damage.
As Lily undertakes continuous production, there will continue to be movements of raw
materials and finished goods in and out of the warehouse during the count. These will be
kept to a minimum where possible.
The level of work-in-progress in the manufacturing plant is to be assessed by the
warehouse manager. It is likely that this will be an immaterial balance. In addition, the raw
materials quantities are to be approximated by measuring the height and width of the raw
material piles. In the past this task has been undertaken by a specialist; however, thewarehouse manager feels confident that he can perform this task.
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Required:
(a) For the inventory count arrangements of Lily Window Glass Co:
(i) Identify and explain SIX deficiencies; and
(ii) Provide a recommendation to address each deficiency.
The total marks will be split equally between each part (12 marks)
You are the audit senior of Daffodil & Co and are responsible for the audit of inventory for
Lily. You will be attending the year-end inventory count on 31 December 2012.
In addition, your manager wishes to utilise computer-assisted audit techniques for the first
time for controls and substantive testing in auditing Lily Window Glass Cos inventory.
Required:
(b) Describe the procedures to be undertaken by the auditor DURING the
inventory count of Lily Window Glass Co in order to gain sufficient appropriate
audit evidence. (6 marks)
(c) For the audit of the inventory cycle and year-end inventory balance of Lily
Window Glass Co:
(i) Describe FOUR audit procedures that could be carried out using
computer-assisted audit techniques (CAATS);(ii) Explain the potential advantages of using CAATs; and
(iii) Explain the potential disadvantages of using CAATs.
The total marks will be split equally between each part (12 marks)
(30 marks)
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2, DEC2011 Q1 payroll system
Introduction and client background
You are the audit senior of Blair & Co and your team has just completed the interim audit
of Chuck Industries Co, whose year end is 31 January 2012. You are in the process ofreviewing the systems testing completed on the payroll cycle, as well as preparing the audit
programmes for the final audit.
Chuck Industries Co manufactures lights and the manufacturing process is predominantly
automated; however there is a workforce of 85 employees, who monitor the machines, as
well as approximately 50 employees who work in sales and administration. The company
manufactures 24 hours a day seven days a week.
Below is a description of the payroll system along with deficiencies identified by the audit
team:
Factory workforce The company operates three shifts every day with employees working
eight hours each. They are required to clock in and out using an employee swipe card,
which identifies the employee number and links into the hours worked report produced by
the computerised payroll system. Employees are paid on an hourly basis for each hour
worked. There is no monitoring/supervision of the clocking in/out process and an employee
was witnessed clocking in several employees using their employee swipe cards.
The payroll department calculates on a weekly basis the cash wages to be paid to theworkforce, based on the hours worked report multiplied by the hourly wage rate, with
appropriate tax deductions. These calculations are not checked by anyone as they are
generated by the payroll system. During the year the hourly wage was increased by the
Human Resources (HR) department and this was notified to the payroll department
verbally.
Each Friday, the payroll department prepares the pay packets and physically hands these
out to the workforce, who operate the morning and late afternoon shifts, upon production
of identification. However, for the night shift workers, the pay packets are given to the
factory supervisor to distribute. If any night shift employees are absent on pay day then the
factory supervisor keeps these wages and returns them to the payroll department on
Monday.
Sales and administration staff
The sales and administration staff are paid monthly by bank transfer. Employee numbers
do fluctuate and during July two administration staff joined; however, due to staff holidays
in the HR department, they delayed informing the payroll department, resulting in incorrect
salaries being paid out.
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Required:
(a) For the deficiencies already identified in the payroll system of Chuck
Industries Co:
(i) explain the possible implications of these; and(ii) suggest a recommendation to address each deficiency. (12 marks)
(b) Describe substantive procedures you should now perform to confirm the
accuracy and completeness of Chuck Industries payroll charge. (6 marks)
(c) Last week the company had a visit from the tax authorities who reviewed the wages
calculations and discovered that incorrect levels of tax had been deducted by the payroll
system, as the tax rates from the previous year had not been updated. The finance director
has queried with the audit team why they did not identify this non-compliance with tax
legislation during last years audit.
Required:
Explain the responsibilities of management and auditors of Chuck Industries Co
in relation to compliance with law and regulations under ISA 250 Consideration
of Laws and Regulations in an Audit of FinancialStatements. (4 marks)
(d) Chuck Industries has decided to outsource its sales ledger department and as a result
it is making 14 employees redundant. A redundancy provision, which is material, will beincluded in the draft accounts.
Required:
Describe substantive procedures you should perform to confirm the redundancy
provision at the year end. (4 marks)
(e) Chuck Industries is considering establishing an internal audit (IA) department next
year. The finance director has asked whether the work performed by the IA department can
be relied upon by Blair & Co.
Required:
Explain the factors that should be considered by an external auditor before
reliance can be placed on the work performed by a companys internal audit
department. (4 marks)
(30 marks)
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3,unusual system evaluation-sales system June2012 Q1
Pear International Co (Pear) is a manufacturer of electrical equipment. It has factories
across the country and its customer base includes retailers as well as individuals, to whom
direct sales are made through their website. The companys year end is 30 September 2012.You are an audit supervisor of Apple & Co and are currently reviewing documentation of
Pears internal control in preparation for the interim audit.
Pears website allows individuals to order goods directly, and full payment is taken in
advance. Currently the website is not integrated into the inventory system and inventory
levels are not checked at the time when orders are placed.
Goods are despatched via local couriers; however, they do not always record customer
signatures as proof that the customer has received the goods. Over the past 12 months
there have been customer complaints about the delay between sales orders and receipt of
goods. Pear has investigated these and found that, in each case, the sales order had been
entered into the sales system correctly but was not forwarded to the despatch department
for fulfilling.
Pears retail customers undergo credit checks prior to being accepted and credit limits are
set accordingly by sales ledger clerks. These customers place their orders through one of
the sales team, who decides on sales discount levels.
