Subject (SQ): Audit and Assurance

Search 500 + past questions and counting.
Sort & Filter

Reset filters

Search

Filter by Professional Bodies

Filter by Subject

Filter by Topics

Filter by Levels

  • 30 Marks

AA – L2 – Q20 – Risk Assessment and Internal Control

Identify risks associated with auditing ConnectSphere Mobile, a mobile phone service provider with expansion plans. Discuss ethical considerations for accepting the audit of ConnectSphere Mobile, including technical and logistical capabilities. Conclude whether to accept or decline the audit of ConnectSphere Mobile, providing principal reasons.

You are the partner in charge of a four partner firm of Chartered Accountants. Your firm has been invited to tender for the audit of ConnectSphere Mobile for the year ended 31 December 20X8.

ConnectSphere Mobile was established two years ago, and provides a mobile phone service for individuals and business. The system being established by the company comprises:

  • Small portable mobile phones, which allow subscribers (users) to contact or be contacted by any other telephone.
  • The mobile phones can be used within range of a local relay station, which receives calls from and sends calls to the mobile phone.
  • The local relay stations are linked to a central computer which connects the calls to other users. Frequently, this is through a computer’s telephone network.

Currently, the local relay stations cover one large city with a population of about 1,000,000. Within the next year the system will cover all large cities in Zamora with a population of over 250,000. By 20X7, the system will cover all trunk roads and cities with a population of over 100,000. Extending the coverage of the system will involve considerable capital expenditure on new relay stations and require additional borrowings.

The cost of the relay stations and central computer are capitalised and are written off over six years.

The mobile phones are manufactured by other companies and sold through retailers. ConnectSphere Mobile does not sell the phones, but it pays ₵2,000 to the retailer for each phone sold and subscription by the customer to ConnectSphere Mobile. This payment is capitalised in the financial statements of ConnectSphere Mobile and written off over four years.

Subscribers are invoiced monthly with a fixed line rental and a variable call charge. Other operators are charged for the time spent by their customers contacting ConnectSphere Mobile’s subscribers (customers). These charges are logged and calculated by the company’s main computer.

All the shares are owned by three wealthy individuals who are non-executive directors. They will receive a fixed salary. They do not plan to make any further investment in the company.

Establishing the network of relay stations and subscribers will result in the company making losses for at least three years. Current borrowings are about 20% of the shareholders’ funds. Because of the substantial capital expenditure and trading losses, it is expected the company will be highly geared by 20X7.

As the company will not be profitable, the non-executive directors have decided that executive directors should receive a basic salary and a bonus based on the number of subscribers to the system.

The owners plan to float the company on the Zamora Stock Exchange in 20X7. The flotation will involve:

  • issuing new shares to the general public to provide funds for the company; and
  • the three non-executive directors selling some of their shares.

You are aware that ConnectSphere Mobile has a number of very large competitors, each of which has a large number of users and comprehensive coverage (i.e. over 90% of the population are within range of a relay station).

Required:
(a) Consider the risks associated with the audit of ConnectSphere Mobile.
(b) Describe the ethical matters you should consider in deciding whether your audit firm should accept the audit. This should include considering whether your firm has the technical and logistical ability to carry out the audit.
(c) Conclude on whether you would advise your firm to accept or decline the audit, giving your principal reasons for coming to this decision.

Login or create a free account to see answers

Login | Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "AA – L2 – Q20 – Risk Assessment and Internal Control"

  • 20 Marks

AA – L2 – Q19 – Risk Assessment

Describe inherent, control, and detection risks for BrightPath Charity and their impact on audit risk. List and explain audit tests for income and expenditure from fundraising events at BrightPath Charity.

