- 1 Marks
AAA – L3 – SA – Q4.5 – Audit evidence
How does an auditor verify understanding of a transaction process and its controls?
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Tag (SQ): Audit Procedures
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AAA – L3 – SA – Q1.4 – Engagement Letter
Contents of a statutory audit engagement letter.
Question
Matters covered in an engagement letter for a statutory audit will normally include:
1 Use of internal audit
2 Use of experts
3 Number of audit personnel who will be involved in the audit
4 Basis of fees
A 1, 2 and 3 only
B 1, 3 and 4 only
C 2, 3 and 4 only
D 1, 2 and 4 only
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- Tags: Audit Procedures, Engagement Letter, ICAG, Statutory Audit
- Level: Level 3
- Topic: Practice management
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- 1 Marks
AA – L2 – SA – Q4.9 – Receivables Circularization
Feature not associated with receivables circularization.
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- Tags: Audit Evidence, Audit Procedures, ICAG, Receivables Circularisation
- Level: Level 2
- Topic: Audit and Assurance Evidence
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- 20 Marks
AA – L2 – Q72 – Inventory Valuation
Discuss amendment need for inventory valuation and impact on auditor's report if unresolved for Mega Construct.
Question
Mega Construct is a listed construction company with an annual revenue of GH₵350m. Mega Construct’s draft statement of profit or loss shows a profit before tax for the year ended December 31, 2008 of GH₵40m.
Mega Construct’s audit firm is conducting an audit. This is the first audit of Mega Construct that this audit firm has conducted. An enquiry to the previous audit firm revealed no reasons for concern. On completing audit work at the company’s premises, the audit senior drafts a memo, extracts from which are reproduced below:
(a) Inventory valuation
Inventories include GH₵7m, at cost, for scrap rubber from used car tyres. This material is widely used as a road surface in other countries. Contracts for road building with this country’s National Road Authority, the state authority for road construction, do not currently permit the use of this material. However, the matter was known to be under review and on being offered a special purchase of this material, Mega Construct speculated on a favourable outcome of this review and purchased the material. In February 2009, shortly before the financial statements were approved by the directors, the National Road Authority reported that it would not, currently, accept the use of this material. If used on non-National Road Authority contracts the material’s net realisable value would not exceed GH₵2m.
The finance director maintains that the issue of the National Road Authority report was a non-adjusting event after the reporting period. The write down of the inventory should, therefore, be reflected in the next period’s financial statements.
Required:
Discuss whether the financial statements require amendment and describe the impact on the auditor’s report if the issue remains unresolved.
(b) Depreciation
During the year ended December 31, 2005 the company purchased two computer controlled earth movers at a cost of GH₵2,500,000 each and a further two at the same price during the year ended December 31, 2006. Depreciation has been provided at 10% straight line, the same basis as it previously depreciated conventional earth movers. This year, 2008, the company has decided that improvements in technology made it worthwhile scrapping their first two computer controlled earth movers and replacing them with the latest model at a cost of GH₵6,000,000 each. The company provides a full year’s depreciation charge in the year of acquisition and none in the year of disposal.
The company’s chief engineer tells you that technology is developing so rapidly it appears likely they will continue to replace these machines every five years. In spite of this the finance director claims that the depreciation rate of 10% is in line with the industry standard and reflects the physical life of the machines. He urges that continued improvements in technology cannot be foreseen and that there is no justification for increasing depreciation to 20% because of the possibility of technological obsolescence.
Required:
Discuss whether the financial statements require amendment and describe the impact on the auditor’s report if the issue remains unresolved.
(c) Contingent liability
The company is being sued for GH₵50m by the National Road Authority for defective work on a recently completed road. The company maintains that it met the National Road Authority’s specification and it is the Authority’s engineers who are at fault in drawing up the specification. Mega Construct maintains that it has no case to answer, that the possibility of loss is remote and that the claim need not be disclosed as a contingent liability. An investigative journalist has recently published an article suggesting that other roads constructed by the company exhibit similar faults. The managing director has admitted that the company’s road building techniques are under investigation by the National Road Authority. If the company were to lose the case its future going concern would be threatened. No disclosure has been made in the financial statements.
Required:
For the following issue, discuss whether the financial statements require amendment and describe the impact on the auditor’s report if the issue remains unresolved.