Raw materials used in the manufacturing process are purchased from a wide range ofsuppliers. As a result of staff changes in the purchase ledger department, supplier
statement reconciliations are no longer performed. Additionally, changes to supplier details
in the purchase ledger master file can be undertaken by purchase ledger clerks as well as
supervisors.
In the past six months Pear has changed part of its manufacturing process and as a result
some new equipment has been purchased, however, there are considerable levels of plant
and equipment which are now surplus to requirement. Purchase requisitions for all new
equipment have been authorised by production supervisors and little has been done to
reduce the surplus of old equipment.
Required:
(a) In respect of the internal control of Pear International Co:
(i) Identify and explain FIVE deficiencies;
(ii) Recommend a control to address each of these deficiencies; and
(iii) Describe a test of control Apple & Co would perform to assess if each of these
controls is operating effectively. (15 marks)
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(b) Describe substantive procedures you should perform at the year end to
confirm each of the following for plant and equipment:
(i) Additions; and
(ii) Disposals. (4 marks)
(c) Pears finance director has expressed an interest in Apple & Co performing other review
engagements in addition to the external audit; however, he is unsure how much assurance
would be gained via these engagements and how this differs to the assurance provided by
an external audit.
Required:
Identify and explain the level of assurance provided by an external audit and
other review engagements.
(3 marks)
Pears directors are considering establishing an internal audit department next year, and
the finance director has asked about the differences between internal audit and external
audit and what impact, if any, establishing an internal audit department would have on
future external audits performed by Apple & Co.
Required:
(d) Distinguish between internal audit and external audit. (4 marks)
(e) Explain the potential impact on the work performed by Apple & Co during theinterim and final audits, if Pear International Co was to establish an internal audit
department. (4 marks)
(30 marks)
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4, purchase system Dec2010 Q1
1 (a) Auditors have a responsibility under ISA 265 Communicating Deficiencies in Internal
Control to those Charged with Governance and Management, to communicate deficiencies
in internal controls. In particular SIGNIFICANTdeficiencies in internal controls must becommunicated in writing to those charged with governance.
Required:
Explain examples of matters the auditor should consider in determining whether
a deficiency in internal controls is significant. (5 marks)
Greystone Co is a retailer of ladies clothing and accessories. It operates in many countries
around the world and has expanded steadily from its base in Europe. Its main market is
aimed at 15 to 35 year olds and its prices are mid to low range. The companys year end
was 30 September 2010.
In the past the company has bulk ordered its clothing and accessories twice a year.
However, if their goods failed to meet the key fashion trends then this resulted in significant
inventory write downs. As a result of this the company has recently introduced a just in
time ordering system. The fashion buyers make an assessment nine months in advance as
to what the key trends are likely to be, these goods are sourced from their suppliers but
only limited numbers are initially ordered.
Greystone Co has an internal audit department but at present their only role is to perform
regular inventory counts at the stores.
Ordering process
Each country has a purchasing manager who decides on the initial inventory levels for each
store, this is not done in conjunction with store or sales managers. These quantities are
communicated to the central buying department at the head office in Europe. An ordering
clerk amalgamates all country orders by specified regions of countries, such as Central
Europe and North America, and passes them to the purchasing director to review and
authorise.
As the goods are sold, it is the store managers responsibility to re-order the goods through
the purchasing manager; they are prompted weekly to review inventory levels as although
the goods are just in time, it can still take up to four weeks for goods to be received in store.
It is not possible to order goods from other branches of stores as all ordering must be
undertaken through the purchasing manager. If a customer requests an item of clothing,
which is unavailable in a particular store, then the customer is provided with other branch
telephone numbers or recommended to try the company website.
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Goods received and Invoicing
To speed up the ordering to receipt of goods cycle, the goods are delivered directly from the
suppliers to the individual stores. On receipt of goods the quantities received are checked
by a sales assistant against the suppliers delivery note, and then the assistant produces agoods received note (GRN). This is done at quiet times of the day so as to maximize sales.
The checked GRNs are sent to head office for matching with purchase invoices.
As purchase invoices are received they are manually matched to GRNs from the stores, this
can be a very time consuming process as some suppliers may have delivered to over 500
stores. Once the invoice has been agreed then it is sent to the purchasing director for
authorisation. It is at this stage that the invoice is entered onto the purchase ledger.
Required:
(b) As the external auditors of Greystone Co, write a report to management in
respect of the purchasing system which:
(i) Identifies and explains FOUR deficiencies in that system;
(ii) Explains the possible implication of each deficiency;
(iii) Provides a recommendation to address each deficiency.
A covering letter is required.
Note: Up to two marks will be awarded within this requirement for presentation. (14 marks)
(c) Describe substantive procedures the auditor should perform on the year-end
trade payables of Greystone Co.
(5 marks)
(d) Describe additional assignments that the internal audit department of
Greystone Co could be asked to perform by those charged with governance. (6
marks)
(30 marks)
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Q2 revision
Here I am going to mix all possible aspects up in to one single question.
And this has almost covered all of the aspects in F8 you need to know.
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(g) ISA 580 Management Representations provides guidance on the use of management
representations as audit evidence.
Required:
List SIX items that could be included in a management representation letter. (3
marks)[June2008]
(h) ISA 620 Using the Work of an Expert explains how an auditor may use an expert to
obtain audit evidence.
Required:
Explain THREE factors that the external auditor should consider when assessing
the competence and objectivity of the expert. (3 marks)
[dec2008]
(i) Auditors have various duties to perform in their role as auditors, for example, to assess
the truth and fairness of the financial statements.
Required:
Explain THREE rights that enable auditors to carry out their duties. (3 marks)
[dec2008]
(j) List and explain FOUR methods of selecting a sample of items to test from a
population in accordance with ISA 530 (Redrafted)Audit Sampling and Other
Means of Testing. (4 marks)
[june2009]
(k) List and explain 7 assertions from ISA 500Audit Evidence that relate to the
recording of classes of transactions. (7 marks)
[june2009 modified]
(l) ISA 500Audit Evidence requires audit evidence to be reliable.
