AUDIT AND ASSURANCE (AA)

QUESTION PACK

S. No Syllabus Area Question ACCA Exam Paper

1 Audit Framework and Regulation Ruby Ltd -
2 Audit Framework and Regulation Emerald Ltd -
3 Audit Framework and Regulation Bark Ltd -
3 Planning and Risk Assessment Magpie Co Sep/Dec 2022
4 Planning and Risk Assessment Esk Co Mar/Jun 2022
5 Planning and Risk Assessment Apricot & Co Sep/Dec 2021
6 Planning and Risk Assessment Hart Co Sep/Dec 2020
7 Planning and Risk Assessment Brooklyn & Co Sep/Dec 2019
8 Planning and Risk Assessment Daffodil & Co Mar/Jun 2019
9 Planning and Risk Assessment Earl and Co Sep/Dec 2018
10 Planning and Risk Assessment Loganberry Mar/Jun 2018
11 Planning and Risk Assessment Dower Ltd -
12 Planning and Risk Assessment Head -
13 Planning and Risk Assessment Glass Ltd -
14 Planning and Risk Assessment Recorder -
15 Internal Control Daley Co Sep/Dec 2022
16 Internal Control Whittaker Mar/Jun 2022
17 Internal Control Pomeranian Co Sep/Dec 2021
18 Internal Control Swift Co Sep/Dec 2020
19 Internal Control Amberjack Co Sep/Dec 2019
20 Internal Control Freesia Mar/Jun 2019
21 Internal Control Raspberry Mar/Jun 2018
22 Internal Control Murray Ltd -
23 Internal Control Becker Ltd -
24 Internal Control Nadal Ltd -
25 Internal Control Cherry -
26 Internal Control Knowledge -
27 Audit Evidence Pacific Co Sep/Dec 2022
28 Audit Evidence Spinach Co Mar/Jun 2022
29 Audit Evidence Danube Co Sep/Dec 2021
30 Audit Evidence Sagettarii & Co Sep/Dec 2020
31 Audit Evidence Spadefish & Co Sep/Dec 2019
32 Audit Evidence Hyacinth Co Mar/Jun 2019
33 Audit Evidence Jasmine Co Sep/Dec 2018
34 Audit Evidence Camomile Sep/Dec 2018
35 Audit Evidence Cranberry Mar/Jun 2018
36 Audit Evidence Pearl Ltd -
37 Audit Evidence Tickam Ltd -
38 Audit Evidence Mast Ltd -
39 Review and Reporting Pizza Ltd -
40 Review and Reporting Lesley and Co -
41 Review and Reporting Gavin Ltd -
42 Review and Reporting Bullfinch -

Page 1 of 66
 Ruby Ltd
You are an audit manager at a medium sized firm of accountants. One of the partners has asked for your
help in evaluating a potential new audit client that has recently approached your firm.

You have been presented with the following information about Ruby Ltd;

Ruby Ltd has changed auditors 3 times in the last seven years. The last firm of auditors resigned a few
weeks ago, the reason given by Ruby Ltd was a dispute over fees.

Ruby operates in the diamond trade and has a number of overseas suppliers with whom they have
established long-term relationships.

The managing director of Ruby Ltd has told you that the audit needs to be done quickly in order to
provide audited financial statements for the bank.

Ruby Ltd has applied for a large bank loan and the bank requires the accounts before a final decision
can be made on whether or not to lend the money.

The managing director has also informed you that there is no finance director at present. The last one
left three months ago due to ill health and no replacement has been found as yet.

Two of the audit staff members at your firm have told you that they have family members that work at
Ruby Ltd.

As well as the audit of Ruby Ltd, there is the potential to obtain additional work.
You have been asked to help with maintaining the accounting records and the preparation of the
financial statements as a short term solution to staff shortages currently being experienced by Ruby Ltd.

Ruby Ltd is also asking for some advice on a potential takeover of a rival company.

Required

a) Discuss the difference between a rules based approach and principles-based approach to
setting ethical standards and state which one of these is adopted by the ACCA Code of Ethics.
(6 Marks)

b) Identify and explain the ethical or quality issues relating to the audit of Ruby Ltd and suggest
any relevant safeguards that may be used to address the issues.
(14 Marks)

(Total 20 Marks)

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 Emerald Ltd
Emerald Ltd designs luxury cars. It is not listed and all the shares are owned by 10 private investors, with
no one owning more than a 10% stake.

There are no non-executive directors and the executive directors are all shareholders. The executive
directors are very successful at present, with a "hands on" approach to running the business.

Emerald Ltd wishes to expand and will require finance in order to do so, but the finance director has
recently left the company so any new finance application has been delayed until a replacement has been
found. This is partly due to the reluctance of the bank to lend, based upon unreliable financial
information.

There is an internal audit function that is appointed by, and reports to, the board. The chief internal
auditor is unhappy about the level of support and direction received from the board and has suggested
that an audit committee should be established.

The board is considering this. If an audit committee is set up, the board has suggested that it comprises
3 members, two drawn from the current board and one new, non-executive role.

a) Compare and contrast the roles of internal and external auditors.

(8 marks)
b) Discuss the benefits to Emerald Ltd of establishing an audit committee.
(12 Marks)

(Total 20 Marks)

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 Bark Ltd
a) Describe the situations where an external auditor can, or must, disclose confidential
information about a client.
(8 Marks)

You are the auditor of Bark Ltd and are currently preparing the engagement letter for the year end 31
December 2017.

Bark Ltd has grown rapidly over the last three years and is now one of your biggest clients.

Bark Ltd has been an audit client for the last 8 years and a range of services has been provided for the
whole time, including audit, tax advice and management consultancy.

The audit staff members are the same as in the previous year, apart from two new audit juniors. One has
told you that they used to work for Bark Ltd and the other has told you that their father is the finance
director.

It is tradition for the directors of Bark Ltd to take all of the audit staff out for a meal at the end of the audit
as a" thank you" for all the hard work that is always done by the audit staff.

b) Identify and explain the ethical threats that exist for the audit of Bark Ltd and suggest ways of
safeguarding against these risks.
(12 Marks)

(Total 20 Marks)

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 Magpie Co
This scenario relates to three requirements.

It is 1 July 20X5. You are the audit supervisor at Crow & Co and are finalising the planning for your new
client Magpie Co for the forthcoming audit for the year ending 31 July 20X5.

Magpie Co is a retailer of garden supplies which operates from 20 stores across the country and
employs 400 staff. The audit manager has attended a meeting with the finance director and has provided
you with the following notes of that meeting and financial statement extracts:

Notes of planning meeting

During the year the company spent $0.75m on refurbishing its stores to improve the customer
experience. All of this expenditure has been recognised in the statement of financial position as property,
plant and equipment. In addition, the company also installed a new sales system during the year which
records all sales and receivables. The system enables daily sales from each store to be automatically
reported to the centralised finance department at the end of each working day. As the system is from a
market leading provider, it was not felt necessary to run the old and the new systems in parallel.

Customers are able to pay for their goods using either cash or credit card. At the end of the working day,
the store manager generates a report from each cash register which confirms the cash takings. The cash
is then counted and compared to the report. Since the new sales system was installed, head office now
receives daily cash takings reports which have shown an increasing number of cash shortages at each
store. These differences have not been investigated or reconciled on the basis that they have only been
small amounts.

The company has a number of corporate customers who buy goods on 90 day credit terms and the level
of receivables which are overdue for payment has increased from the prior year. However, the finance
director has said she does not intend to make any further allowance for receivables as overdue
payments are becoming common in the industry.

The payables ledger clerk has carried out supplier statement reconciliations during the year and in a
number of instances the supplier statements have shown a balance owing by the company which is
higher than the balance on the payables ledger. These differences have been included as reconciling
items on the supplier statement reconciliations by the payables ledger clerk, but no further work has
been performed on these differences.

It has been discovered that the soil relating to a batch of plants with a cost price of $0.1m is
contaminated, meaning that the plants may not be able to be sold. Tests are currently being carried out
to determine whether the contamination can be remedied.

The report to management issued following the 20X4 audit indicated a significant number of deficiencies
noted in the payroll cycle of the business.

Financial statement extracts for the year ending 31 July are as follows:

Forecast 20X5 ($m) Actual 20X4 ($m)

Revenue 22 26
Cost of sales (10.9) (14.5)
Gross profit 11.1 11.5
Operating profit 0.4 1.2
Inventory 1.6 1.1
Trade receivables 9.0 7.2
Cash in hand 1.3 4.2
Trade payables 1. 3.2

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 The audit assistant has already calculated some key ratios for Magpie Co which you have confirmed as
accurate.

Gross profit margin 50% 44%

Inventory holding period 54 days 28 days
Receivables collection period 149 days 101 days

Requirements

Part (a)
ISA 210 Agreeing the Terms of Audit Engagements requires auditors to issue an audit engagement
letter.

Explain the PURPOSE of an audit engagement letter and list FOUR items which should be included in
an audit engagement letter. (4 marks)

Part (b)
Using the table below, calculate the following TWO ratios, for BOTH years, to assist you in planning the
audit of Magpie Co: operating profit margin and payables payment period. (2 marks)

Part (c)
Using the information provided and the ratios calculated, describe SEVEN audit risks and explain the
auditor’s response to each risk in planning the audit of Magpie Co. (14 marks)

Page 6 of 66
 Esk Co

This scenario relates to four requirements.

It is 1 July 20X5. You are an audit supervisor with Bannock & Co and are responsible for planning the
audit of a new client, Esk Co, for the year ending 31 August 20X5. Your audit manager recently met with
the finance director of Esk Co and has provided you with the following planning meeting notes and
financial statement extracts:

Planning meeting notes

Esk Co is a manufacturer and wholesaler of plumbing supplies. It operates from two warehouses which
are situated in the north and south of the country. Extracts from the forecast financial statements for the
year ending 31 August 20X5 and the final financial statements for 20X4 are as follows:

Forecast 20X5 ($m) Forecast 20X4 ($m)

Revenue 30.9 27.5
Cost of sales (22.5) (19.9)
Gross profit 8.4 7.6

Inventories 8.3 6.4

Trade receivables 7.2 4.9

Trade payables 2.4 3.5

In September 20X4, Esk Co purchased a patent for $2.6m which gives it the exclusive right to
manufacture a waste disposal system for a four-year period. The purchase cost capitalised comprises
the cost of the patent and other costs such as legal fees and administrative costs incurred in negotiating
the contract. In order to finance this purchase, Esk Co obtained an interest-bearing bank loan of $2.5m
during the year. The bank loan is payable in five equal annual instalments, with the first instalment due to
be paid on 1 September 20X5.

The payables ledger clerk has recently discovered a batch of supplier invoices that had been mis-coded
and therefore had not been recorded as trade payables. This error has now been corrected but
investigations are still ongoing to determine how this happened and whether any other batches of
invoices have been mis-coded.

There was a fire in the south warehouse in June 20X5 which resulted in damaged inventory. An
inventory count immediately following the fire identified that inventory costing $1.1m required to be fully
written off. The damaged inventory has not yet been replaced as there is sufficient inventory in the north
warehouse to satisfy demand. The directors have raised a claim against Esk Co's insurance company to
cover the full extent of the lost inventory. Although no confirmation has been received from the insurance
company, the directors are confident that the full amount

claimed of $1.1m will be received and have included this amount as other receivables within current
assets.

Esk Co's sales staff receive bonuses if they meet sales targets each quarter. A higher level of sales
bonus is available in the quarter to 31 August each year as a reward for efforts during the year as a
whole. Esk Co offers its regular customers discounts of up to 10%, which are negotiated and
documented by the sales director. This year, in order to easily monitor the amount of the customer
discounts, they have been recorded separately as an expense in cost of sales. In previous years,
revenue has been recorded net of the discount.

Page 7 of 66
 The manager in Esk Co's credit control department has been off work since December 20X4 due to ill
health and has been replaced by an inexperienced temporary manager. As a result, Esk Co has not
been monitoring the ageing of its receivables and only follows up on outstanding invoices when the
system alerts credit control that a customer invoice has been outstanding for 90 days or more. The
standard credit terms are 30 days.

During the year, Esk Co was informed by the tax authorities that it was under investigation for a breach
of legislation relating to sales tax. Esk Co has appointed a tax consultant who has advised that there
does appear to have been a breach of tax legislation and has estimated that a fine and penalty totalling
$0.6m will be payable. The directors do not intend to record anything in the financial statements until
final notification is provided by the tax authority, which is due to be received on 31 January 20X6.

Requirements

ISA 210 Agreeing the Terms of Audit Engagements requires an auditor to establish whether the
preconditions for an audit are present prior to accepting an audit engagement.

Part (a)
Describe the PRECONDITIONS for an audit that Bannock & Co should have established prior to
accepting the audit of Esk Co. (4 marks)

Part (b)
Using the table below, calculate the following FOUR ratios, for BOTH years, to assist you in planning the
audit of Esk Co:
• gross profit margin
• inventory holding period
• receivables collection period, and
• payables payment period.

