Subject (SQ): ADVANCED AUDIT AND ASSURANCE

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  • 15 Marks

AAA – L3 – Q36 – Internal audit

Evaluate use of internal auditors' work on cash sales for Coral Bites audit.

You are the audit manager in charge of the audit of Coral Bites, a company which runs a chain of snack bars operating in a number of beach holiday resorts. Your firm has been the auditor for a number of years and has always had to substantively test cash sales because of a lack of control over the recording of takings. The auditor’s reports to date have been unmodified.
You have recently been informed that the company has taken on a newly qualified chartered accountant as chief internal auditor and an unqualified assistant internal auditor. Since their appointment half way through the year ended 31 December 20X8 the two have spent most of their time carrying out substantive procedures on cash sales.
The directors are hopeful that your audit fee this year will decrease because you will be able to use the work carried out by the internal auditors.
Required:
(a) Explain the issues that will be relevant to your firm in deciding whether you can use the work performed by the internal auditors.

(b) Explain how much reliance to place on that work.

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  • 20 Marks

AAA – L3 – Q35 – Group Audits

Plan and manage the group audit of the Saffron Group, considering subsidiaries with separate auditors.

The Saffron Group is an international business, made up of ten subsidiaries and a head office. You are the manager in charge at the firm undertaking the group audit, but there are separate local auditors for the Cinnamon subsidiary in Japan, the Fennel subsidiary in Thailand, and the Cardamom subsidiary in Greece. You are aware of the following information:

(1) Cardamom is a loss-making subsidiary, with losses at the current year end totalling C2.7 million. There are significant control problems, high levels of irrecoverable receivables, and 25% staff turnover. The local auditors have already stated their intention to give a qualified opinion for the year just ended because of the material issues found.

(2) Cinnamon is operating to a different financial year to that of the group as a whole, being October 20X8 rather than December 20X8.

(3) Shortly after the year end, in January 20X5, the Saffron Group announced the sale of Fennel for $25 million, and this disposal is currently underway.

(4) The Saffron Group is guaranteeing loans of approximately $10 million for its subsidiaries.

Required:

(a) Set out how you would plan and manage the group audit of the Saffron Group.                                                                                        (b) Consider the impact of each of the above issues on the group audit.                                                                                                              (c) Explain the nature of the relationship between your firm and the auditors of the subsidiaries, making particular reference to the extent to which your firm may rely on the component auditors’ work and to the considerations involved where joint audits are conducted.

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  • 10 Marks

AAA – L3 – Q34 – Accounting Policies

List further information needed to form an opinion on Christina's lease premiums, refurbishment, and refit practices.

Christina retails women’s clothes through a chain of over 30 stores. Each of these stores is located in prime city-centre sites. The company is growing rapidly.

You are the audit manager in the firm that has recently been appointed as auditor to Christina. The audit partner has asked you to review a number of the company’s accounting policies and practices. These are set out below.

(1) The majority of the company’s sites are acquired on short leases (typically 10 to 25 years), with rent reviews usually every five years. A premium is usually paid to secure the lease, although this is normally associated with a period of reduced rent. Such premiums are capitalised and amortised over the life of the lease on a straight line basis.

(2) Before a new site can be opened for business it undergoes extensive refurbishment. During the refurbishment period, costs incurred (including rates and services as well as contractors’ fees) are debited to a holding account. On completion of the refurbishment, the costs are transferred to short leaseholds.

(3) Christina is very aware of the importance of image in the retail fashion industry. Following a survey by independent consultants, all the existing shops are to be restyled to project a new image. These costs will be capitalised.

Required

(a) Identify and comment on the accounting and auditing issues raised by the above.                                                                                    (b) List the further information that you require in order to be able to form an opinion on the above practices.

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  • 10 Marks

AAA – L3 – Q33 – Engagement Letters

State six items that could be included in an audit engagement letter per ISA 210.

(a) ISA 210 Agreeing the Terms of Audit Engagements explains the content and use of engagement letters.

Required

State SIX items that could be included in an engagement letter.                                                                                                                               (b)

ISA 500 Audit Evidence explains types of audit evidence that the auditor can obtain.

Required

State, and briefly explain, four types of audit evidence that can be obtained by the auditor.                                                                                                                                                                                                                                                                                                                         (c)  ISA 705 Modifications to the Opinion in the Independent Auditor’s Report explains the form and content of modified audit opinions.

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  • 14 Marks

AAA – L3 – Q32 – Planning

Discuss considerations for developing the audit strategy for an initial audit engagement of a newly listed e-commerce company.

