Audit Evidence – Page 3

AAA – L3 – Q38 – Evaluation and review

Plan audit of Belmont Pharmaceuticals for 31 Dec 20X8, addressing drug development, legal claim, and voucher revenue issues.

Question

Belmont Pharmaceuticals, a public limited liability company, is a pharmaceutical company which concentrates on medical research and the production of new medicines and remedies designed to improve the quality of life, for all ages. You are an audit manager who is planning the audit of Belmont Pharmaceuticals for the year ended 31 December 20X8. Profit before tax for the year ended 31 December 20X8 is C3.46m.
In the course of planning discussions with the finance director of Belmont Pharmaceuticals, he raised the following issues that have affected the financial statements of Belmont Pharmaceuticals for the year:
(a) During the year ended 31 December 20X8, Belmont Pharmaceuticals spent C8m on researching the relationship between two chemicals. As a result of the research, Belmont Pharmaceuticals identified a new drug that discourages the growth of carcinogenic cells in the body. It stimulates the production of antibodies in the white blood cells of the body’s immune system. Substantial progress has been made in the development of the drug and it is hoped that a drug for a cancer antidote may be possible in the foreseeable future. During the year C15 million has been spent on the project to develop this drug, codenamed project ‘Horizon’. The directors of Belmont Pharmaceuticals have capitalised the costs of C15 million as an intangible non-current asset.
(b) On 30 November 20X7, Belmont Pharmaceuticals received notification from its lawyers of a claim from users of a new type of asthma tablet. At 31 December 20X7, neither the likelihood of the success of the claim nor the amount were known and as a result, no provision was made in the financial statements for the year ended 31 December 20X7. As at 31 December 20X8, the case is still in progress, but the lawyers now advise Belmont Pharmaceuticals that the amount of the claim is an estimated C20 million and that the claimants are very likely to be successful in court.
(c) This year, just prior to the year end, Belmont Pharmaceuticals launched a DIY ‘Check the health of your blood’ voucher, marketing it as ‘a perfect choice…the gift of ensuring life longevity’. Belmont Pharmaceuticals will launch the product on a ‘2 for the price of 1’ basis and launch will be timed for Valentine’s Day on 14 February 20X5. Previous schemes on health schemes vouchers have proved immensely popular previously. The directors will issue C5 million vouchers and they expect an 80% take. Accordingly, the directors have included C4 million in revenue in the year to be December 20X8.

Required
For each of the above issues:
(i) Comment on the matters you should consider; and
(ii) State the audit evidence that you should expect to find, in undertaking planning of the audit working papers and financial statements of Belmont Pharmaceuticals.

Answer

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Tags: Audit Evidence, Intangible assets, Provisions, Revenue Recognition, Subsequent events
Level: Level 3

Topic: Evaluation and review

AAA – L3 – Q37 – Evaluation and review

Review subsequent events at Benson Manufacturing for 30 June 20X8, including redundancy, receivables, legal claims, and inventory loss.

Question

You are the manager in charge of the audit of Benson Manufacturing. Your subsequent events review for the year ended 30 June 20X8 has identified the following events, all of which took place after the date of the financial statements:
(1) A third of the sales force was made redundant. Provision has been made in the financial statements for the year ended 30 June 20X8 for redundancy payments of C500,000.
(2) One of Benson Manufacturing’s largest customers, Venture Retail, notified its intention to go into liquidation with an outstanding receivable of C250,000. The directors consider that the current general provision for irrecoverable receivables will cover any potential loss.
(3) A writ has been issued against the company by a former sales director who is claiming C120,000 for breach of his service agreement following his dismissal during the year ended 30 June 20X8. No provision has been made in the financial statements for the year ended 30 June 20X8 in respect of this claim.
(4) A fire at the company’s warehouse destroyed its entire inventory. The inventories had a book value of C2 million. This loss has not been included in the financial statements for the year ended 30 June 20X8.

Required
State the enquiries you would make and the evidence you would seek in order to reach a conclusion on the accounting treatment of the above in the financial statements for the year ended 30 June 20X8.

Answer

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Tags: Audit Evidence, Contingencies, Financial Statements, Inventory, Provisions, Receivables, Subsequent events
Level: Level 3

Topic: Evaluation and review

AA – L2 – Q51 – Audit Evidence

Describe audit work to check supplier statements against purchase ledger balances for Kumasi Manufacturing Ltd. Describe audit work to verify purchases cut-off at year-end for Kumasi Manufacturing Ltd. Describe audit work to ensure sundry payables and accruals are correctly stated for Kumasi Manufacturing Ltd.

