15112557 acca cat paper t8 implementing audit procedures solved past papers

8/8/2019 15112557 ACCA CAT Paper T8 Implementing Audit Procedures Solved Past Papers

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ACCA CERTIFIED ACCOUNTING TECHNICIAN EXAMINATION

ADVANCED LEVEL

MONDAY 14 JUNE 2004

QUESTION PAPER

Time allowed 3 hours

ALL FOUR questions are compulsory and MUST be answered Pape

rT8

(INT)

ImplementingAudit Procedures

(International Stream)

The Association of Chartered Certified Accountants

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ALL FOUR questions are compulsory and MUST be attempted

1 M, a large manufacturing company limited by liability, has all of its production, stores and head office buildings

situated on a single site. The buying and accounts departments are located in the head office building.

Following a recent take-over of the company, the new directors have been informed that there is an inadequate level

of internal controls over the Purchases and Trade Payables system. Weaknesses include an absence of control

procedures and adequate documentation. Similarly there has been no attempt to use supplier statements tosupplement other controls within the system.

A batch entry batch processing system is used throughout the companys accounting system, which incorporates

fully integrated payables and general ledgers.

Required:

(a) State FOUR objectives of having internal controls in a Purchases and Trade Payables system. (4 marks)

(b) Identify the internal controls that should exist in M over the following:

(i) Requisitioning and authorisation of purchases;

(ii) Acknowledgement of the receipt of goods and the return of goods to suppliers;

(iii) Checking and authorisation of purchase invoices prior to batching for processing through the

computerised accounting system. (15 marks)

(c) Explain how supplier statements should be used to supplement other controls in the Purchases and Trade

Payables system of M. (3 marks)

(d) State the meaning of the term batch entry batch processing system and explain the use of control totals in

such a system. (3 marks)

(25 marks)

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2 J.J. is a small limited liability company which sells mineral water dispensing machines and bottles of mineral water.

The companys only shareholders, directors and employees are brothers Joe, Jim and Josh Alsage. The companys

manual accounting system is simple in design and includes a sales day book, a cash book and trade receivables and

general ledgers. Josh maintains the books of prime entry but not the trade receivables and general ledgers. These

ledgers are written up by an independent qualified bookkeeper.

J.J. focuses on achieving bulk order high value sales to multi-site corporate customers. Consequently during the year

ended 31 May 2004 there were only 48 sales invoice transactions. All sales are made on credit terms and invoicesare priced from a standard product price list authorised by the directors. The control procedures employed over sales

include the use of pre-numbered multi-part despatch notes and sales invoice stationery.

You have been assigned to the audit of the financial statements of J.J. for the year ended 31 May 2004. Your audit

manager has explained why a direct verification (vouching) approach to the audit will be adopted as opposed to a

systems based approach, and your first task will be to work on the area of sales. You are not required to verify entries

in the companys trade receivables ledger or general ledger.

Required:

(a) (i) Summarise what is meant by a systems based approach to an audit. Your answer should refer to the

stages of such an approach. (10 marks)and

(ii) Summarise what is meant by a direct verification (vouching) approach to an audit, explaining why the

approach is often more appropriate when auditing the financial statements of a small limited liability

company. (8 marks)

(b) State TWO main common objectives of vouching despatch notes, sales invoices and the sales day book, when

auditing the sales of J.J. (4 marks)

(c) State THREE checks you would carry out to verify the completeness of processing of individual invoices, and

THREE checks you would carry out to verify the accuracy of processing of individual invoices when vouching

the sales invoices of J.J. (3 marks)

(25 marks)

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3 An analysis of the trade receivables of Zais, a limited liability company, as at 31 May 2004 reveals the following:

Balance Level Number of Balances Value

Over $15,000 3 $94,107

$10,001 to $15,000 10 $139,406

$7,501 to $10,000 19 $165,100

$2,501 to $7,500 51 $174,842

$0 to $2,500 146 $130,975Credit Balances 7 ($621)

Total 236 $703,809

Janice, your audit supervisor, has instructed you to obtain direct confirmation of trade receivables using a sample size

of 70 trade receivables balances. You are to use the positive confirmation method. In the course of her conversation

with you, Janice mentioned that it is not always appropriate to adopt a sampling approach when testing various

populations during the course of an audit.

Required:

(a) State FOUR circumstances during the course of an audit when it would not be appropriate to adopt a

sampling approach to testing. (6 marks)

(b) (i) Explain the difference between the positive and negative methods of obtaining direct confirmation of

trade receivables balances and describe the circumstances in which the latter should be used.

(5 marks)

(ii) Explain why none of the employees of Zais should have any influence on the selection of trade

receivables balances to be confirmed. (2 marks)

(c) Explain the significance of including:

(i) All accounts with balances in excess of $7,500;

(ii) Some accounts with zero balances;

in the sample of trade receivables balances of Zais to be confirmed. (6 marks)

(d) Describe the other types of account in addition to those stated in (c) above, which would require special

attention and would need to be represented in the sample of trade receivable balances to be confirmed.

(6 marks)

(25 marks)

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4 (a) Provided an auditor possesses professional objectivity, he does not have to be seen to be independent.

Required:

Comment on the above statement ensuring that you include an explanation of the term professional

objectivity and include commentary on the validity of the statement. (10 marks)

(b) ACCAs Rules of Professional Conduct describe various situations and relationships, which if existing, could posea threat to auditor independence. The guidance notes provide examples of appropriate actions that can be taken

to safeguard against the loss of independence where such situations and relationships exist.

At a recent training seminar, the following scenarios were presented for discussion:

On 20 May 2004, the audit engagement partner of Poynt and Co visited the offices of Geeclubs, a limited

liability company, to plan the final audit procedures for the year ending 31 July 2004. A week later, each

of the five partners of Poynt and Co received an unsolicited letter from the Managing Director of Geeclubs

offering one years free membership at one of the companys golf and country clubs with effect from 1 August

2004. Individual annual membership normally costs $3,000 and the offer was not made to anyone else.

The wife of one of the audit managers at Pebury and Company a large audit firm and auditors of Adlin, a

limited liability company, has recently been appointed as the Financial Director of Adlin. Immediately priorto her appointment she had been employed by one of Adlins competitors. Each of the directors of Adlin is

entitled to an annual bonus based on the reported profit of the company.

Bollies, a long established firm, audit the financial statements of two private limited liability companies

owned by Thomas Arn, an entrepreneur with a very dominant personality. The annual total fee income of

Bollies is $830,000 and the combined audit fees attributable to the two companies is $72,000. Thomas

Arn has recently approached Bollies with a view to appointing them as auditors to a third limited liability

company under his control. The projected annual fee attributable to the third company is $80,000.

Required:

For each of the above scenarios:

(i) comment on any concerns you may have regarding the threat to auditor independence and objectivity.

(ii) recommend the appropriate action to be taken by the audit firm to safeguard against any threat

identified. (15 marks)

(25 marks)

End of Question Paper

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Answers



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ACCA Certified Accounting Technician Examination Paper T8(INT)

Implementing Audit Procedures (International Stream) June 2004 Answers

M, A Large Manufacturing Company

1 (a) The objectives of a Purchases and Trade Payables system are to ensure that:

(i) Goods and services for an entity are only requisitioned when required.

(ii) Goods and services are supplied in accordance with the requirements of an entity in terms of quality and quantity andat the best available price.

