Internal controls – Page 4

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.

Answer

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Tags: Audit Risk, Computerised Systems, Internal controls, Inventory Management, Materiality, Retail Audit
Level: Level 3

Topic: Planning

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

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.

Answer

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Tags: Audit Risk, Financial Reporting, Going Concern, Internal controls, Inventory Management
Level: Level 2

Topic: Risk Assessment and Internal Control

AA – L2 – Q12 – Internal Audits

Review risks, controls, and tests for HR, procurement, and marketing at a cleaning company; explain types of internal audits.

Question

CleanSweep
Internal auditors often assist management in performing internal review assignments covering, for example, human resources, procurement (purchasing), marketing and treasury activities. Such reviews involve:
the identification of risks;
the identification of systems of internal control and procedures implemented to manage those risks;
tests of controls to ensure that internal controls are operating effectively;
an evaluation of the overall effectiveness of the design and operations of controls in managing the risks identified.
You are the internal auditor for a private company, CleanSweep. CleanSweep provides cleaning services to shops and offices and has a reputation for high quality work. You have been asked to review the human resources, procurement and marketing functions within the company.
CleanSweep employs about 500 cleaning staff, all of whom are on the payroll, and most of whom work part time. CleanSweep does not employ sub-contractors. CleanSweep has a high turnover of staff.
The company buys its computers, office stationery and furniture, cleaning materials, equipment and work clothes for staff, from a variety of different suppliers. It processes its payroll in-house.
The company has recently decided to out-source its marketing to a large, aggressive, third party company that will advertise CleanSweep’s services by means of direct mail, sometimes by offering discounts. This company has been criticised in the past for breaching advertising regulations. There is growing price competition in CleanSweep’s market. CleanSweep is struggling to maintain its profitability and would like to expand its client base.
CleanSweep has three main functions:
human resources;
procurement; and
marketing.

Required
(a) For each of the three main functions at CleanSweep describe the:
(i) risks that you expect the company to face;
(ii) controls you expect to be in place to manage the risks you have identified in (i), above;
(iii) tests of control you should perform to check that the controls you have identified in (ii) above are operating effectively.
Marks will be awarded as follows:
(1) Human resources;
(2) Procurement;
(3) Marketing.
You may present your answer in tabular format, if you wish.
(b) Internal audit also perform other work on behalf of management, such as value for money (VFM) audits, best value audits, financial audits and information technology (IT) audits.
Explain what is meant by each of the above four types of audits

Answer

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Tags: Best Value Audits, Financial Audits, Internal Audit, Internal controls, IT Audits, Risk Identification, Tests of Control, Value for Money Audits
Level: Level 2

Topic: Internal Audits

AAA – L3 – Q5 – Corporate Governance

Identify corporate governance issues at BEM plc and recommend changes to align with good governance principles.

Question

Memo
From: A N Accountant
To: Wickman & Co
Date: November 20X8
Subject: Corporate Governance in BEM plc

As requested, I write to explain where your client BEM plc (BEM) does not appear to be following appropriate corporate governance codes and to recommend changes to ensure that the principles of good corporate governance are being followed.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Audit committee, Board structure, Corporate Governance, Internal controls, Non-executive directors
Level: Level 3

Topic: Regulatory environment

Tag (SQ): Internal controls

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AAA – L3 – Q23 – Audit Planning

Draft presentation sections on audit risk and materiality for Wonderful Stores' tender process.

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.

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.

AA – L2 – Q12 – Internal Audits

Review risks, controls, and tests for HR, procurement, and marketing at a cleaning company; explain types of internal audits.

AAA – L3 – Q5 – Corporate Governance

Identify corporate governance issues at BEM plc and recommend changes to align with good governance principles.

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AAA – L3 – Q23 – Audit Planning

Draft presentation sections on audit risk and materiality for Wonderful Stores' tender process.

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AAA – L3 – Q22 – Planning

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

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AAA – L3 – Q21- Planning

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

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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.

You're reporting an error for "AA – L2 – Q22 – Risk Assessment"

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.

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AA – L2 – Q12 – Internal Audits

Review risks, controls, and tests for HR, procurement, and marketing at a cleaning company; explain types of internal audits.

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AAA – L3 – Q5 – Corporate Governance

Identify corporate governance issues at BEM plc and recommend changes to align with good governance principles.

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