SUMMER EXAMINATIONS 2011 ACC300511N

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1 SUMMER EXAMINATIONS 2011 ACC300511N MODULE TITLE LEVEL TIME ALLOWED Audit and Investigations Six Three hours, plus reading time of 15 minutes. Students should begin answering the questions once the reading time has ended. Instructions to students: Please enter your student number not your name on all scripts. Answer any four questions. All questions are equally weighted. Answer each question in a separate answer booklet. Students are allowed to bring a silent non-programmable calculator into the examination room with them. Please note: the 15 minutes reading time has been allotted for students to read the exam paper thoroughly and to make notes. However, students may not commence answering the questions until the reading time has finished. No. of Pages 7 No. of Questions 6 Page 1 of 7

2 ANSWER ANY FOUR QUESTIONS ONLY Question 1 The objectivity of the external auditor may be threatened or appear to be threatened where: There is undue dependence on any audit client or group of clients; The firm, its partners or staff have any financial interest in an audit client; There are family or other close personal relations between the firm, its partners or staff and the audit client. (c) For each of the three examples given above, explain why the objectivity of the external auditor may be threatened, or appear to be threatened, and why the threat is important. (8 marks) Describe auditor professional's requirements that reduce the threats to auditor objectivity for each of the three examples given above. State the extent to which the auditor's independence might be impaired in each of the following two circumstances, indicating whether they might prevent the auditor undertaking the additional work or accepting appointment: You have been the auditor of Cook, a limited liability company, for a number of years. Shortly before the commencement of your audit the client asks you to provide additional accountancy services to assist in the preparation of the final accounts as a senior member of their staff has recently left the company s employment. Would your answer be different if Cook Limited was a public limited company? A number of years ago you acquired 5% of the issued ordinary share capital of Good, a limited liability company, although you have never played any active role in the management of the company. The company's chairman, with whom you are slightly acquainted through membership of a local social club, has now asked if your firm is prepared to accept nomination as the company's next auditor. Page 2 of 7

3 Question 2 You have been the audit manager of Brooks plc, a company listed on a stock exchange, for the last five years. The company manufactures diesel engines. You are currently planning the audit for the year ended 31 March Brooks supplies engines to countries all over the world. Three types of engine are manufactured: (1) Model X - a very recent development; (2) Model B has been in service for the last five years; (3) Model A was designed and put into production twenty years ago. Brooks is currently tendering for a 200m contract with the UK Government to sell Model X engines for a new heavy vehicle. However, stiff competition is being received from a U.S. manufacturer. A 10 million warranty claim has just been received from an overseas customer for 50 Model B engines, supplied in April 2010, which have become clogged with sand. The faulty engine parts concerned were purchased from David, a limited liability company. The inventory ledger is maintained on a computer system. The software was written in house five years ago. A continuous inventory checking system is operated on the 20,000 individual product lines carried. The internal audit manager is closely monitoring this year s physical inventory count, checking results as counting discrepancies are at a higher than expected level and the overall counting programme is behind schedule. The reporting partner for the last ten years has just retired and you are due to meet with the new reporting partner to discuss with her the forthcoming Brooks audit. Describe the areas of financial statement risk particular to Brooks. Explain the audit work you will perform in relation to: (12 marks) the warranty claim; inventory (7 marks) Page 3 of 7

4 Question 3 You are the senior in charge of the audit of Annette, a long established company which manufactures biscuits and confectionery. The draft figures for "current liabilities" as at 31 March 2011 are as follows: Trade payables 261, ,625 Accrued expenses 21,162 18,177 Provisions: - Legal Action 40, Factory repairs 72,000 62,000 You have obtained the following additional information: 394, ,802 (1) The provision for legal action relates to a competitor's claim that their manufacturing process has been illegally copied. (2) The provision for factory repairs was first set up in the year 2010 in respect of sums required to be spent on urgent repairs to the factory foundations and structural steel work. 58,500 was spent during the year to 31 March The audit of trade payables, accrued expenses and provisions as shown in the balance sheet at the year end is to be performed under your supervision by a junior member of staff with no previous experience in this area. Explain why the audit of trade payables, accrued expenses and provisions is a more difficult area for the auditor than gross trade receivables and prepayments. State, with reasons, the procedures that should be undertaken by the junior member of staff carrying out the audit of: trade payables; accrued expenses; provisions. (7 marks) (7 marks) Page 4 of 7

5 Question 4 You are in charge of the internal audit of Dylan, a limited liability computer software company. Your colleague has identified the following significant points of weakness in the accounting and internal control systems. Purchases Invoices and statements are not always produced to the directors when they authorise payment. Sales Credit is given to new customers without adequate references being taken up or proper authorisation. In addition, credit limits are being exceeded, with credit limits unrealistic in many cases. Sequentially numbered credit notes are not used. Payroll The monthly credit transfer lists are signed without reference to the detailed payroll. Petty cash A large number of petty payments are supported only by petty cash vouchers without any independent supporting evidence. Non current assets A register of non current assets is not maintained. Computer systems There is no written disaster recovery plan. Set out, in a manner suitable for inclusion in a report to management, the possible consequences of the above weaknesses and the recommendations to remedy the weaknesses. Your recommendations should clearly describe how the control procedures should operate. (20 marks) Describe the qualities required for a report to management on weaknesses in the accounting and control systems, to be effective. Page 5 of 7

6 Question 5 Analytical procedures are an important and powerful tool for auditors in explaining the performance of a business. They are used at the planning, testing and review stages of the audit. Preliminary analytical procedures are often performed on accounting ratios. Explain the possible reasons for the following changes found at the planning stage of the audit: (iv) (v) an increase in trade receivables; a decrease in trade payables; an increase in the inventory value at year end; an increase in cost of sales as a % of sales; an increase in capital gearing (leverage). (10 marks) NB: No marks will be awarded for showing the calculation of the ratio, all parts carry equal marks The concept of materiality is fundamental to the work of auditors. Matters that are immaterial are not reported in financial statements. explain the concept of materiality; describe how materiality affects the audit work performed by auditors; give an example of qualitative materiality. Page 6 of 7

7 Question 6 You are the auditor of Anon Limited and are preparing for the forthcoming audit of the company's accounts for the year ended 30 June The company makes the majority of bank payments by cheque and a small minority by standing order. As part of your standard audit procedures, you have prepared a bank letter for forwarding to the company's bank. However, the managing director is reluctant to authorise disclosure to you by the bank. In his opinion this is not necessary because all of the company's bank statements reconciled by company employees will be presented to you for the purpose of your audit. Additionally, he has undertaken to give you verbal assurances with regard to the information requested in the letter. The managing director has stated that the company's internal control procedures over cheque payments are very strong with appropriate segregation of duties. Identify six points which you would expect the bank of Anon Limited to confirm in response to your bank letter. (9 marks) Explain why it is important that you should send a bank letter to the bank of Anon Limited. Your explanation should include commentary on the extent to which you could rely on: The company's bank statements as presented by the company; Verbal assurances from the managing director. (10 marks) (c) State the concern you would have and the action you would take if the managing director refused to authorise disclosure of the information required in the bank letter. END OF PAPER Page 7 of 7

Paper F8 (INT) Audit and Assurance (International) Thursday 6 June 2013. Fundamentals Level Skills Module

Paper F8 (INT) Audit and Assurance (International) Thursday 6 June 2013. Fundamentals Level Skills Module Fundamentals Level Skills Module Audit and Assurance (International) Thursday 6 June 2013 Time allowed Reading and planning: Writing: 15 minutes 3 hours ALL FIVE questions are compulsory and MUST be attempted.