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.
Q1: Pilot paper: Substantive procedures on trade payables and purchases; use of CAATs Purchases system; inventory system and count Internal control questionnaires; tests of controls on sales system;
DEC2007: June2008:
receivables' confirmation
DEC2008: June2009:
Wages system; analytical procedures; audit evidence Audit planning; audit risk; analytical procedures; audit procedures (receivables)
DEC2009: June2010:
Audit planning; audit procedures; risk assessment; auditing inventory 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
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!!!)
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 530 Audit 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
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)
DEC2010: Preconditions for an audit; understanding the entity; Using ratios to assess
audit risk
June2013:materiality/ audit planning-analytical procedure/audit risks DEC2013:sales system procedures; sales system control objectives; sales system weaknesses and improvement.
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 audit procedures on
June2012: assertions listed/ audit procedures on inventory/ depreciation and IAS37 working paper items
June2013:procedure on PP&E/ internal audit DEC2013: factors considered before acceptance of audit; precondition; engagement letter content; ethical risks theory.
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)
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.
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
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, the warehouse manager feels confident that he can perform this task.
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)
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 Financial Statements. (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 be included 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)
(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 departmen t 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 the interim and final audits, if Pear International Co was to establish an internal audit department. (4 marks) (30 marks)
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 ass istant produces a goods 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)
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.
(d) Explain each of the FIVE fundamental principles of ACCAs Code of Ethics and Conduct. (5 marks) [DEC2007] (e) ISA 570 Going Concern provides guidance to auditors in respect of ensuring that an entity can continue as a going concern. Required: Explain the actions that an auditor should carry out to try and ascertain whether an entity is a going concern. (5 marks) [DEC2007] (f) List and explain FOUR factors that will influence the auditors judgment regarding the sufficiency of the evidence obtained. (4 marks) [June2008]
(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 500 Audit Evidence that relate to the recording of classes of transactions. (7 marks) [june2009 modified] (l) ISA 500 Audit 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]
(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 230 Audit 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 210 Agreeing 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 up of 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
in planning an audit. Required: Explain the benefits of audit planning. (4 marks) [June2012] (v) ISA 530 Audit Sampling provides guidance on methods for selecting a sample of items for testing. Required: Identify and explain THREE methods of selecting a sample. (3 marks) [June2012] (w) In order for auditors to operate effecti vely and to provide an opinion on an entitys financial statements, they are given certain rights.[DEC2012] Required: State THREE rights of an auditor, excluding those related to resignation and removal. (3 marks) (x) ISA 315 Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment requires auditors to obtain an understanding of control activities relevant to the audit. Control activities are the policies and procedures that help ensure that management directives are carried out; and which are designed to prevent and detect fraud and error occurring. An example of a control activity is the maintenance of a control account. Required: Apart from maintenance of a control account, explain FOUR control activities a company may undertake to prevent and detect fraud and error. (4 marks) [DEC2012] (y) Describe THREE limitations of external audits. (3 marks) [DEC2012]
(z) Auditors are required to perform an overall review of the financial statements before they provide their audit opinion. Required: Explain THREE procedures an auditor should perform in conducting their overall review of the financial statements. (3 marks)
Q3+Q4 Revision Possible areas: Risk assessment in audit planning. Ethics and corporate governance Internal audit Analytical procedures and bank confirmation letter
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)
2, June2010 Q4:
(a) State the FIVE threats contained within ACCAs Code of Ethics and Conduct and for each threat list ONE example of a circumstance that may create the threat. (5 marks) (b) You are the audit manager of Jones & Co and you are planning the audit of LV Fones Co, which has been an audit client for four years and specialises in manufacturing luxury mobile phones. During the planning stage of the audit you have obtained the following information. The employees of LV Fones Co are entitled to purchase mobile phones at a discount of 10%. The audit team has in previous years been offered the same level of staff discount. During the year the financial controller of LV Fones was ill and hence unable to work. The company had no spare staff able to fulfil the role and hence a qualified audit senior of Jones & Co was seconded to the client for three months. The audit partner has recommended that the audit senior work on the audit as he has good knowledge of the client. The fee income derived from LV Fones was boosted by this engagement and along with the audit and tax fee, now accounts for 16% of the fi rms total fees. From a review of the correspondence fi les you note that the partner and the fi nance director have known each other socially for many years and in fact went on holiday together last summer with their families. As a result of this friendship the partner has not yet spoken to the client about the fee for last years audit, 20% of which is still outstanding. Required: (i) Explain the ethical threats which may affect the independence of Jones & Cos audit of LV Fones Co; and (5 marks) (ii) For each threat explain how it might be avoided. (5 marks) (c) Describe the steps an audit firm should perform prior to accepting a new audit engagement. (5 marks)
(d) The finance director of Sunflower Stores Co is considering establishing an internal audit
department. Required: Describe the factors the finance director should consider before establishing an internal audit department. (5 marks) [DEC2012 Q3(c)]
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 udit department, 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)]
Revenue Cost of sales Gross profit Operating expenses Admin Selling and distribution Interest payable Investment income Profit/(loss) before tax Financial statement extract Cash and bank
Required:
253
(950)
(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)
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
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.