Question

our firm is the auditor of Kumasi Manufacturing Ltd, and you have been asked to suggest the audit work you will carry out in verifying accounts payable and purchase accruals at the company’s year-end of 30 September 2025. You attended the inventory count at the year end.

The company operates from a single site and all raw materials for production are received by the goods inwards department. When the materials are received they are checked for quantity and quality to the delivery note and purchase order, and a multipart goods received note is made out and signed by the storekeeper. If there are any problems with the raw materials, a discrepancy note is raised which gives details of the problems (e.g. incorrect quantities or faulty materials).

The purchase accounting department receive the purchase invoices, check them to the purchase order and goods received note and post them to the purchase ledger. At the end of each month, payments are made to suppliers. The purchase ledger is maintained on a PC.

The main sundry payables and accruals at the year-end include:
(i) wages accruals and associated taxes payable;
(ii) sales taxes payable;
(iii) time dependent accruals, such as interest on loans and overdrafts, telephone, heat and light, and other expenses paid in arrears.

Most employees’ wages are paid weekly in arrears.

Required:
(a) Describe in detail the audit work you will carry out to check suppliers’ statements to the balances on the purchase ledger.

(b) Verify that purchases cut-off has been correctly carried out at the year-end.

(c) Ensure that sundry payables and accruals are correctly stated.

Answer

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Tags: Accruals, Audit Evidence, Payroll, Substantive Procedures, Sundry Payables, Taxes
Level: Level 2

Topic: Audit Evidence

AAA – L3 – Q36 – Internal audit

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

Question

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.

Answer

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Tags: Audit Evidence, Auditor Reliance, Cash sales, Internal Audit, Substantive testing
Level: Level 3

Topic: Internal Audit and Outsourcing

AA – L2 – Q50 – Audit Evidence

Explain procedures for obtaining a bank report and substantive procedures for Zenith Healthcare Ltd's bank report. List substantive procedures for auditing bank balances in Zenith Healthcare Ltd's financial statements.

Question

Elisa Medical Co

Elisa Medical Co has a significant number of cash transactions and recent non-current asset purchases have been financed by a bank loan. This loan is repayable in equal annual instalments for the next five years.

Required:
(a) Explain the procedures to obtain a bank report for audit purposes from Elisa Medical Co’s bank and the substantive procedures that should be carried out on that report.
(5 marks)

(b) List the further substantive procedures that should be carried out on the bank balances in Elisa Medical Co’s financial statements.

Answer

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Tags: ank Balances, Audit Evidence, Cash Transactions, Financial Statements, Substantive Procedures
Level: Level 2

Topic: Audit Evidence

AAA – L3 – Q34 – Accounting Policies

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

Question

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.

Answer

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Tags: Audit Evidence, Further Information, IAS 16, IAS 36, Retail Industry
Level: Level 3

Topic: Audit Approaches

AA – L2 – Q46 – Audit Evidence

Describe how audit software can assist in auditing revenue and receivables at Brighton Components. Discuss external auditor reliance on internal audit’s use of embedded software at Brighton Components.

Question

The audit manager of Brighton Components has decided that audit software can be used effectively in the audit of revenue and trade receivables. He has discussed this with the firm’s computer audit department and with the finance director of Brighton Components and this approach has been agreed as a feasible one. Furthermore, the finance director has asked his internal audit function to investigate the possibility of installing embedded software to help the external auditors in their work.

Required:
(a) Describe, giving examples, how audit software in general could assist the audit firm in their audit of revenue and receivables.

(b) Discuss the extent to which the external auditor could rely on the results of the internal auditor’s use of embedded software.

Answer

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Tags: Audit Evidence, Auditor Reliance, Embedded Software, Internal Audit
Level: Level 2

Topic: Audit Evidence

AAA – L3 – Q33 – Engagement Letters

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

Question

(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.

Answer

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Tags: Audit Evidence, Audit Planning, Engagement Letters, ISA 210, Professional standards
Level: Level 3

Topic: Audit Evidence

AA – L2 – Q42 – Audit Evidence

List and explain factors influencing the auditor's judgment on sufficiency of audit evidence. List substantive audit procedures for trade payables, accruals, and provision for legal action at Regent Co.

Question

ISA 500 Audit Evidence states that the objective of the auditor is to ‘design and perform audit procedures in such a way as to enable the auditor to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor’s opinion’.

Required:

(a) List and explain the factors which will influence the auditor’s judgment concerning the sufficiency of audit evidence obtained.