BrightPath Charity is a non-profit organization whose constitution requires that it raises funds for educational projects. These projects seek to educate children and support teachers in various developing regions. Charities in the region where BrightPath Charity is based have recently become subject to new audit and accounting regulations. Charity income consists of cash collections at fundraising events, telephone appeals, and bequests (money left to the charity by deceased persons). The charity is small and the trustees do not consider that the charity can afford to employ a qualified accountant. The charity employs a part-time bookkeeper and relies on volunteers for fundraising. Your firm has been engaged as accountants and auditors to this charity because of the new regulations. Financial statements have been prepared (but not audited) in the past by a volunteer who is a recently retired Chartered Accountant.

Required:

(a) Describe the risks associated with the audit of BrightPath Charity under the headings inherent and control risks and detection risk and explain the implications of these risks for overall audit risk.

(b) List and explain the audit tests to be performed on income and expenditure from fundraising events.

 

Login or create a free account to see answers

Login | Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "AA – L2 – Q19 – Risk Assessment"

  • 20 Marks

AA – L2 – Q18 – Planning an Audit

Explain the importance of planning an audit per ISA 300. Prepare an audit strategy for Brooksides for the year ending 31 December 20X8 using provided financial data.

You are the audit manager in charge of the audit of Seaford Supplies Ltd., a limited liability company. The company’s year-end is 31 December, and Seaford Supplies Ltd. has been a client for seven years. The company purchases and resells fittings for ships including anchors, compasses, rudders, sails, etc. Clients vary in size from small businesses making yachts to large companies maintaining large luxury cruise ships. No manufacturing takes place in Seaford Supplies Ltd.
It is now early in 20X8. Information on the company’s financial performance is available as follows:

20X8 Forecast 20X7 Actual
₵’000 ₵’000
Revenue 45,928 40,825
Cost of sales (37,998) (31,874)
7,930 8,951
Gross profit
Administration costs (4,994) (4,758)
Distribution costs (2,500) (2,500)
Net profit 436 1,693
20X8 Forecast 20X7 Actual
₵’000 ₵’000
Non-current assets (at net book value) 3,600 4,500
Current assets
Inventory 200 1,278
Receivables 6,000 4,052
Cash and bank 500 1,590
10,300 11,420
Total assets
Capital and reserves
Share capital 1,000 1,000
Accumulated profits 5,300 5,764
Total shareholders’ funds 6,300 6,764
Non-current liabilities 1,000 2,058
Current liabilities 3,000 2,598
10,300 11,420

Other information
The industry that Seaford Supplies Ltd. operates in has seen moderate growth of 7% over the last year.
Non-current assets mainly relate to company premises for storing inventory. Ten delivery vehicles are owned with a net book value of ₵300,000.
One of the directors purchased a yacht during the year.
Inventory is stored in ten different locations across the country, with your firm again having offices close to seven of those locations.
A computerised inventory control system was introduced in August.
Inventory balances are now obtainable directly from the computer system. The client does not intend to count inventory at the year-end but to rely instead on the computerised inventory control system.

(a) According to ISA 300, the auditor should plan the audit work so that the engagement will be performed in an effective manner.

Required:

Explain why it is important to plan an audit

(b) Using the information provided above, prepare the audit strategy for Seaford Supplies Ltd. for the year ending 31 December 20X8.

 

Login or create a free account to see answers

Login | Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "AA – L2 – Q18 – Planning an Audit"

  • 15 Marks

AA – L2 – Q17 – Fraud and Error

Respond to directors about undetected petty cash theft and audit report reissuance. Explain why auditors consider compliance with laws and regulations and actions for material non-compliance.

The directors of your client, Solace Medical Research Labs, have telephoned to tell you that one of their junior employees has been caught stealing petty cash and has admitted to several previous thefts. The total amount of lost cash has been estimated by the directors to be $300. The thefts took place in the year in respect of which you have just completed the audit. The materiality level on the audit was set at $100,000.

The directors are demanding to know why this was not picked up during the audit work, and when the auditor’s report will be reissued as the auditor’s report and financial statements have now been signed.

Required:

(a) Set out the points you would include in a response to the directors of Solace Medical Research Labs.