(iii) Only goods and services required by an entity are accepted as a basis for subsequent payment.

(iv) Invoices paid by an entity relate to goods and services actually received.

(v) Payment is made to suppliers on a timely basis for goods and services received by an entity.

(vi) All bona-fide transactions relating to the purchases of goods and services are entered on a timely basis into theaccounting records of an entity.

(Full marks will be awarded for identifying FOUR of the above or other appropriate objectives).

(b) The following procedures and control documentation should exist over the:

(i) Requisitioning and authorisation of purchases

The task of requisitioning for the purchase of goods and services should be allocated only to specified responsibleemployees of the company.

Requisitions for the purchase of goods and services should be communicated on specified forms with uniform detailrequirements including justification for the purchase.

The task of raising purchase orders should be allocated to responsible buying officials of M separate from the goodsreceived and accounting functions.

Strict controls should be maintained over the security of purchase order stationery which should be pre-numbered. Purchase order stationery should be multi-part, with copies being provided to the accounts department for

matching to subsequent goods received documentation and invoice(s) as appropriate. A copy should also beforwarded to the goods received department for checking to subsequent deliveries.

(ii) Acknowledgement of the receipt of goods and return of goods to suppliers.

Goods received personnel should be separate from the ordering and accounting functions of M.

All goods received should be inspected and checked to copy purchase orders as to classification, quality andquantity.

Goods accepted should be recorded on pre-numbered multi-part stationery with one copy being forwarded to theaccounts department for subsequent matching with purchase order(s) and invoice(s).

Goods returned to suppliers should be recorded on pre-numbered multi-part stationery with one copy beingforwarded to the accounts department for matching to credit note(s). A copy should also be despatched with thespecified goods returned for acknowledgement of delivery and returning to M.

(iii) Checking and authorisation of purchase invoices prior to batching.

Individuals involved in the processing of purchase invoices through the companys accounting system should beseparate from the ordering, goods received and payment functions.

All purchase invoices received by M should be immediately forwarded to the companys accounts department. Invoice details and arithmetical accuracy should be checked (and evidenced as such) and discrepancies resolved

before further processing. Invoices should be matched with purchase order(s) and goods received note(s) and discrepancies resolved before

further processing. Matched invoices should be forwarded to the appropriate responsible official(s) in the company for authorisation

and approval of accounts (general ledger) coding as appropriate. There should be separate approval procedures, involving appropriate responsible officials of M, for the approval of

invoices relating to utilities and other sundry services received not subject to the normal purchase ordering andgoods received procedures.

Where invoices are forwarded to responsible officials of the company, a detailed register should be maintained totrack their progress as appropriate.

Prior to batching, invoices should be pre-numbered in sequential order to facilitate completeness of processing.

(c) Where received, statements from suppliers should be reconciled as soon as practicable with the relevant supplier accounts inthe trade payables ledger of M. Reconciliations should be prepared by individuals separated from the processing of purchase

invoices and payments to suppliers (to prevent the possibility of fraudulent activity), but where this is not practical they shouldbe subject to close independent supervisory control.

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The reconciliation of supplier statements supplements other controls over purchases and trade payables by helping to ensurecompleteness of, and to identify errors in processing of purchase ledger transactions. Any differences identified betweensupplier statements and trade payables ledger accounts may reveal the existence of unprocessed invoices for goods or servicesreceived, or even perhaps payments made on accounts but not received by suppliers. Any omissions or errors so revealedshould be subject to immediate enquiry.

(d) The term batch entry batch processing system is used to describe a computer-based accounting system, through which datais entered and processed in discrete batches. Controls should ensure strong segregation of duties between the preparation of

data for processing and the actual input and processing of the data through the computer system.

Preparation procedures should involve the use of control totals (pre-lists) established by monetary value, number ofdocuments or a hash total against which users can check data subsequently processed through the computer system andreturned to them. If there is imparity between a pre-listed total and processed totals, then immediate reconciliation is requiredin order to ensure the integrity of processing.

J J, A Limited Liability Company

2 (a) (i) A systems based approach to an audit describes the approach adopted when reliance is placed on an entitys systemof internal control, to determine the level of detailed testing of transactions and balances. In summary when adoptingthis approach an auditor needs to:

Ascertain and record the internal control system in operation. Evaluate the extent to which it appears that reliance can be placed on the system to prevent error, omission or

fraudulent activity. Perform tests of control (compliance tests) to confirm whether or not the preliminary evaluation of the control

system is correct. Determine the level of detailed testing of transactions and balances to be carried out dependent on the outcome of

the tests above. If in a particular area, internal control procedures are deemed to be strong then the level of detailedtesting may be reduced. Conversely, where controls are weak then the level of detailed testing will have to beincreased.

(ii) A direct verification (or vouching) approach to an audit describes the approach when no reliance is placed on an entityssystem of internal control, to determine the level of detailed testing of transactions and balances. The approach will beadopted when the number of transactions and balances subject to audit is very low. It will also be adopted when thereis an absence of internal controls or where control is very weak. Consequently, dependent on the relative materiality oftransactions and balances, where appropriate, it is not uncommon for testing levels to be set at between 50% and 100%of the population.

This approach is often more appropriate when auditing the financial statements of a small limited liability companybecause: Internal control procedures are often weak or easily overridden. Internal controls used by large entities are usually not practical in small business e.g. limited segregation of duties,

supervisory control may be lacking or inadequate. Due to regular fluctuation from one year to the next in sales, profitability, overhead costs and asset purchases, the

use of analytical review as a substantive test is less effective. The number of transactions and balances subject to audit will often be very low. Record keeping is unsophisticated and easy to audit. More efficient audit approach.

(b) The main objectives are:

(i) To confirm that all goods supplied during the period were duly invoiced.(ii) To confirm that all invoices raised during the period related to sales of the company.

(iii) To confirm the reliability, accuracy and completeness of accounting for sales.

(Full marks will be awarded for stating any TWO of the above or other appropriate objectives).

(c) I would:

(i) Check for completeness of processing of invoices by:

Testing the numerical sequence of the sales invoice raised. Comparing sales invoices to customer orders and goods despatched notes. Vouching invoices to the sales day book.

(ii) Check for accuracy of processing by:

Comparing prices charged on sales invoices to the authorised price list. Checking calculations and additions of invoices (including any government taxes). Vouching individual invoices to the sales day book.

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ZAIS, A Limited Liability Company

3 (a) A sampling approach to testing would not be appropriate in the following circumstances:

(i) Where there is a statutory requirement to disclose specific items in the financial statements, for example directorsremuneration.

(ii) Where the population is very small and the results from sampling could not be relied on, for example when conductingcertain compliance tests.

(iii) Where the population is small in number but comprises material individual balances or transactions, for exampleproperty additions.

(iv) Where the population is not homogenous and requires subdivision before sampling can be attempted, for examplepurchase invoices and credit notes.

(v) When the auditor is put on enquiry for example when testing for fraud.

(vi) Where the costs of sampling outweigh the benefits as compared to 100% testing.

(Full marks will be awarded for identifying FOUR of the above or other appropriate occasions).

(b) (i) The positive method of obtaining direct confirmation of trade receivables balances is the process whereby letters are sentto customers asking them to forward written confirmation (or to provide details of any differences) of the balance on theiraccount as shown in the audit clients records.