Note: Formulas are not required to be shown. (4 marks)

Part (c)
Using the information provided and the ratios calculated, describe EIGHT audit risks and explain the
auditor's response to each risk, in planning the audit of Esk Co. (16 marks)

Part (d)
Describe substantive procedures the auditor should perform to obtain sufficient and appropriate audit
evidence in relation to Esk Co's trade receivables.

Page 8 of 66
 Apricot & Co

This scenario relates to five requirements.

It is 1 July 20X5. You are an audit supervisor with Apricot & Co and have been assigned to the audit of
Peach Co a soft drinks manufacturer which sells to wholesale customers. You are currently planning the
year-end audit for the year ending 31 August 20X5 and have received the following notes from the audit
engagement partner. Materiality for the draft financial statements has been calculated as $153,000,
which is 5% of profit before tax.

Planning meeting notes

A new accounting system was introduced via direct changeover in March 20X5. It had been successfully
tested prior to its implementation and management had such confidence in the new system that they did
not consider it necessary to undertake further testing after implementation.

Peach Co has been developing a new production process which will help to reduce sugar in its drinks by
50%. Development commenced on 1 November 20X4 and the total amount capitalised was $0.8m. On 1
May 20X5, the food safety authority approved the process and production of the new reduced-sugar soft
drinks commenced.

Peach Co has inventories of high-sugar drinks costing $227,000 which it can no longer sell in its home
market due to a lack of demand. The directors believe Peach Co can sell the remaining inventories to an
international customer at a price that marginally exceeds cost but Peach Co will be responsible for all
costs relating to the delivery and shipping of the drinks.

Peach Co replaced two items of machinery in its production line to accommodate a change in the type of
bottles used. There were significant staff costs involved in preparing the site for the new machinery and
in testing that the new machinery was operating correctly. These costs have been included within the
wages and salaries expense for the period. Despite the old machinery being sold at a significant loss,
during the year the directors of Peach Co decided to extend the useful lives of plant and machinery by
an average of five years.

A member of the finance team was dismissed by Peach Co in May 20X5 after it was discovered that
they had been fraudulently purchasing non-current assets for personal use. Peach Co started to
investigate the fraud at the beginning of June 20X5 by reconciling all physical assets to the non-current
asset register but will not have completed the reconciliation by the year-end date.

Peach Co entered into a contract on 1 May 20X5 with a new supplier of bottles. Peach Co has
committed to a minimum order quantity of 150,000 bottles per month for a period of 12 months
commencing 1 May 20X5. No costs have been accounted for to date as no amounts are payable for the
first six months. Three equal instalments are then payable across the remainder of the contract term.
Peach Co's previous supplier has launched a legal claim against Peach Co for breach of contract,
stating that Peach Co did not have the right to exit the agreement early. Peach Co's lawyers have
indicated that it is likely to lose the case and have estimated the amount payable to be in the region of
$0.3m.

In order to fund the development of the new production process and the purchase of new machinery,
Peach Co obtained an interest-bearing bank loan of $1.2m on 1 March 20X5 repayable over the next
three years in arrears. In order to secure the bank loan, Peach Co agreed to maintain a minimum net
profit margin and meet specific sales targets.

Page 9 of 66
 Requirements

Part (a)
Describe EIGHT audit risks, and explain the auditor's response to each risk, in planning the audit of
Peach Co. (16 marks)

Part (b)
Describe Apricot & Co's responsibilities in relation to the prevention and detection of fraud and error. (4
marks)

Part (c)
Peace Co has been an audit client of Apricot & Co for the last 15 years. The audit staff of Apricot & Co
and the client staff of Peach Co have always enjoyed a mean together at the start Of the final audit. Alan
Edward, the managing director of Peach Co has this year suggested that instead of a meal, all the audit
staff and client staff go away for the weekend to a luxury hotel at Peach Co's expense.

Alan Edward has also suggested that the current year audit fee is renegotiated to be based on a
percentage of Peach Co's net profit for the year.

This year, for the first time, Apricot & Co has been approached by Peach Co to help identify acquisition
targets. Discussions are currently at an early stage and no work has been undertaken at present. The
total fee in relation to the audit and other work would fall within acceptable levels in line with ACCA's
Code of Ethics and Conduct.

(i) Identify and explain TWO ethical threats which may affect the independence of Apricot & Co's audit of
Peach Co; and

(ii) For each threat, recommend an appropriate safeguard to reduce the threat to an acceptable level.

(4 marks)

Part (d)
Describe substantive audit procedures the auditor should perform to obtain sufficient and appropriate
audit evidence in relation to Peach Co's development expenditure. (6 marks)

Page 10 of 66
 Hart Co

This scenario relates to four requirements.

It is 1 July 20X5. You are an audit supervisor with Morph & Co responsible for planning the final audit of
a new client, Hart Co, for the year ending 30 September 20X5. Hart Co specialises in the design and
construction of customised playgrounds. The audit manager recenily met with Hart Co's finance director
and has provided you with the following notes:

Planning meeting notes

Hart Co has a forecast profit before tax of $12.2m (20X4: $9.8m) and total assets are expected to be
$28.5m (20X4: $24.3m). The finance director has indicated that the directors are very pleased with the
forecast performance for the year as the directors are paid a bonus based on a percentage of profit
before tax.

Hart Co is undertaking the construction of playgrounds at 16 sites in various locations across the
country. All playgrounds are constructed io specific customer specifications. Customers pay a 25%
deposit on signing the contract, with the balance payable when control of the playground is transferred to
the customer.

The balance of work in progress (WIP) at 30 June 20X5 is $7.6m in respect of the playgrounds under
construction. A WIP count and valuation will be carried out at all sites on 30 September 20X5.
Arrangements have been made for the audit team to attend only five of the WIP counts. Hart Co offers
its customers a warranty at no extra cost, which guarantees that the playgrounds will function as
expected for a period of three years. The warranty provision for the current year has been calculated as
2% of revenue. In the previous year the warranty was based on 6% of revenue. The finance director has
made this change despite no significant difference in construction techniques or the level of claims in the
year.

Hart Co has incurred expenditure of $1.8m relating to the research and development of a new type of
environmentally-friendly building material. $0.6m of the expenditure to date has been written off to the
statement of profit or loss. The remaining $1.2m has been capitalised as an intangible asset. No
amortisation has been recognised to date as the material has not yet been brought into use.

In June 20X5, the company contracted to purchase new machinery costing $2.4m. It paid $1m on
signing the contract to secure the machinery, which was due to be delivered in July 20X5. Due to a
supplier problem, the delivery is delayed and is now scheduled to be delivered in October 20X5. In order
to finance the research and development costs and the machinery purchase, Hart Co made a rights
issue to existing shareholders at a price of $0.75 for each $0.50 share.

Hart Co's payroll function is outsourced to an external service organisation, Chaz Co, which is
responsible for all elements of payroll processing and maintenance of payroll records.

Hart Co’s directors correctly disclosed their remuneration details in the forecast financial statements in
line with IFRS Standards, however, local legislation in the country in which Hart Co is based, requires
more extensive disclosure. The directors have stated that they consider this onerous and so do not
intend to provide the additional information.

Page 11 of 66
 Requirements

Part (a)
ISA 300 Planning an Audit of Financial Statements provides guidance to assist auditors in planning an
audit.

Explain the benefits of audit planning. (4 marks)

Part (b)
Describe EIGHT audit risks and explain the auditor’s response to each risk in planning the audit of Hart
Co. (16 marks)

Part (c)
Describe substantive procedures the auditor should perform to obtain sufficient and appropriate audit
evidence in relation to Hart Co’s directors’ bonuses. (5 marks)

Part (d)
At the end of the planning meeting, the finance director of Hart Co mentioned to the audit manager that
one of the key reasons Morph & Co was appointed as auditor was because of its knowledge of the
industry. There were some concerns however, as to how Morph & Co would keep information obtained
during the audit confidential as it audits three other construction companies specialising in
environmentally- friendly building materials, including Hart Co’s main competitor.

Explain the safeguards which Morph & Co should implement to ensure that this conflict of
interest is appropriately managed. (5 marks)

Page 12 of 66
 Brooklyn & Co

It is 1 July 20X5. You are an audit supervisor of Brooklyn & Co and are planning the audit of Harlem Co
for the year ending 30 September 20X5. The company has been a client of your firm for several years
and manufactures car tyres, selling its products to wholesalers and retailers. The audit manager
attended a planning meeting with the finance director and has provided you with the following notes of
the meeting and financial statement extracts:

Planning meeting notes

Harlem Co sells approximately 40% of its tyres to wholesale customers. These customers purchase
goods on a sale or return basis. Under the terms of the agreement, wholesale customers have 60 days
during which any returns can be made without penalty. The finance director has historically assumed a
return rate of 10%, however, he now feels that this is excessive and intends to change this to 5%.

The company purchased a patent on 30 September 20X4 for $800,000, which was capitalised in the
prior year as an intangible asset. This patent gives Harlem Co the exclusive right to manufacture
specialised wet weather tyres for four years. In preparation for the manufacture of the wet weather tyres,
this year the company conducted a review of its plant and machinery. As part of this review, surplus
items of plant and machinery were sold, resulting in a loss on disposal of $160,000.

In May 20X5, the financial controller of Harlem Co was dismissed after it was alleged that she had
carried out a number of fraudulent transactions against the company. She has threatened to sue the
company for unfair dismissal as she disputes the allegations. The company has only recently started to
investigate the extent of the fraud in order to quantify the required adjustment.

A problem occurred in June 20X5, during production of a significant batch of tyres, which affected their
quality. The issue was identified prior to any goods being dispatched and management is investigating
whether the issues can be rectified and the tyres can subsequently be sold.

Harlem Co’s finance director has informed you that in March 20X5 a significant customer was granted a
payment break of six months, as it has been experiencing financial difficulties. Harlem Co maintains an
allowance for trade receivables and it is anticipated that this will remain at the same level as the prior
year.

The report to management issued by Brooklyn & Co following last year’s audit highlighted significant
deficiencies relating to Harlem Co’s purchases cycle.

The finance director has informed you that the company intends to restructure its debt finance after the
year end and will be looking to consolidate its loans to reduce the overall cost of borrowing. As a result of
the planned restructuring of debt, Harlem Co has not paid its shareholders a dividend this year, choosing
instead to undertake a bonus issue of its $0.50 equity shares.

You have been asked by the audit manager to complete the preliminary analytical review and she has
provided you with the following information:

Financial statement extracts for year ending 30 September

Forecast Actual
20X5 20X4
$'000 $'000
Revenue 23,200 21,900
Cost of sales (18,700) (17,300)
Gross profit 4,500 4,600

Page 13 of 66
 Finance costs 290 250
Profit before tax 450 850

Intangible asset 800 800

Inventory 2,100 1,600

Long and short-term borrowings 13,000 11,000

Total equity 10,000 9,500

The audit assistant has already calculated some key ratios for Harlem Co which you have confirmed as
accurate. She has ascertained that the trade receivables collection period has increased from 38 to 51
days.

Required:

(a) Describe the auditor’s responsibilities in relation to the prevention and detection of fraud
and error.

(4 marks)

(b) Calculate the following FOUR ratios for BOTH years, to assist you in planning the audit of
Harlem Co:

1. Gross profit margin

2. Inventory holding period
3. Gearing
4. Interest cover

Note: Formulas are NOT required to be shown.

(4 marks)

(c) Using the information provided and the ratios calculated, describe EIGHT audit risks and
explain the auditor’s response to each risk in planning the audit of Harlem Co.

(16 marks)

(d) Describe substantive procedures the auditor should perform to obtain sufficient and
appropriate audit evidence in relation to the VALUATION of trade receivables in the current
year.

(3 marks)

(e) Describe substantive procedures the auditor should perform to obtain sufficient and
appropriate audit evidence in relation to the DISPOSAL of plant and machinery in the current
year.

(3 marks)

(Total: 30 marks)

Page 14 of 66
 Daffodil & Co
Part (a)

Define and explain materiality and performance materiality.

(4 marks)

You are an audit supervisor of Daffodil & Co and are planning the audit of Peony Co for the year ending
31 May 20X9. The company is a food retailer with a large network of stores across the country and four
warehouses. The company has been a client of your firm for several years and the forecast profit before
tax is $28·9m. The audit manager has attended a planning meeting with the finance director and has
provided you with the following notes of the meeting.

Planning meeting notes

Peony Co has an internal audit (IA) department which undertakes controls testing across the network of
stores. Each store is visited at least once every 18 months. The audit manager has discussed with the
finance director that the external audit team may rely on the controls testing which is undertaken by IA.

During the meeting, the finance director provided some forecast financial information. Revenue for the
year is expected to increase by 3% as compared to 20X8; the gross margin is expected to increase from
56% to 60%; and the operating margin is predicted to decrease from 21% to 18%.

Peony Co values inventory in line with industry practice, which is to use selling price less average profit
margin. The directors consider this to be a close approximation to cost.

The company does not undertake a full year-end inventory count and instead undertakes monthly
perpetual inventory counts, each of which covers one-twelfth of all lines in stores and the warehouses.
As part of the interim audit which was completed in January, an audit junior attended a perpetual
inventory count at one of the warehouses and noted that there were a large number of exceptions where
the inventory records showed a higher quantity than the physical inventory which was present in the
warehouse. When discussing these exceptions with the financial controller, the audit junior was informed
that this had been a recurring issue.

