Audit Planning – Knowsia

AA – L2 – Q58 – Auditing in a Computerized Environment

Explain benefits of using audit software in the audit of Peak Ltd's inventory systems.

Question

Cal & Co has been appointed as the auditor for Mount Co, a company providing motor vehicle repair services across 25 locations, with a year-end of 30 June 2009 and an audit completion deadline of 15 August 2009. Each location uses the same computerized inventory, sales, and purchasing systems, with data consolidated monthly at the head office. The audit manager is planning the audit approach, considering rewriting Cal & Co’s audit software to test Mount Co’s inventory systems on a live basis. However, July is a major holiday period for the audit firm, posing potential resource constraints

(a) (i) Explain the benefits of using audit software in the audit of Peak Ltd.

(a) (ii) Explain the problems that may be encountered in the audit of Peak Ltd and for each problem, explain how that problem could be overcome.

(b) Following a discussion with the management at Peak Ltd you now understand that the internal audit function is prepared to assist with the statutory specification on the computerised inventory systems at Peak Ltd. Documentation provides details of the software and shows diagrammatically transactions are processed through the inventory system. This documentation can be used to significantly decrease the time needed to understand the computer systems and enable audit software to be written for this year’s audit.

Required:

Explain how you will evaluate the computer systems documentation produced by the internal audit function in order to place reliance on it during your audit.

Answer

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Tags: Audit Challenges, Audit Planning, Software Development, Time Constraints
Level: Level 2

Topic: Audit Evidence

AAA – L3 – Q47 – Financial instruments

Discuss challenges in auditing financial instruments and matters for planning the audit of Tap Co’s forward exchange contracts.

Question

You are the manager in Dee Kay Company, a firm of Chartered Accountants. You have just attended a monthly meeting of audit partners and managers at which client-related matters were discussed. Information relating to one client which were discussed at the meeting is given below.
Tap Co
Tap Co is a clothing manufacturer, which has recently expanded its operations overseas. To manage exposure to cash flows denominated in foreign currencies, the company has set up a treasury management function, which is responsible for entering into hedge transactions such as forward exchange contracts. These transactions are likely to be material to the financial statements. The audit partner is about to commence planning the audit for the year ending 31 July 2014.
Required:
Discuss why the audit of financial instruments is particularly challenging, and explain the matters to be considered in planning the audit of Tap Co’s forward exchange contracts.

Answer

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Tags: Audit Planning, Financial instruments, Forward exchange contracts, Risk Assessment, Treasury management
Level: Level 3

Topic: Audit Evidence

AAA – L3 – Q44 – Group audits

Identify risks, audit planning effects, support letters, and horizontal groups' impact for Kwei Co's group audit.

Question

You are an audit manager in Rita & Co, a firm of Chartered Accountants. One of your audit clients Kwei Co provides satellite broadcasting services in a rapidly growing market.
In February 20X8 Kwei purchased Thunder Co, a competitor group of companies. Significant revenue, cost and capital expenditure synergies are expected as the operations of Kwei and Thunder are being combined into one group of companies. The following financial and operating information consolidates the results of the enlarged Kwei group:

| | Year end 31 December | | | | 20X8 (Est.) | 20X7 (Actual) | | | $m | $m | | Revenue | 6,827 | 4,404 | | Cost of sales | (3,109) | (1,991) | | Distribution costs and administrative expenses | (2,866) | (1,700) | | Research and development costs | (25) | (22) | | Depreciation and amortisation | (927) | (661) | | Interest expense | (266) | (202) | | Loss before taxation | (366) | (172) | | Customers | 14.9m | 7.6m | | Average revenue per customer (ARPC) | 458 | 579 |

In November 20X8 Kwei purchased Storm Co, a large cable communications provider in India, where your firm has no representation. The financial statements of Storm for the year ending 31 December 20X8 will continue to be audited by a local firm of Chartered Accountants. Storm’s activities have not been reflected in the above estimated results of the group. Kwei is committed to introducing its corporate image in India.
In order to sustain growth, significant costs are expected to be incurred as operations are expanded, networks upgraded and new products and services introduced.
Required
(a) Identify and describe the principal business risks for the Kwei group.
(b) Explain what effect the acquisitions will have on the planning of Rita & Co’s audit of the consolidated financial statements of Kwei Co for the year ending 31 December 20X8.
(c) Explain the role of ‘support letters’ (often called ‘comfort letters’) as evidence in the audit of financial statements.
(d) Discuss how ‘horizontal groups’ (i.e. non-consolidated entities under common control) affect the scope of an audit and the audit work undertaken.