You are a manager in the audit department of Yao Asaglo & Co, a firm of Chartered Certified Accountants, and you have just been assigned to the audit of TechNova Limited, a new audit client of your firm, with a financial year ended 31 May 2015. TechNova Limited has just been listed on the Accra Stock Exchange (ASE). It is an e-commerce facility and has grown rapidly in the last few years.
TechNova Limited was formed ten years ago by Ms. Esi Mensah, a graduate in e-commerce from Kofi University. The company designs, develops software for e-commerce with high security features which have won industry awards. In the last two years, the company invested AC₵400m in creating new software to appeal to a large number of multi-national companies, and sales are now made in over 10 countries. The software is developed in this country, but the manufacture of the security features, for obvious reasons, takes place overseas.
The software is largely sold through retail outlets, but approximately 30% of TechNova Limited’s revenue is generated through sales made on the company’s website.
In some countries, TechNova Limited’s products are distributed under a franchise agreement which gives the franchise holder the exclusive right to sell the products in that country. The cost of each franchise to the distributor depends on the estimated sales in the country to which it relates, and the franchise lasts for an average of five years. The revenue which TechNova Limited receives from the sale of a franchise is deferred over the period of the franchise. At 31 May 2015, the total amount of deferred revenue recognised in TechNova Limited’s statement of financial position is AC₵72 million.
As part of a five-year strategic plan, TechNova Limited obtained an ASE listing in December 2014. The listing and related share issue raised a significant amount of finance, and many shares are held by institutional investors. Esi Mensah retains a 20% equity shareholding, and a further 10% of the company’s shares are held by her family members.
Despite being listed, the company does not have an internal audit function, and there is only one non-executive director on the board.

(a) Comment on the matters that you should consider specific to initial audit engagement when developing the audit strategy for TechNova Limited.                                                                                                                                                                                                           (b) Evaluate the audit risks to be considered in planning the audit of TechNova Limited.

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  • 10 Marks

AAA – L3 – Q31 – Planning

Analyze draft financial statements of Meal Haven Ltd using analytical procedures to assess audit impact on accounts receivable.

Your audit and assurance firm has just accepted a financial statement audit engagement from Meal Haven Ltd, a restaurant that prepares lunch for the general public and on special orders. The company operates at a number of sales points in the city.
The company uses a computerised system that has networked all the sales points to its head office. Your firm is planning the new audit and has received the draft financial statements for the year. As the audit senior to lead the engagement team, you are examining the financial statements, an extract of which is shown below:

Statement of Profit or Loss (Extract)

Draft 2015 Audited 2014
GH¢’000 GH¢’000
Revenue 16,346 11,300
Cost of Sales 12,912 8,596
Gross Profit 3,434 2,704
Net Profit 1,962 1,130

Statement of Financial Position (Extract)

Draft 2015 Audited 2014
Non-current Assets 5,598 5,232
Other Current Assets 3,492 2,254
Accounts Receivable 3,964 2,872
Inventories 1,291 860
Accounts Payable 1,028 920

Required:
(a) Using analytical procedures at the planning stage, state your observations drawn from the extracts from the draft financial statements and how they may impact on your audit of accounts receivable.

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  • 10 Marks

AAA – L3 – Q30 – Audit Evidence

Identify information indicating non-compliance with Factories Act at Pureflow Water Limited and its audit implications.

a) Examples of the possible type of information that might have come to the auditors’ attention that might indicate non-compliance with the Factories Act include:

(b) The auditors should consider the following, when evaluating the possible effect on the financial statements for non-compliance with the law

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  • 25 Marks

AAA – L3 – Q29 – Internal Controls

Describe internal controls and financial statement risks for Heritage Art Gallery and Museum's identified risks.

The Heritage Art Gallery and Museum (HAGM) is in the centre of a city that is popular with tourists. About 65% of its revenue comes from admission fees and annual memberships, and about 30% of its revenue comes from sponsorship of special exhibitions by companies. Most of the remaining revenue comes from a small café and gift shop in the art gallery and museum.
Admission fees come from sales of tickets to daily visitors and from annual membership subscriptions from ‘Friends of HAGM’ who are entitled to free entry to the art gallery and museum at any time.
Day tickets can be purchased by credit card in advance, by a telephone ‘hotline’ or at HAGM’s website on the Internet. Alternatively, day tickets can be bought with cash or credit card at the ‘door’ on the day of the visit. Reduced prices are available for children, students and individuals aged over 65, and there are also special reduced-price ‘family tickets’ for two adults and two children.
Sponsorship arrangements are agreed up to 18 months in advance. Some corporate sponsors, particularly transport companies (bus companies and railway companies) sell advertising to HAGM.
The management of HAGM have identified the following applicable risks that need careful attention. They believe that these risks should be managed actively.