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)
2 June2010
(a) Define the going concern assumption. (2 marks) Medimade Co is an established pharmaceutical company that has for many years generated 90% of its revenue through the sale of two specific cold and fl u remedies. Medimade has lately seen a real growth in the level of competition that it faces in its market and demand for its products has significantly declined. To make matters worse, in the past the company has not invested sufficiently in new product development and so has been trying to remedy this by recruiting suitably trained scientific staff, but this has proved more diffi cult than anticipated. In addition to recruiting staff the company also needed to invest $2m in plant and machinery. The company wanted to borrow this sum but was unable to agree suitable terms with the bank; therefore it used its overdraft facility, which carried a higher interest rate. Consequently, some of Medimades suppliers have been paid much later than usual and hence some of them have withdrawn credit terms meaning the company must pay cash on delivery. As a result of the above the companys overdraft balance has grown substantially. The directors have produced a cash fl ow forecast and this shows a signifi cantly worsening position over the coming 12 months. The directors have informed you that the bank overdraft facility is due for renewal next month, but they are confident that it will be renewed. They also strongly believe that the new products which are being developed will be ready to market soon and hence trading levels will improve and therefore that the company is a going concern. Therefore they do not intend to make any disclosures in the accounts regarding going concern. Required: (b) Identify any potential indicators that the company is not a going concern and describe why these could impact upon the ability of the company to continue trading on a going concern basis. (8 marks) (c) Explain the audit procedures that the auditor of Medimade should perform in assessing whether or not the company is a going concern. (6 marks) (d) The auditors have been informed that Medimades bankers will not make a decision on the overdraft facility until after the audit report is completed. The directors have now agreed to include going concern disclosures. Required: Describe the impact on the audit report of Medimade if the auditor believes the company is a going concern but a material uncertainty exists. (4 marks) (20 marks)
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.
Q1 revision
DEC2012 Q1 inventory system (a) Only 6points required. Deficiencies(what+so what) 1, Warehouse manager is not independent from the counting because he is familiar with it and so may hide inefficiencies. 2, Each team has two members and they may count together rather than check each other. 3, The counted area is not flagged and there would be double counting. 4, Internal audit department will assist in counting but they should review the result rather than help them count. 5, Inventory which are not included in the sheet will be recorded in another sheet with no number and this cant ensure completeness of inventory. 6, Counting sheets are in ink and sequentially numbered but not signed by staff and any problems arise its hard to trace to members responsible for it. 7, Damaged goods are not moved to another location but just with a note made by staff and so 1, it would be sold to customers creating a bad reputation; 2, finance department would be hard to determine the level of write down in value if they cant see the damage. 8, Continues production is used and during the count this may result in inaccurate inventory records. Recommendations(How) Use internal audit department manager to supervise the process. One member count the inventory and another check the counting result. Once the area is counted then it should be flagged. They should sample check the result undertaken by the team. The sheets given to member should be prenumbered so supervisor can check its completeness after the count. The sheets should counting staff. be signed by
New purchases on that date must be kept in another location and they should keep sending out of inventory to others minimum. The checking of work in progress should be checked by specialist. Or warehouse manager can assessed it and then specialist check it.
9, The warehouse manager may have no experience to check the work in progress because this was done by specialist previously.
(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 and in 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
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.
(C) (i) Auditor can use audit software to calculate inventory days to ensure inventory balance is not overstated(because inventory days are high(slow) so inventory balance would be high as well.) Auditor can use audit software to cast the inventory listing to ensure its accuracy and completeness. Auditor can use audit software to produce an aged analysis for the inventory to ensure inventory balance is not overstated because some of them needs to be written down in value. Auditor can use audit software to recalculate the cost and net realizable value for a sample of inventory to ensure they are correctly recorded in the financial statements.
(ii) CAATs helps the audit team test a large volume of inventory data accurately and quickly. CAATs can test program controls within the inventory system as well as general IT controls, such as passwords rather than just test on the paper work(printout by auditor) CAATs reduce the level of human error in testing and hence provide a better quality of audit evidence. CAATs would allow auditor to focus on high risk areas and jusgement rather than just numbers calculation.