The negative method requests that customers should only respond if they do not agree the balance on their account asshown in the audit clients records. This type of confirmation should only be used when: The audit client has a strong internal control system over sales and trade receivables. Other good corroborative evidence with regard to the existence of trade receivables has already been obtained from

other tests carried out. There are a large number of small balances. A substantial number of errors is not expected. The auditor has no reason to believe the debtors will disregard the request.

(ii) Whilst the main objective of obtaining written confirmation is to confirm the existence of debts outstanding, a secondaryobjective is to test the propriety of controls actually exercised over the sales and trade receivables function. Clearly ifemployees have been circumventing controls to conceal any (for example fraudulent) activity, they would have a vestedinterest in diverting the auditors attention away from balances on accounts subject to such activity.

(c) (i) By confirming all customer account balances in excess of $7,500, we will ensure coverage of some 57% of the totalvalue of the population before taking account of further balances for inclusion. This is a significant proportion of the totalvalue of the population and inclusion should therefore assist us in reaching a confident conclusion on the accuracy ofthe reported trade receivables figure. It will also assist us in interpreting the materiality of any errors brought to ourattention from the balance of accounts tested.

(ii) Whilst we may not have any reason to doubt the existence of zero balances on customer accounts, there are a varietyof reasons as to why these could be stated incorrectly. For example, as a consequence of cut-off errors (sales notrecorded in the correct financial period), mis-posting of cash receipts (payments made in advance of a sales transaction)or fraudulent activity (diversion of cash received from a customer combined with suppression of sales activity).Confirmation of zero balance accounts will test for the occurrence of these events.

(d) Accounts requiring special attention would include:

(i) Those which have exceeded the normal credit period.

(ii) Those which regularly exceed the authorised credit limit.

(iii) Those which have credit balances.

(iv) Those which show higher/lower balances at the balance sheet date as compared to other times during the year.

(v) Those accounts on which balances have been written off as bad debts or in respect of which provision has been made.

(vi) Those on which there are regular contras with supplier accounts in the companys trade payables ledger.

(vii) Those on which round sum payments are constantly received.

(viii) Those to which credit notes have been regularly posted.

(ix) Those to which journal credits or journal debits have been regularly posted.

(x) Those which appear to have received unusually favourable treatment with regard to credit limits, payment period anddiscounts allowed.

(xi) Those which apply to customers who are known to be connected to Zais or its employees (related parties).

(xii) Accounts with nil balance.

(xiii) Accounts which have been paid by the date of the examination.

(Full marks will be awarded for identifying SIX of the above or other appropriate types of account).

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PROFESSIONAL OBJECTIVITY

4 (a) The Code of ethics as set out in ACCAs Rules of Professional Conduct, requires that members should strive for objectivity inall professional and business judgements. Objectivity is the state of mind which has regard to all considerations relevant tothe task in hand but no other.

The Associations Code of ethics then goes on to explain that (professional) objectivity is a state of mind, but in certain rolesthe preservation of objectivity needs to be protected and demonstrated by the maintenance of a members independence frominfluences which could affect his/her objectivity. The job of an auditor represents such a role.

The belief that a companys un-audited financial statements lack credibility, is fundamental to the supposition that they needto be audited. There is an assumption that the companys management may have lacked objectivity when preparing thefinancial statements, therefore in order to add credibility to them it is important that they are audited by impartialprofessionals, who are free from any influence and pressure which might impair their judgement when carrying out their auditwork.

The nature of the audit function therefore demands that auditors are mentally independent and as such are totally objectivein their audit approach. However, given that their independence is mental, no matter how they may argue that they areobjective in their audit approach, the only people actually aware of their (mental) state of independence are auditorsthemselves.

Given the above, I consider the statement made to be invalid. In order to add credibility to their reporting function it isimportant that auditors remain visibly independent. If they do not and are therefore not seen to be independent, shareholdersand users of financial statements may (albeit mistakenly), take the view that the auditors have not been objective in their

approach, with the consequence that they will not place reliance on the auditors opinion.

(b) Poynt & Co

ACCAs Code of ethics gives clear guidance on the risk posed to objectivity, by the acceptance of goods and services from anaudit client, stating that goods or services should not be accepted by a practice or anyone closely connected with it unlessthe value of any benefits is modest.

The value ($3,000) of individual golf club membership would not be considered to be modest and the threat to the auditobjectivity of Poynt and Co (if the memberships are accepted) is compounded by the fact that the total value of offer to thefirm is $15,000 (5 x $3,000). On this basis, I would be concerned that objectivity could be, or be perceived to be threatened,and would strongly recommend that the partners politely decline the offer.

In addition to the above, I would also be concerned as to the motive of the managing director in making the offer. Given thetotal value of the offer, the timing of it (soon after the start of audit work) and the fact that it was made solely to the partners

would alert me to the possibility that in return for the free membership, the company may have unreasonable expectationsas to how the audit firm may respond when coming across contentious issues in the companys financial statements forexample, the adoption of unacceptable accounting policies.

Pebury and Company

ACCAs Code of ethics gives clear guidance on the risk posed to objectivity as a consequence of family and other personalrelationships stating that objectivity may be threatened or appear to be threatened as a consequence of a family or other closepersonal or business relationship.

The fact that an audit manager of Pebury and Company is married to the new financial director of one of the firms auditclients, clearly poses a potential threat to audit objectivity. Given that the financial director is responsible for the preparationof the companys financial statements, there may well be a perception of impropriety with regard to the figures reported thereinif her husband (as a senior member of the audit team) has a role in the audit function. To avoid such a threat I would stronglyrecommend that the firm ensures that the audit manager has no involvement whatsoever with that audit (or any other)

assignment relating to Adlin. Given the size of the firm this should not unduly affect its operational efficiency.

My concern as to the possibility of perceived impropriety with regard to the figures reported in the financial statements, wouldbe compounded by the fact that the financial director of the company will be entitled to an annual bonus based on thereported figures. Clearly she would have a vested interest in a high reported profit. Given this situation it is important thatPebury and Company should be seen to be totally objective in their audit approach. Such an approach involves carefulselection of staff for specific assignments such that all members of the audit team are totally impartial.

Bollies

ACCAs Code of ethics gives clear guidance on the risk posed to objectivity as a consequence of undue dependence on anaudit client stating that objectivity may be threatened or appear to be threatened by undue dependence on any audit clientor group of connected clients.

The Code points out that the public perception of a firms objectivity is likely to be in jeopardy where the fees for audit andother recurring work paid by one client or group of connected clients exceed 15% of the gross practice income. The figurestated of 15% is an indicative figure only, relating to non-public interest and non-listed companies.

Currently fees receivable from the two connected companies owned by Thomas Arn, represent 87% ($72,000/$830,000)of Bollies gross practice income. This would not appear to represent a threat to the perceived objectivity of the firm with regard

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to the existing audits. However, acceptance of the third audit appointment would mean that 167% ($152,000/$910,000)of the firms gross practice income originates from the three companies owned by Thomas Arn. This could call into questionthe firms objectivity with regard to all three audit assignments, and in the circumstances it may be prudent for Bollies topolitely decline the further audit appointment.

Commercial considerations may encourage the partners of Bollies to accept the third audit appointment, notwithstanding anydoubts as to their perceived objectivity. However Thomas Arn is an entrepreneur with a very dominant personality. Given thistrait, the partners should be alert to the possibility that situations might arise on any of the audit assignments wherein hecould use the threat of the loss of all three audit assignments (and associated fees) to put undue pressure on the firm. Forexample, he may request the firm to take an unusually optimistic view as to the recoverability of unpaid debts. The partnersshould pay particular attention to the possibility of this potential threat before deciding whether to accept the furtherappointment.

