FAU PT2 Answer

Question 1
Part a
The objectives of the internal control which should be exercised over a sales and
trade receivables system are to ensure that:
bad debts are minimised.
only bona fide orders received from customers are executed.
Orders are only accepted from credit worthy customers
bona fide orders received from customers are executed promptly
all goods dispatched or services provided are properly invoiced
all goods dispatched or services provided are promptly invoiced
all debts due are collected in accordance with credit terms
credits are made to customer accounts only when properly due
sales invoice and sales credit documentation are promptly and correctly recorded
in the books of account
the books of account accurately reflect sales and trade receivables information

*As long as the answer has covered the sales (ordering, despatch and recording)
areas it should be given marks
1 mark per point to maximum of 5 marks
Part b
The aim of a test of control is to check that an audit clients internal control
systems are operating effectively. (2 marks)
It is only done after the controls have been deemed to be reliable in design (2
marks)
Test of control provides assurance to the auditor if the system is reliable and assist
in deciding if a reduced substantive procedures can be undertaken (2 marks)

Part c

Weakness

Recording of orders
Orders placed on the Internet site are transferred manually into the inventory and
sales system.

Control over orders and packing lists. Each order/packing list is given a random
alphabetical code. While this is useful, using this type of code makes it difficult to
check
completeness of orders at any stage in the despatch and invoicing process.

Obtaining payment
The customers credit card is charged after despatch of goods to the customer,
meaning that goods are already sent to the customer before payment is authorised.

Completeness of orders
The computer system correctly ensures that order details are available for all
charges to customer credit cards. However, there is no overall check that all
orders recorded
on the inventory and sales system have actually been invoiced.

Potential effect of weakness
Customers will be sent incorrect goods resulting in increased customer complaints.

Manual transfer of order details may result in information being transferred
incompletely or incorrectly, for example, order quantities may be incorrect or the
wrong product code recorded

Packing lists can be lost resulting either in goods not being despatched to the
customer (if the list is lost prior to goods being despatched) or the customers
credit card not being charged (if lost after goods despatched but prior to the list
being received in the accounts department).

Rhapsody Co will not be paid for the goods despatched where the credit company
rejects the payment request. Given that customers are unlikely to return seeds,


Rhapsody will automatically incur a bad debt.
Entire orders may be overlooked and consequently sales and profit understated.

Recommendation

The computer systems are amended so that order details are transferred directly
between the two computer systems. This will remove manual transfer of details
limiting the possibility of human error.


Orders/packing lists are controlled with a numeric sequence. At the end of each
day, gaps in the sequence of packing lists returned to accounts are investigated.


Authorisation to charge the customers credit card is obtained prior to despatch of
goods to ensure Rhapsody Co is paid for all goods despatched.



The computer is programmed to review the order file and orders where there is no
corresponding invoice for an order, these should be flagged for subsequent
investigation.

Each weakness identified 1 marks, then 2 marks for why it is weakness and for 1
mark for limitations. Maximum 16 marks


Question 2

Title of independent auditor
To identify this as an audit report and distinguish it from other reports on financial
statements that might be issued by others, directors, etc.

Addressee (according to local regulations)
To identify the person(s) who may use or rely on the report.

Opening or introductory paragraph identifying the financial statements audited
and
To make it clear which pages of an annual report have been audited.

Responsibilities of entitys management and auditors
To make clear that the directors prepare the financial statements and the auditors
audit them following international standards on auditing (ISAs).

Scope paragraph describing the nature of the audit in terms of ISAs followed and
the work
performed by the auditor
To explain the scope of the audit so the standard of the auditors work is clear and
other factors such as limitation of audit testing (for example, not tested all items)
is known.

Opinion paragraph referring to the financial reporting framework followed and
expressing the
auditors opinion
To provide the auditors opinion on the financial statements in terms of true and
fair view, to assure the reader that the audit has been carried out in accordance
with established principles and practices.

Date of the report
To inform the reader that the auditor has considered effects of transactions that
the auditor became aware of on the financial statements up to that date.

Auditors address
This is normally the city where the auditor responsible for the audit is located so
he/she can be contacted, if necessary.

Auditors signature
This is normally the signature of the audit firm as the firm assumes responsibility
for the audit, not the individual engagement partner.