(iii) The set up costs for the CAATs in the first year is high. Audit staff will need to be trained to use the CAATs and costs associated with it as well as time spent is high. CAATs may be incompatible with clients system and so bespoke system will need to be developed and this will further increase the costs. When using the CAATs to test the live system the date may be interrupted.
2, DEC2011 Q1 payroll system (a) Implication 1, no supervision during the clocking in/out will lead to multiple employees being clocked by one single employee at a time. 2, no supervision during the clocking in/out will lead to hours being boosted by employees clocking out several hours after the shift. 3, wages calculation is not checked by others and if an error occurs in the system and this will lead to wages being misstated. Recommendation The clocking in/out process should be supervised. Overtime hours should be reviewed by production supervisor before authorized. Senior member in the payroll team should recalculate the wages to ensure its accuracy. So the increase in hourly rate should be agreed to board as well.
4, if the increase in hourly rate is just agreed by human resource department then this may not be agreed by the board leading to dysfunctional behaviors. 5, verbal increase in hourly rate will lead to unauthorized increase, eg, a member in HR department just wants to increase salary for one of their friends. 6, supervisor is not independent of the pay and he could adjust the pay more to his close friends and less to others. 7, wages not distributed on Friday would be easily stolen.
No supervisor would be allowed to hand out those wages. Wages not distributed on friend night should be kept in safe overnight. When the new joiners complete the form which should be distributed to relevant departments immediately.
8, new joiners and leavers are not recorded in the system timely and this will result in the wages payment misstated.
(b) Agree the total wages in the payroll system to the detailed trial balance and investigate any differences to verify its completeness. Agree the total net pay per the payroll records to the cashbook to verify its completeness. Recalculate a sample of payroll records to confirm completeness and accuracy of the payroll expense. Recalculate the gross and net pay of employees and agree to the payroll records to verify accuracy.
Recalculate that joiners and leavers first/last pay packet to verify its accuracy and completeness, ie being recorded. Perform analytical procedures to compare the total payroll expense to the prior year and investigate any significant differences to verify its accuracy.
(C) ISA250 Management has sole responsibility to ensure company acts according to laws and regulations. Auditor has responsibility in giving audit opinion on the true and fairness of the financial statement not to detect the non-compliance of laws by company. If the non-compliance of laws will lead to a material misstatement onto the financial statement then auditor would have a responsibility to obtain sufficient and appropriate audit evidence relating to this non-compliance. If the non-compliance of laws will have an impact on the going concern of the company then auditors should enquire with management about whether they have complied with laws and inspect correspondence with the regulatory authorities.
(d) only 4 required. Enquire with management about the redundancy to confirm a liability exists. Inspect the announcement of outsource of the department to confirm a liability exists. Inspect board minutes to confirm cash outflow is probable. Recalculate components within the provision to confirm its accuracy. Obtain a written representation from management to confirm the completeness of the provision. Inspect the disclosure of the redundancy provision to ensure compliance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
(e) ISA610: Using the Work of Internal Auditors Only 4 points required. Objectivity They should consider who internal auditors report to, ie, if they report to audit committee rather than finance director then more reliance can be placed on their work. Competence They should consider whether the internal auditors have appropriate qualification from a recognized body such as ACCA and if yes we should place more reliance on their work. Experience They should consider the experience of internal auditors,ie, if they have more experience of doing the internal audit they can place more reliance on internal auditors work. Work They should consider whether work done by internal auditors are properly documented and supervised and if yes then more reliance can be placed on. Communication They should consider whether effective meeting or other communication between internal and external auditors exist and if yes then more reliance can be placed on internal audits work.
1,no inventory integration on the website which will lead to impairment of reputation because orders by customers are not with sufficient inventory 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. 3, when sales orders placed this are not forwarded to dispatch department leading to delay and hence it will impair goodwill from customers. 4, sales ledger clerk sets credit limit and they may set the credit too high leading to an increase in bad debts. 5, all sales team members can set discount and this will lead to a loss in revenue given they prefer to boost sales. 6, suppliers statement reconciliation are not done on a timely basis which may lead to errors in recording purchases and payables. 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.
Integrate inventory on the website and if theres no inventory currently when orders placed so waiting time should be presented to customers. Pear should obtain signature from customers when goods dispatch to them.
Auditor can input an order of inventory which is currently out of stock and expect a reject from the system with appropriate waiting time. Auditor can inspect sample of dispatches to confirm signatures made.
Auditor can inspect a sample of sales order to verify they have been forwarded to the dispatch department.
Discounts should be set by a senior member within the sales team. A limit should be set on the discount granted by the sales team. Supplier statement reconciliation should be done on a monthly basis.