If the firm does proceed with the additional appointment I would strongly recommend that they should protect against theloss of independence on each of the audits by implementing additional safeguards to maintain objectivity. Such safeguardsshould be subject to an annual independent review by a partner unconnected with the audits and may include theemployment of a different audit engagement partner and suitably qualified audit teams on each of the three audits.

(Full marks will be awarded for coverage of any FIFTEEN relevant points pertaining to each scenario with a maximum of NINEmarks being available for each scenario).

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Implementing Audit Procedures (International Stream) June 2004 Marking Scheme

The marking scheme generally indicates that 1 mark or 11/2 marks are awarded for each point. However, consideration should be givento the depth and relevance of points provided by each candidate when answering the question; for example if only a brief explanationis given then it may only be worth 1/2 point whilst a detailed discussion could be worth up to a maximum of 2 points.

Marks are not allocated to specific points as the candidate may include a valid point within their answer which is not included in themodel answer; the candidate should be given full credit for such points.

The majority of the questions require several points to be included within the answer, so if a candidate concentrates on a few pointsthen they should not be given as much recognition, and their overall mark should be lower than a candidate who provides a range ofpoints.

In conclusion, it is important that the overall standard of the candidates answer is considered in terms of whether it is above or belowa pass grade. After marking each question, the total mark awarded should be evaluated to assess whether it is fair. If it is decided thatthe total mark is not a proper reflection of the standard of the candidates answer then the answer should be reviewed again, and themarks adjusted to ensure that the total awarded is fair. If the answer is of a pass standard then it should be awarded a minimum of40%; if it is below a pass standard then it should be awarded less than 40%.

M, A Large Manufacturing Company

1 (a) Stating objectives of the internal controls exercised over a Purchases and Trade Payables system.

Generally 1 mark per objective up to a maximum of (4 marks)

(b) Identification of the internal controls that should exist over:

(i) Requisition and authorisation of purchases.

(ii) Acknowledgement of the receipt of goods and the return of goods to suppliers.

(iii) Checking and authorisation of purchase invoices prior to batching for processing through thecomputerised accounting system.

Generally 11/2 marks per point, with a maximum of 9 marks (6 x 11/2) for each function (i), (ii)

and (iii) up to a maximum of (15 marks)

(c) Explanation of how suppliers statements should be used to supplement other controls.

Generally 1 mark per point up to a maximum of (3 marks)

(d) Stating the meaning of the term batch entry batch processing system. (1 mark)

Explanation on the use of control totals in such a system.

Generally 1/2 mark per point up to a maximum of (2 marks)

Total (25 marks)

J J, A Limited Liability Company

2 (a) (i) Summarised explanation of what is meant by a systems based approach to an audit.

Generally up to 11/2

marks per point up to a maximum of (10 marks)

(ii) Summarised explanation of what is meant by a direct verification (vouching) approach to an auditand explanation of why the approach is often more appropriate for the audit of a small limitedliability company.

Generally up to 11/2 marks per point up to a maximum of (8 marks)

(b) Statement of TWO main objectives of vouching despatch notes, sales invoices and the sales day book.

Generally 1 mark per point up to a maximum of 2 marks for each objective (2 x 2) (4 marks)

(c) Statement of SIX sales invoice checking procedures.

Generally 1/2 mark per point up to a maximum of (3 marks)

Total (25 marks)

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ZAIS, A Limited Liability Company

3 (a) Statement of FOUR circumstances when a sampling approach would not be appropriate:

Generally 11/2 marks per occasion up to a maximum of (6 marks)

(b) (i) Explanation of the difference between the positive and negative confirmation methods.


Description of circumstances when a negative method should be used.


(ii) Explanation as to why employees should have no influence on the selection of the tradereceivables balance to be confirmed.


(c) Explanation of the significance of inclusion in the sample of:

(i) Accounts with balances in excess of $7,500

(ii) Some accounts with zero balances.

Generally 1 mark per point with a maximum of 3 marks for (i) and (ii) up to a maximum of (2 x 3) (6 marks)

(d) Description of SIX types of activity which would require special attention and representation in the sample:

Generally 1 mark for each type of activity up to a maximum of (6 x 1) (6 marks)

Total (25 marks)

PROFESSIONAL OBJECTIVITY

4 (a) Comment on statement including definition of (professional) objectivity.


Other commentary:


(b) Commentary on objectivity/independence issues arising from the scenarios involving: Poynt & Co Pebury and Company Bollies

Generally 1 mark per point for commentary on the various issues, including specific concerns andrecommendations with a maximum of 9 marks (9 x 1) for each scenario up to an overall maximum of (15 marks)

Total (25 marks)

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ADVANCED LEVEL

MONDAY 13 DECEMBER 2004

QUESTION PAPER


ALL FOUR questions are compulsory and MUST be answered

Do not open this paper until instructed by the supervisor

This question paper must not be removed from the examination

hall

Pape

rT8

(INT)

Implementing

Audit Procedures





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1 Opiniol is a limited liability company which carries out public opinion surveys.

The company employs an interviews manager to control 40 interviewers who conduct interviews with members of

the public at random. The interviewers are paid monthly in arrears for hours worked, with hourly rates and productivity

bonus payments being dependent on surveys undertaken. They submit their monthly time sheets to the companys

head office for processing and the company operates a separate monthly payroll specifically for interviewers wages.

The companys wages software program produces on request:

1. A master file update report detailing the update report number, the amendments made since the last report,

and the number of existing employees on file.

2. A current period payment details report showing gross payment, deductions and net payment amounts by

employee and in total.

3. Wage slips the computerised production of which is requested only after other control procedures employed

have ensured that information provided on the current period payment details report (above) is in agreement with

a hash total representing gross wages input.

The interviews manager is based at the companys head office, together with the accounting and administrationdepartments. He is responsible for the recruitment of interviewers, deployment to assignments, overseeing of interview

work and for the authorisation of pay rates and bonus payments.

The company has a good control environment including appropriate segregation of duties throughout the specific areas

of the business. Head office employees include a company accountant, a wages supervisor and three wages clerks.

Required:

(a) State FOUR objectives of the internal controls that should be exercised over a wages system. (4 marks)

(b) State the internal control procedures that Opiniol should adopt over the updating of its wages master file with

regard to interviewer starters and leavers. (9 marks)

(c) State the internal control procedures that Opiniol should adopt over the completion and authorisation of, and

the computer processing of interviewers time sheets, prior to the request being made for the production of

the monthly computerised wage slips. (12 marks)

(25 marks)

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2 The directors of Wizzin have asked your firm to quote for the appointment as the companys new auditors. The next

financial statements due for audit will be those for the year ending 31 March 2005 and from discussions with the

directors your firms audit engagement partner has ascertained the following information:

1. Wizzin is a long established, limited liability company, trading as builders merchants. Owing to a large influx of

competitors into the market place, the company has had declining profits in recent years, although the directors

appear not to be unduly concerned about the companys ongoing trading.

2. The company operates from 14 sites around the country. All sites comprise a shop and a yard with the largest

site also accommodating the companys head office. In order to attract new customers all of the shops have

recently undergone major repair and refurbishment programmes. The costs of these programmes were substantial

and have been financed by bank borrowing.