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- 15 Marks
Question Title: AA – L2 – Q71 – Subsequent Events
Describe auditor's responsibilities for subsequent events between year-end and report signing, and post-signing to issuance.
Question
You are an audit senior for an audit firm and are currently working on the audit of TechWorks Co, a company which produces sophisticated electronic laboratory equipment. The company imports a high proportion of the components it uses from China. The equipment is used by some laboratories dealing with hazardous chemicals.
As the audit draws to a close, the partner in charge has asked you to ensure that all procedures relating to subsequent events and going concern are properly performed. You are to consider the audit work to be performed in relation to ISA 560 Subsequent Events and ISA 570 Going Concern.
Required:
(a) Describe the auditor’s responsibilities for subsequent events occurring between:
(i) The year-end date and the date the auditor’s report is signed.
(ii) The date the auditor’s report is signed and the date the financial statements are issued. (6 marks)
(b) Going concern relates to the judgement that an entity will continue to trade for the foreseeable future.
(i) Explain the responsibilities of directors and auditors in relation to going concern. (3 marks)
(ii) Explain the audit procedures that audit could carry out when conducting the going concern review of TechWorks Co.
(c) TechWorks Co has an internal audit function. The partner in charge of the audit is seeking clarification regarding how any deficiencies in internal control should be identified and communicated to management. The partner feels the report produced by the external auditors may duplicate the produced by the internal audit function.
Required:
Explain how the purpose and content of an internal auditor’s report on internal control deficiencies differs from one prepared by the external auditor.
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- Tags: Audit Procedures, Going Concern, ISA 570, Responsibilities
- Level: Level 2
- Topic: Internal Audits
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- 30 Marks
AA – L2 – Q67 – Internal Control Systems
List six audit procedures for Bertram Co's procurement and purchases system with reasons. List four audit procedures before attending Bertram Co's inventory count. Identify deficiencies in Bertram Co's inventory count at depot nine and explain how to address them.
Question
Bertram Co
Bertram Co assembles fridges, microwaves, washing machines and other domestic appliances from parts procured from a large number of suppliers. As part of the interim audit work two weeks prior to the company year-end, you are testing the procurement and purchases systems and attending the inventory count.
Procurement and purchases system
Parts inventory is monitored by the stores manager. When the quantity of a particular part falls below re-order level, an e-mail is sent to the procurement department detailing the part required and the quantity to order. A copy of the e-mail is filed on the store manager’s computer.
Staff in the procurement department check the e-mail, allocate the order to an authorised supplier and send the order to that supplier using Electronic Data Interchange (EDI). A copy of the EDI order is filed in the order database by the computer system. The order is identified by a unique order number.
When goods are received at Bertram, the stores clerk confirms that the inventory agrees to the delivery note and checks the order database to ensure that the inventory were in fact ordered by Bertram. (Delivery is refused where goods do not have a delivery note.)
The order in the order database is updated to confirm receipt of goods, and the perpetual inventory system updated to show the receipt of inventory. The physical goods are added to the parts store and the paper delivery note is stamped with the order number and is filed in the goods inwards department.
The supplier sends a purchase invoice to Bertram using EDI; invoices are automatically routed to the accounts department. On receipt of the invoice, the accounts clerk checks the order database, matches the invoice details with the database and updates the database to confirm receipt of invoice. The invoice is added to the purchases database, where the purchase day book (PDB) and suppliers individual account in the payables ledger are automatically updated.
Required:
(a) List SIX audit procedures that an auditor would normally carry out on the purchases system at Bertram Co, explaining the reason for each procedure.
(b) List FOUR audit procedures that an auditor will normally perform prior to attending the client’s premises on the day of the inventory count.
(c) On the day of the inventory count, you attended depot nine at Bertram. You observed the following activities:
- Pre-numbered count sheets were being issued to client’s staff carrying out the count. The count sheets showed the inventory ledger balances for checking against physical inventory.
- All count staff were drawn from the inventory warehouse and were counting in teams of two.
- Three counting teams were allocated to each area of the stores to count, although the teams were allowed to decide which pair of staff counted which inventory within each area. Staff were warned that they had to remember which inventory had been counted.
- Information was recorded on the count sheets in pencil so amendments could be made easily as required.
- Any inventory not located on the pre-numbered inventory sheets was recorded on separate inventory sheets – which were numbered by staff as they were used.