Auditor can inspect authorization of credit limit signature to confirm it has been done by a senior member in the sales team. Auditor can inspect the limit on the discount given by sales team to confirm its existence. Auditor can inspect the supplier statement reconciliation to confirm it has been done on a timely basis.
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.
8, surplus land will run a risk of being theft which will lead to a loss of income. 9, purchase requisition of equipment is authorized by production supervisor but they are not senior enough to do so.
Theres should be regular inspection of surplus equipment by senior staff within company. High value equipment can be authorized by board while the low value ones can be authorized by production supervisor.
Auditor can observe the process reviewed by senior factory personnel. Auditor can inspect signatures for the authorization of purchase to confirm appropriate authorization has made.
(b) 2points each required. Also revise DEC2010 Q4(c) covered in tuition video Additions Agree cost of asset to supplier invoice to confirm its accuracy. Inspect Physically sample additions to ensure its existence. Agree the breakdown of additions to non current asset register to confirm its completeness. Disposals: Recalculate sample of gains and losses on disposal and agree to income statement to confirm it accuracy/ valuation. Agree proceeds for sample of disposals to cash book and bank statement as well as involves confirming its accuracy/valuation.
(C) Only 3points are required. External audit External audit gives positive assurance meaning auditors have gathered sufficient and appropriate audit evidence to give more confidence to shareholders as to whether the financial statements are true and fair. And it would be usually expressed using in our opinion. Other review engagement This gives a negative assurance to users as not sufficient and appropriate audit evidence gathered by auditors. And it would be usually expressed using nothing has come to our attention suggesting the subject matter contains material misstatement.
(d) Objective The objective of internal audit is to improve business operaton by reviewing internal control system effectiveness while the objective of external audit is to express its audit opinion on true and fairness of financial statement. Reporting Internal auditors report to manegemrnt or those charged ith governance which external auditors report to shareholders. Scope of work The scope of work by internal auditors is defined by management including reviewing lots of internal control systems while for external auditors their scope is to express their audit opinion on the true and fairness of the financial statements. Appointment Internal auditors are appointed by management while external auditors are appointed by shareholders independently.
(e) Interim audit Apple & Co can rely on the risk assessment done by internal auditor to reduce the work. Apple& Co could rely on the control testing done by internal auditor to reduce the work. Apple & Co can rely on the work done by internal auditor to assess management fraud and non compliance with law to reduce the work. Final audit Apple & Co can rely on work done by internal auditors about inventory count at the year end to reduce the work but Apple & Co still needs to perform their reduced testing.
DEC2010 Q1 (a)
If the internal control deficiency will lead to a material misstatement in the FS then its significant. If many internal control deficiencies exist which will lead to a material misstatement in the FS then its significant. If the override of the internal control by management which will lead to lead to a material misstatement in the FS then its significant. If a missing of internal control system which leads to a material misstatement in the FS then its significant. If the internal control system is easily leading to loss or fraud of the related asset or liability then its significant.
(b)
ABC & Co Certified Accountants 29 High Street The Board of Directors Greystone 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 1, The purchasing manager decides on the inventory levels for each store without discussion with store or sales managers. 2, The purchase orders are only reviewed and only authorised by a purchasing director 3, The store managers are responsible for re-ordering goods through the purchasing manager. (ii) Implication This could result in stores ordering goods that are not likely to sell. It will be difficult for the purchasing director to know everything about the purchase decision. If the store managers forget or order too late, then as the ordering process will delay and result in stock out. 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. 5, Goods are then checked by sales assistants to the suppliers delivery 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. 6, Goods are being received without any checks being made against purchase orders. 7, Purchase invoices are manually matched to a high volume of GRNs from the individual stores. This could result in Greystone receiving and subsequently paying for goods it did not require. 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 be automatically matched. The goods should then be checked on arrival for quantity and quality before acceptance. (iii) Recommendation The purchasing manager should initially hold a meeting with area managers of stores before agreeing jointly goods to be purchased. Decision can be authorized by senior purchasing manager and then passed to the purchasing director for final review and sign off. Automatic re-order levels should be set up in the inventory management systems.
An internal ordering system should be set up which allows for the transfer of goods between stores.
A copy of authorised orders should be kept at the relevant store and checked against GRNs.
8, A purchase invoice is not put on the system until it is ready for authorisation by the purchasing director
The purchase ledger will not have all invoices posted, understating liabilities. Also payables may be paid late.
Any unauthorized invoices should be accrued for and kept in another file.