3. Each site sells a wide range of products including timber and consumable materials, decorating and general

building products. Ranges of tools and equipment are also available both for sale and for short-term hire, whilst

very large stockpiles of sand and gravel are kept in each yard to meet customer demand.

4. A cash sales policy applies to most customers, but where credit terms are granted, customers may either collect

goods directly or take advantage of the companys delivery service.

5. Wizzin owns a large volume of mobile plant and machinery to service its yard and delivery operations. These

include mechanical shovels, dumper trucks, lorries and vans.

6. Each site is open throughout the year, closing only for public holidays. Consequently 18 full-time shop and yard

staff are employed at each site together with varying numbers of part-time and temporary employees.

Required:

(a) Describe THREE matters the audit engagement partner of your firm should consider before deciding whether

to quote for the appointment as auditors to Wizzin. (9 marks)

(b) State with reasons FIVE factors that would affect the initial assessment of inherent risk associated with the

audit of the financial statements of Wizzin. (16 marks)

(25 marks)

3 (a) Required:

Explain what is meant by the term audit evidence and state what it comprises. (3 marks)

(b) An auditor may obtain audit evidence by one or more of the following procedures:

(1) Inspection

(2) Observation

(3) Recalculation(4) Analytical Procedures

Required:

(i) Explain what each of these procedures involves. (6 marks)

(ii) For each procedure provide TWO examples of its use during the course of an audit stating clearly in each

example the purpose of carrying out the procedure. (16 marks)

(25 marks)

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4 Whilst there is a difference between the roles of internal auditors and external (registered) auditors, they often liaise

on various matters and a Chartered Certified Accountant employed in either capacity has an obligation to adhere to

the Fundamental Principles of the Code of ethics as set out in ACCAs Rules of Professional Conduct.

Required:

(a) (i) Contrast the objectives and scope of an internal auditors work for a limited liability company with that

of an external (registered) auditor auditing its financial statements. (5 marks)

(ii) Discuss the extent to which each should be expected to detect fraud. (4 marks)

(b) Explain FOUR matters that external auditors should consider when evaluating and testing work carried out

by internal auditors with a view to relying on it to reduce their own work. (8 marks)

(c) State FOUR of the fundamental principles of ACCAs Code of ethics. (8 marks)

(25 marks)


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Answers



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Implementing Audit Procedures (International Stream) December 2004 Answers

1 (a) The objectives of the internal controls that should be exercised over a wages system are to ensure that:

(i) wages are paid only to authorised employees of the company.

(ii) wages are paid only in respect of work carried out or other authorised criteria.

(iii) wages are paid only at authorised rates of pay.

(iv) wages deductions are properly accounted for.

(v) wages deductions are paid over in full to the appropriate third parties.

(vi) wages transactions are recorded completely and accurately in the accounting records.

(Full marks will be awarded for identifying FOUR of the above or other appropriate objectives.)

(b) The following control procedures should be adopted:

(i) employees involved in the actual input and processing of wages data should have read only access to the wages master

file.

(ii) there should be formal procedures requiring the interviews manager to provide detailed written notification to a

responsible official (for example the wages supervisor) of starters and leavers.

(iii) the responsible official (above) should maintain an independent record of the cumulative number of authorisedemployees on file and after preparing appropriate input documentation should update this record to show the revised

number of authorised employees that should exist on the master file. The written notification received from the interviews

manager should be retained for reference as appropriate (see below).

(iv) after updating the wages master file, the responsible official should request a master file update report, and check that:

the report number is in line with expectations.

the amended details agree with the written notifications from the interviews manager.

the number of authorised employees on file agrees with the independent record maintained.

Any discrepancies should be investigated immediately.

(v) after completion of the foregoing procedures the master file update reports should be filed securely together with input

documentation and written notifications from the interviews manager.

(vi) at random intervals a more senior responsible official of the company (for example the company accountant), should

access the wages master file and check its contents to the manual records maintained, input documentation and

notifications from the interviews manager as appropriate.

(Full marks will be awarded for stating procedures similar to those above.)

(c) The following control procedures should be adopted:

(i) the interviews manager should issue standardised time sheets to all interviewers in advance of work to be undertaken.

Time sheets should be easily identifiable to individual interviewers.

(ii) interviewers should submit their time sheets to the interviews manager on a timely basis for monthly processing.

Interviewers should be pursued for time sheets not submitted. Time sheets should be checked and evidenced as such

for authenticity and hours worked, by the interviews manager.

(iii) pay rates applicable for hours worked and bonus payments due should be either noted on the time sheets by theinterviews manager or noted on separate documentation as appropriate, for the attention of the wages clerk (below).

(iv) all authorised time sheets and pay rates/bonus documents should be forwarded intact to a wages clerk for the calculation

of gross wages by the interviewer (employee).

(v) having calculated gross wages, the wages clerk should prepare the data for input by batching and the calculation of a

batch input total, using a hash total represented by the total gross wages due.

(vi) all data documentation prepared should then be passed to the wages supervisor for checking, and authorisation prior to

passing to another wages clerk for computer input and processing following password access.

(vii) on completion of processing, the input documentation should then be passed together with the computer produced

current period payment details report, to the wages supervisor for cross checking of report totals. Any discrepancies

should be noted for re-input.

(viii) on satisfactory processing of re-input data and cross checking to a further current period payment details report asrequired, a request should be made for the computerised production of the interviewers wage slips.

(Full marks will be awarded for stating procedures similar to those above.)

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2 (a) The audit engagement partner (audit partner) should consider the following general matters:

(i) the reason why the directors of Wizzin wish to appoint new auditors to the company. If it is because they have refused

to respond positively to a reasonable request from the existing auditors, resulting in a breakdown of the working

relationship with them, then the audit partner of your firm may not be interested in quoting for the appointment.

(ii) any risk of breaching the independence of the firm. There may be a risk of a threat to the independence or perceived

independence of the firm if it is considered that it would become unduly dependent on Wizzin as a consequence of the

size of the fee charged to it. ACCAs Rules of Professional Conduct provide detailed guidance notes on this issue. Similarly

if any of the firms partners are connected to Wizzin in any way, then legislation founded in order to maintain auditorindependence may prohibit the firm from acting as auditors to it.

(iii) the ability of the firm to carry out an efficient audit. This will be determined by the reporting deadline set by the company

and the audit resources available to the firm. Given the nature, size and spread of locations of Wizzins activities, the

audit partner would need to carefully consider whether the firm could properly service this particular audit assignment.

The availability of staff with sufficient technical knowledge and expertise may be dependent on other audit assignments

to which the firm is already committed.

(iv) general commercial considerations. The audit partner would need confidence that the firm could build a successful

audit/client working relationship with the company. He would also need to ensure that such a relationship was

commercially viable from the firms perspective. Consequently he would need to consider the integrity and working

practices of Wizzins directors together with the financial strength of the company.

(Full marks will be awarded for describing THREE of the above or other relevant matters.)

(b) The following factors would affect the assessment of the inherent risks associated with the audit of the financial statements

of Wizzin:

(i) The company is operating in a competitive market place, has suffered declining profits and has substantial bank

borrowings. The directors appear not to be unduly concerned about the companys trading position. However they may

be predisposed to misstating the financial statements in order to present a more favourable trading and balance sheet

position and to instil greater third party confidence in the company. The assessment of inherent risk would need to take

into account these factors, together with the possibilities of potential going concern problems being encountered by the

company.