During the year, IA performed a review of the non-current assets physically present in around one-third
of the company’s stores. A number of assets which had not been fully depreciated were identified as
obsolete by this review.

The company launched a significant TV advertising campaign in January 20X9 in order to increase
revenue. The directors have indicated that at the year end a current asset of $0·7m will be recognised,
as they believe that the advertisements will help to boost future sales in the next 12 months. The last
advertisement will be shown on TV in early May 20X9.

Peony Co decided to outsource its payroll function to an external service organisation. This service
organisation handles all elements of the payroll cycle and sends monthly reports to Peony Co which
detail wages and salaries and statutory obligations. Peony Co maintained its own payroll records until 31
December 20X8, at which point the records were transferred to the service organisation.

Peony Co is planning to expand the company by opening three new stores during July 20X9 and in order
to finance this, in March 20X9 the company obtained a $3m bank loan. This is repayable in arrears over
five years in quarterly instalments. In preparation for the expansion, the company is looking to streamline
operations in the warehouses and is planning to make approximately 60 employees redundant after the
year end. No decision has been made as to when this will be announced, but it is likely to be in May
20X9.

Page 15 of 66
 Required:

(b) Describe EIGHT audit risks and explain the auditor’s response to each risk in planning the
audit of Peony Co.

Note: Prepare your answer using two columns headed Audit risk and Auditor’s response
respectively.
(16 marks)

(20 marks)

Page 16 of 66
 Earl & Co

You are an audit supervisor of Earl & Co and are planning the audit of Darjeeling Co for the year ending
30 September 20X8. The company develops and manufactures specialist paint products and has been a
client of your firm for several years. The audit manager has attended a planning meeting with the finance
director and has provided you with the following notes of the meeting and financial statement extracts.
You have been asked by the audit manager to undertake preliminary analytical procedures using the
financial statement extracts.

Planning meeting notes

During the year Darjeeling Co has spent $0·9m, which is included within intangible assets, on the
development of new product lines, some of which are in the early stages of their development cycle.
Additionally, as the company is looking to expand production, during the year it purchased and installed
a new manufacturing line. All costs, incurred in the purchase and installation of that asset, have been
included within property, plant and equipment. These capitalised costs include the purchase price of
$2·2m, installation costs of $0·4m and a five-year servicing and maintenance plan costing $0·5m. In
order to finance the development projects and the new manufacturing line, the company borrowed $4m
from the bank which is to be repaid in instalments over eight years and has an interest rate of 5%.
Developing new products and expanding production is important as the company intends to undertake a
stock exchange listing in the next 12 months.

The company started a number of initiatives during the year in order to boost revenue. It offered
extended credit terms to its customers on the condition that their sales order quantities were increased.
In addition, Darjeeling Co made an announcement in October 20X7 of its ‘price promise’: that it would
match the prices of any competitor for similar products purchased. Customers who are able to prove that
they could purchase the products cheaper elsewhere are asked to claim the difference from Darjeeling
Co, within one month of the date of purchase of goods, via its website. The company intends to include a
refund liability of $0·25m, which is based on the monthly level of claims to date, in the draft financial
statements.

The finance director informed the audit manager that a problem arose in June 20X8 in relation to the
mixing of materials within the production process for one particular product line. A number of these faulty
paint products had already been sold and the issue was identified following a number of complaints from
customers about the paint consistency being incorrect. As a precaution, further sales have been stopped
and a product recall has been initiated for any of these specific paint products sold since June.
Management is investigating whether the paint consistency of the faulty products can be rectified and
subsequently sold.

Financial statement extracts for year ending 30 September

Forecast Actual
20X8 20X7
$’000 $’000
Revenue 19,850 16,990
Cost of sales (12,440) (10,800)
––––––– –––––––
Gross profit 7,410 6,190
––––––– –––––––
Inventory 1,850 1,330
Trade receivables 2,750 1,780
Bank (810) 560
Trade payables 1,970 1,190

Page 17 of 66
 Required:

(a) Explain why analytical procedures are used during THREE stages of an audit.
(3 marks)

(b) Calculate THREE ratios, for BOTH years, which would assist you in planning the audit of
Darjeeling Co.
(3 marks)

(c) Using the information provided and the ratios calculated, describe EIGHT audit risks and
explain the auditor’s response to each risk in planning the audit of Darjeeling Co.

Note: Prepare your answer using two columns headed Audit risk and Auditor’s response
respectively.
(16 marks)

(d) Describe substantive procedures the auditor should perform in relation to the faulty paint
products held in inventory at the year end.
(3 marks)

(e) Describe substantive procedures the auditor should perform to obtain sufficient and
appropriate evidence in relation to Darjeeling Co’s revenue.
(5 marks)
(30 marks)

Page 18 of 66
 Loganberry
You are an audit senior of Loganberry & Co and are planning the audit of Blackberry Co for the year
ending 31 March 20X8. The company is a manufacturer of portable music players and your audit
manager has already had a planning meeting with the finance director. Forecast revenue is $68.6m and
profit before tax is $4.2m.

She has provided you with the following notes of the meeting:

Planning meeting notes

Inventory is valued at the lower of cost and net realisable value. Cost is made up of the purchase price of
raw materials and costs of conversion, including labour, production and general overheads. Inventory is
held in three warehouses across the country. The company plans to conduct full inventory counts at the
warehouses on 2, 3 and 4 April, and any necessary adjustments will be made to reflect post year-end
movements of inventory. The internal audit team will attend the counts.

During the year, Blackberry Co paid $1.1m to purchase a patent which allows the company the exclusive
right for three years to customise their portable music players to gain a competitive advantage in their
industry. The $1.1m has been expensed in the current year statement of profit or loss. In order to finance
this purchase, Blackberry Co raised $1.2m through issuing shares at a premium.

In November 20X7, it was discovered that a significant teeming and lading fraud had been carried out by
four members of the sales ledger department who had colluded. They had stolen funds from wholesale
customer receipts and then to cover this, they allocated later customer receipts against the older
receivables. These employees were all reported to the police and subsequently dismissed. As a result of
the vacancies in the sales ledger department, Blackberry Co decided to outsource its sales ledger
processing to an external service organisation. This service organisation handles all elements of the
sales ledger cycle, including sales invoicing and chasing of receivables balances and sends monthly
reports to Blackberry Co detailing the sales and receivable amounts. Blackberry Co ran its own sales
ledger until 31 January 20X8, at which point the records were transferred to the service organisation.

In December 20X7, the financial accountant of Blackberry Co was dismissed. He had been employed by
the company for nine years, and he has threatened to sue the company for unfair dismissal. As a result
of this dismissal, and until his replacement commences work in April, the financial accountant’s
responsibilities have been adequately allocated to other members of the finance department. However,
for this period no supplier statement reconciliations or purchase ledger control account reconciliations
have been performed.

In January 20X7, a receivable balance of $0.9m was written off by Blackberry Co as it was deemed
irrecoverable as the customer had declared itself bankrupt. In February 20X8, the liquidators handling
the bankruptcy of the company publicly announced that it was likely that most of its creditors would
receive a pay-out of 40% of the balance owed. As a result, Blackberry Co has included a current asset of
$360,000 within the statement of financial position and other income in the statement of profit or loss.

Page 19 of 66
 Required:
(a) Describe Loganberry & Co’s responsibilities in relation to the prevention and detection of
fraud and error.
(4 marks)

(b) Describe EIGHT audit risks and explain the auditor’s response to each risk in planning the
audit of Blackberry Co.

Note: Prepare your answer using two columns headed Audit risk and Auditor’s response
respectively.
(16 marks)

(20 marks)

Page 20 of 66
 Dower Ltd
a) Explain FOUR reasons why auditors plan their work.
(5 Marks)

b) Explain what analytical procedures are and give THREE examples of how they could be used
at the planning stage of an audit.
(5 Marks)

Dower Ltd is a builder merchant, selling largely to trade customers in the north of England and has been
an audit client of your firm for the past 5 years. You have been asked to help plan this year's audit and
have discovered the following:

Dower Ltd has installed a new computer system during the year in order to deal with the increased
volume of transactions. They also completed the construction of an extension to the existing warehouse
that will double the storage capacity. This was required due to the rapid expansion that is being
experienced due to an upturn in the building trade. Dower Ltd have recently applied for a bank loan to
help with further expansion, but the bank require audited financial statements to be available before they
will make a decision on the extra funding.

The directors of Dower Ltd are all paid a bonus that is based upon the sales volumes achieved during
the year. This year sales volume has increased by 30% and will result in a record bonus being paid. A
large amount of the business carried out by Dower Ltd is cash based, due to the fact that lots of
customers run very small businesses and prefer to deal in cash. Dower Ltd has a fleet of delivery vans
that are quite old and need replacing but, due to all spare cash being spent on the building extension,
the vans will not be replaced for the next two years at least.

Dower Ltd is being sued by a customer, who claims that they were injured by a ladder that fell on them
whilst they were buying goods at the warehouse just before the end of the year. As well as a large
number of cash customers, Dower Ltd has some big account customers who are given 30 days credit.
Traditionally, all have paid on time but this year some customers have begun to pay late.

c) From the above information, identify and explain the inherent risk factors that are relevant for
Dower Ltd.
(10 marks)

d) Briefly describe Detection Risk and explain THREE ways in which it would be possible to
DECREASE detection risk, giving an example of each one that could be relevant for Dower Ltd.
(7 Marks)

e) Briefly explain the difference between quantitative and qualitative materiality.

(3 Marks)

(Total 30 Marks)

Page 21 of 66
 Head
a) Explain the three elements of audit risk that comprise overall audit risk.
(6 Marks)

Head is a charitable organisation that was established in 1975. Its main aim is to help children form
under privileged backgrounds take part in a range of sporting activities.

The charity is run under strict guidelines, including a stipulation that expenditure cannot be more than
20% of income each year.
Income is all form voluntary donations and comes from three major sources;

- Cash collected by volunteers in major shopping complexes.

- Cheques sent in to the head office.

- Donations from wealthy individuals who often stipulate how the money can be spent.

The taxation of charities in this jurisdiction are complex with only certain expenses being allowable for
tax purposes and specific rules relating to the difference between capital and revenue expenditure.

b) Identify and explain the inherent risk factors that relate to Head and the effect that these will
have on the audit approach.
(16 Marks)

c) Explain why Head may have a weak control environment.

(8 Marks)

(Total 30 Marks)

Page 22 of 66
 Glass Ltd
a) List the purposes of working papers.
(3 Marks)

You have just been promoted to the role of audit manager and, as part of your new responsibilities; you
are in charge of the audit of Glass Ltd. Glass Ltd is an opticians with 50 stores located all across the UK.

b) List the documentation that would be useful to you in familiarising yourself with all aspects of
Glass Ltd and explain briefly what you expect each document to tell you.
(8 Marks)

You are now approaching the end of the audit, so you are in the process of reviewing the audit working
papers. You are currently reviewing the working paper below;

Client name: Glass Ltd

Year end: 31 Dec

Prepared by:
Reviewed by: WT

Assertion: The purchase day book is correct.

Method: 15 purchase orders were selected and details were traced to goods received notes, purchase
invoices and the purchase day book.

The sample was selected from a numerically sequenced purchase order system. Details of the specific
items selected are on a separate schedule.

Results: Details for 5 orders could not be found. This turned out to be because these orders were
cancelled.

Conclusion: All purchase orders are recorded correctly.

c) Identify and explain the weaknesses in the above working paper.

(9 Marks)

(Total 20 Marks)

Page 23 of 66
 Recorder
Recorder Communications Co (Recorder) is a large mobile phone company which operates a network of
stores in countries across Europe. The company’s year end is 30 June 2014. You are the audit senior of
Piano & Co. Recorder is a new client and you are currently planning the audit with the audit manager.
You have been provided with the following planning notes from the audit partner following his meeting
with the finance director.

Recorder purchases goods from a supplier in South Asia and these goods are shipped to the company’s
central warehouse. The goods are usually in transit for two weeks and the company correctly records the
goods when received. Recorder does not undertake a year-end inventory count, but carries out monthly
continuous (perpetual) inventory counts and any errors identified are adjusted in the inventory system for
that month.

During the year the company introduced a bonus based on sales for its sales persons. The bonus target
was based on increasing the number of customers signing up for 24-month phone line contracts. This
has been successful and revenue has increased by 15%, especially in the last few months of the year.
The level of receivables is considerably higher than last year and there are concerns about the
creditworthiness of some customers.

Recorder has a policy of revaluing its land and buildings and this year has updated the valuations of all
land and buildings.

During the year the directors have each been paid a significant bonus, and they have included this within
wages and salaries. Separate disclosure of the bonus is required by local legislation.

Required:

(a) Describe FIVE audit risks, and explain the auditor’s response to each risk, in planning the
audit of Recorder Communications Co.
(10 marks)
(b) Explain the audit procedures you should perform in order to place reliance on the continuous
(perpetual) counts for year-end inventory.
(3 marks)
(c) Describe substantive procedures you should perform to confirm the directors’ bonus
payments included in the financial statements.
(3 marks)

The finance director of Recorder informed the audit partner that the reason for appointing Piano & Co as
auditors was because they audit other mobile phone companies, including Recorder’s main competitor.
The finance director has asked how Piano & Co keeps information obtained during the audit confidential.