You are the audit senior in charge of the audit of Regent Co, a company that has been trading for over 50 years. Regent Co manufactures and sells tables and chairs directly to the public. The company’s year-end is 31 March.
Current liabilities are shown on Regent Co’s statement of financial position as follows:

	20X8	20X7
	C	C
Trade payables	884,824	816,817
Accruals	56,903	51,551
Provision for legal action	60,000	–
	1,001,727	868,368

The provision for legal action relates to a claim from a customer who suffered an injury while assembling a chair supplied by Regent Co. The directors of Regent Co dispute the claim, although they are recommending an out of court settlement to avoid damaging publicity against Regent Co.

Required:
(b) List the substantive audit procedures that you should undertake in the audit of current liabilities of Regent Co for the year ended 31 March 20X8. For each procedure, explain the purpose of that procedure.
marks are allocated as follows:
(i) Trade payables (9 marks)
(ii) Accruals (3 marks)
(iii) The provision for legal action (4 marks)

Answer

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Tags: Audit Evidence, Auditor Judgment, Risk Assessment, Sufficiency of Evidence
Level: Level 2

Topic: Audit Evidence

AA – L2 – Q41 – Audit Evidence

List four examples of external confirmations and explain one supported and one unsupported audit assertion for each.

Question

ISA 500 Audit Evidence identifies seven main testing procedures. One of these is external confirmation.
Required:
(a) List FOUR examples of external confirmations.
(2 marks)
(b) For EACH of the examples in (a) above explain:

ONE audit assertion that the external confirmation supports, and
ONE audit assertion that the external confirmation does NOT support.
(8 marks)
(Total: 10 marks)

Answer

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Tags: Audit Evidence, Audit Procedures, External Confirmations, Financial Statement Assertions
Level: Level 2

Topic: Audit Evidence

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AAA – L3 – Q38 – Evaluation and review

Plan audit of Belmont Pharmaceuticals for 31 Dec 20X8, addressing drug development, legal claim, and voucher revenue issues.

AAA – L3 – Q37 – Evaluation and review

Review subsequent events at Benson Manufacturing for 30 June 20X8, including redundancy, receivables, legal claims, and inventory loss.

AA – L2 – Q51 – Audit Evidence

AAA – L3 – Q36 – Internal audit

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

AA – L2 – Q50 – Audit Evidence

Explain procedures for obtaining a bank report and substantive procedures for Zenith Healthcare Ltd's bank report. List substantive procedures for auditing bank balances in Zenith Healthcare Ltd's financial statements.

AAA – L3 – Q34 – Accounting Policies

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

AA – L2 – Q46 – Audit Evidence

Describe how audit software can assist in auditing revenue and receivables at Brighton Components. Discuss external auditor reliance on internal audit’s use of embedded software at Brighton Components.

AAA – L3 – Q33 – Engagement Letters

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

AA – L2 – Q42 – Audit Evidence

List and explain factors influencing the auditor's judgment on sufficiency of audit evidence. List substantive audit procedures for trade payables, accruals, and provision for legal action at Regent Co.

AA – L2 – Q41 – Audit Evidence

List four examples of external confirmations and explain one supported and one unsupported audit assertion for each.

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Plan audit of Belmont Pharmaceuticals for 31 Dec 20X8, addressing drug development, legal claim, and voucher revenue issues.

You're reporting an error for "AAA – L3 – Q38 – Evaluation and review"

Review subsequent events at Benson Manufacturing for 30 June 20X8, including redundancy, receivables, legal claims, and inventory loss.

You're reporting an error for "AAA – L3 – Q37 – Evaluation and review"

You're reporting an error for "AA – L2 – Q51 – Audit Evidence"

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

You're reporting an error for "AAA – L3 – Q36 – Internal audit"

Explain procedures for obtaining a bank report and substantive procedures for Zenith Healthcare Ltd's bank report. List substantive procedures for auditing bank balances in Zenith Healthcare Ltd's financial statements.

You're reporting an error for "AA – L2 – Q50 – Audit Evidence"

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

You're reporting an error for "AAA – L3 – Q34 – Accounting Policies"

Describe how audit software can assist in auditing revenue and receivables at Brighton Components. Discuss external auditor reliance on internal audit’s use of embedded software at Brighton Components.

You're reporting an error for "AA – L2 – Q46 – Audit Evidence"

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

You're reporting an error for "AAA – L3 – Q33 – Engagement Letters"

List and explain factors influencing the auditor's judgment on sufficiency of audit evidence. List substantive audit procedures for trade payables, accruals, and provision for legal action at Regent Co.

You're reporting an error for "AA – L2 – Q42 – Audit Evidence"

List four examples of external confirmations and explain one supported and one unsupported audit assertion for each.

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