(b) Explain why the auditor, when planning and performing his audit, should consider whether his client has complied with law and regulations. Set out the actions which may be appropriate if the auditor identifies material instances of noncompliance (NOCLAR).

 

Login or create a free account to see answers

Login | Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "AA – L2 – Q17 – Fraud and Error"

  • 20 Marks

AA – L2 – Q16 – Planning an Audit

Explain the need for audit planning and its benefits per ISA 300. Outline steps to take before auditing a long-term limited company client. Explain how internal auditor's planning differs from external auditor's.

ISA 300 Planning an Audit of Financial Statements requires the auditor to plan his audit work so that the audit will be performed in an effective manner.

Required:

(a) Explain why the need for planning exists and what benefits are to be derived from adopting such an approach.

(b) Set out the steps you would take prior to the commencement of an audit of a limited company which has been a client for a number of years.

(c) Planning is equally relevant to the work of the internal auditor. Explain how the internal auditor’s planning differs to that of the external auditor.

Login or create a free account to see answers

Login | Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "AA – L2 – Q16 – Planning an Audit"

  • 20 Marks

AA – L2 – Q15 – Professional Ethics and Code of Conduct for Auditors

Identify threats to auditor independence from non-audit services and board appointment at HealthTrend Co, and suggest resolutions. Describe matters and procedures to consider before accepting appointment as statutory auditor of HealthTrend Co.

You work for a firm of accountants and auditors which has eight partners. The audit firm has been invited by the Managing Director (MD) and majority shareholder of HealthTrend Co, to accept appointment as statutory auditor of the company, replacing the current firm of auditors who will not be re-appointed.
The principal activity of HealthTrend Co is the manufacture and distribution of healthcare products. Your firm has several companies operating in the healthcare sector in its client portfolio.
The MD of HealthTrend has requested that your firm assists with the preparation of the company’s tax computation, and provides consultancy services on an ongoing basis in connection with his plans to grow the business.
The MD has also suggested that a partner in your firm joins the board of HealthTrend Co as a non-executive director.

Required:
(a) Identify and explain the threats to independence and objectivity which may arise from the provision of the services requested by the HealthTrend MD, and state how these threats should be resolved.

(b) Describe the matters, other than independence and objectivity, to be considered and the procedures to be performed in order to determine whether it is appropriate for your firm to accept appointment as statutory auditor of HealthTrend Co.

(c) Set out the benefits to audit firms and their clients of having audit and non-audit services provided by the same firm of accountants.

Login or create a free account to see answers

Login | Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "AA – L2 – Q15 – Professional Ethics and Code of Conduct for Auditors"

  • 20 Marks

AA – L2 – Q14 – Professional Ethics and Code of Conduct for Auditors

Explain ethical threats to auditor independence for Vark Co and suggest safeguards to mitigate them. Discuss the benefits of establishing an internal audit function for Vark Co.

(a)  You are a manager in the audit firm of XYZ & Co; and this is your first time you have worked on one of the firm’s established clients, Vark Co. The main activity of Vark Co is providing investment advice to individuals regarding saving for retirement, purchase of shares and securities and investing in tax efficient savings schemes. Vark is regulated by the relevant financial services authority.
You have been asked to start the audit planning for Vark Co, by Mr. Lee, a partner in XYZ & Co. Mr. Lee has been the engagement partner for Vark Co, for the past nine years and so has excellent knowledge of the client. Mr. Lee informs you that Mr. Tan, the audit senior, received investment advice from Vark Co during the year and intends to do the same next year.
In an initial meeting with the finance director of Vark Co, you learnt that the audit team will not be entertained on Vark Co’s yacht this year as this could appear to be an attempt to influence the opinion of the audit. Instead, he has arranged a balloon flight costing less than one-tenth of the expenses of using the yacht and hopes this will be acceptable. The director also states that the fee for taxation services this year should be based on a percentage of tax saved and trust that your firm will accept a fixed fee for representing Vark Co in court in a dispute regarding the amount of sales tax payable to the taxation authorities. Sales tax payable is material to the current year financial statements.
Required:
(i) Explain the ethical threats which may affect the auditor of Vark Co.
(ii) For each ethical threat, discuss how the effect of the threat can be mitigated.
(b) Discuss the benefits of Vark Co establishing an internal audit function.