Required:
List FOUR factors that influence the reliability of audit evidence. (4 marks)
[DEC2009]
(m) ISA 260 (Revised and Redrafted) Communication with Those Charged with
Governance deals with the auditors responsibility to communicate with those charged with
governance in relation to an audit of financial statements.
Required:
(i) Describe TWO specific responsibilities of those charged with governance; (2
marks)
(ii) Explain FOUR examples of matters that might be communicated to them by
the auditor. (4 marks)[DEC2009]
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(n) Auditors are frequently required to provide assurance for a range of non-audit
engagements.
Required:
List and explain the elements of an assurance engagement. (5 marks)
[June2010]
(o) ISA 320 Materiality in Planning and Performing an Audit provides guidance on the
concept of materiality in planning and performing an audit.
Required:
Define materiality and determine how the level of materiality is assessed. (5
marks)
[June2010]
(p)Explain the concept of TRUE and FAIR presentation. (4 marks)[DEC2010]
(Q) Explain the status of International Standards on Auditing. (2 marks)
[DEC2010]
(R) ISA 230Audit Documentation deals with the auditors responsibility to prepare audit
documentation for an audit of financial statements.
Required:
State FOUR benefits of documenting audit work. (4 marks)
[DEC2010]
(S)ISA 210Agreeing the Terms of Audit Engagements provides guidance on the content of
engagement letters and deals with the auditors responsibilities in agreeing the terms of the
audit engagement with management.
[June2011]
Required:
(i) State the purpose of an engagement letter. (1 mark)
(T) ISA 315 Identifying and Assessing the Risks of Material Misstatement through
Understanding the Entity and Its Environment requires auditors to understand the entitys
internal control. An entitys internal control is made upof several components. [DEC2011]
Required:
State the FIVE components of an entitys internal control and give a brief
explanation of each component.
(5 marks)
(u) ISA 300 Planning an Audit of Financial Statements provides guidance to assist auditors
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1, Risks:
DEC2011 Q3 modified
3 (a) Explain the components of audit risk and, for each component, state an
example of a factor which can result in increased audit risk. (6 marks)
Abrahams Co develops, manufactures and sells a range of pharmaceuticals and has a wide
customer base across Europe and Asia. You are the audit manager of Nate & Co and you are
planning the audit of Abrahams Co whose financial year end is 31 January. You attended a
planning meeting with the finance director and engagement partner and are now reviewing
the meeting notes in order to produce the audit strategy and plan. Revenue for the year is
forecast at $25 million.
During the year the company has spent $22 million on developing several new products.
Some of these are in the early stages of development whilst others are nearing completion.
The finance director has confirmed that all projects are likely to be successful and so he is
intending to capitalise the full $22 million.
Once products have completed the development stage, Abrahams begins manufacturing
them. At the year end it is anticipated that there will be significant levels of work in progress.
In addition the company uses a standard costing method to value inventory; the standard
costs are set when a product is first manufactured and are not usually updated. In order to
fulfil customer orders promptly, Abrahams Co has warehouses for finished goods located
across Europe and Asia; approximately one third of these are third party warehouses whereAbrahams just rents space.
In September a new accounting package was introduced. This is a bespoke system
developed by the information technology (IT) manager. The old and new packages were
not run in parallel as it was felt that this would be too onerous for the accounting team. Two
months after the system changeover the IT manager left the company; a new manager has
been recruited but is not due to start work until January.
In order to fund the development of new products, Abrahams has restructured its finance
and raised $1 million through issuing shares at a premium and $25 million through a
long-term loan. There are bank covenants attached to the loan, the main one relating to a
minimum level of total assets. If these covenants are breached then the loan becomes
immediately repayable. The company has a policy of revaluing land and buildings, and the
finance director has announced that all land and buildings will be revalued as at the year
end.
The reporting timetable for audit completion of Abrahams Co is quite short, and the finance
director would like to report results even earlier this year.
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Required:
(b) Using the information provided, identify and describe FIVE audit risks and
explain the auditors response to each risk in planning the audit of Abrahams Co.
(10 marks)
(c) Describe substantive procedures you should perform to obtain sufficient
appropriate evidence in relation to:
(i) Inventory held at the third party warehouses; and
(ii) Use of standard costs for inventory valuation. (4 marks)
(d) Discuss the importance of assessing risks at the planning stage of an audit.
(4 marks) [june2010 Q1(b)]
(24 marks)
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2 Ethics
1, DEC2011 Q4:
(a) Explain what is meant by corporate governance and why it is important. (3marks)
(b) Serena VDW Co has been trading for over 20 years and obtained a listing on a stock
exchange five years ago. It provides specialist training in accounting and finance.
The listing rules of the stock exchange require compliance with corporate governance
principles, and the directors are fairly confident that they are following best practice in
relation to this. However, they have recently received an email from a significant
shareholder, who is concerned that Serena VDW Co does not comply with corporate
governance principles.
Serena VDW Cos board is comprised of six directors; there are four execu tives who
originally set up the company and two non-executive directors who joined Serena VDW Co
just prior to the listing. Each director has a specific area of responsibility and only the
finance director reviews the financial statements and budgets.
The chief executive officer, Daniel Brown, set up the audit committee and he sits on this
sub-committee along with the finance director and the non-executive directors. As the
board is relatively small, and to save costs, Daniel Brown has recently taken on the role of
chairman of the board. It is the finance director and the chairman who make decisions onthe appointment and remuneration of the external auditors. Again, to save costs, no
internal audit function has been set up to monitor internal controls.
The executive directors remuneration is proposed by the finance director and approved by
the chairman. They are paid an annual salary as well as a generous annual revenue related
bonus.
Since the company listed, the directors have remained unchanged and none have been
subject to re-election by shareholders.