(ii) The geographical spread of the companys activities over 14 sites would, in isolation, increase the possibility of material

misstatement in the companys financial statements. The nature of the companys operation appears to be quite

complex, with large volumes of purchases, sales and accounting transactions generally. There would therefore be

concern as to the completeness and accuracy of recording of transactions in the companys accounting records and the

reflection of the same in the financial statements.

(iii) The company has incurred substantial costs on repair and refurbishment programmes at all 14 sites around the country.

These costs would have a material effect on the companys financial statements and initial concerns would centre

around the completeness and accuracy of recording, including the correct categorisation of costs between revenue

(repair) and capital (improvement) expenditure in the financial statements.

(iv) The company has extensive retail operations selling a wide range of products. Sales are predominantly for cash, which

is particularly susceptible to loss or misappropriation and this together with the collect or delivery flexibility given to

credit sale customers increases the likelihood of unrecorded sales. The nature and mix of sales at each site including

the hiring of tools and equipment, would lead to audit concern as to the possibility of unrecorded sales and the incorrect

categorisation of sales in the companys accounting records.

(v) Inventories would represent a significant proportion of the companys assets and there would be initial concern over this

area of the companys financial statements. Concerns would centre around the basis of the quantification and valuation

of inventories for inclusion in the companys balance sheet. As regards quantification, there may be particular concernas to the measurement of stockpiles of sand and gravel and concerns about valuation may be founded primarily on the

values ascribed to inventory lines and individual items of inventory held at each site. Owing to the portability of inventory

lines and open access to them, there would also be concern as to the likelihood of loss or misappropration of inventories.

(vi) The companys tangible non-current assets include a large volume of high value mobile items. This would cause initial

audit concern and would render this area of the companys financial statements being allocated a high inherent risk

factor. Any mobile or transportable assets owned by a company are susceptible to loss or misappropriation, but this

characteristic is particularly applicable to the non-current assets stated as owned by the company, including the range

of tools and equipment available for hire. As well as the issue of existence, the valuation of individual assets may cause

concern given the possibility of damage and shortened assets lives brought about as a consequence of the relatively

harsh operating environment of the company.

(vii) The company employs 252 (14 x 18) full-time shop and yard staff supplemented with part-time and temporary

employees, in addition to those employed at its head office. Given the likelihood of starters and leavers throughout the

year and other payroll complexities including the possibility of overtime and bonus payments, the company will have alarge volume of payroll transactions. This would lead to concerns over the completeness and accuracy of recording in

this area and the potential of unauthorised payments of salaries and wages.

(Full marks will be awarded for stating and commenting on FIVE of the above or other relevant factors that would affect the

initial assessment of inherent risk.)

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3 (a) The term audit evidence describes the information obtained by the auditors in arriving at the conclusions on which the audit

opinion is based. Audit evidence comprises source documents and accounting records underlying the financial statements

(subject to audit) and corroborating information from other sources.

(b) (1) Inspection

(i) Consists of examining records, documents or tangible assets.

(ii) Example the physical inspection of a freehold office building to verify existence of the building.

Example the examination of a purchase invoice to vouch the validity of an entry in the trade payables ledger.(2) Observation

(i) Consists of looking at a process or procedure performed by others.

(ii) Example the observation of the counting of inventories by an entitys personnel to ensure that they are counted

in accordance with procedures authorised by the management of the entity.

Example the observation of the opening of the mail of an entity to ensure that at least two employees are present

to receive and witness the receipt of monies received by the entity.

(3) Recalculation

(i) Consists of checking the mathematical accuracy of documents or records.

(ii) Example checking the accuracy of extensions of balance sheet inventory calculations to verify the accuracy of the

valuation of reported inventories.

Example checking the depreciation calculations as applied to non-current assets to ensure that depreciation ratesare in accordance with the stated policy of the entity.

(4) Analytical Procedures

(i) Consists of evaluations of financial information made by plausible relationships among both financial and non-

financial data.

(ii) Example the calculation of the average remuneration (total wages and salaries divided by total employees) paid

to the employees of an entity, to assess the reasonableness of the reported wages and salaries costs as compared

to a previous equivalent period.

Example the calculation of an entitys trade receivables ratio to help assess the reasonableness of bad debt

provisions, the effectiveness of credit control and the possibility of under/over statement of reported sales.

4 (a) (i) The objectives and scope of the work of an internal auditor may vary widely and depend on the size and structure of

the company and requirements of its management. Ordinarily, internal auditing activities include one or more of the

following:

Review of the accounting and internal control systems.

Examination of financial and operating information.

Review of the economy, efficiency and effectiveness of operations.

Review of compliance with laws, regulations and other external requirements and with management policies and

directives and other internal requirements.

The objective of the work of an external auditor, employed to audit the financial statements of a limited liability company,

is to enable the auditors to express an opinion as to whether the financial statements are prepared in all material

respects, in accordance with an identified reporting framework. The scope of the work required to meet these objectives

is determined by the auditor having regard to any terms of the audit engagement and reporting requirements together

with the requirements of International Standards on Auditing, relevant professional bodies, legislation and regulations.(Full marks may be awarded for answers including only some of the above or other relevant points.)

(ii) The extent to which an internal auditor should be expected to detect fraud will vary dependent on the tasks he is asked

to carry out by management, the scale of any fraudulent activity and the resources with which he is provided to detect

fraud. An external auditor should design audit procedures to obtain reasonable assurance that misstatement arising from

fraud that is material to a companys financial statements will be detected. The auditor must maintain an attitude of

professional scepticism throughout the audit, notwithstanding the auditors past experience about the honesty and

integrity of management and those charged with governance. However, it is often accepted that fraud may not be easy

to detect, particularly when carried out by senior managers of a company, since it is ordinarily accompanied by acts

specifically designed to conceal its existence. Consequently the extent to which an external auditor should be expected

to detect fraudulent activity is dependent on the scale, the degree of concealment and the level of the resultant

misstatement in the financial statements.

(Full marks may be awarded for answers including only some of the above or other relevant points.)

(b) External auditors should consider whether:

(i) the work has been performed by persons having adequate technical training and proficiency as internal auditors and the

work of assistants has been properly supervised, reviewed and documented.

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(ii) sufficient appropriate audit evidence has been obtained to afford a reasonable basis for the conclusion reached.

(iii) conclusions reached are appropriate in the circumstances and any reports prepared are consistent with the results of

the work performed.

(iv) any exceptions or unusual matters disclosed as a consequence of the work have been properly resolved.

(c) The fundamental principles of the ACCAs Code of ethics are:

(i) members should behave with integrity in all professional, business and personal financial relationships. Integrity implies

not merely honesty but fair dealing and truthfulness.

(ii) members should strive for objectivity in all professional and business judgements. Objectivity is the state of mind which

has regard to all considerations relevant to the task in hand but no other. It presupposes intellectual honesty.

(iii) members should not accept or perform work which they are not competent to undertake unless they obtain such advice

and assistance as will enable them competently to carry out the work.

(iv) members should carry out their professional work with due skill, care, diligence and expedition and with proper regard

for the technical and professional standards expected of them as members.

(v) members should behave with courtesy and consideration towards all with whom they come into contact during the

course of performing their work.

(Full marks will be awarded for stating any FOUR of the above principles.)