This report is solely for the use of management and if you have any further questions then please do not hesitate to contact us. Yours faithfully An audit firm
(C) Completeness Circularize trade payables to confirm balances owed as at year end were included in the financial statements. Existence Circularize the trade payables to confirm existence directly from the reply of circularization letter. Valuation Send out a letter of circularization to ask the suppliers to independently confirm the balances outstanding as at the year end. Post year end bank statement External auditors should inspect bank statement to confirm cheques going through a few days/weeks after the year end. completeness Inspect after date invoices and credit notes to ensure no further items need to be accrued to verify its completeness.
(d) only 6points are required. Internal controls Internal auditor would review Gs internal controls to assess their effectiveness and report to those charged with governance. Recommend improvements Internal auditors could recommend improvements to internal controls and report back to those charged with governance or directors. Special investigation Internal auditors could be involved in investigating fraud and reporting back to directors. Corporate governance advice Internal auditors could give advice to the board of directors of how to structure itself to have a good corporate governance structure. Review FS intergrity Internal auditors could help review financial informations integrity before its passed to the board of directors for discussion. Internal auditors help external auditors Internal auditors could help external auditors through control testing in certain area such as stock count. Value for money audit Internal auditors can audit the system for 3Es, economy, efficiency and effectiveness. Business strategy Internal auditors can help management review business strategy given their specific expertise.
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.
(c) only 3points are required. When theres material/pervasive misstatement in the clients financial statement, eg, not complying with certain accounting standards. When auditors cannot obtain sufficient and appropriate audit evidence either material or pervasive. When emphasis of matter paragraph is added to tell shareholders theres something affecting going concern status of the clients company. When other matter paragraph is added to tell shareholders financial information does not equal to non-financial information. (d) Mr PICCO Professional behavior Auditors can do anything that will damage ACCAs reputation. Integrity Auditors cant lie to shareholders. Competence and due care Auditors must pass ACCA exams and accumulate experience and also do annual continuous professional development before becoming a qualified auditor. Also auditor should do the audit work according to ISAs. Confidentiality Auditor cant disclose clients confidential information to 3rd party without clients permission but if clients company is involved in illegal activity such as money laundering then auditor can disclose this to the appropriate authority. Objectivity Auditor should be objective to give the audit opinion on true and fairness of the financial statements,eg,they shouldn't allow anything that will override the objectivity such as personal bias.
(e) ISA570 going concern. Tips: the key here is to look at whether company has cash flow problems and the plan by management in the future. Auditor can perform analytical procedures to calculate receivable days to identify if theres an increase in receivable days which may suggest a cash flow problem. Auditor can re-perform the receivable aged analysis to identify if there is an increase in receivable days which may suggest a cash flow problem. Auditor can perform analytical procedures to calculate inventory days to identify if theres an increase in inventory days which may suggest an operational problem, ie, inventory cant be sold by company which may affect going concern status of company. Auditor can enquire with management and obtain their future plan based on going concern assessment. Auditor can enquire with management and seek written representation about the future action by company.
(f) sufficiency of audit evidence- in the study note I just list 3 but 4 required here: If the balance is very risky then more audit evidence will be needed. If the balance within the financial statement is material then more audit evidence will be needed. If the audit evidence is less reliable such as internal generated evidence like management representation then more evidence will be needed. If the auditor knows the business very well and also staff within company are integrate then less audit evidence will be needed.
(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.
(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. Existence Assets recorded by company actually exist.
(I) reliability of audit evidence (4points you can break the first point down into 2 points.) If audit evidence is generated from external source then its more reliable than that generated from internal source such as auditors generated auditor evidence is more reliable than 3rd party generated which is more reliable than management generated. Written audit evidence is more reliable than oral audit evidence. Original audit evidence is more reliable than photocopied audit evidence. Audit evidence relating to past events is more reliable than that relating to future events. (m) (i)Those charged with governance will: (2pints are enough) Promote good corporate governance Implement sufficient internal controls(to detect fraud and errors) Oversee the strategic direction of the company Etc (ii) (only 4points required.) Audit opinion Auditor is responsible for giving the audit opinion on the tru and fairness of the financial statement. Modification If theres any modification of audit report then it should be communicated to those charged with governance. Fraud If fraud is found during the audit then it should be communicated to those charged with governance, ie, audit committee. Approach The approach to risk assessment should be communicated to those charged with governance. Ethics Auditors should communicate to those charged with governance that auditors have complied with Ethical standards.
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.
(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 the transaction. Eg, if the lease transaction complies with finance lease condition then it should be classified into finance lease rather than operating lease.
(Q) ISA status International standards on auditing are issued by international auditing and assurance standards board to give guidance of how to perform an audit engagement. This is used when performing audit on the historical financial information.
