Tag (SQ): Risk Assessment

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  • 20 Marks

AA – L2 – Q37 – Audit of Financial Statements

Describe external auditor's responsibilities and work for going concern assessment. Describe auditor's reports for going concern issues and their circumstances. List considerations for recommending internal controls for cash sales in a garage.

(a) Describe external auditor’s responsibilities and the work that the auditors must perform in relation to an audit client’s ability to continue as a going concern.

(b) Describe the possible auditor’s reports that can be issued where the ability of a company to continue as a going concern status is called into question; your answer should describe the circumstances in which they can be issued.

(c) You have been asked by your client, a garage proprietor, to advise on a system of internal control for cash sales. Set out the points you would take into consideration before giving your recommendations.

 

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  • 30 Marks

AA – L2 – Q23 – Analytical Procedures

Explain when and how analytical procedures are applied per ISA 520. Comment on Zenith Technologies' financial performance for two years using provided data. Identify audit risks from Zenith Technologies' performance and describe audit procedures to address them.

You have been presented with the following draft financial information about Fresca Solutions, a very successful company that develops and licenses specialist computer software and hardware. Its non-current assets mainly consist of property, computer hardware and investments, and there have been additions to these during the year. The company is experiencing increasing competition from rival companies, most of which specialise in hardware or software, but not both. There is pressure to advertise and cut prices.
You are the audit manager. You are planning the audit and are conducting a preliminary analytical review and associated risk analysis for this client for the year ended 31 May 20X8. You have been provided with a summarised draft statement of comprehensive income which has been produced very quickly and certain accounting ratios and percentages. You have been informed that the company accounts for research and development costs in accordance with IAS 38 Intangible Assets.

Statement of comprehensive income

Year ended 31 May
20X7 20X8
€’000 €’000
Revenue 15,206 13,524
Cost of sales 3,009 3,007
Gross profit 12,197 10,517
Distribution costs 3,006 1,996
Administration expenses 994 1,768
Selling expenses 3,002 274
Profit from operations 5,195 6,479
Net interest receivable 995 395
Profit before tax 6,190 6,874
Income tax expense 3,104 1,452
Net profit 3,086 5,422
Retained profits 1,617 3,983
Dividends paid €1,469,000 €1,439,000

Accounting ratios and percentages

Year ended 31 May
20X7 20X8
Earnings per share 0.43 1.04
Performance ratios include the following:
Gross margin 0.80 0.78
Expenses as a percentage of revenue:
Distribution costs 0.20 0.15
Administrative expenses 0.07 0.13
Selling expenses 0.20 0.02
Operating profit 0.34 0.48

Required

(a)  In accordance with ISA 520 Analytical Procedures explain when analytical procedures shall or may be carried out and the nature of such procedures.

(b) Using the information above, comment briefly on the performance of the company for the two years.

(c) Use your answer for part (b) to identify the areas that are subject to increased audit risk and describe the further audit work you would perform in response to those risks.

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  • 15 Marks

AAA – L3 – Q22 – Planning

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

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.

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  • 20 Marks

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.

(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.

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  • 10 Marks

AAA – L3 – Q15 – Practice Management

Advise new auditors on ISOM 1 considerations for accepting a nomination as auditors of a former client’s company.

Kofi Amo and Kwame Osei, who recently qualified as professional accountants, have decided to enter into professional practice under the firm name Amo Osei & Partners. These two were trainee accountants at an audit and assurance firm for three years before qualifying.
For their first engagement, the CEO of Adom Ltd has nominated Amo Osei & Partners for appointment as auditors of his company, though Adom Ltd was a former client of their former firm. Kofi Amo and Kwame Osei were never on the engagement team of Adom Ltd.
As beginners, Kofi Amo and Kwame Osei intend to follow best practice as required by ISOM 1 Quality Management for Firms that Perform Audits or Reviews of Financial Statements or Other Assurance or Related Services. However, they are not clear on the matters they have to consider in their acceptance decision according to the standard. They have approached you, a senior partner of their former firm, for advice.
Required:
Advise Kofi Amo and Kwame Osei on the matters they may have to consider in relation to the acceptance decision on their nomination.

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