Auditing Standards state that “The auditor should plan and perform an audit with an attitude of professional

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• Publié par: Edwie
• Nombre de lectures: 139
• Langue: English

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Question 1 (a) As part of the process of planning the external audit of High 5, a public listed company, for the year ending 31 October 2004, you have reviewed the minutes of meetings of the Board of Directors for the year to date. You have identified the following items likely to have a bearing on the assessment of audit risk and the design of audit procedures when drawing up the audit plan. (1) In order to encourage performance, a bonus scheme has been introduced for senior management. In total, 25% of the company’s reported profits before tax in excess of the previous period’s profits will be set aside to provide for bonuses. No bonus will be paid if profits do not exceed the previous period. (2) An internal audit department has been established. (3) In order to finance investment in new projects High 5 has taken out a substantial bank loan. The loan agreement states that the company’s gearing ratio (the proportion of loan capital to equity capital) must not exceed 30%. Last year’s financial statements had a gearing ratio of 20% and the latest monthly management accounts show a gearing ratio of 25%. Required: For each of the items (1) to (3) above: (i) explain how it might affect the assessment of inherent or control risk.(3 marks) (ii) consider how it might affect the design of audit procedures specific to that item.(6 marks) Assume each item is potentially material. Consider each item separately. (b)You are part of a team auditing the financial statements of Smartbuy Limited. The company sells home decorating and maintenance products from a large retail and warehouse unit. From enquiries into the company’s internal control systems you have ascertained the following information: Stock Purchases. New stock is ordered over the telephone by the company buyer. He maintains a record of telephone orders. When goods are subsequently received, the buyer has sole responsibility for checking goods received for quantity only, to his record of telephone orders. Invoices from suppliers are sent to the buyer for authorisation, before being forwarded to the Accounts Department for entry into the accounting records and subsequent payment. Sales. Customers either pay by cash or cheque and the company operates electronic cash tills. Till receipts are issued to customers but till rolls are not retained. On a

daily basis each till operator independently empties their till and takes the day’s takings to the company cashier. The cashier counts the total daily takings and makes the appropriate entries in the company’s accounting records before depositing the monies with the company’s bank.

You are aware from a review of the controls exercised over the company’s bank account that the cashier is responsible for reconciling the monthly bank statements to the bank account in the nominal ledger.

Required: With regard to the stock purchases system of Smartbuy Limited: (i) identify THREE weaknesses in the system; (ii) describe the implication of each weakness identified; (iii) recommend improvements to address the weaknesses.

You should assume that there is a sufficient number of employees in the company to operate effective controls.(6 marks)

(c)

Explain why your team would be concerned about obtaining adequate audit assurance as to the completeness of the sales income figure in the financial statements of Smartbuy Limited.(5 marks)

Question 2 As a staff member of Reddy and Abel, Certified Public Accountants, you are assigned to the audit of tangible fixed assets of Redfern Limited for the year ended 30 September 1999. Reddy and Abel have been the auditors of Redfern for many years. You obtain the following schedule of fixed asset movements and analysis of additions from the company’s accountant. Property Plant & Total Equipment Cost or valuation $’000 $’000 $’000 1 October 1998 340 275 615 Additions 123 123 Disposals (72) (72) Revaluations 120 120 30 September 1999 460 326 786 Accumulated depreciation 1 October 1998 24 213 237 Provision 5 30 35 Written back on disposal (65) (65) Adjustment on revaluation (24) (24) 30 September 1999 5 178 183 Written down value 455 148 603 Schedule of additions (Plant and equipment) Supplier Description Cost  $ New Models Ltd Milling machine Model 38 55,000 Drill Suppliers Power drill Type 45C 34,000 Hoist Co Ltd Electric hoist No 722 18,000 Sundry below $1,000 16,000 123,000 The company’s accountant also advises you that the property was revalued following a valuation by the company’s property manager who is a professionally qualified valuer. During your verification of depreciation you discover that most plant and equipment is fully depreciated. Moreover, you discover that, due to oversight, depreciation has continued to be provided on fully depreciated items. As at the beginning of the year the amount of overstatement was $43,000. The accountant suggests the correction be made by reducing the current year’s charge for depreciation. Required:

(a) Outline the substantive audit procedures you would apply in verifying additions to plant and equipment. Your answer should identify procedures applicable to each of the financial statement assertions. (10 marks) (b) Describe the audit procedures applicable to verifying the revaluation of property.(5 marks) (c) With respect to the correction to accumulated depreciation, and assuming the amount to be material, discuss the accountant’s proposed treatment. If you disagree with the accountant’s proposal, state, with reasons, the correct accounting treatment.(5 marks) (20 marks)

Question 3 Your firm of Certified Public Accountants is the external auditor of Glebe, a listed company. Glebe is a retailer with its head office, principal store and warehouse in Bigtown and additional stores in 12 other cities. The company has developed itsinternal audit operation in recent years. Among the activities of the internal audit department are: the documentation and evaluation of accounting and internal control systems, testing compliance with laid down procedures, identifying control weaknesses and recommending changes to control procedures; monitoring of computer operations through the use of embedded audit facilities; routine visits to stores which include cash counts and observation of cyclical inventory counts as well as a range of tests of controls and of substantive procedures in areas such as purchasing, wages records and banking. Glebe’s Chief Financial Officer believes that the external audit fee could be significantly reduced if there was more effective coordination of work between the internal and external auditors and the elimination of unnecessary duplication. Required: (a) Describe the evaluation of the internal audit function that your firm would need to undertake;(8 marks) (b) Assuming the evaluation confirms the adequacy of the internal audit function, explain the extent to which your firm could place reliance on the work of internal audit in the following areas: (i) obtaining and documenting the understanding of the accounting and internal control systems; (ii) performing tests of controls; (iii) assessing inherent and control risk; (iv) performing procedures requiring the use of computer assisted audit techniques (CAATs); (v) performing substantive tests on cash and inventory at the stores.(12 marks) (20 marks)

Question 4 You have been assigned to the team who will audit the financial statements of Foodpro Limited, a food production company, for the forthcoming year ended 31 March 2004. Your first task will be to assist in the compilation of internal control questionnaires (ICQs) and internal control evaluation questionnaires (ICEQs) for use by the audit team. Required: (a) Explain the purpose and nature of ICQs and ICEQs.(4 marks) (b) Explain the importance of each of the following questions to be included in the ICQ to be used by the team auditing the financial statements of Foodpro Limited: (i) Does the closing stock valuation include an appropriate proportion of production overhead costs?(2 marks) (ii) Do buying clerks have access to stock or the accounting records of the company?(2 marks) (iii) Are journal entries authorised by a responsible official of the company?(2 marks) (c) The preparation of working papers is an important part of the audit process. You have been asked to prepare a session introducing new recruits to your firm of Certified Public Accountants to the use of working papers. Amongst the topics you have been asked to cover are the distinction between working papers held in the permanent and current audit files, the design and use of audit programmes and the concept of an audit trail with respect to the conduct of the audit itself. Required: (i) State four matters you would expect to find recorded in working papers in the permanent audit file and explain their purpose.(4 marks) (ii) Explain the design and use of audit programmes and the respective merits of standard and tailored audit programmes.(6 marks) (20 marks)