  1. There is a failure to attract more visitors because of the poor condition of many of the paintings in the art gallery and of the items in the museum. Paintings must be restored regularly because their condition deteriorates. HAGM has just one specialist restorer, who is unable to keep up with the required volume of work. The management of HAGM recognise that investment in new items and the restoration of existing items is inadequate, but blame the lack of revenue for the problem.
  2. Some corporate sponsorship agreements may not be invoiced due to poor communication between the sponsors, HAGM’s sponsorship managers and the accounts department of HAGM.
  3. Some sponsorship agreements are not invoiced at their correct amount. This happens often when a sponsor is also a company that provides advertising for HAGM. Normal practice is for these sponsors to deduct their advertising charges from the amount they pay to HAGM in sponsorship. However, the accounts department in HAGM are not given the details of these set-off arrangements.
  4. Some of the cash received from day visitors at the door may be stolen (or lost, or used by management for business expenses) and does not reach HAGM’s cashier.
  5. The on-line booking system for buying tickets in advance on the HAGM website is not always available because the website is ‘down’.
    Required:
    (a) Describe appropriate internal controls to manage each of the applicable risks
    (b) Explain the financial statement risks that arise from each of these applicable risks

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  • 15 Marks

AAA – L3 – Q28 – Planning

Identify principal business risks for Sparks Electrical Wholesalers from provided information.

You are the audit manager responsible for visiting potential new audit clients. You are visiting an electrical wholesaler, Sparks Electrical Wholesalers (Sparks), a limited liability company. The managing director and majority shareholder, Mr Samuel, has asked your company to tender for the audit because he is considering obtaining a quotation on the Accra Stock Exchange.

You make the following notes from your initial meeting:

Revenue has grown from $2 million to $3.5 million in the last two years and the company is very profitable. Finance is needed, in order to:

(1) establish a nationwide customer base by making some of the company’s products available to the public through builders merchants; and

(2) set up a subsidiary in Vietnam to purchase supplies. No sales would be made there as the company faces strong competition.

Mr Samuel is the main contact with suppliers and customers and negotiates prices directly with both. Mr Samuel is in charge of buying, sales and stores. A senior bookkeeper has recently been recruited (not a qualified accountant) to help with credit control and to set up more formal accounting systems and procedures. There is a recently installed accounting software package but staff are still being trained to use it and Mr Samuel’s former brother-in-law has specifically written the software. Mr Samuel is dissatisfied with his existing firm of accountants who prepare and audit the annual financial statements. His dissatisfaction is partly because of the un-reconciled amounts on the ledgers and partly because his accountants have failed to suggest how he can take increased emoluments to meet his personal needs.

Required:

(a) Write a memorandum to the intended audit partner which highlights the principal business risks for Sparks Electrical Wholesalers identified from an analysis of the above information.                                                                                                                        (b) Write a memorandum to the intended audit partner which highlights the factors that should influence the partner in deciding whether or not the firm should make a proposal for this engagement.                                                                                                                (c) Write a memorandum to the intended audit partner which highlights the principal risks you would identify if planning the first audit of Sparks Electrical Wholesalers.                                                                                                                                                                          (d) Write a memorandum to the intended audit partner which highlights two significant steps which could be taken by the company to improve accounting procedures and financial controls prior to the next audit.

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  • 20 Marks

AAA – L3 – Q27 – Audit Evidence

Identify audit risks for Asante Motors, a multi-site car retailer with inventory and warranty issues.

Asante Motors (AM) sells motor vehicles and spare parts, and also provides servicing and repairs for vehicles. It operates from eight locations, having expanded recently from just four locations. Each location has a showroom for new and used automobiles, a store for spare parts and a service workshop.

Many of the second-hand vehicles sold by AM are vehicles that have been traded in by customers in part-exchange for a new or newer vehicle. Many used cars are sold for cash.

New cars are imported from a single supplier and are delivered on consignment. AM pays the agreed purchase price plus 2.5% interest four months after delivery. AM has a legal right to return unsold cars to the supplier, but in practice never does so.

New cars are sold with a two-year warranty from the supplier and used cars are sold by AM with a one-year guarantee. All repairs under warranty or guarantee are carried out by AM in its service workshops.

Each location carries a large amount of spare parts in its parts workshops. These operate under the brand name ‘StrongSpares’ and many parts are actually labelled with the StrongSpares brand name. A perpetual inventory system is used, and storekeepers continually check inventories of parts.

The car service workshops try to complete all jobs on the same day that they are started, and are successful in about 80% of cases. Jobs are usually invoiced immediately after completion, and are usually paid for by customers when they come to collect their vehicle.

The senior sales representative at each location is able to use a new car, selected from each consignment delivered from the supplier. These cars are used for business purposes and as demonstration models. They are eventually sold second-hand as ex-demonstration models.

AM purchased the StrongSpares brand name for its parts stores. Senior management believe that the cost of the brand name should not be amortised because they consider that the asset has an indefinite useful life.

AM has recently established an internal audit function, although this has not yet done much work.

Required
Using the information provided, identify and explain the audit risks that will have to be considered and dealt with when planning the final audit of Asante Motors for the financial year just ending.

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