Program: BS (Accounting & Finance) Class/Section: BSAF 5B

Course Name: Auditing Duration: 2 Hours 30 Minutes

Instructor’s Name: M. Amir Total Marks: 40
Course Code: AF3502____ Submission Date & Time: 24 January 2021 / 1:30 pm

IMPORTANT instructions:
 Read all the questions carefully first and then ask for clarifications.
 Assessment related queries will not be entertained after 30 minutes of start of the assessment.
 Marks of each question are mentioned at the end of each question.
 Students are not allowed to use any other email ID other than SZABIST.PK
 Convert the Handwritten file into PDF and submit your answer sheet and question paper
through only in Google Class. Kindly mention Reg no. in File name while saving.
 Assessments submitted on any other medium (including email) other than Google Class will
not be considered.
 All answer sheets (Handwritten) are to be numbered.
 Write Name, Registration number, Class & Section, Course Name, and Date on the assessment
answer sheet.
 This assessment is divided into two sections. Section A will be conducted on google forms
through Google Class. Section A is to be attempted at first and the time to complete Section A
is 50 mins. Section B is comprised of 3 Questions and will be answered by the student on the
answer sheet. Time to complete Section B is 100 mins.
 Section A is of 15 marks whereas Section B is of 25 marks.

SECTION - B
Question 2 (Total 10 m a r k s )

Cosmo is a high-quality, private motor manufacturing company. It operates in many

countries around the world and has expanded steadily from its base in Europe. The
company’s year-end was 30 September 2020.
Overview of company's purchase system is explained below.

Ordering process
Goods or services are obtained by placing a purchase requisition with the centralized
purchasing department. Requisitions are sequentially pre-numbered, and the purchasing
department perform a weekly sequence check. All requisitions must be authorised by an
appropriate manager.
On receipt of a purchase requisition, a purchase officer agrees the manager’s signature to
the signatory list held on file and checks inventory levels where appropriate. Orders are
placed with suppliers using sequentially pre-numbered purchase orders.
Orders can only be placed with suppliers from the approved suppliers list. Suppliers can
only be added to the approved suppliers list by the procurement team once the terms of
the contract have been agreed, and references obtained. Written confirmation is
requested for all orders placed, and the purchase officer agrees the quoted price against
the agreed price list and ensures any bulk discounts to which Murray Co is entitled, have
been honored.

Goods received
Goods are received into the central warehouse. Goods are inspected for condition and
quantity by a warehouse operative, and agreed to the purchase order before the
supplier's delivery note is signed to accept the goods.
A sequentially pre-numbered goods received note (GRN) is prepared by the warehouse
team manager, and grid-stamped. The grid stamp is signed by the warehouse operative
to confirm that the goods have been inspected for condition and quantity and agreed to
the purchase order.
The warehouse manager updates the inventory system on a daily basis from the
prepared GRNs. The warehouse manager checks the sequence of purchase orders
received on a weekly basis and informs the purchasing department of any missing orders
so that they can be followed up.

Invoicing
On receipt of an invoice by the head office accounts team, the invoice is matched to and
filed with the relevant GRN, using the purchase order number marked on the invoice (if
there is no purchase order number marked on the invoice, this must be obtained from the
supplier). The invoice number is noted on the GRN grid stamp. The invoice is also
checked to the original purchase order to ensure the agreed prices and discounts have
been honored.
A monthly check of GRNs is made by the purchases ledger manager, to identify any
GRNs for which no invoice has been received.

Recording
The purchases ledger clerk enters invoices onto the system in batches. A batch control
sheet is used, which details the number of invoices and the total value. These details are
checked to the system batch report.
Each invoice is stamped as "recorded" once the details have been entered onto the
system. The purchase ledger manager inspects the file of invoices on a monthly basis to
ensure that all invoices have been recorded.
Suppliers are required to submit monthly supplier statements, which are reconciled to the
suppliers ledger account by the purchases ledger manager. The purchase ledger is
reconciled to the purchase ledger control account on a monthly basis by the purchase
ledger manager, and reviewed by the company accountant.