Required:
Describe SIX corporate governance weaknesses faced by Serena VDW Co and
provide recommendations to address each weakness, to ensure compliance with
corporate governance principles. (12 marks)
(c) Explain the auditors ethical responsibilities with regard to client
confidentiality and when they have an:
(i) obligatory responsibility; and
(ii) voluntary responsibility to disclose client information. (5 marks)(20 marks)
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3 Internal audit
DEC2007 Q3 (a)
Factors limiting the independence of internal audit department
Matalas Co sells cars, car parts and petrol from 25 different locations in one country.
Each branch has up to 20 staff working there, although most of the accounting
systems are designed and implemented from the companys head office. All
accounting systems, apart from petty cash, are computerised, with the internal
audit department frequently dvising and implementing controls within those
systems.
Matalas has an internal audit department of six staff, all of whom have been
employed at Matalas for a minimum of ive years and some for as long as 15 years.
In the past, the chief internal auditor appoints staff within the internal uditdepartment, although the chief executive officer (CEO) is responsible for
appointing the chief internal auditor.
The chief internal auditor reports directly to the finance director. The finance
director also assists the chief internal auditor in deciding on the scope of work of
the internal audit department.
Required:(a)Explain the issues which limit the independence of the internal audit department
in Matalas Co. Recommend a way of overcoming each issue. (8 marks)
(b) Describe substantive procedures an auditor would perform in verifying a
companys bank balance. (7 marks) [June2010 Q3(c)]
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4 Analytical procedures and bank confirmation letter
June2008 Q3
(a) With reference to ISA 520Analytical Procedures explain
(i) what is meant by the term analyticalprocedures; (2 marks)(ii) the different types of analytical procedures available to the auditor; and (3
marks)
(iii) the situations in the audit when analytical procedures can be used. (3 marks)
Zak Co sells garden sheds and furniture from 15 retail outlets. Sales are made to
individuals, with income being in the form of cash and debit cards. All items purchased are
delivered to the customer using Zaks own delivery vans;
most sheds are too big for individuals to transport in their own motor vehicles. The directors
of Zak indicate that the company has had a difficult year, but are pleased to present some
acceptable results to the members.
The income statements for the last two financial years are shown below:
31 march 2008 31 march 2007
Revenue 7,482 6,364
Cost of sales (3,520) (4,253)
Gross profit 3,962 2,111
Operating expensesAdmin (1,235) (1,320)
Selling and distribution (981) (689)
Interest payable (101) (105)
Investment income 145 -
Profit/(loss) before tax 1,790 (3)
Financial statement extract
Cash and bank 253 (950)
Required:
(b) As part of your risk assessment procedures for Zak Co, identify and provide a
possible explanation for unusual changes in the income statement. (9 marks)
(c) Confirmation of the end of year bank balances is an important audit procedure.
Required:
Explain the procedures necessary to obtain a bank confirmation letter from Zak
Cos bank.
(3 marks)
(20 marks)
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Q5 revision
This question is focusing on stage 5+6 of your audit flowchart.
Top tips:1, DEC2011Q5: subsequent events (ISA560)
2, June2010: Going concern; audit reporting
3, DEC2010: Auditing accounting estimates; written representations; audit report
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1, DEC2011 Q5
(a) Describe the auditors responsibility for subsequent events occurring
between:
(i) The year-end date and the date the auditors report is signed; and
(ii) The date the auditors report is signed and the date the financial statements
are issued.
(5 marks)
(b) Humphries Co operates a chain of food wholesalers across the country and its year end
was 30 September 2011.
The final audit is nearly complete and it is proposed that the financial statements and audit
report will be signed on 13 December. Revenue for the year is $78 million and profit before
taxation is $75 million. The following events have occurred subsequent to the year end.
Receivable
A customer of Humphries Co has been experiencing cash flow problems and its year-end
balance is $03 million.
The company has just become aware that its customer is experiencing significant going
concern difficulties.
Humphries believe that as the company has been trading for many years, they will receive
some, if not full, payment from the customer; hence they have not adjusted the receivable
balance.
Lawsuit
A key supplier of Humphries Co is suing them for breach of contract. The lawsuit was filed
prior to the year end, and the sum claimed by them is $1 million. This has been disclosed
as a contingent liability in the notes to the financial statements; however correspondence
has just arrived from the supplier indicating that they are willing to settle the case for a
payment by Humphries Co of $06 million. It is likely that the company will agree to this.
Warehouse
Humphries Co has three warehouses; following extensive rain on 20 November significant
rain and river water flooded the warehouse located in Bass. All of the inventory was
damaged and has been disposed of. The insurance company has already been contacted.
No amendments or disclosures have been made in the financial statements.
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Required:
For each of the three events above:
(i) discuss whether the financial statements require amendment;
(ii) describe audit procedures that should be performed in order to form a
conclusion on the amendment; and
(iii) explain the impact on the audit report should the issue remain unresolved.
(15 marks)
Note: The total marks will be split equally between each event.
(20 marks)
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DEC2010 (VERY IMPORTANT!)
Greenfields Co specialises in manufacturing equipment which can help to reduce toxic
emissions in the production of chemicals. The company has grown rapidly over the past
eight years and this is due partly to the warranties that the company gives to its customers.
It guarantees its products for five years and if problems arise in this period it undertakes tofix them, or provide a replacement product.
You are the manager responsible for the audit of Greenfields and you are performing the
final review stage of the audit and have come across the following two issues.
Receivable balance owing from Yellowmix Co
Greenfields has a material receivable balance owing from its customer, Yellowmix Co.
During the year-end audit, your team reviewed the ageing of this balance and found that no
payments had been received from Yellowmix for over six months, and Greenfields would
not allow this balance to be circularised. Instead management has assured your team that
they will provide a written representation confirming that the balance is recoverable.
Warranty provision
The warranty provision included within the statement of financial position is material. The
audit team has performed testing over the calculations and assumptions which are
consistent with prior years. The team has requested a written representation from
management confirming the basis and amount of the provision are reasonable.
