acca f8 practise

8/12/2019 ACCA F8 practise

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Paper F8 Mock Exam Questions of 7

ACCA Fundamentals Level

Paper F8 Audit and Assurance

Mock Examination

Question Paper

Time allowed

Reading and PlanningWriting

15 minutes3 hours

ALL FIVE questions are compulsory and MUST be at tempted

During reading and planning time only the question paper may beannotated

Instructions: Please attempt this paper under examinationconditions

DO NOT OPEN THIS PAPER UNTIL YOU ARE READY TO STARTUNDER EXAMINATION CONDITIONS

Source: BPP Learning Media




Question 1

Al l-Eco Co

All-Eco Co is an internet retailer selling a wide variety of ecologically friendly goods.

Inventories are housed in a large warehouse from which orders are dispatched direct tocustomers. There are approximately 50,000 lines of inventory. The quantity held ininventory for any one line depends largely on its nature. Clothes tend to have smallerquantities than household goods, which turnover faster and are kept in larger quantities.

The company has computerised inventory records. The system records inventory levels,costs, sales price, and movement history. It can identify the supplier of each item ofinventory and when it was purchased. The system integrates with the order system tothe extent that customers can see the level of inventory available when their order isplaced.

The company operates a perpetual inventory system. All inventory items are counted at

least once every six months, with inventory counts taking place once a month. Aftereach count, differences (which usually relate to damaged goods) are validated andauthorised by a member of staff not usually connected with inventory and then amendedon the system.

All-Eco Co has experienced rising prices of goods during the year.

Required:

(a) Explain the advantages to All -Eco Co of using a perpetual inventory sys tem. (4marks)

(b) List the audit procedures you should perform to conf irm the completeness andexistence of inventories in the financial statements at All-Eco Co. For eachprocedure, explain the purpose of that procedure. (12 marks)

(c) List the substantive procedures you should perform to confirm the valuation ofinventories in the financial statements at All-Eco Co. For each procedure,explain the purpose of that procedure. (6 marks)

(d) Discuss the extent to which Computer Assisted Audit Techniques (CAATs)might be used in your audit of i nventories at All-Eco Co. (8 marks)

(Total: 30 marks)




Question 2

(a) Briefly explain the reasons for auditors documenting their work. (3 marks)

(b) SSA 530 Audi t sampling and other means of test ing states that ‘in determiningthe sample size, the auditor should consider whether sampling risk is reduced to anacceptably low level.’

Required:

List six factors that inf luence sample sizes for tests of details. (3 marks)

(c) Auditors report on whether financial statements contain material misstatements.

Required:

Define materiality and explain its impact on an audit. (4 marks)

(Total: 10 marks)




Question 3

Frank Shipley has been approached to accept a position as a non-executive director ofPowerbolt Co, a listed company with operations in diverse business sectors, tradinginternationally. He has previously held senior positions in the public sector and is

seeking out information about various aspects of his potential new role.

Knowing that you work for an audit firm with many large companies as clients, he hasasked you for an update on corporate governance regulation, particularly those aspectsthat relate to audit.

Required:

You have been asked to prepare a memo which provides key information on theprinciples of good corporate governance.

You should address the following in your memo:

(a) The role and responsib ilit ies of:

(i) the internal audit function, and(ii) the external auditor (10 marks)

(b) The role and responsibi liti es of the audit commit tee. (10 marks)

(Total = 20 marks)




Question 4

You are the senior in charge of the audit of Sparks Co, a distributor of electricalcomponents. A member of the audit team has undertaken a review of the accountingand control systems and has identified and confirmed the following significant points ofweakness:

(1) Purchases

Purchase ledger clerks amend the payables master file with details of new supplierson oral authority of the financial controller. No printout of amendments is obtained.

(2) Sales

Credit limit parameters within the sales order processing software are unrealisticallylow, resulting in a high volume of items being rejected as exceptions.

(3) Cash at bank

The monthly bank reconciliations prepared by the assistant accountant are notreviewed.

(4) Contingency planning

There is no formal disaster recovery plan.

Required:

(a) Set out, in a manner suitable for inclusion in a report to management, thepossible consequences o f the above weaknesses and the recommendationsto remedy the weaknesses. Your recommendations should clearly describehow the control procedures should operate. (12 marks)

Note: You are not required to repeat the weaknesses in your answer.

(b) Explain how a report on these matters written by internal audit would differfrom the external auditors ' report to management. (8 marks)

(Total = 20 marks)




Question 5

Creation Co is a listed construction company with an annual revenue of $350 million andits draft income statement shows an operating profit for the year ended 31 December20X8 of $40 million. This is the first audit by the audit firm. Enquiry of the previousauditor revealed no reasons for concern. On completing audit work at the company'spremises, the audit senior drafts a memo, extracts from which are reproduced below.

(a) Inventory valuation

Inventories include $7 million, at cost, for scrap rubber from used car tyres. This materialis widely used as a road surface in other countries. Contracts for road building with thiscountry's Highways Agency, the state authority for road construction, do not currentlypermit the use of this material. However, the matter was known to be under review and,on being offered a special purchase of this material, Creation speculated on afavourable outcome of this review and purchased the material. In February 20X9, shortlybefore the financial statements were approved by the directors, the Highways Agencyreported that it would not, currently, accept the use of this material. If used on non-Highways Agency contracts the material's net realisable value would not exceed $2million. The finance director maintains that the issue of the Highways Agency report wasa non-adjusting post balance sheet event. The write down of the inventory should,therefore, be reflected in the next period's financial statements. (6 marks)

(b) Depreciation

In 20X4 the company purchased two computer controlled earth movers at a cost of$2,500,000 each and a further two at the same price in 20X5. Depreciation has beenprovided at 10% straight line, the same basis as it previously depreciated conventionalearth movers. This year, 20X8, the company has decided that improvements intechnology made it worthwhile scrapping their first two computer controlled earth movers

and replacing them with the latest model at a cost of $4,000,000 each. The company'schief engineer tells you that technology is developing so rapidly it appears likely they willcontinue to replace these machines every five years. In spite of this the finance directorclaims that the depreciation rate of 10% is in line with the industry standard and reflectsthe physical life of the machines. He argues that continued improvements in technologycannot be foreseen and that there is no justification for increasing depreciation to 20%because of the possibility of technological obsolescence. (7 marks)

(c) Contingent liability

The company is being sued for $50 million by the Highways Agency for defective workon a recently completed road. The company maintains that it met the Highways

Agency's specification and it is the Agency's engineers who are at fault in drawing up thespecification. Creation maintains that it has no case to answer, that the possibility of lossis remote and that the claim need not be disclosed as a contingent liability. Aninvestigative journalist has recently published an article suggesting that other roadsconstructed by the company exhibit similar faults. The managing director has admittedthat the company's road building techniques are under investigation by the Highways

Agency. If the company were to lose the case its future going concern would bethreatened. (7 marks)




Required:

Explain the effect of each matter

(i) on the financial statements; and

(ii) if the company were to refuse to amend the financial statements, on theauditor's report. Your answer should consider materiality where appropriate.

(Total = 20 marks)

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