Question 5 (a)They have beenGoh, Lee is a firm of Certified Public Accountants.  Lee, approached by Don’t-Do-Can Pte Ltd, a limited company, to accept appointment as statutory auditor for the year ending 31 December 2004. Don’t-Do-Can is a company that manufactures and sells pest control chemicals. Don’t-Do-Can has one physical site, where the office, factory and warehouse are. Their pest control chemicals are sold to pest control companies and industrial and commercial customers. Lee, Goh, Lee has written to the existing auditor of Don’t-Do-Can as part of pre- appointment communication and has received a response which stated there is nothing that cause them to believe Lee, Goh, Lee should not accept the appointment. Prior to the signing of the audit engagement letter and the general meeting to approve the appointment of Lee, Goh, Lee as auditor, Lee, Goh, Lee received a letter from the directors of Don’t-Do-Can, requesting Lee, Goh, Lee not to attend any physical count (neither during the year nor at the year-end), and no access to production formula and hence the costing method will be available to Lee, Goh, Lee. This is to protect the secret formula of their pest control products. Don’t-Do-Can has requested the above exclusion to be specifically added to the engagement letter before the directors are willing to accept the engagement letter. Required: Describe the appropriate course of actions that could be taken by Lee, Goh, Lee. (4 marks) (b)Don’t-Agree-Change Pte Ltd is a private limited company has been audited by Lee, Goh, Lee for quite a few years. Recently, the company has been experiencing cash flow problems and the directors are planning a systematic winding down of the company. The company has stopped accepting new orders and has been concentrating on fulfilling existing orders and clearing existing inventory. The company has sold some machinery that is not needed and is actively looking for buyers to buy the office building. The directors expressed their expectation that sales proceeds from assets and remaining cash should help to repay most liabilities. The accountant of Don’t-Agree-Change has informed Lee, Goh, Lee that the accounting policy is no longer based on going assumption. In fact, all assets and liabilities have been restated based on “break-up” basis. All long-term assets and liabilities are reclassified as current and are based on realizable value. There are no intangible assets. However, the directors insisted that this change in policy should not be disclosed in financial statements or mentioned in the auditor’s report. They believe it will affect their plan t obtain best price for the assets they try to sell if the market knows about their plan. Lee, Goh, Lee insisted on mentioning the change in accounting policy in the audit report. The directors of Don’t-Agree-Change has informed Lee, Goh, Lee that a general meeting has been called in three-weeks’ time to remove Lee, Goh, Lee

(c)

as auditor so that they can appoint another auditor who is agreeable to Don’t- Agree-Change. Required:

(i)

(ii)

Describe two ways by which the auditor could mention the change in accounting policy in the auditor’s report. (4 marks)

Describe the cause of actions on director’s intention on suppressing auditor’s opinion that could be taken by Lee, Goh, Lee relating to the removal of their appointment as auditors of Don’t-Agree-Change. (4 marks)

Jobuild Limited carries out short term contracts, refurbishing office and retail premises for numerous customers. The company carries work-in-progress of high value and at any time this represents a large proportion of the company’s gross assets value. However a work-in-progress account is not maintained in the company’s general ledger, with all contract costs instead being posted directly to a ‘Contract Costs’ account. The work-in-progress value for inclusion in the company’s annual financial statements is estimated by the directors using independent computerized spreadsheet records maintained by the contracts manager.

The company’s auditors have commenced their audit of the work-in-progress figure and the directors have initially refused them access to the spreadsheet records maintained by the contracts manager. They do not understand why the auditors are unwilling to accept their valuation without question.

Required:

(i)

(ii)

Explain why the verification of the work-in-progress figure would form an important part of the auditors’ procedures when auditing the financial statements of Jobuild Limited. You should include commentary on any concerns that the auditors may have with regard to the directors’ valuation.(4 marks)

Describe the action that the auditors should take in response to the directors’ initial refusal to allow them access to the work-in- progress records maintained by the contracts manager. Your answer should include comments on any impact that their continued refusal may have on the auditors’ report.(4 marks)

(20 marks)

Question 6 (a)Auditing Standards state that “The auditor should plan and perform an audit with an attitude of professional scepticism recognizing that circumstances may exist that cause the financial statements to be materially misstated.” Required: Briefly explain the nature and purpose of “an attitude of professional skepticism” and its relationship with “management representation” as audit evidence. (7 marks) (b)An audit in accordance with auditing standards is designed to provide reasonable assurance that the financial statements taken as a whole are free from material misstatement. An audit is not a guarantee that the financial statements are free of material misstatement. Required: Explain why an auditor cannot obtain absolute assurance that the financial statements are free of material misstatement. (7 marks) (c)Internal control, no matter how well designed and operated, can provide an entity with only reasonable assurance about achieving the entity’s financial reporting objectives. Required: Briefly describe three reasons why internal control can provide only reasonable assurance about achieving the entity’s financial reporting objectives. (6 marks) (20 marks)