Required:

(d) Explain the safeguards which your firm should implement to ensure that this conflict of
interest is properly managed.
(4 marks)
(20 marks)

Page 24 of 66
 Daley Co

This scenario relates to six requirements.

It is 1 July 20X5. Daley Co, a listed company, manufactures double glazed windows and doors. The
company's year end is 30 September 20X5. You are an audit supervisor with Cooper & Co and you are
in the process of reviewing the following extracts from the internal controls documentation in preparation
for the forthcoming audit:

Payroll
The company employs 210 staff in its factory who are paid on a weekly basis by bank transfer. Factory
staff have key cards and are required to swipe in and out at the beginning and end of their shift. This
process is supervised. Hours worked by employees are recorded electronically using the key card
system which is linked to the payroll system. Each week the hours worked are automatically transferred
to the payroll system. As the process is automated, no checks over this transfer are performed.

The payroll is run on a weekly basis and the system automatically calculates the wages to be paid. On a
sample basis, a payroll clerk checks gross to net pay calculations and compares these to the system-
generated balances to ensure the accuracy of the payroll system. If any changes to the payroll data are
required, the payroll clerk makes the amendment. An edit report of any amendments is produced weekly
by the system but is not reviewed.

Non-current assets
Daley Co has a head office and ten factories, with a warehouse included at each factory. The company
has an internal audit (IA) department which carries out a comparison between all of the assets recorded
on the non-current assets register to those physically present in each of Daley Co's 21 sites. This year's
programme of visits, which has been planned and carried out on the same basis as previous years,
means that by 30 September 20X5, IA will only have completed this comparison at one factory and one
warehouse.

During the year, the financial controller changed the company’s capitalisation accounting policy. In
accordance with the revised policy, only items of a capital nature exceeding $20,000 are accounted for
as additions to non-current assets in the statement of financial position. Any non-current assets
purchased below $20,000 are written off to the statement of profit or loss as an expense.

Bank and cash

On a weekly basis, a bank payments list is generated for supplier payments. The finance director
reviews the total amount of the bank payments list and authorises it. She then passes it to the financial
controller who processes it for payment.

Daley Co incurs a lot of petty cash expenditure and the finance department maintains a petty cash float
of $500 which is kept in the safe. It is used for making any sundry purchases by the company. When
staff wish to purchase sundry items, the required sum of cash is given to the staff member who signs for
it. The staff member is required to return any excess money to the finance department but there is
currently no requirement for receipts to be provided.

The cashier reconciles the main current account on a monthly basis as this contains the highest levels of
activity and reconciles the remaining three bank accounts every three months. The reconciliations are
reviewed by the finance director who evidences this review.

Page 25 of 66
 Requirements

Part (a)
ISA 315 (Revised 2019) Identifying and Assessing the Risks of Material Misstatement states that an
entity's system of internal control consists of five components: control environment, the entity's risk
assessment process, the entity's process to monitor the system of internal control, the information
system and communication and control activities.

Using the table below, describe the five components of an entity's system of internal control.

Note: You do not need to refer to the scenario to answer this requirement. (5 marks)

Part (b)
In respect of the system of internal control of Daley Co:
(i) Identify and explain FIVE deficiencies;
(ii) Recommend a control to address each of these deficiencies; and
(iii) Describe a TEST OF CONTROL the external auditors should perform to assess if each of these
controls, if implemented, is operating effectively.

Note: The total marks will be split equally between each part. (15 marks)

Part (c)
Describe substantive procedures the auditor should perform to obtain sufficient and appropriate audit
evidence in relation to Daley Co's bank balances. (4 marks)

Part (d)
During the year, the Chair of Daley Co resigned due to his other commitments and Fred Johnson, who is
the chief executive of the company, took over this role. Fred has recently written to all shareholders to
inform them that any questions or comments they may have could only be raised at the company’s
annual general meeting and that any other communication with the board is not possible.

The executive directors' remuneration is set by the remuneration committee. The non-executive
directors’ remuneration is set by the board and is based on pre-tax profit targets which are agreed by the
board at the start of each financial year. As the board is of the view that the internal control environment
is very effective, an audit committee has not been established.

Describe THREE corporate governance deficiencies faced by Daley Co and provide a

recommendation to address each deficiency to ensure compliance with corporate governance
principles. (6 marks)

Page 26 of 66
 Whittaker

This scenario relates to four requirements.

It is 1 July 20X5. You are an audit supervisor with Walsh & Co. You are currently reviewing notes in
relation to the internal controls in place at your client, Whittaker Co. Whittaker Co manufactures and sells
luxury bed linen wholesale to the hotel trade and direct to the public from its factory store. It has a year
ending 31 August 20X5.

Sales
Whittaker Co implemented a new sales system in May 20X5. The new system was fully tested prior to its
implementation and will be run in parallel with the old system until the year end. Whittaker Co's internal
audit (IA) department is responsible for comparing the output from the old and new systems,
investigating any discrepancies and making recommendations for further action.

The company operates a fully automated credit check process for all its new hotel customers. The
automated system generates a credit limit for each new customer which the sales director approves
before the customer can place any orders. She evidences her approval in the system.

On a monthly basis, the receivables ledger clerk downloads the aged receivables report and reviews it
for outstanding debts. In line with Whittaker Co's credit control policy, any debts which are greater than
30 days overdue are then passed to the credit control department which contacts the customers to
resolve any issues and recover the debt. Also on a monthly basis, the accounts clerk reconciles the
receivables ledger control account to the receivables ledger in order to verify the month end receivables
balance. Any reconciling items are documented, errors are corrected on a timely basis and then the
reconciliations are reviewed and approved by the financial controller.

Payroll
Whittaker Co has a human resources (HR) department which is responsible for processing joiners and
leavers, including preparing and sending authorised joiners forms to the payroll department so that new
employees can be set up correctly on the payroll system. However, when additional staff are required at
short notice, joiners forms are not completed and instead, the production supervisor notifies the payroll
department by email on the day they commence employment.

Staff are required to work overtime on a regular basis in order to meet production targets. Overtime is
paid monthly in arrears, at the end of the month in which it is worked. All overtime reports are reviewed
on a quarterly basis by the production supervisor after the overtime has been paid. Reviews of overtime
reports are evidenced by signature of the production director.

The payroll system automatically calculates wages and deductions for all employees based on standing
data. The standing data is reviewed regularly to ensure it is still accurate however no checks are
performed on the monthly payroll calculations.

In May each year, all employees receive a bonus, the amount of which varies depending upon their
performance. The payroll department receives written notification from the HR manager of the bonus,
based only on his view of the employees' performance in the year. The bonuses for 20X5 were input into
the payroll system by the payroll clerk. After May's payroll had been processed, a small number of
employees notified the payroll department that the bonus they had been paid did not agree to their
bonus confirmation letter. This was corrected in June 20X5.

Bank
Whittaker Co uses an internet banking system which requires a two-step verification process. A
password is required to log on to the system. An additional passcode is then required to set up new
payees or to withdraw funds. The login details including the password and the passcode are saved in a
shared file which is accessible to all payables ledger staff in the accounts department.

Page 27 of 66
 The accounts clerk undertakes the bank reconciliations on a weekly basis. The reconciling items are
documented and sent to the financial controller for review. The financial controller only investigates the
reconciling items if the sum of these items is significant.

Auditors are required, under ISA 265 Communicating Deficiencies in Internal Control to Those Charged
with Governance and Management, to communicate in writing to those charged with governance any
significant deficiencies in internal control.

Requirements

Part (a)
Describe FOUR matters the auditor may consider in determining whether a deficiency in internal control
is significant. (4 marks)

Note: You do not need to refer to the scenario to answer this requirement.

Part (b)
In respect of the SALES system of Whittaker Co:

(i) Identify and explain THREE DIRECT CONTROLS on which the auditor may seek to place reliance;
and

(ii) Describe a TEST OF CONTROL the auditor should perform to assess if each of these direct
controls is operating effectively.

Note: The marks will be split equally between each part. (6 marks)

Part (c)
Identify and explain FIVE DEFICIENCIES in Whittaker Co’s PAYROLL and BANK systems and provide a
control recommendation to address each of these deficiencies. (10 marks)

Page 28 of 66
 Pomeranian Co

This scenario relates to two requirements.

It is 1 July 20X5. Pomeranian Co is a manufacturer of fizzy drinks and operates across the county. The
company's year end is 30 September 20X. You are an audit supervisor with Poodle & Co and you are
reviewing extracts from the internal controls documentation in preparation for the forthcoming audit.

Sales

All new customers of Pomeranian Co are required to pass suitable credit checks. Upon passing the
credit check, customers are set up in the receivables ledger master file and a credit limit is set by the
sales director. The credit limits are only then changed when a customer requests an increase.

Customer orders are processed by Pomeranian Co's sales ordering department and goods are
dispatched from one of the company's warehouses. Sequentially numbered multi-part goods dispatched
notes (GDNs) are completed and a copy is filed in the warehouse when the goods are dispatched.
Copies of the GDNs are sent to the sales ordering department and the finance department on a weekly
basis.

Pomeranian Co's credit controller is currently on maternity leave for six months and no one has taken
over her duties. As part of the month-end procedures, a clear reconciles the receivables ledger control
account to the receivables ledger, and the reconciliations are only reviewed by the financial controller if
there are any unreconciled differences.

Non-current assets

An annual capital expenditure budget is set for each department within Pomeranian Co and is referred to
as part of the approval process. Board approval is required for any capital items costing more than
$0.5m. Capital expenditure below this level can be authorised by the relevant head of department.

Pomeranian Co has head office and five factories, each of which includes a warehouse. The company
has an internal audit (IA) department which is required, over a three-year cycle, to carry out a
comparison between all the assets recorded on the non-current assets register to those physically
present in each of the company's 11 sites. The programme of visits for the current year means that by
the year end,, IA will only have completed this comparison at one factory and one warehouse.

Purchase and inventory

Pomeranian Co maintains a perpetual inventory system in which finished goods and raw materials,
stored in the warehouses, are counted monthly throughout the year rather than just being counted at the
year end. Each of the five warehouse managers are responsible for supervising the inventory counts at
their sites and ensuring that the counting teams are following the issued instructions.

The company calculates the cost of its inventory using standard costs, both for internal management
reporting and for inclusion in the year-end financial statements. The basis of the standard costs was
reviewed by the production department approximately two years ago.

The company has a central purchasing department which is based at its head office. All members of this
department have full access to the supplier master file data and a monthly exception report of any
changes to master file data is automatically generated and then filed by a purchasing clerk.

Sequentially numbered goods received notes (GRNs) are produced by the warehouse department when
goods are received, a copy of which is promptly sent to the purchasing and finance departments. On
receipt of the purchase invoices, the finance clerk matches the invoices to the relevant purchase order
and then passes the documents to the finance director for authorisation prior to input.

Page 29 of 66
 Requirements

Part (a)
In order to obtain sufficient appropriate audit evidence, and auditor cannot place complete reliance on an
entity's system of internal control. In addition to performing tests of controls, auditors must always
perform some substantive procedures due to the limitations of internal control.

Describe the LIMITATIONS of internal control. (4 marks)

Note: You do not need to refer to the scenario to answer this requirement.

Part (b)
Identify and explain EIGHT deficiencies in Pomeranian Co's internal controls and provide a control
recommendation to address each of these deficiencies. (16 marks)

Page 30 of 66
 Swift Co

This scenario relates to four requirements.

It is 1 July 20X5. Swift Co prints books which it sells online and supplies to retailers across the country.
The company’s year-end is 30 September 20X5. You are an audit supervisor with Toucan & Co,
preparing the draft audit programmes and reviewing the internal controls documentation in preparation
for the interim audit.

Payroll
Swift Co employs factory staff who are required to work a standard shift of eight hours per day. No staff
members are required to work overtime. All staff members are paid monthly by bank transfer. The
company has a human resources (HR) department which is responsible for setting up all new joiners and
a payroll department which processes wages and salaries.

When a new employee joins the company, HR completes a joiners’ form which includes a unique
employee number for each new employee. The joiners’ jorm is then seni to the payroll department so
that the new employee can be set up for payment. The unigue employee number must be entered into
the payrall system before the employee can be added to payroll. On a monthly basis, an exception report
relating to changes to the payroll standing data is produced and reviewed by the payroll manager whe
evidences this review.

Employee hours worked and their hourly wage rates are preset into the system, which automatically
calculates the gross and net pay along with relevant deductions and generates employee payslips. The
payroll supervisor selects a sample of the payslips, re-performs the gross to net pay calculations and
investigates any discrepancies. The sampled payslips are then signed as evidence of this review.

Purchases
The company has a purchasing department based at its head office. When raw materials are required,
the production supervisors submit a requisition form to the purchasing department. A multi-part purchase
order is generated and the purchasing manager authorises all orders up to $5,000. Orders over $5,000
are authorised by the purchasing director.