0.5 mark per point identified and another 0.5 mark for explaining it to maximum
of 5

Part b
However, client information may be disclosed where:
Consent has been obtained from the client (2 marks)
There is a public duty to disclose or (2 marks)
There is a legal or professional right or duty to disclose. (2 marks)
There is a regulatory pressure to disclose say from income tax. (2 marks)
The auditor will be obliged to disclose if there is a suspicion that the client is
involved in treason, drug trafficking, money laundering, terrorism or if there is a
court order for disclosure (2 marks)
The auditor has a voluntary option to disclose if there a need to protect members
interest or client as taken action against public interest such as release of toxic
waste in the river (2 marks)

Part c (maximum 12 marks 4 areas only)
Identify 1 mark
Explain 1 mark
Solution 1 mark

Audit partner time in office familiarity threat (1)
The partner has been the auditor for 8 years. This may affect the professional
scepticism of the partner (1)
This can be solved by rotation of partner (1)

Unpaid taxation fees intimidation (1)
The fees for last year is still not paid yet. This may be used by the client to
threaten the firm into giving a favourable audit report (1)
The firm can demand payment before starting the engagement (1)


Allyson Worm familiarity / self interest threat (1)
The daughter is the finance director gives the perception of lack of independence
of the partner in question (1)
The firm can appoint another audit partner to take over the audit (1)

Meal self interest threat (1)
The offer for entertainment should only be accepted if it is modest. In this case it
might impact the audit teams professional scepticism by making them indebted to
Allyson (1)
The offer for the meal should be declined or the meal tab should be covered by
themselves (1)

Fees self-interest threat (1)
The business is growing rapidly and therefore the audit firm may break the
threshold for fee causing a self-interest threat to appear (1)
This can be avoided by the auditors reviewing the fees and regular review of fees
should be undertaken (1)

Question 3
(a) An audit firm may use third party confirmations to provide evidence in relation
to the following items:
(i) Stocks Stocks are often held on third party premises on behalf of a company.
Similarly, companies often allow customers to hold its stock on a sale or return
basis. In both of these circumstances an audit firm may seek written confirmation
directly from the third parties as to the quantity and value of stocks held on behalf
of the audit client at its year end.

(ii) Debtors An audit firm may carry out a debtors circularisation on behalf of an
audit client. This entails a request being made to customers of the company to
provide written confirmation directly to the auditors as to the amount owed by the
debtor to the audit client at its year end.

(iii) Investments Share certificates and other securities owned by a company are
often lodged with a solicitor or a bank for safekeeping. In such circumstances an
audit firm may seek written confirmation directly from the solicitor or bank as to
the nature of such holdings at the companys year end.

(iv) Bank An audit firm should seek written confirmation directly from a
companys bank as to the balance of funds/overdrafts in the company bank
account(s) at its year end. The bank confirmation would usually also include other
confirmations including details of any securities held by the bank at the year end.

(v) Cash A company will often give cash advances to individual employees to
enable them to carry out their employment duties without financial hindrance. For
example, employees who incur a large amount of travel expenses will often
receive such an advance. In such circumstances an audit firm will often seek
written confirmation directly from relevant employees as to the amount of cash
advances held at the companys year end.

(vi) Loans A company may have loaned funds to a third party or alternatively it
may itself have borrowed funds. In either case, an audit firm may seek written
confirmation directly from the borrower/lender as to the amount of loan
outstanding at the companys year-end.

(vii) Creditors An audit firm may carry out a creditors circularisation on behalf of
a client. This entails a request being made to the suppliers of the company to
provide written confirmation directly to the auditors as to the amount owed by the
company to the suppliers at the companys year-end

Confirmation what and who (2 marks) but must write a bit long say 2 lines


Use of standardised audit programmes:

Advantages
Disadvantages
(i)
they provide a clear set of instructions encouraging
consistency of approach to audit assignments irrespective of staffing.
(i)
procedures may be carried out in a mechanical fashion without due consideration
to their relevance and appropriateness in specific circumstances.


(ii)
they provide a control to help ensure that important procedures are not
overlooked or that work is not duplicated.
(ii)
they may stifle the initiative of audit staff when planning audit work.



(iii)

they facilitate review because reviewers are familiar with the standard audit
approach

(iii)

they tend to inhibit audit staff from making probing investigations when they are
put upon enquiry as a consequence of specific audit findings


(iv)
they help to instil confidence that in the event of a claim for negligence with
regard to a particular audit assignment, evidence of work carried out will be fully
documented on the audit file.
(iv)
staff of the client company may become familiar with the work carried out by the
audit firm from one year to the next. This could encourage staff to commit fraud
in areas they perceive will receive little attention from the auditors.


