Audit Planning – Page 2

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

AA – L2 – Q24 – Planning an Audit

Describe matters to consider in planning the audit of Rylan Products and actions for specific issues. Explain why auditors must understand the client’s legal framework per ISA 250 and actions for non-compliance. Explain the importance of planning an audit per ISA 300.

Question

Your firm has been the auditor of Rylan Products, a listed company, for a number of years. The engagement partner has asked you to describe the matters you would consider when planning the audit for the year ended 31 January 20X5.
During a recent visit to the company you obtained the following information:
(i) The management accounts for the 10 months to 30 November 20X8 show revenue of €13 million and a profit before tax of €400,000. Assume revenue and profits accrue evenly throughout the year. In the year ended 31 January 20X5, Rylan Products had revenue of €11 million and a profit before tax of €800,000.
(ii) The company installed a new computerised control system which has operated from 1 June 20X8. As the control system records inventory movements and current inventory quantities, the company is proposing:

to use the quantities on the computer to value the inventory at the year-end; and
not to carry out a physical inventory count at the year end.
(iii) You are aware there have been reliability problems with the company’s products, which have resulted in legal claims being brought against the company by customers, and customers refusing to pay for the products.
(iv) The revenue increase in the 10 months to 30 November 20X8 over the previous year has been achieved by attracting new customers and by offering extended credit. The new credit arrangements allow customers three months credit before their debt becomes overdue, rather than the one month credit period allowed previously. As a result of this change, the age of receivables has increased from 1.6 to 4.1 months.
(v) The financial director and purchasing manager were dismissed on 15 August. A replacement purchasing manager has been appointed but it is not expected that a new financial director will be appointed before the year end of 31 January 20X5. The chief accountant will be responsible for preparing the financial statements for audit.

Required

(a) Describe the reasons why it is important that auditors should plan their audit work.

(b) Explain why ISA 250 Consideration of Laws and Regulations in an Audit of Financial Statements requires auditors to obtain a general understanding of the legal and regulatory framework applicable to their client and how their client is complying with that framework. Set out the action auditors should take if they suspect material areas of non-compliance.

(c) Describe the matters you will consider in planning the audit and the further action you will take concerning the matters listed in (i) to (v) above.

Answer

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Tags: Audit Effectiveness, Audit Planning, Audit Strategy, ISA 300
Level: Level 2

Topic: Planning an Audit

AAA – L3 – Q22 – Planning

Identify circumstances affecting audit planning for a new small recruitment company and explain their relevance.

Question

Your firm has recently been appointed auditor of Zebra Recruitment, a small company set up two years ago by the managing director, Daniel Zebra, who was previously an investment banker. The initial capital was provided equally by Daniel and the bank. The bank loan and the current overdraft facility are secured on the company’s assets. The overdraft is running just under its limit.
The company places highly qualified personnel in management positions. Daniel employs the following staff:

A senior recruitment consultant, Laura Leopard.
Three other recruitment consultants.
An office manager, Jacob Antelope.
A bookkeeper, Sarah Slug.
Laura places clients in employment and supervises and trains the other recruitment consultants.
Jacob is in charge of all office administration. He raises invoices for fees when Daniel instructs him to do so and pays invoices when Daniel tells him to. Daniel is the sole cheque signatory.
Sarah maintains the accounting records on a PC located in the general office. The PC is regularly backed up and copies retained in a drawer under the desk on which the PC stands.
Required
Identify, from the situation outlined above, circumstances that should be taken into account when planning the audit. Explain why these matters should be taken into account.

Answer

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Tags: Audit Planning, Financial Risk, Internal controls, IT Controls, New Audit Client, Risk Assessment, Small Business
Level: Level 3

Topic: Planning an Audit

AAA – L3 – Q21- Planning

Identify principal control risks for SkyWing Aviation and suggest internal controls to mitigate them.

Question

You are the manager in charge of the audit of SkyWing Aviation, a small airfield which provides fuel, maintenance services, long and short term tie down, hangar facilities and flying tuition in the company’s five light aircraft.