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Implementing Audit Procedures (International Stream) December 2004 Marking Scheme

The marking scheme generally indicates that 1 mark or 11/2

marks are awarded for each point. However, consideration should be given

to the depth and relevance of points provided by each candidate when answering the question; for example if only a brief explanation

is given then it may only be worth 1/2 point whilst a detailed discussion could be worth up to a maximum of 2 points.

Marks are not allocated to specific points as the candidate may include a valid point within their answer which is not included in the

model answer; the candidate should be given full credit for such points.

The majority of the questions require several points to be included within the answer, so if a candidate concentrates on a few points

then they should not be given as much recognition, and their overall mark should be lower than a candidate who provides a range of

points.

In conclusion, it is important that the overall standard of the candidates answer is considered in terms of whether it is above or below

a pass grade. After marking each question, the total mark awarded should be evaluated to assess whether it is fair. If it is decided that

the total mark is not a proper reflection of the standard of the candidates answer then the answer should be reviewed again, and the

marks adjusted to ensure that the total awarded is fair. If the answer is of a pass standard then it should be awarded a minimum of

40%; if it is below a pass standard then it should be awarded less than 40%.

1 Opiniol

(a) Stating objectives of the internal controls exercised over a wages system.

Generally 1 mark per objective up to a maximum of (4 marks)

(b) Stating the internal control procedures that the company should adopt over the updating of its wages

master file with regards to starters and leavers.

Generally up to 11/2

marks for each stated procedure up to a maximum of (6 x 11/2) (9 marks)

(c) Stating the internal control procedures that the company should adopt over the completion, authorisation

and computer processing of interviewers time sheets.

Generally up to 11/2 marks for each stated procedure up to a maximum of (8 x 11/2) (12 marks)

(Total 25 marks)

2 Wizzin

(a) Describing general matters the audit engagement partner should consider in deciding whether to quote for

the audit appointment.

Generally up to 1 mark per point up to a maximum of 3 marks for each matter with an overall

maximum of (3 x 3) (9 marks)

(b) Stating with reasons factors that would affect the initial assessment of inherent risks associated with the

audit of the financial statements.

Generally up to 1 mark for each point with a maximum of 4 marks for each factor with an overall

maximum of (16 marks)

(Total 25 marks)

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3 Audit Evidence

(a) Explanation of the term audit evidence (11/2 marks)

Statement of what it comprises (11/2

marks)

(b) (i) Explaining what the following procedures involve:

Inspection (11/2

marks)

Observation (11/2

marks)

Recalculation (11/2 marks)

Analytical Procedures (11/2

marks)

(ii) Providing TWO examples of the use of each of the procedures.

Generally up to 1 mark for each example up to a maximum of (4 x 2) (8 marks)

Explanation of the purpose of the procedure stated in each example.

Generally up to 1 mark for each explanation up to a maximum of (4 x 2) (8 marks)

(Total 25 marks)

4 Internal Auditors and External (Registered) Auditors

(a) (i) Contrasting the objectives and scope of the work of internal auditors and external (registered) auditors.


(ii) Commenting on the extent to which each should be expected to detect fraud.


(b) Explanation of the matters that the external auditor should consider when evaluating and testing work

carried out by internal auditors.

Generally up to 1 mark per point pertaining to each matter up to a maximum of (4 x 2) (8 marks)

(c) Stating the fundamental principles of ACCAs Code of ethics.

Generally up to 2 marks for each principle stated up to a maximum of (4 x 2) (8 marks)

(Total 25 marks)

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ADVANCED LEVEL

MONDAY 13 JUNE 2005

QUESTION PAPER


ALL FOUR questions are compulsory and MUST be answered

Do not open this paper until instructed by the supervisor

This question paper must not be removed from the examination

hall

Pape

rT8

(INT)

Implementing

Audit Procedures





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1 Recruitment Co is a limited liability company which operates as a prestigious, executive recruitment agency. Its most

recent financial statements are those for the year ended 31 March 2005. The directors of the company have

developed a strong control environment in the company and have introduced effective internal controls. These include

the review of monthly management accounts at formal monthly board meetings and the use of a non-current assets

register.

The company has 36 employees, most of whom are provided with an executive type of company car. It is company

policy to purchase only new cars and to replace them when they are two years old. Employees are allowed to purchase

replaced cars, and they do so by forwarding sealed bids to the company as and when replaced cars become available.

To protect the company from receiving only low bids from employees, sealed bids are also received from independent

motor car dealers.

During the year ended 31 March 2005 the company purchased large quantities of office furniture, as part of an

ongoing expansion programme. This included $30,000 of furniture which was ordered on 18 February 2005 but in

respect of which the company had not been invoiced by 31 March 2005. The companys accounting records show

that the furniture was delivered on 31 March 2005 and that the associated supplier invoice was received on 31 May

2005, some two weeks after the companys financial statements were presented for audit.

Required:

(a) State FOUR objectives of the internal controls that should be exercised over non-current assets. (4 marks)

(b) Explain how Recruitment Cos non-current assets register, if properly maintained, may be used by the

company to facilitate control over non-current assets. (4 marks)

(c) (i) Explain why it is particularly important that there should be strong internal controls over the disposal of

cars by Recruitment Co; (3 marks)

(ii) Suggest FIVE internal controls that Recruitment Co should employ over the disposal of cars.

(10 marks)

(d) With regard to the delivery of office furniture to Recruitment Co on 31 March 2005:

(i) State how Recruitment Co should have reflected the transaction in its accounting records; (2 marks)

(ii) Briefly describe TWO procedures the companys auditors should carry out to verify that the delivery

occurred on that date. (2 marks)

(25 marks)

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2 Sweet Scents Co is a wholesale supplier of cosmetic, beauty and perfumery products.

The companys inventories are stored in a central warehouse and a computerised system, updated from goods

received notes and goods despatched notes, identifies quantities of inventories held by product number and

description. Inventories are counted only at the companys year end date.

In discussions with the auditors about their forthcoming audit of the companys financial statements for the year

ending 30 June 2005, Sweet Scents Cos financial director made the following statements:

(1) Our employees will carry out a thorough count and valuation of all inventories as at 30 June 2005. However,

because employees of your firm will be in attendance at the count and will check inventory values, your firm will

be responsible for the accuracy of the reported inventories figure.

(2) Most of the companys inventories are stored in sealed cardboard boxes, as delivered to the company, which are

labelled with product descriptions, quantities and use by dates. This will make inventories easy to identify and

easy to count.

(3) On 31 May 2005 a flood at the warehouse caused varying degrees of damage to some of the inventories. The

damaged inventories were not covered by insurance but as we will be valuing them at cost they will not be

separately identified at the inventory count on 30 June 2005.

(4) Approximately five per cent of the value of our inventories is represented by Fleurs Bleu perfumery products.These were purchased in July 2004 in anticipation of a high demand, but due to a public health scare we havent

sold any. We are resigned to the fact that these products are worthless but well wait until the next financial year

before we throw them out and write them off.

Required:

(a) Comment on the validity of statement (1) of the financial director as to the audit firms responsibility for the

accuracy of the inventories figure at 30 June 2005. (5 marks)

(b) With reference to each of the statements (2), (3) and (4) made by the financial director to the auditors of

Sweet Scents Co:

(i) Identify and explain the concerns the auditors should have with regard to the accuracy of the inventoriesfigure to be reported in the companys financial statements for the year ending 30 June 2005; and

(ii) State the action the company should take both at the inventory count and in the valuation process to

overcome these concerns.