Answer

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Tags: Audit Planning, Business Risks, Group audits, Horizontal groups, Support letters
Level: Level 3

Topic: Group audits

AAA – L3 – Q40 – Group audits

Planning considerations for Pinnacle Holdings and Viper audits, including group restructuring and disposals.

Question

The following diagram shows the structure of the Pinnacle Holdings group, a listed company with subsidiaries both locally and overseas. All subsidiaries are wholly-owned. All of Pinnacle Holdings’ overseas operations are run via Falcon.
During the year ended 31 December 20X8 the board of Pinnacle Holdings decided to restructure the group and the following events took place:
(1) Robin was sold on 1 August 20X8 to an East African competitor, Hawk. The consideration was in the form of shares in Hawk, such that Falcon now owns 30% of Hawk.
(2) Heron was sold on 30 November 20X8 to Viper. The consideration was C100 million settled in cash.
(3) To stimulate the operations of Viper and Heron, 26% of the Viper group was sold to Innovative Ventures on 1 December 20X8.
You are the audit manager on the Pinnacle Holdings audit. In addition to the main group financial statements, Viper is also required by Innovative Ventures to prepare group financial statements. Your office audits the Pinnacle Holdings group, Viper and Heron. Your Asian associate audits Falcon. Ibis (which is not material to the group) is not audited, and Hawk and Robin are audited by a small East African practice. With the exception of Ibis, all members of the group are components at which audit work will be performed.

Required
(a) Prepare notes for a planning meeting with the engagement partner setting out the significant matters which need to be considered at this stage in respect of the Viper audit.
(b) Prepare notes for a planning meeting with the engagement partner setting out the significant matters which need to be considered at this stage in respect of the Pinnacle Holdings audit.

Answer

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Tags: Audit Planning, Disposals, Financial Statements, Group audits, Subsidiary audits
Level: Level 3

Topic: Group audits

AAA – L3 – Q35 – Group Audits

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

Question

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.

Answer

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Tags: Audit Planning, Component auditors, Consolidation, Financial Statements, Group audits
Level: Level 3

Topic: Audit Evidence, Group audits, Planning

AA – L2 – Q49 – Analytical Procedures

Explain reasons for changes in current ratio, gross profit margin, and inventory holding period at audit planning. Explain automated tools and techniques and their use at the audit planning stage.

Question

Analytical procedures are an important and powerful tool for auditors explaining the performance of a business. ISAs 315 and 320 require the auditors to apply analytical procedures at the planning and overall review stages of the audit.

Required
(a) Explain the possible reasons for the following changes in accounting ratios found at the planning stage of the audit:
(i) an increase in the current ratio;
(ii) a decrease in the gross profit margin; and
(iii) an increase in the inventory holding period.

(b) Explain what automated tools and techniques are and describe how they can be used at the planning stage of the audit.

Answer

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Tags: Accounting Ratios, Analytical Procedures, Audit Planning, Risk Assessment
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

AAA – L3 – Q31 – Planning

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

Question

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.

Answer

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Tags: Accounts Receivable, Analytical Procedures, Audit Planning, Audit Risk, Financial Statement Analysis
Level: Level 3

Topic: Planning

AAA – L3 – Q28 – Planning

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

Question

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.

Answer

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Tags: Accounting Systems, Audit Planning, Audit Strategy, Business Risks, Control Risks, Electrical Wholesaler, Financial Controls, New Client, Stock Exchange Listing, Substantive Approach
Level: Level 3

Topic: Planning

AAA – L3 – Q24 – Planning

Identify issues affecting audit planning for the Accra branch of Rosaline, a furniture manufacturer with a complex IT system.

Question

Your firm has just been appointed the first auditor to the Lagos branch of Pinnacle Furnishings, a Nigerian manufacturer of household furniture. The branch has only been in existence for thirteen months. The branch is involved in importing and distributing the furniture through wholesalers and major retailers in Nigeria. The auditors of the Nigerian company are a medium-sized Nigerian firm. There is no legal requirement for a branch audit, but management has expressed concern about the Lagos operations.