(S) ISA210 engagement letter (i) This provides a written agreement of the terms between auditors and management and reduce the misunderstanding of the audit.
(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 procedures This 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
(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 Controls Password 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.
(y) limitation of external audit (only 3points required.) Sampling Auditors are required to sample not to test 100% transactions so there could be an error existed in the area not being sampled. Internal control system Internal control system is operated by human beings and so there would be override of control by management and because auditor relies on this so reduces usefulness of audit. Audit report Audit report is written in technical language and it is not easily understood by non-financial users. Historical information The audit is focusing on the historic financial information but the position of company is changing al the time. Subjectivity Some areas are not covered in ISA and so it requires auditors to use their judgment.
(z) Assess whether the audit evidence gathered by the team is sufficient and appropriate to support the audit opinion Perform analytical procedures of the financial statements before forming an overall conclusion on the financial statements, ie, whether company is still a going concern status.
Review the disclosure of the accounting policies to ensure that they are in accordance with the accounting treatment and sufficiently disclosed.
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.
response 1, Auditor should inspect items within Finance director decides to capitalize development costs and only items $2.2m of development expenses. fulfilling capitalization criteria can be capitalize with others being There is a risk that criteria in IAS38 expensed. intangible assets relating to development costs are not fulfilled and so they need to be expensed to income statement. So the assets may be overstated and related expenses will be understated. 2, Standard costing is used by the company and its acceptable by IAS2. There is a risk that standard cost calculated would be different from the actual cost and its out of date. So inventory would be under/over misstated. 3, Auditors can observe inventory rd One third of inventory belongs to 3 counting process to make sure party. inventory quantities are correct. Theres a risk that quantities are not correctly identified by company. So inventory balance would under/Over misstated. 4, A new accounting system introduced. be
Audit risk
Auditors should recalculate the actual cost for inventory using other methods and compare with standard cost and identify any differences between the two.
Auditors can perform test of is controls by inputting some dummy data into system such as exceeding the limit of credit offered to customer Theres a risk that errors happened and expect a reject from system. in the changeover process will result in trial balance being misstated.
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.
Auditors should enquire with management of how to deal with this risk and consider further actions needed.
This will lead to misstatements in the financial statements. 6, Auditor should recalculate the share Equity finance of $1m is raised. capital and premium to verify its accuracy. 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. 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. 8, Auditors should obtain the land and buildings are revalued at breakdown of the land and buildings the year end. and recalculate it to verify its accuracy. Theres risk that revaluation reserve is not properly recognized as per IAS16. This will result in the PPE being misstated.
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Auditors should enquire with management about the possibility of the repayment and to recalculate its current financial ratio as well.
There is a risk that auditors may not Auditors can allocate more resources have enough time to complete the to the audit but will never lower audit. down the quality of audit. And this will result in audit opinion given is not correct.
(C)
Auditor can Send a letter requesting direct confirmation of inventory balances held at year end from the third party warehouse providers used by Abrahams Co regarding quantities and condition. Attend the inventory count (if one is to be performed) at the third party warehouses to review the controls in operation to ensure the completeness and existence of inventory. Inspect any reports produced by the auditors of the 3rd party warehouses relating to the adequacy of controls over inventory. (ii) Procedures to confirm use of standard costs for inventory valuation: Discuss with management of Abrahams Co how often these standard costs are reviewed and updated. Review the level of variances between standard and actual costs and discuss with management how these are treated. Obtain a breakdown of the standard costs and agree a sample of these costs to actual invoices or wage records to assess their reasonableness.
DEC2011 Q4 Ethics(1) (a) Only 3points required. Corporate governance is a set of rules to make directors work in the best interest of the company rather than on their own. Its important to shareholders because if the and board company operates effectively then more wealth will be created and distributed to shareholders. Its important to government because if the and board company operates effectively then more wealth will be created more tax paid to government. Its important to potential investor because if the company follows good corporate governance then it will bring more confidence to the investor and hence more finance raised by the company. (b) revision of corporate governance:
Weakness 1, Four executives and two non-executive directors are on the board and this balance is not correct. 2, Only finance director review the FS but the board should be presented with the assessment of the financial information as well. 3, The CEO and finance director sits on the audit committee. 4, CEO and chairman are the same person. 5, External auditors are appointed by CEO and FD and this decreases the independence of external auditors. 6, No internal audit function has been set up so that internal control system of company may be weak. 7, Executive directors remuneration is agreed by chairman who is also CEO and this will result in payment in excess to executive directors. 8, Executive directors are paid by annual salary and annual bonus but this is short term motivation and will lead to directors sacrifice the long term benefit to satisfy the short term one. 9, No re-election was taking place and this will result in some directors are not suitable to the company without being replaced.