The warehouse team processes goods received from suppliers. They agree the goods received to the
purchase order and check the quantity and the quality of the goods. On completion of those checks a
goods received note (GRN) is produced. One copy of the GRN is then signed and filed in the
warehouse. Another copy of the GRN is sent to the finance department.

A payables ledger clerk logs the purchase invoices in batches of 20 into the purchase day book utilising
control totals. A batch control sheet is completed for each set of 20 invoices and the clerk signs to
evidence the checks undertaken.

Supplier statement reconciliations are periormed on a monthly basis. All differences are fully
investigated, and the financial controller reviews these reconciliations. Invoices are paid in accordance
with the supplier's credit terms. The finance director authorises the bank transfer payment list for
suppliers having first agreed the amounts to be paid to supporting documentation and having reviewed
the list for duplicate payments.

Page 31 of 66
 Requirements

Part (a)
Auditors are required to document a company’s accounting and internal control systems as part of their
audit process. Three methods available for documenting internal control systems are narrative notes,
flowcharts and questionnaires.

For each of the THREE methods identified in the table: (6 marks)

(i) Describe the method for documenting internal control systems; and

(ii) Explain an ADVANTAGE of using this method.

Part (b)
In respect of the internal control system of Swift Co: (14 marks)

(i) Identify and explain SEVEN KEY CONTROLS which the auditor may seek to place reliance on;
and

(ii) Describe a TEST OF CONTROL the auditor should perform to assess if each of these key controls
is operating effectively.

Note: The marks will be split equally between each part.

Page 32 of 66
 Amberjack Co

Amberjack Co manufactures and distributes car tyres to a wide customer base both in its country and
across the rest of the continent. Its year end was 30 April 20X5. It is 1 July 20X5. You are an audit
manager of Pinfish & Co and you are reviewing extracts of the documentation describing Amberjack
Co’s sales and dispatch system following completion of the interim audit.

Amberjack Co has grown in size over the previous 18 months. All new customers undergo credit checks
prior to being accepted and credit limits are subsequently set by the receivables ledger clerks who
record the new customer details, assign a unique customer number and set credit limits in the master
data file. The company’s credit controller is currently on secondment to the internal audit department for
six months and no replacement has been appointed.

Customers wishing to order goods, telephone the company’s sales order department and provide their
unique account details. Sequentially numbered four-part sales orders are generated for all orders, after
checking available inventory levels. One copy is retained by the sales ordering team to enable them to
monitor progress of the sales orders, one copy is sent to the customer, one copy is sent to one of the
company’s warehouses for dispatch and the final copy is sent to the finance department. Upon dispatch,
a three-part goods dispatch note (GDN) is completed which is assigned the same sequential number as
the order number; one copy is sent with the goods, one remains with the warehouse and one is sent to
the finance department.

Due to the recent growth of the company, and as there are a large number of sales invoices, additional
temporary staff members have been appointed to help the sales clerks to produce the sales invoices.
The sales invoices are prepared using quantities from the GDNs and prices from the authorised sales
prices list, which is updated every six months. This year, in line with its main competitors, the company
offered a 10% discount on all orders placed during one weekend in late November. Where a discount
has been given, this has to be manually entered by the sales clerks onto the sequentially numbered
invoice.

Customer statements are no longer being generated and sent out. The company only reconciles the
receivables ledger control account at the end of April in order to verify the year-end balance.

Required:

(a) List FOUR control objectives of Amberjack Co's sales and dispatch system.

(4 marks)

(b) As the external auditor of Amberjack Co, write a report to management in respect of the
sales and dispatch system described which:

(i) Identifies and explains SEVEN deficiencies in the sales and dispatch system and
recommends a control to address each of these deficiencies; and

(ii) Includes a covering letter

Note: Two marks will be awarded within this requirement for the covering letter.

(16 marks)

(20 marks)

Page 33 of 66
 Freesia
Part (a)

Auditors are required to document a company’s accounting and internal control systems as part of their
audit process. Two methods available for documenting internal control systems are narrative notes and
questionnaires.

Required:

For each of the two methods, NARRATIVE NOTES and QUESTIONNAIRES:

(i) Describe the method for documenting internal control systems; and
(ii) Explain an ADVANTAGE of using this method. Note: The total marks will be split
equally between each part.
(4 marks)

Freesia Co is a company listed on a stock exchange. It manufactures furniture which it supplies to a wide
range of retailers across the region. The company has an internal audit (IA) department and the
company’s year end is 30 June 20X9. You are an audit supervisor with Zinnia & Co, preparing the draft
audit programmes and reviewing extracts from the internal controls documentation in preparation for the
interim audit.

Sales
Freesia Co generates revenue through visits by its sales staff to customers’ premises. Sales ledger
clerks, who work at head office, carry out credit checks on new customers prior to being accepted and
then set their credit limits. Sales staff visit retail customers’ sites personally and orders are completed
using a four-part pre-printed order form. One copy is left with the customer, a second copy is returned to
the sales ordering department, the third is sent to the warehouse and the fourth to the finance
department at head office. Each sales order number is based on the sales person’s own identification
number in order to facilitate monitoring of sales staff performance.

Retail customers are given payment terms of 30 days and most customers choose to pay their invoices
by bank transfer. Each day Lily Shah, a finance clerk, posts the bank transfer receipts from the bank
statements to the cash book and updates the sales ledger. On a monthly basis, she performs the bank
reconciliation.

Purchases and inventory

Receipts of raw materials and goods from suppliers are processed by the warehouse team at head
office, who agree the delivery to the purchase order, check the quantity and quality of goods and
complete a sequentially numbered goods received note (GRN). The GRNs are sent to the finance
department daily. On receipt of the purchase invoice from the supplier, Camilla Brown, the purchase
ledger clerk, matches it to the GRN and order and the three documents are sent for authorisation by the
appropriate individual. Once authorised, the purchase invoices are logged into the purchase ledger by
Camilla, who utilises document count controls to ensure the correct number of invoices has been input.

The company values its inventory using standard costs, both for internal management reporting and for
inclusion in the year-end financial statements. The basis of the standard costs was reviewed
approximately 18 months ago.

Payroll
Freesia Co employs a mixture of factory staff, who work a standard shift of eight hours a day, and
administration and sales staff who are salaried. All staff are paid monthly by bank transfer. Occasionally,
overtime is required of factory staff. Where this occurs, details of overtime worked per employee is
collated and submitted to the payroll department by a production clerk. The payroll department pays this

Page 34 of 66
 overtime in the month it occurs. At the end of each quarter, the company’s payroll department sends
overtime reports which detail the amount of overtime worked to the production director for their review.

Freesia Co’s payroll package produces a list of payments per employee which links into the bank system
to produce a list of automatic bank transfer payments. The finance director reviews the total to be paid
on the list of automatic payments and compares this to the total payroll amount to be paid for the month
per the payroll records. If any issues arise, then the automatic bank transfer can be manually changed
by the finance director.

Required:

(b) In respect of the internal controls of Freesia Co:

(i) Identify and explain SIX deficiencies;

(ii) Recommend a control to address each of these deficiencies; and
(iii) Describe a TEST OF CONTROL the external auditors should perform to assess if each
of these controls, if implemented, is operating effectively to reduce the identified
deficiency.

Note: Prepare your answer using three columns headed Control deficiency, Control
recommendation and Test of control respectively. The total marks will be split equally
between each part.
(18 marks)

Freesia Co deducts employment taxes from its employees’ wages and salaries on a monthly basis and
pays these to the local taxation authorities in the following month. At the year end, the financial
statements will contain an accrual for employment tax payable.

Required:

(c) Describe the substantive procedures the auditor should perform to obtain sufficient and
appropriate audit evidence in respect of Freesia Co’s year-end accrual for employment tax
payable.
(4 marks)

The listing rules of the stock exchange require compliance with corporate governance principles and the
directors of Freesia Co are confident that they are following best practice in relation to this. However, the
chairman recently received correspondence from a shareholder, who is concerned that the company is
not fully compliant. The company’s finance director has therefore requested a review of the company’s
compliance with corporate governance principles.

Freesia Co has been listed for over eight years and its board comprises four executive and four
independent non-executive directors (NEDs), excluding the chairman. An audit committee comprised of
the NEDs and the finance director meets each quarter to review the company’s internal controls.

The directors’ remuneration is set by the finance director. NEDs are paid a fixed fee for their services
and executive directors are paid an annual salary as well as a significant annual bonus based on Freesia
Co’s profits. The company’s chairman does not have an executive role and so she has sole responsibility
for liaising with the shareholders and answering any of their questions.

Page 35 of 66
 Required:

(d) Describe TWO corporate governance weaknesses faced by Freesia Co and provide a
recommendation to address each weakness to ensure compliance with corporate governance
principles.

Note: Prepare your answer using two columns headed Weakness and Recommendation
respectively.
(4 marks)

(30 marks)

Page 36 of 66
 Raspberry
Raspberry Co. operates an electric power station, which produces electricity 24 hours a day, seven days
a week. The company’s year end is 30 June 20X8. You are an audit manager of Grapefruit & Co, the
auditor of Raspberry Co. The interim audit has been completed and you are reviewing the
documentation describing Raspberry Co’s payroll system.

Systems notes – payroll

Raspberry Co employs over 250 people and approximately 70% of the employees work in production at
the power station. There are three shifts every day with employees working eight hours each. The
production employees are paid weekly in cash. The remaining 30% of employees work at the head office
in non-production roles and are paid monthly by bank transfer.

The company has a human resources (HR) department, responsible for setting up all new joiners. Pre-
printed forms are completed by HR for all new employees and, once verified, a copy is sent to the payroll
department for the employee to be set up for payment. This form includes the staff member’s employee
number and payroll cannot set up new joiners without this information. To encourage staff to attend work
on time for all shifts, Raspberry Co introduced a discretionary bonus, paid every three months, for
production staff. The production supervisors determine the amounts to be paid and notify the payroll
department. This quarterly bonus is entered into the system by a clerk and each entry is checked by a
senior clerk for input errors prior to processing. The senior clerk signs the bonus listing as evidence of
undertaking this review.

Production employees are issued with clock cards and are required to swipe their cards at the beginning
and end of their shift. This process is supervised by security staff 24 hours a day. Each card identifies
the employee number and links into the hours worked report produced by the payroll system, which
automatically calculates the gross and net pay along with relevant deductions. These calculations are
not checked.

In addition to tax deductions from pay, some employees’ wages are reduced for such items as
repayments of student loans owed to the central government. All employers have a statutory obligation
to remit funds on a timely basis and to maintain accounting records which reconcile with annual loan
statements sent by the government to employers. At Raspberry Co student loan deduction forms are
completed by the relevant employee and payments are made directly to the government until the
employee notifies HR that the loan has been repaid in full.

On a quarterly basis, exception reports relating to changes to the payroll standing data are produced and
reviewed by the payroll director. No overtime is worked by employees. Employees are entitled to take 28
holiday days annually. Holiday request forms are required to be completed and authorised by relevant
line managers, however, this does not always occur.

On a monthly basis, for employees paid by bank transfer, the senior payroll manager reviews the list of
bank payments and agrees this to the payroll records prior to authorising the payment. If any errors are
noted, the payroll senior manager amends the records.

For production employees paid in cash, the necessary amount of cash is delivered weekly from the bank
by a security company. Two members of the payroll department produce the pay packets, one is
responsible for preparing them and the other checks the finished pay packets. Both members of staff are
required to sign the weekly payroll listing on completion of this task. The pay packets are then delivered
to the production supervisors, who distribute them to employees at the end of the employees’ shift, as
they know each member of their production team.

Monthly management accounts are produced which detail variances between budgeted amounts and
actual. Revenue and key production costs are detailed, however, as there are no overtime costs, wages
and salaries are not analysed.

Page 37 of 66
 Required:

(a) In respect of the payroll system for Raspberry Co:

(i) Identify and explain FIVE KEY CONTROLS which the auditor may seek to place
reliance on; and

(ii) Describe a TEST OF CONTROL the auditor should perform to assess if each of these
key controls is operating effectively.

Note: Prepare your answer using two columns headed Key control and Test of control
respectively. The total marks will be split equally between each part.
(10 marks)

(b) Identify and explain FIVE DEFICIENCIES in Raspberry Co’s payroll system and provide a
recommendation to address each of these deficiencies.

Note: Prepare your answer using two columns headed Control deficiency and Control
recommendation respectively.
(10 marks)

The finance director is interested in establishing an internal audit department (IAD). In the company she
previously worked for the IAD carried out inventory counts, however, as this is not relevant for Raspberry
Co, she has asked for guidance on what other assignments an IAD could be asked to perform.

Required:
(c) Describe assignments the internal audit department of Raspberry Co could carry out.
(5 marks)

Raspberry Co deducts employment taxes from its employees’ wages on a weekly/monthly basis and
pays these to the local taxation authorities in the following month. At the year end the financial
statements will contain an accrual for income tax payable on employment income.

Required:
(d) Describe the substantive procedures the auditor should perform to confirm the year-end
accrual for tax payable on employment income.
(5 marks)

(30 marks)

Page 38 of 66
 Murray Ltd
a) List and briefly describe the major component parts of an internal control system.
(5 Marks)

b) Give TWO examples of control objectives and TWO related control activities for each of the
following stages in a sales system;

- Order
- Despatch
- Invoicing
(12 Marks)

Murray Ltd sells sports equipment to the general public and has asked you for help in improving the
system for monitoring and controlling purchases.

