- 1 Marks
AA – L2 – SA – Q5.4 – Detection Risk
Influence on detection risk.
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500
+ past questions and counting.
- 1 Marks
AA – L2 – SA – Q3.1 – Material Items Focus
Why auditors focus on material items in financial statements.
Question
Why do auditors concentrate their efforts on material items in the financial statements?
A Because they are easier to audit
B Because it reduces the audit time
C Because the risk to the financial statements of being materially misstated is greater
D Because the directors have asked for it
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- 10 Marks
AAA – L3 – Q42 – Audit Evidence and Materiality
State audit testing procedures, criteria for using internal audit work, and materiality definition with audit stages.
Question
Required
(a) ISA 500 Audit Evidence identifies the different audit procedures that can be performed in order to obtain audit evidence.
Required
State, and briefly explain, five testing procedures that can be performed to obtain audit evidence.
(b) ISA 610 Using the Work of Internal Auditors explains when the work of the internal audit function can be used.
Required
State TWO criteria that the external auditor shall evaluate when assessing whether the work of the internal audit function can be used for the purposes of the audit.
(c) ISA 320 Audit Materiality provides guidance to the auditor on the concept of materiality and its relationship with audit risk.
Required
State a brief definition of materiality and state the two stages of the audit at which the auditor should consider materiality.
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- Tags: Audit Evidence, Audit Risk, Internal Audit, ISA 320, ISA 500, ISA 610, Materiality, Testing procedures
- Level: Level 3
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- 10 Marks
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.
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- 20 Marks
AAA – L3 – Q27 – Audit Evidence
Identify audit risks for Asante Motors, a multi-site car retailer with inventory and warranty issues.
Question
Asante Motors (AM) sells motor vehicles and spare parts, and also provides servicing and repairs for vehicles. It operates from eight locations, having expanded recently from just four locations. Each location has a showroom for new and used automobiles, a store for spare parts and a service workshop.
Many of the second-hand vehicles sold by AM are vehicles that have been traded in by customers in part-exchange for a new or newer vehicle. Many used cars are sold for cash.
New cars are imported from a single supplier and are delivered on consignment. AM pays the agreed purchase price plus 2.5% interest four months after delivery. AM has a legal right to return unsold cars to the supplier, but in practice never does so.
New cars are sold with a two-year warranty from the supplier and used cars are sold by AM with a one-year guarantee. All repairs under warranty or guarantee are carried out by AM in its service workshops.
Each location carries a large amount of spare parts in its parts workshops. These operate under the brand name ‘StrongSpares’ and many parts are actually labelled with the StrongSpares brand name. A perpetual inventory system is used, and storekeepers continually check inventories of parts.
The car service workshops try to complete all jobs on the same day that they are started, and are successful in about 80% of cases. Jobs are usually invoiced immediately after completion, and are usually paid for by customers when they come to collect their vehicle.
The senior sales representative at each location is able to use a new car, selected from each consignment delivered from the supplier. These cars are used for business purposes and as demonstration models. They are eventually sold second-hand as ex-demonstration models.
AM purchased the StrongSpares brand name for its parts stores. Senior management believe that the cost of the brand name should not be amortised because they consider that the asset has an indefinite useful life.
AM has recently established an internal audit function, although this has not yet done much work.
Required
Using the information provided, identify and explain the audit risks that will have to be considered and dealt with when planning the final audit of Asante Motors for the financial year just ending.
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- 20 Marks
AAA – L3 – Q26 – Audit Planning and Risk Analysis
Identify high-risk areas in the audit of Kumasi Playthings, a toy retailer with inventory and management issues.
Question
Kumasi Playthings is a prestigious toy retailer trading from a single urban retail district. The accounts and administration offices are above the shop. The company is the wholly-owned subsidiary of a prominent retail group. Kumasi Playthings is headed by its dynamic managing director, Kofi Mensah, aged 70.
At Kofi Mensah’s insistence, your firm, as local to Kumasi Playthings, has recently been appointed as the auditor. Kumasi Playthings is now the only group company not to be audited by the group auditors.
The following matters have come to light during the preliminary discussions with Kofi Mensah and those members of his staff to whom he has allowed you access:
(1) The parent company wishes Kumasi Playthings to develop operations in a number of out-of-town shopping centres. Kofi Mensah regards this as unacceptable because it would destroy the goodwill and prestige built up over 150 years of quality retailing.
(2) The company has approximately 30,000 lines of inventory. Contrary to group accounting instructions, no physical count is planned for the year end. The company intends to rely on the continuous inventory system which commenced operation in March 20X8. Two major problems have occurred with the system to date. Firstly, a trainee failed to enter all the inventory lines before the system went live. Secondly, due to a dispute with the IT provider, there has been no maintenance service for five months.