SkyWing Aviation is a family owned company. The two principal shareholders/directors are mainly involved in flying tuition. Other employees are a part-time bookkeeper, a receptionist, two full-time mechanics and other part-time flying instructors.

Required:

(a) Set out the principal control risks for SkyWing Aviation and suggest internal controls which would mitigate those risks. (b) Justify an appropriate audit strategy.

Answer

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Tags: Audit Planning, Aviation Industry, Control Risks, Internal controls, Small Business
Level: Level 3

Topic: Planning an Audit

AA – L2 – Q22 – Risk Assessment

Explain the purpose of risk assessment procedures and outline sources of audit evidence for risk assessment. Identify and describe issues to consider in the risk assessment for the audit of Vantage Communications LLC.

Question

(a) ISA 315 (Revised 2019) Identifying and Assessing the Risks of Material Misstatement deals with the auditor’s responsibility to identify and assess the risks of material misstatement in the financial statements.

Required:

(i) Explain the purpose of risk assessment procedures. (3 marks)

(ii) Outline the sources of audit evidence the auditor can use as part of risk assessment procedures. (3 marks)

(b) Roberts & Co, an audit firm, has seven partners. The firm has a number of audit clients in different industrial sectors, with a wide range of fee income.
An audit partner of Roberts & Co has just delegated to you the planning work for the audit of Vantage Communications LLC. This company provides a range of mobile communication facilities and this will be the second year your firm has provided audit services.
You have just met with the financial controller of Vantage prior to agreeing the engagement letter for this year.
The controller has informed you that Vantage has continued to grow quickly, with financial accounting systems changing rapidly and appropriate systems of internal control being difficult to maintain. Additional services in terms of review and implementation of a system of internal control have been requested. An internal audit function has recently been established and the controller wants you to ensure that external audit work is limited by using this function.
You have also learnt that Vantage is to market a new type of mobile telephone, which is able to intercept messages from law enforcement agencies. The legal status of this telephone is unclear at present and development is not being publicised.
The granting of the licence to market the mobile telephone is dependent on the financial stability of Vantage. The financial controller has indicated that Roberts & Co may be asked to provide a report to the mobile telephone licensing authority regarding Vantage’s cash flow forecast for the year ending December 20X5 to support the licence application.

Required:
As part of your risk assessment procedures for the audit of Vantage Communications LLC for the year ending 31 December 20X8, identify and describe the issues to be considered when providing services to this client.

(c) When reporting on a cash flow forecast, explain the term ‘negative assurance’ (4 marks) and why this is used.

Answer

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Tags: Audit Evidence, Audit Planning, Internal controls, Risk Assessment
Level: Level 2

Topic: Risk Assessment and Internal Control

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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.

AA – L2 – Q24 – Planning an Audit

Describe matters to consider in planning the audit of Rylan Products and actions for specific issues. Explain why auditors must understand the client’s legal framework per ISA 250 and actions for non-compliance. Explain the importance of planning an audit per ISA 300.

AAA – L3 – Q22 – Planning

Identify circumstances affecting audit planning for a new small recruitment company and explain their relevance.

AAA – L3 – Q21- Planning

Identify principal control risks for SkyWing Aviation and suggest internal controls to mitigate them.

AA – L2 – Q22 – Risk Assessment

Explain the purpose of risk assessment procedures and outline sources of audit evidence for risk assessment. Identify and describe issues to consider in the risk assessment for the audit of Vantage Communications LLC.

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

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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"

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

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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"

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

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

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

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Describe matters to consider in planning the audit of Rylan Products and actions for specific issues. Explain why auditors must understand the client’s legal framework per ISA 250 and actions for non-compliance. Explain the importance of planning an audit per ISA 300.

You're reporting an error for "AA – L2 – Q24 – Planning an Audit"

Identify circumstances affecting audit planning for a new small recruitment company and explain their relevance.

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Identify principal control risks for SkyWing Aviation and suggest internal controls to mitigate them.

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Explain the purpose of risk assessment procedures and outline sources of audit evidence for risk assessment. Identify and describe issues to consider in the risk assessment for the audit of Vantage Communications LLC.

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