- At the end of the count, all count sheets were collected and the numeric sequence of the sheets checked; the sheets were not signed.
Required:
(i) List the deficiencies in the control system for counting inventory at depot nine.
(ii) For each deficiency, explain why it is a deficiency and state how that deficiency can be overcome.
(d) (i) State the aim of a test of control and the aim of a substantive procedure.
(ii) In respect of your attendance at Bertram Co’s inventory count, state one test of control and one substantive procedure that you should perform.
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- Tags: Audit Evidence, Audit Procedures, Internal controls, Procurement System, Purchases System
- Level: Level 2
- Topic: Audit Procedures
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- 10 Marks
AAA – L3 – Q65 – Reporting
Prepare a management report on payroll internal control deficiencies at Bibini Co. Ltd., including implications and recommendations.
Question
Kofi & Co. have audited the annual financial statements of Akoma Co. Ltd., a public limited liability company, for the year ended 31st December 2014. The accounting system of the company is partially computerised.
During the audit, it was detected that just two members of staff, out of one hundred and fifty workers, were entirely and equally responsible for the maintenance of personnel records and preparation of the payroll. The chief accountant only confirms that the amount of the wages and salaries cheque agrees with the total of the net wages column in the payroll, then he signs without any reasonableness check of the amount of the total wages cheque. This situation is a serious deficiency in the system of internal control which can have serious implications. As audit senior, you are considering communicating this situation to the management, showing the deficiency, implications, and recommendations.
Required:
Prepare an appropriate report to management on the deficiency noted in the system of internal control for payroll.
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- 8 Marks
AAA – L3 – Q64 – Subsequent events
Identify four financial statement areas relevant to subsequent events review, with relevant post-year-end information and reasons.
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- Tags: Audit Procedures, Financial Statements, Going Concern, Inventory, Payables, Receivables, Subsequent events
- Level: Level 3
- Topic: Subsequent events
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- 15 Marks
AAA – L3 – Q63 – Audit-related services
Assess audit procedures and alternative audit opinions for Maris Vintages' going concern status due to loan repayment issues.
Question
You are the audit manager in charge of the audit of Maris Vintages, a company which imports and distributes palm wine. In recent years the company has become less profitable due to the large range of palm wines now carried by supermarkets. The draft financial statements for the year ended 30 November 20X8 show that current liabilities exceed current assets by $200,000.
The company’s major source of finance is a bank loan of $500,000 which is due for repayment in full on 31 October 20X5. The company is currently negotiating with its bankers for a replacement long-term loan of $1 million. They intend to use some of the loan to reposition themselves in the marketplace to establish the superiority of their wines over those sold in supermarkets.
The directors submitted a profit forecast with their loan application and are optimistic that their application will be successful. However, they do not expect negotiations to be completed before the annual general meeting in March. Your firm has been asked not to approach the bank directly.
Required
(a) Set out the audit procedures you would perform in order to establish the ability of Maris Vintages to continue as a going concern.
(b) Discuss the alternative audit opinions that might be relevant to the financial statements of Maris Vintages together with the circumstances in which each would be appropriate.
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- 12 Marks
AAA – L3 – Q61 – Audit Evidence
Discuss reliability of directors' written representations and actions if directors refuse to sign, focusing on revenue and expenditure.
Question
You are the external auditor of Jonas Healthcare Services Co.
A written representation letter has been prepared in which the directors have been asked to confirm that all revenue has been included in the financial statements and that when there is weak evidence of expenditure, the expenditure has been for the benefit of the company and not for the personal benefit of any employee or director.
Required
(a) Discuss the reliability of audit evidence provided by directors in the written representation letter and whether you should rely wholly on the representations of the directors or whether you should obtain other evidence.
A written representation letter has been prepared in which the directors have been asked to confirm that all revenue has been included in the financial statements and that when there is weak evidence of expenditure, the expenditure has been for the benefit of the company and not for the personal benefit of any employee or director.
Required
(a) Discuss the reliability of audit evidence provided by directors in the written representation letter and whether you should rely wholly on the representations of the directors or whether you should obtain other evidence.
(b) Describe the action you would take and the conclusions you would reach if the directors refused to sign a written representation letter. Your answer should specifically consider the statements in the letter concerning completeness of revenue and validity of expenditure.
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