(3) Kofi Mensah has just returned from a toy fair at which he placed an order for 50,000 dolls produced by a little-known youth cooperative led by his only niece. The chief buyer is said to be fuming over the incident.
(4) In the year to 31 January 20X8, Kofi Mensah received a bonus of C2m, but you were unable to obtain any information in respect of the calculation and authorization of the bonus. No other director of Kumasi Playthings received a bonus in that year and the next highest paid director received a total emoluments package of C300,000.
(5) There is a dispute with a major supplier over the credit facilities offered to Kumasi Playthings. The supplier manufactures and supplies 30% of Kumasi Playthings’ purchases and claims that Kumasi Playthings has continually exceeded its credit period and that its accounting staff are impatient and incompetent.
(6) The company’s overdraft limit of C2.5m is due for renegotiation in April 20X5.
Required
Identify the potentially high risk areas of the audit.
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- 20 Marks
AA – L2 – Q27 – Risk Assessment and Internal Control
Identify five audit risks for Unity Football Club and explain auditor responses. Describe proof in total calculations for UFC’s ticket sales, loan interest, and payroll expenses. Explain three internal controls for UFC’s club shop or snack bars and their objectives.
Question
You are the senior responsible for planning the audit of Unity Football Club Limited (UFC) for the year ended May 31, 2008.
UFC runs a football club which was promoted to the top division in the league this season. The football season starts on September 1 and ends on May 31 so that the players get a break over the summer months.
UFC own their football stadium which now has the capacity to seat 25,000 people. Of the 25,000 seats, 19,000 are allocated to UFC supporters (home supporters) and are sold to season ticket holders only. The remaining 6,000 tickets are for away supporters and cannot be sold to UFC supporters.
Season tickets cost GH¢260 for adults and GH¢175 for children. Following their recent promotion all the season tickets have been sold this year with 70% of season tickets sold to adults and the remaining 30% to children. Tickets for away supporters are always sold at GH¢20 per ticket regardless of whether the ticket is sold to an adult or a child. On average 50% of away supporter tickets have been sold for each of the 14 home games played at UFC’s stadium during the football season.
UFC’s other revenue streams include the sale of football kits and other memorabilia from the club shop, and food and drink sales from the club snack bars.
Following promotion to the top division, the club added an extra stand to the stadium to increase the seating capacity to the current level of 25,000. Other existing areas of the stadium also underwent maintenance in order to restore them to their original condition. The work was carried out during June and July, 2007 and cost a total of GH¢3,360,000. To finance this UFC took out a GH¢2,900,000 loan on June 1, 2007.
The loan carries an interest rate of 7% and is repayable over the next five years. The loan is secured on the stadium.
The directors feel that the club’s greatest assets (other than the stadium) are the football players themselves. The players have performed so well this year that some of the other football clubs in the same division have made preliminary offers to buy three of UFC’s players. UFC is particularly pleased about this as these players joined the club through their youth academy programme. Consequently the directors would like to value these three players as intangible non-current assets in UFC’s financial statements. The players will be valued at the offer price received from the other clubs. The directors feel this is a prudent valuation because they are confident that the eventual selling price would be much higher than the preliminary offer.
One of the major drawbacks of the club’s promotion has been that the club has had to increase the level of players’ salaries. The total salary expense for the year is estimated to be in the region of GH¢2,800,000. This is a particularly surprising figure as it is higher than the other operating costs for the year which are estimated at GH¢2,400,000.
UFC has just appointed a team of internal auditors. They have not been in position long enough to help you with your audit work but the directors are keen for the internal auditors to improve the company’s internal controls in relation to the club shop and snack bars.
Required:
(a) Using the information provided, describe FIVE (5) audit risks and explain the auditor’s response to each risk in planning the audit of UFC.
(b) Describe how the auditor could perform a proof in total calculation to confirm each of UFC’s revenue from ticket sales, loan interest and payroll expense for players’ salaries.
(c) Explain THREE (3) internal controls the internal auditors of UFC should implement relating to the club shop or snack bars, and state the objective of each of the three controls.
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- 20 Marks
AAA – L3 – Q23 – Audit Planning
Draft presentation sections on audit risk and materiality for Wonderful Stores' tender process.
Question
Your firm has been invited to tender for the audit of Marvelous Retail, a chain of twenty stores operating a sophisticated computerised inventory control and re-ordering system. Four other firms have also been invited to tender. As part of the tendering process, you have been asked to produce a written presentation.