A complex computerised accounting and inventory control system is maintained. You have ascertained that the mainframe installation is in Nigeria. The terminals in Nigeria (Lagos) are linked to the mainframe by private telecommunications lines. All input is performed in Lagos with overnight batch processing and output the following day.

The software used is a Nigerian package and all user manuals are written in Yoruba; there are nine volumes (nine manuals) in total. The IT personnel in Lagos are competent users of the system but none of the staff has a detailed knowledge of the actual software.

The Lagos branch has been expanding rapidly and problems have been experienced because its IT department has been unable to keep pace with developments.

An internal auditor is employed, and he reports directly to the manager of the branch, who has set down his programme of work. The internal auditor is not a qualified accountant and his working papers and reporting are not very formalised. He performs daily checking of certain areas and has an audit programme. The programme of work is structured in such a way that a specific area is examined each month.

Required

Identify and comment on the issues raised as they affect your planning of the audit of the Lagos branch.

Answer

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Tags: Audit Planning, Branch Audit, Computerised Systems, Control Risk, Inherent Risk, Internal Audit, Substantive Approach
Level: Level 3

Topic: Planning

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AA – L2 – Q58 – Auditing in a Computerized Environment

Explain benefits of using audit software in the audit of Peak Ltd's inventory systems.

AAA – L3 – Q47 – Financial instruments

Discuss challenges in auditing financial instruments and matters for planning the audit of Tap Co’s forward exchange contracts.

AAA – L3 – Q44 – Group audits

Identify risks, audit planning effects, support letters, and horizontal groups' impact for Kwei Co's group audit.

AAA – L3 – Q40 – Group audits

Planning considerations for Pinnacle Holdings and Viper audits, including group restructuring and disposals.

AAA – L3 – Q35 – Group Audits

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

AA – L2 – Q49 – Analytical Procedures

Explain reasons for changes in current ratio, gross profit margin, and inventory holding period at audit planning. Explain automated tools and techniques and their use at the audit planning stage.

AAA – L3 – Q33 – Engagement Letters

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

AAA – L3 – Q31 – Planning

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

AAA – L3 – Q28 – Planning

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

AAA – L3 – Q24 – Planning

Identify issues affecting audit planning for the Accra branch of Rosaline, a furniture manufacturer with a complex IT system.

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AA – L2 – Q58 – Auditing in a Computerized Environment

Explain benefits of using audit software in the audit of Peak Ltd's inventory systems.

You're reporting an error for "AA – L2 – Q58 – Auditing in a Computerized Environment"

AAA – L3 – Q47 – Financial instruments

Discuss challenges in auditing financial instruments and matters for planning the audit of Tap Co’s forward exchange contracts.

You're reporting an error for "AAA – L3 – Q47 – Financial instruments"

AAA – L3 – Q44 – Group audits

Identify risks, audit planning effects, support letters, and horizontal groups' impact for Kwei Co's group audit.

You're reporting an error for "AAA – L3 – Q44 – Group audits"

AAA – L3 – Q40 – Group audits

Planning considerations for Pinnacle Holdings and Viper audits, including group restructuring and disposals.

You're reporting an error for "AAA – L3 – Q40 – Group audits"

AAA – L3 – Q35 – Group Audits

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

You're reporting an error for "AAA – L3 – Q35 – Group Audits"

AA – L2 – Q49 – Analytical Procedures

Explain reasons for changes in current ratio, gross profit margin, and inventory holding period at audit planning. Explain automated tools and techniques and their use at the audit planning stage.

You're reporting an error for "AA – L2 – Q49 – Analytical Procedures"

AAA – L3 – Q33 – Engagement Letters

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"

AAA – L3 – Q31 – Planning

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

You're reporting an error for "AAA – L3 – Q31 – Planning"

AAA – L3 – Q28 – Planning

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

You're reporting an error for "AAA – L3 – Q28 – Planning"

AAA – L3 – Q24 – Planning

Identify issues affecting audit planning for the Accra branch of Rosaline, a furniture manufacturer with a complex IT system.

You're reporting an error for "AAA – L3 – Q24 – Planning"

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