3040 22 S2 Practice Mid Semester Test 2 With Solutions 2022 09 07

ACCG 3040 Mid-Semester Practice Exam #2 Solutions
Question 1
You are considering the audit of Better Beauty (BB), a firm specialising in cosmetic surgery with
around ten branches across Australian cities. The CEO of BB is Sid Red, who founded the company
around 15 years ago and still owns the majority of shares. Sid believes that BB has outgrown its
current auditor, who only has offices in Sydney, and is looking for a larger firm as a business partner
as they want to list on the stock exchange in 3-5 years.
Your research on the firm reveals the following:
In recent years, BB has specialised in eye enlargements, referred to as “Anime eyes”. This operation
is heavily promoted by many Instagram influencers and has become extremely fashionable among
14–25-year-olds. It is so popular that 50% deposits (which are refundable) are taken as a booking
fee, which can be up to six months before the operation is carried out.
Sid Red is somewhat of a celebrity, and is often photographed with his luxury cars and yachts. Sid is
also a large donor to the charity “Second Chance”, which helps convicted criminals find jobs after
they have been released from jail. Sid has been quoted as saying “I’m an example of someone who
turned their life around after prison”.
In the last few months BB has hired Clara Kay, an ex-auditor from a Big 4 firm, to lead their finance
team and begin preparations for their listing.
BB was recently the target of a special investigation by a current affairs program. The program
interviewed several of BB’s former clients, who alleged that the operations BB performed left them
with significant health problems, including blindness. The program also featured a senior politician,
who stated that: “better regulation of this industry is coming soon”.
Solution (note other correct answers are possible and would be given marks)
1. Based on the above information, list two factors that are relevant to assessing the integrity
of BB. For each factor explain whether BB seems to have high or low levels of integrity (2
marks)
Adapted from G&S 5.16 (week 2)
a. SR is dominant figure – low
b. SR convicted criminal – low
c. Press coverage – low
d. SR has long history in the industry – high
e. BB has hired Clara Kay – high
f. BB performed questionable cosmetic practices - low
g. Dependent on single source of income - low
1
2. In addition to the facts provided above, state one example of other information you would
obtain in order to evaluate the integrity of BB (1 mark)
a. circumstances of previous auditors
b. Previous auditor’s opinion
c. Whether BB associates with other entities with poor reputation
3. Identify two business risks faced by BB. For each business risk, discuss how it might lead to a
material misstatement of the financial report. (2 marks)
a. Litigation from prior clients – provision for damages
b. Drop in sales due to poor publicity – going concern / incorrect treatment of booking
fee
c. Drop in sales due to changing fashion – going concern going concern / incorrect
treatment of booking fee
d. Higher costs / lower sales due to changes in regulation – lack of provision for costs
4. Identify one factor that would impact preliminary materiality, and explain whether it would
increase or decrease materiality (2 marks)
a. Plans to list – decrease
b. Major shareholder controls the board - decrease
c. Also inherent risks as per Q1
2
Question 2
You are the auditor of Happy Handbags (HH), a handbag manufacturer who uses only non-animal
products and supplies leading department stores in Australia and overseas. HH purchases materials
using the following process:
- The production manager raises a purchase order, which is then sent to the relevant supplier;
- When goods are received, the warehouse manager inspects the goods and only accepts
them (and signs the shipping document) if goods are in good condition;
- When invoices are received from suppliers, they are given a sequential invoice number in
the accounts department;
- Before payment of supplier invoices, the accountant ensures that the invoice amounts and
quantities match the purchase order;
- At the end of each month, the accountant reviews the list of invoices received to identify
any missing items
1/ Identify two controls in the above system. For each control state the relevant assertion, whether
it is preventative or detective, and how you would test the control (3 marks).
Solution
Based on G&S 8.21 / Case 2-1, week 5
Control Assertion Preventative / How test

detective
Goods inspected Occurrence Preventative Examine shipping documents
before acceptance for evidence of signature,
observe inspection taking
place
Supplier invoices given Completeness Detective Review evidence of sequence
sequential number and follow up (e.g. signature,
and follow up documentation)
Matching of invoice Accuracy OR Preventative Review evidence of matching
amount and purchase Occurrence (e.g. signature)
order prior to
payment
3
2/ Identify two weaknesses in the above system and explain the relevant assertion affected (2
marks).
Solution
Control weakness Assertion

Purchase order not Occurrence
authorised
Quantities received Occurrence
are not matched with
quantities ordered
Invoice quantities are Occurrence /
not matched with completeness /
goods received (i.e. accuracy
signed shipping
document)
Part B (3 marks)
Your supervisor tells you that controls testing of HH’s purchases may not be required, because the
internal audit department has already performed this testing. Briefly explain which element of the
COSO framework the internal audit function relates to, and provide two factors you would need to
consider before placing reliance on the work of internal audit. (3 marks)
- Internal audit is a monitoring control because it reviews the operation of the whole system
of internal control (Q2, week 4)
- Adapted from G&S 7.28 (week 5)
o Experience, competence, training of internal audit team
o Independence of IA function
o Quality of documentation
o Etc.

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ACCG 3040 Mid-Semester Practice Exam #2 Solutions

Your research on the firm reveals the following:

Based on G&S 8.21 / Case 2-1, week 5

Control Assertion Preventative / How test

Control weakness Assertion

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