Given the complex systems within its business, Marvelous Retail is particularly anxious to establish the ability of your audit procedures to deal with the business risks and has asked you to set out as part of your presentation, your approach concerning the following:
(1) Audit risk, and how your procedures would seek to address it to their business.
(2) Materiality, and how this might be applied.
Required
Draft the sections of the presentation to Marvelous Retail which deal with these two aspects of the audit approach.
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- 15 Marks
AA – L2 – Q21 – Risk Assessment and Internal Control
Explain the meaning of audit risk and its importance to the auditor. Identify risks in auditing Aurum LLC and explain why they need consideration.
Question
21 Golden LLC
Golden LLC designs, manufactures and retails traditional Ghanaian jewellery. Inventory is held at the design warehouse and at three shops. Inventory is also sometimes sent to customers for approval prior to a sale being made. Your firm has been re-appointed as auditors for the year ended 31st December 20X8.
Golden LLC has had a difficult year. A recession has caused a fall in revenue and the future is uncertain. A fourth shop was closed during the year and the premises are still up for sale. The financial director was dismissed half way through the year and is pursuing a claim for unfair dismissal. A replacement has not yet been found.
The managing director is due to retire next year and is likely to require loans he has made to the business to be repaid. Negotiations with the bank in respect of loans to cover these repayments have started.
Required
(a) State what you understand by audit risk and why it is important to the auditor.
(b) Identify the risks arising from the above that will need to be considered when planning the audit of Golden LLC. Explain why these risks need to be considered.
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- 30 Marks
AA – L2 – Q20 – Risk Assessment and Internal Control
Identify risks associated with auditing ConnectSphere Mobile, a mobile phone service provider with expansion plans. Discuss ethical considerations for accepting the audit of ConnectSphere Mobile, including technical and logistical capabilities. Conclude whether to accept or decline the audit of ConnectSphere Mobile, providing principal reasons.
Question
You are the partner in charge of a four partner firm of Chartered Accountants. Your firm has been invited to tender for the audit of ConnectSphere Mobile for the year ended 31 December 20X8.
ConnectSphere Mobile was established two years ago, and provides a mobile phone service for individuals and business. The system being established by the company comprises:
- Small portable mobile phones, which allow subscribers (users) to contact or be contacted by any other telephone.
- The mobile phones can be used within range of a local relay station, which receives calls from and sends calls to the mobile phone.
- The local relay stations are linked to a central computer which connects the calls to other users. Frequently, this is through a computer’s telephone network.
Currently, the local relay stations cover one large city with a population of about 1,000,000. Within the next year the system will cover all large cities in Zamora with a population of over 250,000. By 20X7, the system will cover all trunk roads and cities with a population of over 100,000. Extending the coverage of the system will involve considerable capital expenditure on new relay stations and require additional borrowings.
The cost of the relay stations and central computer are capitalised and are written off over six years.
The mobile phones are manufactured by other companies and sold through retailers. ConnectSphere Mobile does not sell the phones, but it pays ₵2,000 to the retailer for each phone sold and subscription by the customer to ConnectSphere Mobile. This payment is capitalised in the financial statements of ConnectSphere Mobile and written off over four years.
Subscribers are invoiced monthly with a fixed line rental and a variable call charge. Other operators are charged for the time spent by their customers contacting ConnectSphere Mobile’s subscribers (customers). These charges are logged and calculated by the company’s main computer.
All the shares are owned by three wealthy individuals who are non-executive directors. They will receive a fixed salary. They do not plan to make any further investment in the company.
Establishing the network of relay stations and subscribers will result in the company making losses for at least three years. Current borrowings are about 20% of the shareholders’ funds. Because of the substantial capital expenditure and trading losses, it is expected the company will be highly geared by 20X7.
As the company will not be profitable, the non-executive directors have decided that executive directors should receive a basic salary and a bonus based on the number of subscribers to the system.
The owners plan to float the company on the Zamora Stock Exchange in 20X7. The flotation will involve:
- issuing new shares to the general public to provide funds for the company; and
- the three non-executive directors selling some of their shares.
You are aware that ConnectSphere Mobile has a number of very large competitors, each of which has a large number of users and comprehensive coverage (i.e. over 90% of the population are within range of a relay station).
Required:
(a) Consider the risks associated with the audit of ConnectSphere Mobile.
(b) Describe the ethical matters you should consider in deciding whether your audit firm should accept the audit. This should include considering whether your firm has the technical and logistical ability to carry out the audit.
(c) Conclude on whether you would advise your firm to accept or decline the audit, giving your principal reasons for coming to this decision.
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