Tag (SQ): Audit Planning
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500
+ past questions and counting.
- 1 Marks
AA – L2 – SA – Q4.5 – Internal Controls
Identifying non-internal control activity.
Question
Which of the following is NOT an internal control?
A Authorizing purchase orders
B Ensuring cash is locked away
C Performing external confirmation of receivables
D The opening of the post should not be the same person who banks the cheques
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- 1 Marks
AA – L2 – SA – Q4.4 – Inherent Risk Factors
Identifying non-inherent risk factor.
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AA – L2 – SA – Q2.5 – Materiality
Identify what is not true about materiality.
Question
Which of the following is NOT true about materiality?
A Certain matters are always material
B Essentially materiality is a matter of judgment
C Matters that are not material should always be considered in isolation D Materiality affects sample size
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- 1 Marks
AA – L2 – SA – Q1.5 – Audit Planning
Identify what is not considered at the audit planning stage.
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- 20 Marks
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.
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- Tags: Audit Challenges, Audit Planning, Software Development, Time Constraints
- Level: Level 2
- Topic: Audit Evidence
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- 10 Marks
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.
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.
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- 30 Marks
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.
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- Tags: Audit Planning, Business Risks, Group audits, Horizontal groups, Support letters
- Level: Level 3
- Topic: Group audits
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- 20 Marks
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.
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- Tags: Audit Planning, Disposals, Financial Statements, Group audits, Subsidiary audits
- Level: Level 3
- Topic: Group audits
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