(Note: parts (i) and (ii) above carry equal marks.) (15 marks)

(c) Describe the procedures the auditors of Sweet Scents Co should carry out on goods despatched notes and

sales invoices to test sales cut-off at the year end date. (5 marks)

(25 marks)

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3 Jip Co, a limited liability manufacturing company is an established audit client of your firm.

In March 2005 an audit team from your firm visited Jip Co to review the companys internal control system in

preparation for the final audit of the companys financial statements for the year ending 31 July 2005.

As part of the final audit team you, together with other team members, have been instructed to attend a briefing

meeting as part of the planning of the final audit of Jip Cos year end financial statements.

Required:(a) Detail the work that the audit team should have carried out in March 2005, in preparation for the final audit

of Jip Cos financial statements for the year ending 31 July 2005. (8 marks)

(b) State FIVE matters that should be discussed at the audit briefing meeting as part of the planning process of

the final audit of Jip Cos financial statements for the year ending 31 July 2005. (5 marks)

(c) For each of the sources of audit evidence identified below, provide FOUR practical examples of how members

of your audit team may use such evidence to support their audit conclusions in respect of the final audit of

Jip Cos financial statements for the year ending 31 July 2005.

(i) Events after the balance sheet date;

(ii) Satisfactory internal control procedures;

(iii) Written confirmation from third parties. (12 marks)

(25 marks)

4 Your firm has selected you to attend a discussion workshop as part of your audit training programme. Attendees at

the workshop will discuss the auditors responsibilities in the audit of financial statements regarding the

appropriateness of the going concern assumption as a basis for the preparation of the financial statements.

Required:(a) Explain the underlying assumption applying to an entity when its financial statements are prepared on a

going concern basis. (4 marks)

(b) State EIGHT financial indicators and FOUR operating or other indicators of risk that the continuance of an

entity as a going concern may be questionable. (12 marks)

(c) State SIX audit procedures to obtain evidence that the going concern assumption is appropriate for an entity.

(9 marks)

(25 marks)


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Answers



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Implementing Audit Procedures (International Stream) June 2005 Answers

1 (a) The objectives of the internal controls that should be exercised over a non-current assets system are to ensure that non-currentassets:(i) are acquired only when necessary.(ii) are acquired on the most economic terms.

(iii) are acquired only when authorised.(iv) are properly recorded in the accounting records.(v) are protected from loss and damage.(vi) are disposed of only when necessary.(vii) are disposed of only when authorised.(viii) are disposed of at the best possible price.

(Full marks will be awarded for stating any FOUR of the above or other appropriate objectives.)

(b) Recruitment Cos non-current asset register should provide an up to date inventory of all non-current assets owned by thecompany. The format of the register should allow for the groups of assets (e.g. motor vehicles, office furniture, officeequipment) as reflected in the companys general ledger, to be identified by individual asset such that at any point in timereference may be made to individual assets as appropriate. Specific information relating to each individual asset as recordedin the register will normally include asset description, location, date of acquisition, cost, expected useful life, depreciation rate,

depreciation charged and written down value.

Such information above should facilitate the directors of the company in maintaining control over the use, safe custody andreplacement of assets, some of which will be transportable, valuable and desirous and by their nature possibly subject tomisuse or misappropriation. However, in order to maintain effective control, it is important that existence and condition checksare regularly carried out on the non-current assets of the company. Checks should be made in both directions from the registerto assets and from assets to the register, by a responsible individual of the company, who is independent from the acquisitioncustodian, disposal and recording functions. Similarly, it is important that any discrepancies and damage noted whenchecking are brought to managements attention and promptly resolved.

(Full marks may be awarded to answers which do not contain all of the above points.)

(c) (i) Given that most of Recruitment Cos employees are provided with a company car and that each car is replaced bi-annually, there is a relatively high frequency of car disposals by the company. This, combined with the value of eachexecutive type vehicle increases the risk of loss to the company in this area. Owing to the nature of each new carpurchased, it is probable that there is a significant loss in value over each two year period of ownership as compared tothe purchase price. However, because vehicles for disposal are likely to be highly desirable to prospective purchasers(both third party and employee) the disposal process should be carefully managed to ensure that losses are minimised.

(Full marks may be awarded to answers which include only some of the points referred to above.)

(ii) Recruitment Co should exercise the following internal controls over the disposal of cars:

there should be formal written instructions as authorised by the board of directors, governing the companys policyand procedures to be followed on the disposal of cars.

a responsible official should authorise the disposal of cars in accordance with company policy. The individualshould be independent of the purchasing function and of recording in the companys accounting records.

when cars are two years old, sealed bids to purchase should be obtained from at least three reputable independent

car dealers in addition to bids from interested employees. sealed bids should be forwarded to the responsible official for scrutiny, subsequent contact with the successful

bidder and authority to dispose of the relevant car. Disposal should be to the highest bidder and all bid documentsshould be retained for future reference as appropriate.

by the authority of the responsible official, Recruitment should raise fully detailed invoices for the sale of the cars.Invoices should be checked for completeness and accuracy before issue. Given the possible loss to the companyas a consequence of non-payment, cars should be released to buyers only when the company has received clearedfunds in respect of sales. Procedures should encompass appropriate and clear lines of communication in thisregard.

details of disposals of cars should be promptly and accurately recorded in the companys accounting records,including the non-current assets register. These tasks should be carried out by personnel who are independent ofthe purchase and disposal functions, and should be subject to verification by an appropriate company official, for

example, the companys financial director.

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the board of directors of the company should monitor the profits/losses arising on the disposal of cars as reportedin the monthly management accounts to assess the appropriateness of the companys depreciation policy and tooversee the effectiveness of the companys disposal procedures, for example, by seeking detailed explanations asto the reasons for any particularly large losses on disposal.

(Full marks will be awarded for suggesting any FIVE of the above indicative controls or other appropriate controls.)

(d) (i) Recruitment Co should have reflected the transaction in its accounting records as an addition (at cost) of $30,000 tonon-current assets (office furniture) and made an appropriate accrual of $30,000 in respect of the suppliers invoice notreceived at the balance sheet date.

(ii) To verify the date of delivery the auditors should:

confirm the date of receipt recorded on the suppliers delivery note.

confirm the date of receipt recorded on goods received documentation issued by Recruitment Co.

confirm the date of delivery as stated on the suppliers invoice, subsequently received.

make verbal enquiries to appropriate employees of Recruitment.

(Full marks will be awarded for describing any TWO of the above or other appropriate procedures.)

2 (a) The directors statement is invalid. It is the responsibility of the directors of Sweet Scents Co to prepare the annual financial

statements for audit and to ensure that the financial statements show a true and fair view (or are presented fairly, in allmaterial respects). Consequently, it is their responsibility to ensure that the amount at which inventories are reported in thefinancial statements represents inventories, which are physically in existence and are valued in accordance with generallyaccepted accounting principles and accounting standards. Arranging for Sweet Scents Cos employees to count and value thecompanys inventories is only part of the directors obligation in meeting their responsibility with regard to the financialstatements. Whilst the auditors of Sweet Scents Co may attend the physical count and carry out tests to determine theaccuracy of the count and subsequent valuation, the responsibility of the companys directors in this regard is not reduced.

(b) Storage of Inventor

15112557 acca cat paper t8 implementing audit procedures solved past papers

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