Recommendation There should be appropriate balance of executive and non-executive directors, eg, 3 EDs and 4 NEDs. The finance director should present financial information to the audit committee or board as well.
Only non-executive director should sit on audit committee. There should be a split between CEO and chairman. External auditors should be appointed by audit committee.
This can be done by audit committee and company should also consider the benefit of this rather than just cost. Executive directors remuneration should be agreed by non-executive directors.
not
(C) Auditors cant disclose clients confidential information without clients permission. Obligatory responsibility If clients company is involved in money laundering issues then it doesn't comply with laws and auditors can disclose its information to the appropriate authority such as police station. If the client is involved in other crime activities such as terrorism then auditor can disclose information without clients permission. Voluntary responsibility If client is involved in activity which is damaging the environment and doing harm to public interest and auditor can disclose those activities to the 3rd party. Non-governmental bodies may approach to auditors to a misconduct done by client but this is not crime activity or civil wrong and auditor can disclose information to them as long as these bodies have statutory power.
June2010 Q4 Ethics(2) (a) Mnemonics: SSAFIM, only 5points required. Self-interest threat This 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 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. 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. 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 wrong audit opinion to satisfy client. How its solved If the discount is significant then auditor should decline the offer.
Auditor should consider resign from LV fones./ Auditor should consider to do a quality review on the audit work done.
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 a wrong audit opinion. 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 is rejected 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.
(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 this will increase the confidence from investors.
Internal audit DEC2007 Q3 + June2010Q3(c) modified (a) only 4points required. System Internal auditors implement controls and audit them and this will create a familiarity threat meaning internal auditors may not spot mistakes when checking the system. So for those who implement controls and check controls should be separated.
Years Internal audit staff are employed for more than 6 years and this creates familiarity threat meaning they are very familiar with the system they are working with so when actually check the system they may lose professional skepticism and may not spot mistakes. So internal audit staff should be rotated to other areas of the internal audit work. Appointment CEO appoints chief internal auditor and CEO may appoint someone who will not criticize his work and this reduces the independence of internal auditors. So chief internal auditors should be appointed by audit committee. Report Chief internal auditor reports to finance director and if finance director makes a mistake in one area and being reported by internal auditor and then finance director can easily conceal that mistake. So chief internal auditor should report to audit committee. Scope of work Finance directors decides the scope of work to chief internal auditor and this can direct internal auditors attention away to some sensitive areas where fraud may exist by finance director. So the scope of work should be decided by audit committee or chief internal auditor.
(b) cash substantive testing (7points) [Top Tip!] Auditor should agree cash balance from FS to the cash book records. Auditor should agree bank reconciliation amounts to cash book. Auditor should reperform bank reconciliation to verify its accuracy. Auditor should obtain a bank confirmation letter and agree balances within bank confirmation letter to the balance in the companys bank reconciliations. Auditor should inspect outstanding lodgment recorded in cash book and also adjusted in the bank reconciliation later. Auditor should inspect unpresented cheques recorded in cash book and also adjusted in the bank reconciliation later. Auditor should inspect cash movements before and after the year end to identify any window dressing issues and reverse them.
This is used by comparing financial and non financial information to identify any unexpected 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.
(b) All calculation are in the appendix. Sales revenue growth Company has a difficult year but sales revenue has increased by 17% and this is not in line with directors comment and maybe sale revenue has been overstated. Cost of sales Cost of sales has decreased by 17% and this may be due to incorrect valuation of inventory by company. Gross profit margin Gross profit margin has increased from 33% to 53% and this may be due to overstatement of sales or misstatement of cost of sales. Admin expenses Admin expenses has decreased by 6% but this is not in line with growth in sales revenue of 17% and hence may be admin expense are understated. Selling and distribution expenses Selling and distribution expenses has increased by 42% and this is significantly higher than the growth in sales so may be this is due to mis allocation of expenses. Interest payable Interest payable has decreased by 4% but given a positive cash balance within the company and its highly unlikely that company will continue to pay the interest at such a high amount and it may imply interest payable has been understated. Investment income The investment income has changed from 0 to 145 and because cash balance is positive so it can be reasonably expected that company will invest its money to buy assets but given a difficult year exists and maybe this investment income has been overstated.
Appendix: 2008 Revenue growth Cost of sales growth Gross profit margin Admin expense Selling and distribution Interest payable 7482-6364 6364 3520-4253 4253 53% 1235-1320 1320 =(6%) 981-689 689 101-105 105 =42% =(4%) =17% =(17%) 33% 2007
(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 r equest to send the reply directly back to the auditors.
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.