The following details are available on the current purchases system;

Purchase orders are raised by all staff at Murray Ltd. There is no central ordering system so staff record
orders on handwritten purchase orders.

When goods are received, they are placed straight into inventory on the shop floor, ready for sale. The
goods received notes are created and matched, where possible, to the original purchase order.

The goods received notes are then passed to the accounts department who match the goods received
notes against the invoices when they are received by the accounts clerk.

The accounts clerk then allocates a nominal ledger code to the invoice, posts it onto the computerised
accounting system and prints out a list of suppliers to be paid.

If a new supplier is used, the accounts clerk is able to create a new supplier on the purchase ledger.

The finance director is supposed to review the payments listing and access the bank account to
authorise the payments but, due to time pressure, the accounts clerk has been doing this as well for the
last four months of the year.

c) Describe the current weaknesses in the purchases system, explaining the consequences of
each weakness. Please assume that the only controls that exist are mentioned in the question.
(10 Marks)

d) BRIEFLY describe the basic content and format of a Management Letter.

(3 Marks)

(Total 30 Marks)

Page 39 of 66
 Becker Ltd
Becker Ltd is a DIY store that specialises in garden and agricultural products. It sells to both trade and
domestic customers. Becker Ltd has no internal audit department or audit committee.

The most successful area of business for Becker Ltd is the seed division. Most seed sales are online via
the company website.

Customers order using a unique product code and provide their credit or debit card details onto a secure
server. Order details are then transferred manually onto the inventory control and sales system. Each
order is given a random code based upon the name of the person who input it onto the system.

A two part packing list is produce in the warehouse and the packets of seeds are taken from the correct
storage bin in the warehouse. One copy is sent out with the seeds and the other copy is sent to the
accounts department, who update the system to show that the goods have been despatched. The
customer's credit card is then charged with the full amount.

Bad debts are currently running at 4% of sales for the seed division.

Finally, the computer system checks that each credit card charge has order details on file to confirm that
the charge was made correctly.

a) In relation to the seed division, prepare, in a form suitable for inclusion in a Report to
Management then following information;

- The weaknesses in the sales system.

(5 Marks)
- The possible effect of each weakness.
(5 Marks)
- A recommendation to address each weakness.
(5 Marks)

(Presentation 2 Marks)

b) Briefly describe the information that should be included in a covering letter that usually
accompanies a Report to Management.
(4 Marks)
c) Describe the possible benefits to Becker Ltd of having an internal audit department.
(5 Marks)
d) List FOUR responsibilities of an audit committee.
(4 marks)

(Total 30 Marks)

Page 40 of 66
 Nadal Ltd
Nadal Ltd is a construction company with a large proportion of its workforce being paid in cash on a
weekly basis. The following information is available concerning the current wages system;

• Hours are recorded using a clocking in/out system. Each employee enters a unique code into a
keypad upon arrival and leaving the premises.

• Each site has a foreman who has a record of all employees and can issue temporary numbers
for new employees.

• Any overtime is calculated by the computerised wages system and is then added to the standard
pay.

• The two staff members in the wages department at head office make amendments to the
computerised system to account for illness and holidays. The same two staff members set up
and maintain employee’s records.

• The computerised wages system calculates all deductions made from gross pay and a list of net
of net cash payments to employees is produced.

• Cash is delivered to the wages office on each site by secure courier.

• Two staff members make up the wage packets along with a handwritten note confirming the
amount of gross pay. Each site foreman then hands out the pay packets to the employees.

a) Identify and explain the weaknesses in the wages system of Nadal Ltd.
(8 Marks)

b) For each weakness, suggest an internal control activity that would help to overcome the
weakness.
(8 Marks)

Nadal Ltd believes that the current computerised wages system needs updating and wishes to obtain
some advice form an external consultant on the matter.

c) Explain the factors that should be taken into account by Nadal Ltd when selecting an external
consultant.
(6 Marks)

d) Assuming the external auditors of Nadal Ltd were to provide the external advice, briefly
describe the ethical issues that would occur.
(4 Marks)

e) Compare the responsibilities of internal and external auditors for the prevention and detection
of fraud.
(4 Marks)

(Total 30 Marks)

Page 41 of 66
 Cherry
Cherry Blossom Co (Cherry) manufactures custom made furniture and its year end is 30 April. The
company purchases its raw materials from a wide range of suppliers. Below is a description of Cherry’s
purchasing system.

When production supervisors require raw materials, they complete a requisition form and this is
submitted to the purchase ordering department. Requisition forms do not require authorisation and no
reference is made to the current inventory levels of the materials being requested. Staff in the purchase
ordering department use the requisitions to raise sequentially numbered purchase orders based on the
approved suppliers list, which was last updated 24 months ago. The purchasing director authorises the
orders prior to these being sent to the suppliers. When the goods are received, the warehouse
department verifies the quantity to the suppliers despatch note and checks that the quality of the goods
received are satisfactory. They complete a sequentially numbered goods received note (GRN) and send
a copy of the GRN to the finance department.

Purchase invoices are sent directly to the purchase ledger clerk, who stores them in a manual file until
the end of each week. He then inputs them into the purchase ledger using batch controls and gives each
invoice a unique number based on the supplier code. The invoices are reviewed and authorised for
payment by the finance director, but the actual payment is only made 60 days after the invoice is input
into the system.

Required:

In respect of the purchasing system of Cherry Blossom Co:

(i) Identify and explain FIVE deficiencies; and

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

Note: The total marks will be split equally between each part.

(10 marks)

Page 42 of 66
 Knowledge

a) Define the ‘three Es’ of a value for money audit.

(3 marks)

b) ISA 230 Audit Documentation requires auditors to prepare audit documentation for an audit of
financial statements on a timely basis.

Required:

Describe FOUR benefits of documenting audit work.

(4 marks)

c) ISA 530 Audit Sampling applies when the auditor has decided to use sampling to obtain
sufficient and appropriate audit evidence.

Required:

Define what is meant by ‘audit sampling’ and explain the need for this.
(3 marks)

(10 marks)

Page 43 of 66
Page 44 of 66
 Pacific Co

This scenario relates to four requirements.

It is 1 July 20X5. Pacific Co operates a chain of 14 retail stores across the country, selling its own range
of cosmetic products. You are the audit supervisor of Caribbean & Co and the final audit is due to
commence shortly for the year ended 31 May 20X5. Draft financial statements show revenue of $45.2m
and profit before tax of $4.1m. The following three matters have been brought to your attention:

Trade payables and accruals

As part of the year-end process, Pacific Co’s payables ledger is closed at the end of the day on 31 May.
Any invoices received after this date, relating to goods received before the year end, are recorded in the
goods received not invoiced (GRNI) accrual.

This year, the payables ledger was kept open in error until 1 June 20X5. As a result, a significant
payment run for suppliers made by bank transfer on 1 June 20X5 was recorded in the 20X5 payables
ledger. The finance director has confirmed that the year-end trade payables balance was corrected using
a journal.

Provision for legal claims

In March 20X5, a number of claims were received by the company from customers who suffered severe
allergic reactions after using one of Pacific Co's products. They allege that the product ingredients listed
on the label were incorrect. An internal investigation has suggested that one batch of the product had
been incorrectly labelled. The finance director has recognised a provision in the draft financial
statements of $0.5m.

Revenue
The company’s revenue has increased by $3.9m during the year (20X4: total revenue $41.3m). The
management accounts record information for revenue by key product line, of which there are eight, and
also by store. In August 20X4, Pacific Co opened a new retail store, bringing the number of stores to 14.
In addition, it launched a number of new products across most of the key product lines.

Requirements

Part (a)
Describe substantive procedures the auditor should perform to obtain sufficient and appropriate audit
evidence in relation to the COMPLETENESS of Pacific Co’s trade payables and accruals. (5 marks)

Part (b)
Describe substantive procedures the auditor should perform to obtain sufficient and appropriate audit
evidence in relation to Pacific Co’s provision for the legal claims. (6 marks)

Part (c)
Describe SUBSTANTIVE ANALYTICAL procedures the auditor should perform to obtain sufficient and
appropriate audit evidence in relation to Pacific Co's revenue. (4 marks)

Part (d)
During the audit of Pacific Co's provision for the legal claims, the audit team gathered audit evidence
showing that the provision should amount to $0.8m. The finance director has suggested that no
adjustment is made in the 20X5 financial statements as he believes $0.5m is a reasonable estimate and
that the difference of $0.3m is not material.

Discuss the issue and describe the impact on the auditor’s report, if any, should this issue remain
unresolved. (5 marks)

Page 45 of 66
 Spinach Co

This scenario relates to five requirements.

It is 1 July 20X5. You are an audit supervisor with Sweetcorn & Co and are responsible for the final audit
of your existing client Spinach Co, which is due to commence in September 20X5. Spinach Co is a listed
company which manufactures garden furniture. Its draft financial statements for the year ending 31 July
20X5 show revenue of $65.1m and profit before tax of $18.2m. The following matters have been brought
to your attention:

Revenue
Spinach Co’s revenue is generated through sales to individual customers via its website and also to
wholesale customers such as garden centres and stores. Price increases in line with inflation were
applied across all products in September 20X4. Spinach Co successfully launched three new product
lines in February 20X5.
Wholesale customers place their orders on credit via Spinach Co’s sales ordering department. Individual
customers place their order online and immediately pay the full amount owing. The goods are normally
dispatched within seven days of the customer placing the order.

Inventory count
Spinach Co is forecasting a year-end inventory balance of $9.3m. The company undertakes continuous
production and full year-end inventory counts will be carried out on 31 July 20X5. Spinach Co’s raw
materials and finished goods inventory are stored in its six warehouses which are located across the
country. The company has one factory site and it is expected that there will be no significant work in
progress held at the year end. Each inventory count will be supervised by a member of
Spinach Co’s internal audit department. There will be no movements of goods in and out of the
warehouses during the counts. Sweetcorn & Co will only attend some of the counts.

The largest warehouse is located at the factory site and around 10% of this warehouse space is rented
out to a third-party company, which stores its inventory of cleaning products there. The finance director
has explained that the third-party inventory is located in one specific area of the warehouse.

Issue of share capital

The company is looking to expand its operations by securing an additional factory site in January 20X6.
In order to raise sufficient capital to fund the factory purchase, Spinach Co issued ordinary shares at a
premium in May 20X5, raising a sum of
$4.3m.

Page 46 of 66
 Requirements

Part (a)
Describe substantive procedures the auditor should perform to obtain sufficient and appropriate audit
evidence in relation to Spinach Co’s revenue. (5 marks)

Part (b)
Describe the audit procedures the auditor should perform as part of the audit of Spinach Co BEFORE
and DURING the inventory count. (6 marks)

Part (c)
Describe substantive procedures the auditor should perform to obtain sufficient and appropriate audit
evidence in relation to Spinach Co’s issue of share capital. (4 marks)

It is now 12 November 20X5. During the audit of Spinach Co’s inventory, the audit team identified five
product lines which were very slow moving and concluded that the net realisable value of these goods
was below cost. A significant write down of inventory was required in order to comply with IAS 2
Inventories. The audit engagement partner has determined that inventory is now appropriately valued
and that this issue should be communicated as a key audit matter (KAM) in accordance with ISA 701
Communicating Key Audit Matters in the Independent Auditor's Report.

Part (d)
(i) Describe the factors which the audit engagement partner would have considered in determining
that this issue is a KAM; and

(ii) Describe the content of the KAM section of the auditor’s report for Spinach Co.

(5 marks)

Page 47 of 66
 Danube Co

This scenario relates to five requirements.

It is 1 July 20X5. Danube Co is listed on a a stock exchange and sells consumer goods to wholesale
customers. The company has a large head office and 18 warehouses. You are an audit supervisor of
Mississippi & Co and the final audit for the year ended 31 March 20X5 is due to commence shortly. The
draft financial statements show total assets of $198.5m and profit before tax of $56.1m. The following
three matters have been brought to your attention.:

Land and buildings

Danube Co historically recorded all property, plan and equipment (PPE) at cot less accumulated
depreciation. However during the year, management decided to change the accounting policy for land
and building from the cost model to the revaluation model. The finance director hired an external
independent valuer to undertake the valuation of all land and buildings, and this took place in July 20X4.
Depreciation is calculated monthly on a pro rata basis. Danube Co's year-end balance for PPE includes
land and buildings of $79.2m (20X4: $64m).

Trade receivables circularisation

Danube Co's year-end trade receivables balance of $9.3m (20X4: $7.7m) has significantly increased
compared to the prior year. Danube Co's receivables ledger is made up of a large number of customers
with balances ranging from $15,000 to $150,000. A positive trade receivables circularisation has been
undertaken by the audit team based on the year-end balances. The majority of responses from
customers agreed to the balances as per Danube Co's receivables ledger at 31 March 20X5, however
the following exceptions are noted:

Customer Balance per Danube Co Response from customer

Nile Co $141,102 No response
Congo Co $136,321 $122,189

Provision and receivable arising from the sale of defective goods

In December 20X4 Danube Co sold a number of hoverboards to a customer, Kalama Kids Co. It is
alleged by Kalama Kids Co that these hoverboards are faulty, as there have been a few instances of the
hoverboards overheating and catching fire. As a result, Kalama Kids Co is suing Danube Co for $3.9m.
The court case is due to take place in August 20X5 and management believes that Kalama Kids Co's
claim is likely to be successful. No hoverboards remain in Danube Co's inventory at the year end.