Payment
The list of payments is sent to the company accountant, who agrees the details of each
payment to the relevant invoice and signs each invoice to authorize payment and
evidence the check. The list of payments is signed by the accountant once all invoices
have been checked, and sent to the cashier's office for payment.
If any individual payment is for more than $35,000 or total payments are for more than
$350,000 a second signatory is required. These payments must also be checked and
signed by either the financial controller, or finance director.
Payments are made by the cashier's office by bank transfer. Invoices are stamped as
"paid", and returned to the purchases ledger team who record the payment and file the
invoices (separately from invoices not yet paid).
The purchase ledger manager checks GRNs on a monthly basis to ensure that invoices
have been received and paid on a timely basis.

Required:

In respect of the purchase system of Cosmo Co:

(i) Identify and explain FIVE deficiencies. (5 marks)

(ii) Recommend a control to address each of these deficiencies. (5 marks)

Note: Prepare your answer using two columns headed Control Deficiency and Control
Recommendation respectively.

Question 3 (Total 6 marks)

Precor Inc (Precor) is a fitness equipment specialist company and has been trading for
over seven years. The company is funded partially from overdrafts and loans and also by
some financially sound shareholders; the year end is 30 December 2020.
Precor has experienced substantial growth in last few years; however, in the current year
a new competitor, Fitness Inc (Fitness), has entered the market and has gained
significant market share from Precor. One of Precor’s larger customers has stopped
dealing with them and has moved its business to Fitness. In addition, a number of
Precor’s specialist equipment designers have left the company and joined Fitness. Precor
has found it difficult to find suitable replacement due to the level of their skills. Precor has
just received information that its core supplier who supplies the company with specialist
equipment has ceased to trade.
Precor is looking to develop new products. It has approached its shareholders to finance
this development; however, they refused to invest further in Precor. Precor’s loan is long
term and it has repaid all installments on time. The overdraft has increased over the year
and the directors have informed you that the overdraft facility is due for renewal next
month, and they assured that it will be renewed.
The company is seeking new funding through an Initial public offering of shares (i.e.
listing on the stock exchange). In the event that the initial public could not be proceed, this
will require Precor’s existing banking arrangements to be re-negotiated.
The directors have produced a cash flow forecast which shows a significantly worsening
position over the coming 12 months. They are confident with the new products being
developed, and in light of their trading history of significant growth, believe it is
unnecessary to make any disclosures in the financial statements regarding going
concern. As a result of cash shortages in January 2021, a number of suppliers are being
paid late.
At the year end, Precor received notification from one of its customers that the new kind
of equipment installed by Precor for the customers has malfunctioned. Precor has
investigated the problem post year end and found serious flaw in the design of the new
equipment. Resultantly, product work-in-progress is similarly affected and finished goods
inventory should be written down.

Required:
Using the information provided, explain SIX potential indicators that Precor Co is
not a going concern. (6 marks)
Question 4 (Total 9 marks)

Following subsequent events come under review for Radical Co for the year ended 31 Dec 2019.

1) Columbus Ltd, a major customer of Radical Co. became insolvent and was placed into
administration owing $211,000 on 2 January 2020.

2) There was a fire at the premises of the third party warehouse provider, on 5 February 2020,
which destroyed all inventory held there. Approximately one half of Radical Co’s inventory was
stored in these premises. The total value of inventory stored at the premises was $1,054,000.

3) The financial statements include a $40,000 provision for an unfair dismissal case brought by
an ex-employee of Radical Co. On 7 February 2020 a letter was received from the claimant’s
solicitors stating that they would be willing to settle out-of-court for $25,000. It is likely that the
company will agree to this.

Financial Statement Excerpts 31 Dec 2019 31 Dec 2018

$000 $000
Revenue 21,960 19,580
Profit before Tax 1,048 248
Total Assets 9,697 7,288

Required:
For each of the events discuss above:
i) For each event calculate materiality level using all three parameters. (3 marks)
ii) Classify each event as an adjusting or a non-adjusting event. (3 marks)
iii) For each event inform the type of opinion auditor will issue i.e. type of
audit report will be issued. (3 marks)

Note: Materiality benchmarks

 ½ % ─ 1 % of Revenue
 5 % ─ 10 % of Profit before tax
 1 % ─ 2% of Total assets

***Best of Luck***

Faculty signature Moderator’s signature

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