Lawsuit (i) A contingent liability was recognized before the year end because of the claim by supplier and after the year end company is likely to pay $0.6m and it provides evidence existing as at the year end as a present obligation. So the financial statement should be adjusted with $0.6m of expense and liability being recognized and disclosure removed.
(ii) Auditor should enquire with lawyer about whether $0.6m is probable. Auditor should inspect the correspondence with the supplier to confirm they are willing to accept $0.6m. (iii) $0.6m accounts for 0.8% of revenue and 8% of profit before tax so its material to the financial statement. If no adjustment is made then auditor should qualify its audit opinion with except for detailing material misstatement exists in clients financial statement. Warehouse (i) Events happened after the financial statement year end and it provides no evidence existing for the balance as at the financial statement year end. So this is a non-adjusting event. (ii) Auditor should enquire with management to confirm company has sufficient inventory to trade in the future. Auditor should obtain a written representation from management to confirm company is still a going concern. (iii) If the disclosure if required because its material but not made by the management then auditor should qualify its audit opinion with except for qualification detailing material misstatement in clients financial statement. If it affects going concern status of clients company then an emphasis of matt er paragraph should be placed after the opinion paragraph drawing shareholders attention that company may not be a going concern entity.
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 1, 90% revenue are from 2 products. Why If therere not sufficient sales then it has difficulty in paying expenses and hence lead to going concern problems. If company cant increase the demand then its hard to generate sufficient cash flow which will lead to going concern problems. 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. This will hold up the product development process and hence lead to going concern problems. No investment into PPE to generate into future income which will lead to going concern problems. Suppliers may be upset and refuse to supply to company which will lead to going concern problem. 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. If bank doesn't renew the overdraft facility then the company is unable to trade any more. If company cant improve this then it will have difficulty in funding its operating activity and hence lead to going concern problem.
2, demand is falling.
5, $2m will be hard to raise by company from bank. 6, suppliers has been paid much later.
(c)
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Almost the same as Q2(e): (e) ISA570 going concern. Tips: the key here is to look at whether company has cash flow problems and the plan by management in the future. Auditor can perform analytical procedures to calculate receivable days to identify if theres an increase in receivable days which may suggest a cash flow problem. Auditor can re-perform the receivable aged analysis to identify if there is an increase in receivable days which may suggest a cash flow problem. Auditor can perform analytical procedures to calculate inventory days to identify if theres an increase in inventory days which may suggest an operational problem, ie, inventory cant be sold by company which may affect going concern status of company. Auditor can enquire with management and obtain their future plan based on going concern assessment. Auditor can enquire with management and seek written representation about the future action by company. Auditor can bank correspondence to assess the likelihood of the bank renewing the overdraft facility.
(d) If the disclosure about going concern uncertainty disclosure has been made by management sufficiently then an unqualified audit opinion will be given but with emphasis of matter paragraph. Emphasis of matter paragraph will draw the shareholders attention that company may have uncertainty about going concern and it should be placed after the opinion paragraph and state the audit opinion will not be modified in this issue. If the disclosure about uncertainty of going concern status is not disclosed by management sufficiently then a qualified audit opinion will be given. The basis of opinion paragraph will detail the significant uncertainty about the going concern status of the company.
DEC2010 Q5 audit of accounting estimate Revision: (IAS8) Accounting policy is something to do with: Measurement basis of the figure, eg, value the inventory using FIFO but now use weighted average method; use replacement cost rather than historic cost. Recognition basis of 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.
(b) Receivable balance (i) This is internally generate aduit evidence and its less reliable than 3rd party generated audit evidence ,ie, circularization from customer. Without other audit evidence auditors cant just use written represent ation to be as a source of audit evidence and its deemed that the audit evidence is not sufficient. (ii) Enquire with management the reasons as to why a circularisation request was refused. Inspect board minutes assess whether any legal action is being taken to recover the amounts due. Warranty provision (i) The calculation and assumptions as well as written representation are internal generated audit evidence and they are less reliable than externally generated audit evidence. But given the missing of other external audit evidence then written representation would still be useful. (ii) Inspect the level of prior year provisions with the amounts claimed to assess the reasonableness of managements forecasting. Inspect board minutes to assess whether any changes are required to the level of the provision as a result of a change in the level of claims by customers. (c) Auditors should discuss with management about the reasons of why written representation is not provided and assess its reasonableness. Auditors should reassess the integrity of the management and impact on the audit report. As auditor cannot obtain sufficient and appropriate audit evidence so a qualification of opinion should be given. Because this is just material so qualification with an except for the audit evidence is not obtained relating to management representation.
The basis of opinion paragraph should state reasons why a qualification of audit opinion will be given, ie, management refuses to give a written representation.