Danube Co purchased the hoverboards from a supplier, Thames Co. In February 20X5 Danube Co
contacted Thames Co and requested that they reimburse Danube Co for damages which may become
payable as a result of the sale of defective hoverboards. Danube Co is requesting a sum of $3.9m from
Thames Co. The draft financial statements contain a provision of $3.9m in respect of the customer's
claim and a receivable of $3.9m in respect of Danube Co's counter-claim against its supplier.

Page 48 of 66
 Requirements

Part (a)
Describe substantive procedures the auditor should perform to obtain sufficient and appropriate audit
evidence in relation to Danube Co's land and buildings. (6 marks)

Part (b)
Describe the procedures that auditor should perform in relation to the exceptions noted during trade
receivables circularisation in respect of Bile Co and Congo Co. (4 marks)

Note: The marks will be split equally between each customer.

Part (c)
Describe substantive procedures the auditor should perform to obtain sufficient and appropriate audit
evidence in relation to the PROVISION and the RECEIVABLE arising from the sale of defective goods.
(5 marks)

Part (d)
The audito engagement partner has determined that the issue relating to the provision and receivables
arising from the sale of defective goods should be communicated as a key audit matter (KAM), in
accordance with ISA 701 Communicating Key Audit Matters in the Independence Auditor's Report.

(d) (i) Describe the factors which the audit engagement partner would have considered in determining
that this issue is a KAM; and

(d) (ii) Describe the contents of the KAM section of the auditor's report for Danube Co.

(5 marks)

Page 49 of 66
 Spadefish & Co

It is 1 July 20X5 and you are an audit manager of Spadefish & Co and you are currently responsible for
the audits of two existing clients:

Triggerfish Co manufactures hair products and its year ended on 31 May 20X5. You are finalising the
audit programmes for the forthcoming year-end audit.

Marlin Co is a distributor of electronic goods and its year ended on 30 April 20X5. The audit is almost
complete and the auditor's report is due to be signed shortly.

The following matters have been brought to your attention for each company.

Triggerfish Co - Receivables

Triggerfish Co.’s draft year-end trade receivables are $3.85m (20X4: $2.45m) and revenue for the year is
slightly increased on 20X4. Triggerfish Co has a large number of customers with balances ranging from
$5,000 to $45,000. A positive receivables circularisation has been undertaken based on the year-end
balances. The majority of responses from customers agreed to the balances as per Triggerfish Co’s
receivables ledger, however, the following exceptions were noted:

Balance per Triggerfish Response from customer

Albacore Co $36,558 Nil response
Flounder Co $24,115 $18,265
Menhaden Co -$5,360 (Credit) $3,450

Due to the increase in receivables, Triggerfish Co has recently recruited an additional credit controller to
chase outstanding receivables. As a result of the additional focus on chasing outstanding receivables the
finance director thinks it is not necessary to continue to maintain a significant allowance for receivables
and has reduced the closing allowance from $125,000 to $5,000.

Marlin Co - Going concern

During the year under audit Marlin Co has consistently paid a number of its suppliers significantly later
than usual and only after several reminders. As a result some of its suppliers have withdrawn credit
terms meaning the company must pay cash on delivery. The company has also just received notification
that its main supplier who provides the company with over 60% of its specialist electrical equipment has
ceased to trade.

The overdraft has increased significantly over the year and the directors have informed you that the
overdraft facility is due for renewal next month, and they are confident it will be renewed. The directors
have decided that in order to conserve cash, no final dividend will be paid in 20X5.

Required:

(a) Describe the procedures the auditor should perform to resolve the exceptions noted for
each customer during the positive receivables circularisation for Triggerfish Co.

(8 marks)

(b) Describe substantive procedures the auditor should perform to obtain sufficient and
appropriate audit evidence in relation to the allowance for receivables in the current year.

(4 marks)

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 (c) Identify and explain THREE potential indicators that Marlin Co is NOT a going concern.

(3 marks)

(d) Describe the audit procedures the auditor should perform in assessing whether or not
Marlin Co is a going concern.

(5 marks)

(20 marks)

Page 51 of 66
 Hyacinth Co
Hyacinth Co develops and manufactures computer components and its year end was 31 December
20X8. The company has a large factory, and two warehouses, one of which is off-site. You are an audit
supervisor of Tulip & Co and the final audit is due to commence shortly. Draft financial statements show
total assets of $23·2m and profit before tax of $6·4m. The following three matters have been brought to
your attention:

Inventory valuation
Your firm attended the year-end inventory count for Hyacinth Co and confirmed that the controls and
processes for recording work in progress (WIP) and finished goods were acceptable. WIP and finished
goods are both material to the financial statements and the audit team was able to confirm both the
quantity and stage of completion of WIP.

Before goods are dispatched, they are inspected by the company’s quality control department. Just prior
to the inventory count, it was noted that a batch of product line ‘Crocus’, which had been produced to
meet a customer’s specific technical requirements, did not meet that customer’s quality and technical
standards. This inventory had a production cost of $450,000. Upon discussions with the production
supervisor, the finance director believes that the inventory can still be sold to alternative customers at a
discounted price of $90,000.

Research and development

Hyacinth Co includes expenditure incurred in developing new products within intangible assets once the
recognition criteria under IAS® 38 Intangible Assets have been met. Intangible assets are amortised on
a straight line basis over four years once production commences. The amortisation policy is based on
past experience of the likely useful lives of the products. The opening balance of intangible assets is
$1·9m.

In the current year, Hyacinth Co spent $0·8m developing three new products which are all at different
stages of development.

Sales tax liability

Hyacinth Co is required by the relevant tax authority in the country in which it operates to charge sales
tax at 15% on all products which it sells. This sales tax is payable to the tax authority. When purchasing
raw materials and incurring expenses in the manufacturing process, the company pays 15% sales tax on
any items purchased and this can be reclaimed from the tax authority. The company is required to report
the taxes charged and incurred by completing a tax return on a quarterly basis, and the net amount
owing to the tax authority must be remitted within four weeks of the quarter end. The draft financial
statements contain a $1·1m liability for sales tax for the quarter ended 31 December 20X8.

Required:

(a) Describe substantive procedures the auditor should perform to obtain sufficient and
appropriate audit evidence in relation to the VALUATION of Hyacinth Co’s inventory.
(6 marks)

(b) Describe substantive procedures the auditor should perform to obtain sufficient and
appropriate audit evidence in relation to Hyacinth Co’s research and development
expenditure.
(4 marks)

(c) Describe substantive procedures the auditor should perform to obtain sufficient and
appropriate audit evidence in relation to Hyacinth Co’s year-end sales tax liability.
(4 marks)

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 The audit is now almost complete and the auditor’s report is due to be signed shortly. The following
matter has been brought to your attention:

On 3 February 20X9, a flood occurred at the off-site warehouse. This resulted in some damage to
inventory and property, plant and equipment. However, there have been no significant delays to
customer deliveries or complaints from customers. Hyacinth Co’s management has investigated the
cause of the flooding and believes that the company is unlikely to be able to claim on its insurance. The
finance director of Hyacinth Co has estimated that the value of damaged inventory and property, plant
and equipment was $0·7m and that it now has no scrap value.

Required:

(d) (i) Explain whether the 20X8 financial statements of Hyacinth Co require amendment in
relation to the flood; and

(ii) Describe audit procedures which should be performed in order to form a conclusion on
any required amendment.

Note: The total marks will be split equally between each part.
(6 marks)

(20 marks)

Page 53 of 66
 Jasmine Co
Part (a)

Jasmine Co manufactures motor vehicle components and its year end was 30 June 20X8. You are an
audit supervisor of Peppermint & Co and the final audit is due to commence shortly. Total assets are
$43·2m and profit before tax is $7·2m. The following matters have been brought to your attention:

Trade receivables

Jasmine Co’s trade receivables ledger is comprised of a large number of customers. In previous years,
the audit team has undertaken a positive trade receivables circularisation to confirm year-end balances.
However, the customer response rate has historically been low and so alternative audit procedures have
been undertaken. A decision has been made that for the current year audit a circularisation will not be
performed. The year-end trade receivables balance is $3·9m (20X7: $2·8m) and the allowance for trade
receivables is $410,000 (20X7: $300,000).

Bank balances

The bank and cash figure included in Jasmine Co’s draft financial statements is comprised of a number
of bank account balances: an overdraft of $5·1m which is the company’s main current account and
$0·2m relating to several savings accounts. The finance director has informed the audit manager that all
accounts have been reconciled as at the year end. The overdraft of $5·1m has increased significantly
since the prior year (20X7: $1·2m). The directors have informed you that the overdraft facility, which the
company requires in order to operate on a daily basis, is due for renewal in October 20X8 and that they
are confident it will be renewed.

Required:

(a) Describe substantive procedures the auditor should perform to obtain sufficient and
appropriate audit evidence in relation to Jasmine Co’s trade receivables.
(5 marks)
(b) Describe substantive procedures the auditor should perform to obtain sufficient and
appropriate audit evidence in relation to Jasmine Co’s bank balances.
(5 marks)
(c) Describe the audit procedures the auditor should perform in assessing whether or not
Jasmine Co is a going concern.
(5 marks)

During the final audit, the finance director has informed the audit team that Jasmine Co’s bankers will not
make a decision on the renewal of the overdraft facility until after the auditor’s report is signed. The audit
engagement partner is satisfied that the use of the going concern basis is appropriate. The directors
have agreed to include some brief going concern disclosures in the draft financial statements and the
audit team still have to assess the adequacy of these disclosures.

Required:

(d) Discuss the issue and describe the impact on the auditor’s report of Jasmine Co of adequate
AND inadequate going concern disclosure.

(5 marks)

(20 marks)

Page 54 of 66
 Camomile
Part (a)

ISA 260 Communication with Those Charged with Governance provides guidance to auditors in relation
to communicating with those charged with governance on matters arising from the audit of an entity’s
financial statements.

Required:

(i) Explain why it is important for auditors to communicate throughout the audit with those
charged with governance; and
(ii) Identify TWO examples of matters which the auditor may communicate to those charged
with governance.

Note: The total marks will be split equally between each part.
(4 marks)
Part (b)

Camomile Co operates six restaurant and bar venues which are open seven days a week. The
company’s year end is 31 December 20X8. You are the audit supervisor reviewing the internal controls
documentation in relation to the cash receipts and payments system in preparation for the interim audit,
which will involve visiting a number of the venues as well as the head office. The company has a small
internal audit (IA) department based at head office.

The purchasing department based at the company’s head office is responsible for ordering food and
beverages for all six venues. In addition, each venue has a petty cash float of $400, held in the safe,
which is used for the purchase of sundry items. When making purchases of sundries, employees are
required to obtain the funds from the restaurant manager, purchase the sundries and return any excess
money and the receipt to the manager. At any time the petty cash sum held and receipts should equal
the float of $400 but it has been noted by the company’s IA department that on some occasions this has
not been the case.

Each venue has five cash tills (cash registers) to take payments from customers. Three are located in
the bar area and two in the restaurant area. Customers can pay using either cash or a credit card and for
any transaction either the credit card vouchers or cash are placed in the till by the employee operating
the till. To speed up the payment process, each venue has a specific log on code which can be used to
access all five tills and is changed every two weeks.

At each venue at the end of the day, the tills are closed down by the restaurant manager who counts the
total cash in all five tills and the sum of the credit card vouchers and these totals are reconciled with the
aggregated daily readings of sales taken from each till. Any discrepancies are noted on the daily sales
sheet. The daily sales sheet records the sales per the tills, the cash counted and the total credit card
vouchers as well as any discrepancies. These sheets are scanned and emailed to the cashier at head
office at the end of each week.

Approximately 30% of Camomile Co’s customers pay in cash for their restaurant or bar bills. Cash is
stored in the safe at each venue on a daily basis after the sales reconciliation has been undertaken.
Each safe is accessed via a key which the restaurant manager has responsibility for. Each key is stored
in a drawer of the manager’s desk when not being used. Cash is transferred to the bank via daily
collection by a security company. The security company provides a receipt for the sums collected, and
these receipts are immediately forwarded to head office. The credit card company remits the amounts
due directly into Camomile Co’s bank account within two days of the transaction.

At head office, on receipt of the daily sales sheets and security company receipts, the cashier agrees the
cash transferred by the security company has been banked for all venues. She agrees the cash per the

Page 55 of 66
 daily sales sheets to bank deposit slips and to the bank statements. The cashier updates the cash book
with the cash banked and details of the credit card vouchers from the daily sales sheets. On a monthly
basis, the credit card company sends a statement of all credit card receipts from the six venues which is
filed by the cashier.