Login or create a free account to see answers

Login | Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "AA – L2 – Q14 – Professional Ethics and Code of Conduct for Auditors"

  • 10 Marks

AA – L2 – Q13 – Audit of Public Sector Entities

Identify key differences between private and public sector auditing in Ghana.

Public Sector Auditing

Identify the key differences between audits in the private sector and audits in the public sector in Ghana.

 

Login or create a free account to see answers

Login | Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "AA – L2 – Q13 – Audit of Public Sector Entities"

  • 30 Marks

AA – L2 – Q12 – Internal Audits

Review risks, controls, and tests for HR, procurement, and marketing at a cleaning company; explain types of internal audits.

CleanSweep
Internal auditors often assist management in performing internal review assignments covering, for example, human resources, procurement (purchasing), marketing and treasury activities. Such reviews involve:
the identification of risks;
the identification of systems of internal control and procedures implemented to manage those risks;
tests of controls to ensure that internal controls are operating effectively;
an evaluation of the overall effectiveness of the design and operations of controls in managing the risks identified.
You are the internal auditor for a private company, CleanSweep. CleanSweep provides cleaning services to shops and offices and has a reputation for high quality work. You have been asked to review the human resources, procurement and marketing functions within the company.
CleanSweep employs about 500 cleaning staff, all of whom are on the payroll, and most of whom work part time. CleanSweep does not employ sub-contractors. CleanSweep has a high turnover of staff.
The company buys its computers, office stationery and furniture, cleaning materials, equipment and work clothes for staff, from a variety of different suppliers. It processes its payroll in-house.
The company has recently decided to out-source its marketing to a large, aggressive, third party company that will advertise CleanSweep’s services by means of direct mail, sometimes by offering discounts. This company has been criticised in the past for breaching advertising regulations. There is growing price competition in CleanSweep’s market. CleanSweep is struggling to maintain its profitability and would like to expand its client base.
CleanSweep has three main functions:
human resources;
procurement; and
marketing.

Required
(a) For each of the three main functions at CleanSweep describe the:
(i) risks that you expect the company to face;
(ii) controls you expect to be in place to manage the risks you have identified in (i), above;
(iii) tests of control you should perform to check that the controls you have identified in (ii) above are operating effectively.
Marks will be awarded as follows:
(1) Human resources;
(2) Procurement;
(3) Marketing.
You may present your answer in tabular format, if you wish.
(b) Internal audit also perform other work on behalf of management, such as value for money (VFM) audits, best value audits, financial audits and information technology (IT) audits.
Explain what is meant by each of the above four types of audits

Login or create a free account to see answers

Login | Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "AA – L2 – Q12 – Internal Audits"

  • 10 Marks

AA – L2 – Q11 – Professional Ethics and Code of Conduct for Auditors

Explain why auditor independence is essential and discuss advantages/disadvantages of auditors providing consulting services.

Independence

The responsibilities of external auditors are not always well understood. When external auditors provide non-audit services to their audit clients, it is essential that the auditors make a clear distinction between their audit and non-audit responsibilities.

Required

(a) Explain why it is essential for external auditors to be independent of their clients.

 

(b) Explain the advantages and disadvantages of external auditors providing consulting services to their audit clients.

Login or create a free account to see answers

Login | Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "AA – L2 – Q11 – Professional Ethics and Code of Conduct for Auditors"

Oops!

This feature is only available in selected plans.

Click here to view all plans

Click on the login button below to login if you’re already subscribed to a plan or click on the upgrade button below to upgrade your current plan.

Login
Upgrade Plan

If you’re not subscribed to a plan, click on the button below to choose a plan

Subscribe to a plan

Pick a Form

Professional Tutor Application Form
Academic Tutor Application Form
Student Tutor Application Form