Management has yet to confirm acceptance of this representation.
Required:(a) Describe the audit procedures required in respect of accounting estimates. (5
marks)
(b) For each of the two issues above:
(i) Discuss the appropriateness of written representations as a form of audit
evidence; and
(4 marks)
(ii) Describe additional procedures the auditor should now perform in order to
reach a conclusion on the balance to be included in the financial statements.
(6 marks)
Note: The total marks will be split equally between each issue.
(c) The directors of Greenfields have decided not to provide the audit firm with the written
representation for the warranty provision as they feel that it is unnecessary.
Required:
Explain the steps the auditor of Greenfields Co should now take and the impact on
the audit report in relation to the refusal to provide the written representation.
(5 marks)
(20 marks)
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ACCA F8 Audit & Assurance (INT)
JUNE2014
Live Online 2 Days Revision Note Answer
Tutor: Steve Harris
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(b) Only 6points required. (During the counting!)
Auditor should observe the count to ensure count instructions are being followed.
auditor should inspect the identity of the counting staff to ensure staff involved in
counting are independent. Auditor should inspect a sample of inventory counting sheets to confirm
completeness.
Auditor should observe the counting process to ensure inventory counted are
labeled.
Auditor should observe the counting process to ensure areas are divided into
different areas and all of them have been counted.
Auditor should inspect the signature from a second check after the first check has
been done.
Auditor should enquire with management to familiarize themselves of how the
goods during the movement are recorded to ensure its accuracy.
Auditor should perform test counts from floor to sheet(inventory counting sheet) tp
confirm completeness.
Auditor should perform test counts from sheet(inventory counting sheet) to floor to
confirm existence.
IF before counting is asked then answer would be:
Auditor should enquire with management to ensure staff involved in the counting
are informed.
Auditor should obtain the inventory counting procedure to ensure its accurate andin line with auditors understanding.
Auditor should enquire with management about the work in progress and ensure
its in line with auditors business understanding.
Auditor should timetable the audit junior about the inventory counting, ie, they
should check during the counting process.
IF control procedures are asked then you can list how the company is gonna do: a few
ideas:
None of the warehouse staff will be involved in the count(they are familiar with
them and cover the mistakes they make)
Teams of two performing the count(one counts and one checks)
Handing in the sheets after each good has been counted.
Count sheets should be pre numbered and contain quantities
Count sheets should be completed in ink
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IF control objective is asked then you need to say WHY company has done the above
control procedures? so you should start with To ensure that. Eg,
Control procedures: (by company)
Count sheets should be pre numbered and contain quantities:
Control objective: (by company)
To ensure that count sheets are complete.
Test of control/ control testing/audit procedures (by auditor)
Auditor should inspect a sample of count sheets to ensure they are pre-numbered.
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June2012 Q1
(a) only 5 points are required.
Deficiency Control(control procedures) Test of control(audit procedures/control testing)
1,no inventory integration onthe website which will lead to
impairment of reputation
because orders by customers
are not with sufficient
inventory
Integrate inventory on thewebsite and if theres no
inventory currently when
orders placed so waiting time
should be presented to
customers.
Auditor can input an order ofinventory which is currently out of
stock and expect a reject from the
system with appropriate waiting
time.
2, no signature made by
customer when they receive
the goods and this will lead to
a situation where customers
claim they havent received
goods but they have actually
received them.
Pear should obtain signature
from customers when goods
dispatch to them.
Auditor can inspect sample of
dispatches to confirm signatures
made.
3, when sales orders placed
this are not forwarded to
dispatch department leading
to delay and hence it will
impair goodwill from
customers.
When orders are placed they
should be forwarded to
dispatch department.
Auditor can inspect a sample of
sales order to verify they have been
forwarded to the dispatch
department.
4, sales ledger clerk setscredit limit and they may set
the credit too high leading to
an increase in bad debts.
Discounts should be set by asenior member within the
sales team.
Auditor can inspect authorization ofcredit limit signature to confirm it
has been done by a senior member
in the sales team.
5, all sales team members can
set discount and this will lead
to a loss in revenue given they
prefer to boost sales.
A limit should be set on the
discount granted by the sales
team.
Auditor can inspect the limit on the
discount given by sales team to
confirm its existence.
6, suppliers statement
reconciliation are not done on
a timely basis which may lead
to errors in recording
purchases and payables.
Supplier statement
reconciliation should be done
on a monthly basis.
Auditor can inspect the supplier
statement reconciliation to confirm
it has been done on a timely basis.
7, purchase ledger clerk can
amend the supplier details in
the master file and this will
lead to suppliers data being
manipulated, ie, fictitious
supplier created.
Only purchase supervisor will
have the authority to get
access to the amendment of
the master file.
Auditor can use one of the purchase
clerk ID to get access to and amend
the supplier master file and expect
a reject from it.
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(b)
ABC & Co
Certified Accountants
29 High Street
The Board of DirectorsGreystone Co
15 Low Street
8 December 2010
Dear Sirs,
Audit of Greystone Co for year ended 30 September 2010
This report details efficiencies implications and recommendations to the efficiency.
(i) Deficiency (ii) Implication (iii) Recommendation
1, The purchasing manager decides on the
inventory levels for each store without
discussion with store or sales managers.
This could result in stores
ordering
goods that are not likely to sell.
The purchasing manager should
initially hold a meeting with area
managers of stores before agreeing jointly
goods to be purchased.
2, The purchase orders are only
reviewed and only authorised by a
purchasing director
It will be difficult for the
purchasing
director to know everything
about the purchase decision.
Decision can be authorized by senior
purchasing manager and then passed to
the purchasing director for final review
and sign off.
3, The store managers are responsible for
re-ordering goods through the purchasing
manager.
If the store managers forget or
order
too late, then as the ordering
process will delay and result instock out.
Automatic re-order levels should be set up
in the inventory management systems.
4, Customers are told to contact the stores
themselves of use company website if the
goods are unavailable.