Does not need to be so long but can be shorter the highlighted issue may be
enough


The following factors should be taken into consideration by an audit firm, when
allocating staff to audit assignments:
(i) the size and complexity of the entity subject to audit.
(ii) the requirement for any specialist experience.
(iii) the existence of a reporting deadline date meaning that all audit procedures
would need to have been completed by that date.
(iv) the requirement for existing audit clients to ideally have at least one senior
member of the audit team who is familiar with the audit client.
(v) the requirement to ensure that audit staff are periodically rotated around audit
clients to help prevent over familiarity between the staff of both the firm and
the entity, thus endeavouring to maintain the objectivity of audit staff.
(vi) the ability to use audit assignments as a means of training and developing staff
whilst working on-the-job.
(vii) staff considerations including individuals home proximity to client locations,
study and annual leave entitlements.
(Full marks will be awarded for identifying FIVE of the above factors).

Marking guide
(a) Description of how an audit firm may use third party confirmations as
confirming evidence.
Generally 1 mark per point for each relevant procedure identified up to a
maximum of 6
Explanatory points in respect of each procedure Generally 1 mark per point up to a
maximum of 6
(b) Listing of four advantages and four disadvantages of using standard audit
programmes.
Generally 1 mark per point up to a maximum of (4 + 4) 8
(c) Identification of five factors that should be taken into consideration when
allocating staff to audit assignment.
Generally 1 mark per point for each relevant factor identified up to a maximum of
5


Question 4
(a)
(i) Audit working papers are the material that auditors prepare or obtain, and
retain in connection with the performance of their audit.
They may be in the form of data stored on paper, film, electronic media or other
media. Audit working papers record all of the evidence that auditors consider
necessary to collect in order to support an opinion.

(ii)
The permanent audit file contains working papers containing information of
continuing importance. This file should be updated from one audit to the next.
The current audit file contains information and evidence collected relating
primarily to the period currently subject to the audit.

(iii) Examples of matters that should be recorded on the permanent file include:
information concerning the legal and organisational structure of the company,
including the principal activities of the company, operating locations and key staff
members.
extracts or copies of important legal documents, agreements and minutes.
information concerning the industry, economic environment and legislative
environment within which the company operates.
a description of the companys accounting systems and internal controls.
copies of final signed financial statements of the company.
engagement details including a copy of the engagement letter, details of special
audit requirement and other (nonaudit) services provided by the firm.
(Up to four marks will be awarded for identifying up to four of the above or other
appropriate matters).

Examples of matters that should be recorded on the current audit file include:
evidence of the planning process and any changes thereto.
evidence of inherent and control risk assessments and any revisions thereof.
a record of the nature, timing and extent of audit procedures undertaken and the
results of such procedures.
copies of communications with other auditors, experts and other third parties.
letters of representation from the company.s directors.
summary of the significant aspects of the audit, highlighting audit concerns, the
directors views and conclusions reached.
audit completion and disclosure check list.
(Up to four marks will be awarded for identifying up to four of the above or other
appropriate matters).

(b) (i)
Coal stocks are likely to represent a significant proportion of the value of a coal
mining companys total assets it is material to the financial statement
There is a high risk of material misstatement occurring from the current method
used by management to obtain the quantity of coal stock
The quantity of stock may be determined in a scientific manner or method which
the auditor is not familiar with.
There is no other means of obtaining the quantification of coal stock pile other
than using an expert
The auditor cannot place reliance the quantification performed by the
management due to poor compliance to instructions
Any other valid points that do make sense should be rewarded accordingly


(ii) The two primary factors that the auditors should consider in assessing the likely
competence of the independent experts are:
the experts professional certification, or licensing by, or membership of an
appropriate professional body.
the experience and reputation of the experts in carrying out previous
assignments of this type.
(iii) Other situations in which the auditors of a coal mining company may seek to
obtain audit evidence from independent experts include:
in the valuation of assets, for example land and buildings.
in the determination of the quantity and quality of underground coal reserves.
in the determination of the remaining useful life of plant and machinery, in
particular that which may be of special nature and of high value.
in the evaluation of material accounting estimates, for example an estimated
provision for damages arising from a lawsuit.
(Full marks will be given for describing two of the above or other appropriate
situations).

(a) (i) Definition of the term .audit working papers..
Generally 1 mark per point up to a maximum of 3
(ii) Explanation of the differences between a permanent audit file and a current
audit file.
Generally 1 mark per point up to a maximum of 2
(iii) Examples of matters that should be recorded on each file.
Permanent Audit File
Generally 1 mark per point up to a maximum of 4
Current Audit File
Generally 1 mark per point up to a maximum of 4

(b) (i) Explanation of why auditors may recommend the use of independent experts.
Generally 1 mark per point up to a maximum of 5
(ii) Identification of the two primary factors to consider when assessing the likely
competence of independent experts.
Professional qualifications, certification or licensing. 1
Experience and reputation from carrying out previous assignments. 1
(iii) Description of two situations when the auditors may seek to obtain audit
evidence from independent experts.
Generally up to 2 marks for each situation described up to a maximum of 4