Every two months, the cashier reconciles the bank statements to the cash book. The reconciliations are
reviewed by the financial controller who evidences her review by signature and these are filed in the
accounts department. All purchases of food and beverages for the venues are paid by bank transfer. At
the relevant payment dates, the finance director is given the total amount of the payments list which he
authorises.

Required:

Identify and explain EIGHT DEFICIENCIES in Camomile Co’s cash receipts and payments system
and provide a recommendation to address each of these deficiencies.

Note: Prepare your answer using two columns headed Control deficiencies and Control recommendation
respectively.

(16 marks)

(20 marks)

Page 56 of 66
 Cranberry
You are an audit manager of Cranberry & Co and you are currently responsible for the audit of
Gooseberry Co, a company which develops and manufactures health and beauty products and
distributes these to wholesale customers. Its draft profit before tax is $6·4m and total assets are $37·2m
for the financial year ended 31 January 20X8. The final audit is due to commence shortly and the
following matters have been brought to your attention:

Research and development

Gooseberry Co spent $1·9m in the current year developing nine new health and beauty products, all of
which are at different stages of development. Once they meet the recognition criteria under IAS® 38
Intangible Assets for development expenditure, Gooseberry Co includes the costs incurred within
intangible assets. Once production commences, the intangible assets are amortised on a straight line
basis over three years. Management believes that this amortisation policy is a reasonable approximation
of the assets’ useful lives, as in this industry there is constant demand for innovative new products.

Depreciation
Gooseberry Co has a large portfolio of property, plant and equipment (PPE). In March 20X7, the
company carried out a full review of all its PPE and updated the useful lives, residual values,
depreciation rates and methods for many categories of asset. The finance director felt the changes were
necessary to better reflect the use of the assets. This resulted in the depreciation charge of some assets
changing significantly for this year.

Bonus
The company’s board is comprised of seven directors. They are each entitled to a bonus based on the
draft year-end net assets, excluding intangible assets. Details of the bonus entitlement are included in
the directors’ service contracts. The bonus, which related to the 20X8 year end, was paid to each
director in February 20X8 and the costs were accrued and recognised within wages and salaries for the
year ended 31 January 20X8. Separate disclosure of the bonus, by director, is required by local
legislation.

Required:

(a) Describe substantive procedures the auditor should perform to obtain sufficient and
appropriate audit evidence in relation to Gooseberry Co’s research and development
expenditure.
(5 marks)

(b) Describe substantive procedures the auditor should perform to obtain sufficient and
appropriate audit evidence in relation to the matters identified regarding depreciation of
property, plant and equipment.
(5 marks)

(c) Describe substantive procedures the auditor should perform to obtain sufficient and
appropriate audit evidence in relation to the directors’ bonuses.
(5 marks)

Page 57 of 66
 During the audit, the team discovers that the intangible assets balance includes $440,000 related to one
of the nine new health and beauty products development projects, which does not meet the criteria for
capitalisation. As this project is ongoing, the finance director has suggested that no adjustment is made
in the 20X8 financial statements. She is confident that the project will meet the criteria for capitalisation
in 20X9.

Required:

(d) Discuss the issue and describe the impact on the auditor’s report, if any, should this
issue remain unresolved.
(5 marks)

(20 marks)

Page 58 of 66
 Pearl Ltd
a) List and briefly describe the methods of obtaining evidence as stated in ISA 500.
(7 Marks)

Pearl Ltd is a construction company that has a large amount of Property, Plant and Equipment. There
are 20 buildings located all over the north of England. Pearl Ltd had a large fleet of motor vehicles, some
of which are leased. There is also a considerable amount of plant of various sizes and values.

b) With specific reference to Property, Plant and Equipment, for each of the methods of
obtaining evidence that have been briefly described in a), explain TWO audit procedures for
EACH of the methods described.
(14 Marks)

c) List and describe the main audit procedures that would confirm the reasonableness of the
depreciation policy adopted by Pearl Ltd for the Motor Vehicles.
(5 marks)

d) Briefly discuss the potential impact on the audit report assuming that Pearl Ltd did not
maintain a plant register.
(4 Marks)

(Total 30 Marks)

Page 59 of 66
 Tickam Ltd
You are the external auditor of Tickam Ltd (T) which is a large transport company.

T is a public listed company with a year -end of Dec 31.

The company has grown rapidly over the last few years and now has a fleet of 600 vehicles that it hires
out to customers for anything from one day to three months.

Approximately 30 vehicles are on the premises of T at any one time, usually because they are being
repaired. The rest will be out with customers. The company maintains a full plant register in order to
keep track of all of the vehicles.

Customer bookings are received both on line and via the telephone. The credit status of the customer is
confirmed, as well as the availability of the relevant vehicle, using specialist vehicle management
software (VMS).

The booking is then entered into the VMS and a confirmation e mail sent to the customer, although some
bookings are still confirmed by telephone.

The booking is then automatically transferred to the receivables ledger and an invoice is raised.

There is a standard price list that is used to determine the invoice values and invoice copies are then
sent to customers - hard copy invoices for telephone orders and email copies for the email orders.

a) List and describe the audit procedures to be carried out in order to verify the sales figure in
the financial statements of T Ltd.
(15 marks)

b) List and describe the audit procedures to be carried out in order to verify the Vehicles figure
included as part of the non -current assets of T Ltd.
(15 Marks)

(Total 30 Marks)

Page 60 of 66
 Mast Ltd
You are the audit manager for Mast Ltd who is a book retailer. The company owns one large warehouse
which can contain up to 2 million books of up to 150,000 different titles.

Mast Ltd has about 100,000 customers. Customers place orders via the internet and books are
despatched on the day the order is received. Customers can return books within 30 days as long as they
are in mint condition.

Due to the volume of transactions, Mast Ltd maintains a perpetual inventory system using a standard
computer software package. You have relied upon the software package for the last 5 years and have
not yet found any errors within the software.

The internal audit department of Mast Ltd carries out random checks on the inventory system.

You are currently working with a junior member of staff on the inventory audit of Mast Ltd.

a) Explain the advantages to Mast Ltd of having a perpetual inventory system.

(5 Marks)

b) Explain the audit procedures that should be performed in order to confirm that the perpetual
inventory system is operating effectively. Each procedure should be briefly described, along with
a reason for doing it.
(12 Marks)

The audit junior has also asked for some ethical guidance.

c) List and briefly describe the fundamental principles that are included in the ACCA ethical code
of conduct.
(5 Marks)

During the course of your initial audit planning, you notice that the letter of engagement has been
returned and has not been signed by the directors of Mast Ltd.

When questioned, the directors have said that they are unable to allow you access to certain documents
that relate to a new website that is being developed due to its confidential nature.

This will result in your audit work being restricted.

d) Describe the actions you will take as a result of the directors failing to sign the letter of
engagement.
(8 Marks)

(Total 30 Marks)

Page 61 of 66
 Pizza Ltd
Below is an extract from a draft audit report for Pizza Ltd. Pizza Ltd has been experiencing some issues
this year and the extract below is the proposed opinion and basis of opinion for the current financial year.

The main two issues relate to a provision and a depreciation calculation.

The depreciation calculation has been misstated by $5m and the provision for the same amount has
been omitted from the financial statements. Both items are considered to be material.

The draft audit report extract is as follows;

Opinion

"We have audited the financial statements for Pizza Ltd for the year to 31 December 2017. In our
opinion, the financial statements do not give a true and fair view of the state of the company affairs and
have not been prepared in accordance with International Accounting Standards. This is due to a non-
current asset misstatement and a provision omission."

Basis of Opinion

"An audit is an independent examination and certification of the financial statements of Pizza Ltd for the
year. We will confirm that the financial statements are accurate. We will also confirm the accuracy of the
estimates and judgements made by the directors of Pizza Ltd as part of the financial statement
preparation."

a) Explain the type of audit modification that is currently being adopted for Pizza Ltd.
(4 Marks)

b) Explain whether or not this type of modification is the most appropriate one for the specific
circumstances of Pizza Ltd.
(4 Marks)

c) Identify any shortcomings of the wording and information that is included in the basis of
opinion section of the draft audit report.
(8 Marks)

d) Define and explain a Key Audit Matter.

(4 Marks)

(Total 20 Marks)

Page 62 of 66
 Lesley and Co
a) Briefly explain the difference between a hot and cold review and the benefits of each one.
(5 Marks)

You are an audit manager for Lesley and Co and you are responsible for some of the internal review
work that your firm carries out on a selection of audit clients before the audit reports are signed.

You have been presented with the five following situations. Audit work has been completed in all cases
and a draft audit has been produced. Your job is to assess the reasonableness of the proposed report in
each case.

i) Sapling Ltd has been experiencing difficulties with its computer system during the year. Two months’
worth of sales records were lost and no alternative method of verification has been possible.

The proposed audit opinion reads;

“We are unable to form an opinion on the financial statements of Sapling Ltd due to the loss of data that
has occurred.”

ii) Shrub Ltd has miscalculated the final inventory value of a major line of inventory. The miscalculation is
for $200,000 and the total assets of Shrub Ltd are $25m.

The proposed audit opinion reads;

"Except for the miscalculation of inventory, the financial statements of Shrub Ltd give a true and fair view
of the state of the company's affairs for the year."

iii) Branch Ltd has been sued by a customer for allegedly supplying faulty products. The legal advisers of
Branch Ltd have stated that it is likely that Branch Ltd will be successful in defending the claim.

No mention of this claim has been made in the financial statements. The claim is considered to be
material but is thought to be significant enough to affect the going concern status of Branch Ltd. The
claim will not be settled before the audit report is signed.

The proposed audit opinion reads;

"In our opinion, the financial statements of Branch Ltd give a true and fair view of the state of the
company affairs for the year."

iv) Leaf Ltd is a medium sized manufacturing company. There were issues with the directors of Leaf Ltd
during the audit and they have refused to sign the letter of representation.

The proposed audit opinion reads;

"In our opinion, the financial statements of Leaf Ltd give a true and fair view of the state of the company
affairs for the year."

An emphasis of matter paragraph has been in included in the basis of opinion section that refers to an
uncertainty in relation to this issue.

v) Twig Plc. has produced an environmental report as part of its annual report for the year. A statement
in the environmental report says that $60m was spent upon sustainability investigations during the year,
but the audit work revealed that the actual expense was $6m, which is the figure that is included in the
financial statements.

The proposed audit opinion reads;

Page 63 of 66
 "In view of the seriousness of this misstatement, the financial statements do not give a true and fair view
of the state of the company affairs for the year."

b) For each of the four situations above, comment on the suitability, or otherwise, of the
proposed audit report extracts and suggest an alternative if appropriate (in all cases you should
assume that no further adjustments are going to be made to the financial statements).
(25 marks)

(Total 30 Marks)

Page 64 of 66
 Gavin Ltd
a) Define “going concern” and briefly discuss the auditor's responsibilities in respect of going
concern.
(4 Marks)
Gavin Ltd provides cleaning services to a wide range of clients.

As an audit senior involved in the audit of Gavin Ltd, you have reported to the engagement partner that
Gavin Ltd is having some financial difficulties. Income has fallen sharply due to adverse publicity as a
result of two court cases. A number of clients have now ceased to use Gavin Ltd.

Also, a senior employee has left, claiming that the company is not investing in new techniques and
materials.

A cash flow forecast has been produced by Gavin Ltd that shows the need for a significant injection of
funds is required within the next 6 months.

b) Describe the audit procedures that should be carried out in order to determine the going
concern status of Gavin Ltd.
(8 Marks)

c) Describe the possible impact on the audit report of Gavin Ltd in the following circumstances;

- The future of Gavin Ltd is uncertain and this uncertainty has been disclosed adequately in the
financial statements.
(5 Marks)

- The future of Gavin Ltd is uncertain but no disclosure has been made in the financial
statements.
(5 Marks)

- The directors of Gavin Ltd believe that the company will continue to trade but the auditor does
not agree.
(4 Marks)

d) Concerning the cash flow forecast, define negative assurance and explain how this differs
from the positive level of assurance that is normally given on a set of historic financial
statements.
(4 Marks)

(Total 30 Marks)

Page 65 of 66
 Bullfinch
Part (a)

ISA 700 Forming an Opinion and Reporting on Financial Statements requires auditors to produce an
audit report. This report should contain a number of consistent elements so that users are able to
understand what the audit report means.

Required:

Describe FOUR elements of an unmodified auditor’s report and for each explain why they are
included.
(4 marks)

Part (b)

Bullfinch.com is a website design company whose year-end was 31 October 2014. The audit is almost
complete and the financial statements are due to be signed shortly. Revenue for the year is $11·2 million
and profit before tax is $3·8 million. A key customer, with a receivables balance at the year-end of
$283,000, has just notified Bullfinch.com that they are experiencing cash flow difficulties and so are
unable to make any payments for the foreseeable future. The finance director has notified the auditor
that he will write this balance off as an irrecoverable debt in the 2015 financial statements.

Required:

(i) Explain whether or not the 2014 financial statements require amendment; and
(ii) Describe audit procedures which should be performed in order to form a conclusion
on any required amendment.
(6 marks)
Note: The total marks will be split equally between each part.
(10 marks)

Page 66 of 66