Customers are less likely to
contact
individual stores themselves
and this could result in the
company losing sales.
An internal ordering system should be
set up which allows for the transfer of
goods between stores.
5, Goods are then checked by sales
assistants to the suppliersdelivery note to
agree quantities but not quality.
If the sales assistants are only
checking quantities then goods
which are not of a saleable
condition (bad quality) may be
accepted.
The goods should then be checked on
arrival for quantity and quality before
acceptance.
6, Goods are being received without
any checks being made against
purchase orders.
This could result in Greystone
receiving and subsequently
paying for goods it did not
require.
A copy of authorised orders should be
kept at the relevant store and checked
against GRNs.
7, Purchase invoices are manually
matched to a high volume of GRNs
from the individual stores.
A manual checking process
increases the risk of error.
The checked GRNs should be logged onto
the purchasing system, matched against
the relevant order number, then as the
invoice is received this should beautomatically matched.
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Q2 Q mix
(a) mnemonics: FARSES
Fee cover note:It explains the basis of fees.
Address
Engagement letter is address to directors not shareholders.
Responsibilities
A section on the responsibility of auditor and directors.
Scope
A very detailed section explaining the basis of the audit.
Extras
The non audit engagement services such as tax consultations can also be included in
the engagement letter.
Signature
Signatures of both auditor and CEO.
(b)(AEIOU)Analytical procedure
Auditors can compare financial and non-financial information to identify the
unexpected situation.
Enquiry
Auditors can enquire with management within company to confirm something,eg,
existence.
Inspection
Auditors can inspect particular documents to confirm something, eg, accuracy.
Observation
Auditors can observe a process to confirm its existence.
Recalculation
Auditors can recalculate the balance to confirm its accuracy.
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(g) ISA580 content within management representation (6points)
Mnemonics: Briefl
B: Books and records are available to auditors.R: Related parties are fully disclosed.
I: No plan to abandon product line resulting in the inventory being obsolete.
E: Events after the reporting period have all been disclosed.
F: Financial statements are not materially misstated and omitted.
L: Laws and regulations are complied by management.
(H)
Competence
The expert should be a member of a professional body.
The expert should have relevant experience and reputation in doing the work in the
filed.
Independence:
The expert should not be employed by the client.
(i)3 auditors right covered in tuition video
The auditor has the right of having access to the companys books and records at
any reasonable time for audit purposes.
The auditor has the right to require from the companys officers the information and
explanations that the auditor considers necessary to perform their duties as
auditors.
The auditor has a right to receive a copy of those resolutions where the company
uses written resolutions.
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(J) Tutor tips: sampling can either be statistical sampling using extrapolation or
non-statistical sampling using judgment.
Statistical sampling: Random sampling:
This ensures every item in the population will have an equal chance of being selected.
Monetary unit sampling:
This ensures every $1 in the population has an equal chance of being selected.
Non-statistical sampling:
Haphazard sampling:
This means auditor will not use structured method to sample but rather base on the
amount selected.
Block sampling:
This means auditor will choose a block of samples within a population, eg, selecting the
first 3months figures.
(K) Tutor tips:
Assertions relating to SOCI: OCACC
Assertions relating to SFP: CRAVE Occurrence.
The transactions recorded have actually occurred.
Completeness. (both in SFP and SOCI)
All transactions recorded have been recorded.
Accuracy. (in SFP called valuation)
The amounts of recorded transactions are correct.
Cut-off.
Transactions have been recorded in the correct accounting period.
Classification. (in SFP called allocation)
Transactions have been recorded in the correct accounts.
Rights and obligation
Assets and liabilities recorded actually belong to company.
ExistenceAssets recorded by company actually exist.
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Adjusting events
Any event needs adjusting should be communicated to those charged with governance
if not made by the management.
(n) mnemonics: S3SER
Subject matter
This explains whether the assurance engagement is audit engagement or non-audit
engagement.
3parties
3 part involved includes:
Practitioner, ie, auditor if its audit engagement.
Responsible party, ie, directors.
Users, ie, shareholders.
Standards
This explains what standard the auditor need to comply with, eg, for audit its ISAs.
Evidence
This explains how much evidence that auditor needs to obtain, ie, sufficient and
appropriate audit evidence if its audit.
Report
This explains either positive audit assurance or negative audit assurance will be given.
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(o) ISA320 materiality
1, Definition:
A misstatement is material if it affects investor economic decisions.
2, Quantity of misstatement:The quantity of the misstatement refers to the relative size of it and its always
calculated as follows:
0.5%-1% of total revenue
1%-2% of total assets
5%-10% of total profit before tax.
3, Quality of misstatement:
The quality of the misstatement is important because of WHAT they are, rather than
the actual size of the error, eg, creative accounting.
4, Aggregation:
In assessing materiality the auditor must consider that a number of errors each with a
low value may when aggregated amount to a material misstatement.
5, Performance materiality:
This is the lower figure set up at the planning stage by the auditor to help guide the
auditor in deciding whether the client is a risky client or not.
(p) true and fair view
True
This means financial information should comply with relevant accounting
standards.
Eg, research expense should always be expensed to the income statement
according to ISA38.
Fair
This means financial information should reflect the true substance of thetransaction.
Eg, if the lease transaction complies with finance lease condition then it
should be classified into finance lease rather than operating lease.
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(T) ISA315: the examiner has tested you one aspect of the 5 within ISA315:
Control environment
This means whether management deems internal control system of the
company very important and if yes then the control environment is strong.
Risk assessment
This means how the management of the company assess the business risks
and quantify their likelihood and impact on the company.
Information system
This means how the assets and liabilities are generated by the company
using its information system.
Control proceduresThis means procedures implemented by company to meet with control
objective, eg, quality check of goods when arrival to ensure goods are in
good condition to be sold.
Monitoring control
This is usually done by internal auditors to monitor controls to ensure they
are working not just paper work.
(U) ISA300 benefits of audit planning
It can help auditors develop a suitable method to audit, eg, system based
approach or full substantive testing approach.
It can help auditors allocate resources during the audit, eg, allocate staff
to another country to do the audit.
It can help auditors focus on the high risk areas.
It can help auditors generate into appropriate audit procedures to be
used in the material and high risky areas when actually performing the
audit.
(V) ISA530 sampling methods
Same answer as (j)
(W) auditors right
Same as i
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(X) ISA315 about control activities [mnemonics: CARCAP]
Only 4 points required.
Comparison
Comparing the budgeted company performance with the actual one.
Authorisation
There would be authorization of transaction by management to ensure
transaction is genuine.
Reconciliations
Bank reconciliation should be done to identify any difference and investigate
reasons why.
Computer ControlsPassword should be set to protect the access of the system by others.
Arithmetical
There should be controls which check the arithmetical accuracy of
accounting records.
Physical
There should be restricting access to physical assets such as cash to reduce
the risk of theft.
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Q3+Q4 revision
DEC2011 Q3modified
(a)
Inherent risk
This is a risk happened in the first place.
Eg: if the balance is very complicated then accountants would easily make a
mistake. / change in industry
Control risk
This is a risk that errors cant be detected by internal control system.
Eg: no segregation of duties between accountant and cashier leading to
cash being stolen.
Detection risk
This is a risk that errors cant be detected by auditors.
Eg: auditor lacks of experience to deal with the issue and cant spot the
mistake.
(b)
Tutor tips:Audit risk is usually asked in p7 exam and we follow these 3 steps to
generate into high quality answers:
What
Risk that accounting standard not complied with
Impact (asset/liability/income/expense under/over stated)
Only 5 points are required but for illustrative purposes I have listed 9 points.
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5,
IT manager left the company and the
system is bespoke.
Theres a risk any errors faced by
staff will not be addressed by them.
This will lead to misstatements in the
financial statements.
Auditors should enquire with
management of how to deal with this
risk and consider further actions
needed.
6,
Equity finance of $1m is raised.
There is a risk that if shares are
issued above/under the par value
then share capital and premium is
wrongly accounted for.
And it would lead to a misstatement
in the equity figure.
Auditor should recalculate the share
capital and premium to verify its
accuracy.
7,
Covenants are attached to the
$2.5m loan and if covenant is
breached then loan would be
repayable.
Theres a risk that a liability and
expense hasn't been recorded
according to IAS37 provisions,
contingent liabilities and contingent
assets or a contingent liability is not
disclosed.
This will result in expenses and
liability being understated or under
disclosure of contingent liability.
Auditors should enquire with
management about the possibility of
the repayment and to recalculate its
current financial ratio as well.
8,
land and buildings are revalued at
the year end.
Theres risk that revaluation reserve
is not properly recognized as per
IAS16.
This will result in the PPE beingmisstated.
Auditors should obtain the
breakdown of the land and buildings
and recalculate it to verify its
accuracy.
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June2010 Q4 Ethics(2)
(a) Mnemonics: SSAFIM, only 5points required.
Self-interest threatThis can arise from acceptance of financial benefit from clients management.
Self-review threat
This can arise from designing and auditing the system by auditor.
Advocacy threat
This can arise from acting on behalf of client and promoting status of clients company
by auditors.
Familiarity threat
This can arise from being too close to management, eg, long association with client.
Intimidation threat
This can arise from pressure placed by client management, eg, threaten to remove
auditors.
Management threat
This can arise from making decision for client by auditor.
(b)
Threats How its solved
1, Staff are entitled to a 10% discount
to buy telephone which creates a self
interest threat meaning in order to keep
the discount auditors may give a wrong
opinion to keep client happy.
If the discount is significant then
auditor should decline the offer.
2, Audit senior was seconded to be a
financial controller so this creates a self
review threat meaning when checking
his own work he may lose professional
skepticism to do the work and hence
ignore the mistakes made.
So he should be removed to be an
auditor for LV fones co.
3, Total income from LV jones accounts
for 16% of firms income and this
exceeds 15% and hence creates a self
interest threat meaning in order to keep
the income auditors may issue a wrongaudit opinion to satisfy client.
Auditor should consider resign from LV
fones./
Auditor should consider to do a quality
review on the audit work done.
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4, Finance director and audit partner
has a close relationship and this creates
a familiarity threat meaning audit
partner may keep mistakes made by
finance director and hence gives awrong audit opinion.
An alternative audit partner should be
appointed to this audit engagement.
5, 20% of audit fee is still outstanding
and this creates:
1, intimidation threat meaning client
may have pressure on audit firm that if
audit firm doesn't give an opinion
satisfies the client then client will not
give money back to auditors.
2, familiarity threat meaning this will be
perceived a loan offered to client and
hence may be perceived a good
relationship between the two and any
opinion given by auditors may not be
trustable.
Audit firm should chase the outstanding
fee from client./
Discuss with those charged with
governance, ie , audit committee.
(c) only 5points required.
Professional clearance:
Auditor should seek managements permission to talk to outgoing auditors and if this isrejected then auditors should not accept the work.
If client permits then auditor should contact the outgoing auditor asking, are there
any reasons that you think we should not accept this engagement?
If the answer is yes then we should contact client again asking, can you explain away
the problem?
If client cannot explain away the problem then we should reject it but if they can then
we can accept it.
Competence:
Auditors should consider whether they are competent to do the work.
Client
We should also assess the integrity of the clients management and if they are not
integrate then we should reject the work.
Also if there are conflict of interest then we should consider resign to be an auditor from
one of them.
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(d) modified. Need for internal audit department (only 5 points required)
Size of company
The bigger the company is then the greater need for an internal audit
department.
Costs
Finance director should consider whether the costs of setting up the internal audit
department will outweigh the benefit it can obtain.
If theres existing staff carrying out the internal audit function such as company has
outsourced the internal audit function to external audit firm and this decrease the
need for internal audit department.
Internal control system
If there is lots of fraud happening within the company then a greater need for the
internal audit department would be.
If the control environment of the company is quite weak, ie, management will
override controls quite a lot then an internal audit department to monitor those
controls will be needed.
Listed
If company is going to go listed then if an internal audit department is set and thiswill increase the confidence from investors.
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5/28/2018 F8 2days Live Online Revision Class
74/85
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5/28/2018 F8 2days Live Online Revision Class
75/85
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76/85
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June2008 Q3
(a)
(i)
This is used by comparing financial and non financial information to identify anyunexpected situations of the clients company.
Eg, the sales revenue, receivable balance and overdraft balance of clients company
has increased significantly so auditor can expect that maybe client is overtrading.
(ii)
Comparing information with prior years to identify unusual changes.
Comparing information with other similar companies to identify unusual changes.
Comparing actual information with budgeted information to identify unusual
changes.
(iii)
Planning stage
Analytical procedures are used in this stage to identify risks of material misstatement
of clients financial statements.
Substantive testing
Analytical procedure can be used as one of substantive procedures to collect audit
evidence.
Review stage
Substantive procedures can be used here to try to show whether clients financial
statement is overall in line with auditors understanding.
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5/28/2018 F8 2days Live Online Revision Class
77/85
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78/85
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Appendix:
2008 2007
Revenue growth 7482-6364
6364 =17%Cost of sales growth 3520-4253
4253 =(17%)
Gross profit margin 53% 33%
Admin expense 1235-1320
1320 =(6%)
Selling and distribution 981-689
689 =42%
Interest payable 101-105
105 =(4%)
(c) bank confirmation letter
Eg, to check clients company how much cash balances
Obtain authorization on that letter from a director of Zak for the bank to disclose
information to the auditor.
The auditor's request must refer to the client's letter of authority and the date of that
authority.
The auditor sends the letter directly to Zaks bank with a request to send the reply
directly back to the auditors.
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Q5 revision
DEC2011 Q5 subsequent events +report
(a)
(i)
In this period auditor will have active responsibility to identify any subsequent
events.
This means auditors should perform eg, enquiry with management whether any
subsequent events needs to be disclosed to identify further subsequent events.
(ii)
In this period auditor will have passive responsibility to identify any subsequent
events.
This means auditors are not required to perform any further audit procedures to
identify any subsequent events.
But if an event is known to auditor at the date audit report is signed then auditor
should assess whether event needs to be adjusted and how managements going to
do with it and additional audit procedure will be required.
(b)
Receivable
(i)
$0.3m gives evidence existing as at the year end regarding the recoverability of
receivable so its an adjusting event.
(ii)
Auditor can inspect the correspondence with customer to assess the likelihood of
payment.
Auditor can inspect post year end transaction to assess whether company ahs
received any payment from the customer.
(iii)
Because $0.3m accounts for 4% of profit before tax and 0.4% of revenue so its not
material to the financial statement and hence no adjustment needed.
Because the amount of $0.3 is not material so no impact on the audit opinion.
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5/28/2018 F8 2days Live Online Revision Class
80/85
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81/85
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June2010 Q5 going concern
(a)
Going concern means company will continuous in business in the foreseeable future,
ie, more than 12 months.
Management of the company will prepare the financial statement based on the
going concern basis.
(b)
Indicators Why
1, 90% revenue are from 2 products. If therere not sufficient sales then it has
difficulty in paying expenses and hence
lead to going concern problems.
2, demand is falling. If company cant increase the demand
then its hard to generate sufficient cash
flow which will lead to going concern
problems.
3, company hasn't invested money into
development sufficiently.
If there is no other products at the new
industry lifecycle to generate into future
cash flow then it will lead to going concern
problems.
4, suitable staff are hard to recruit. This will hold up the product developmentprocess and hence lead to going concern
problems.
5, $2m will be hard to raise by company
from bank.
No investment into PPE to generate into
future income which will lead to going
concern problems.
6, suppliers has been paid much later. Suppliers may be upset and refuse to
supply to company which will lead to going
concern problem.
7, company must pay cash on delivery. This will have pressure on overdraft used
by company so company will have to pay
high amount of interest and this will lead
to going concern problem.
8,overdraft balance has greatly increased. If bank doesn't renew the overdraft facility
then the company is unable to trade any
more.
9, cash flow forecast is worsening. If company cant improve this then it will
have difficulty in funding its operating
activity and hence lead to going concern
problem.(c)
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5/28/2018 F8 2days Live Online Revision Class
82/85
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5/28/2018 F8 2days Live Online Revision Class
83/85
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DEC2010 Q5 audit of accounting estimate
Revision: (IAS8)
Accounting policy is something to do with:
Measurement basisof the figure, eg, value the inventory using FIFO but now use
weighted average method; use replacement cost rather than historic cost. Recognition basisof the figure, eg, recognize as an expense before but now for
asset(eg,IAS 23 borrowing costs)
Presentation basis of the figure, eg, recognize the depreciation expense into cost
of sales now rather than in administrative expenses before.
Accounting estimate is like:
Allowance for receivables;
Useful life/ depreciation method of the non-current assets;
Warranty provision relating to return of goods from customers.
An error may happen if theres a
Misuse of the accounting standard last year;
Fraud happended last year;
Omit some figures in last years account.
(a) Enquire of management how the accounting estimate is made to ensure its in line
with auditors understanding.
Inspect the method of assumption made and confirm its reasonableness.
Obtain written representations from management to confirm they believe
significant assumptions used in making accounting estimates are reasonable
Obtain sufficient appropriate audit evidence about whether the disclosures in the
financial statements related to accounting estimates are reasonable.
Inspect whether events after the reporting period provide audit evidence regarding
the accounting estimate.
Recalculate the accounting estimate to verify its accuracy.
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5/28/2018 F8 2days Live Online Revision Class
84/85
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5/28/2018 F8 2days Live Online Revision Class
85/85