PROFESSIONAL LEVEL EXAMINATION

2019

Mock Exam

(3 hours)

Advanced Audit and Assurance

Answers

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 Mock examination: Answers

Question 1
(a)
Tutorial note: The answer is not separated into parts (i) and (ii) as they are so closely
connected. An alternative layout would be to adopt a columnar format for your answer.
This answer is in note-form to demonstrate the breadth and depth of points you need to
make for a pass-standard answer. Subsequent answers are presented in a more full-
format.
Risk: No inventory count at year-end
Factor: Traditionally a good source of audit evidence
Audit work:
 Evaluate reliability of inventory records
 Review reliability of continuous inventory checking records
 Check cut-off (goods received notes and goods despatched notes).
Risk: Overstatement of inventories
Factor: Non-compliance with IAS 2, higher levels of inventory (nature of inventory, thus
theft)
Audit work:
 Check lower of cost and NRV is used for all lines of inventory
 Check the premises for all obsolete, damaged and slow-moving inventory
 Check sell-by dates for all lines of inventory.
Risk: Misstated opening balances
Factor: Recent appointment
Audit work:
 Check that the opening balances have been brought forward correctly
 Consultation with management
 Review of previous period’s accounting records and control procedures/ client
working papers and schedules
 Review the previous auditor’s work
 If the above is unsatisfactory, perform substantive procedures on opening
balances.
Risk: Internal controls not applied at all locations
Factor: Multiple locations
Audit work:
 Branch visits to test internal controls
 Cash counts reconciled to till records.
Risk: Mis-stated purchases/payables/inventory
Factor: Spanish suppliers likely to involve foreign currency transactions
Audit work:
 Check appropriate exchange rates used in translation
 Recalculate sample of foreign currency translations

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 Check ability of accounting system to deal with foreign currency

 Sensitivity analysis on forecasts to assess impact of a rise or fall in the euro.
Risk: Unrecorded cash sales
Factor: Retail sales on a cash basis
Audit work:
 Evaluate and test controls over cash
 Analytical review of profit margins
 Review results of inventory counts to ascertain any shortfalls.
Risk: Inappropriate accounting treatment of website, unreliable accounting
systems
Factor: Development of website
Audit work:
 Review costs included and ensure capital in nature
 Test internal controls over on-line ordering system.
Risk: Overstatement of receivables
Factor: Area of judgement is uncertain as to recoverability of receivables
Audit work:
 Circularisation of receivables
 Ascertain whether customer monies were received after end of the period
 Age analysis of receivables balances
 Review the allowance for receivables (irrecoverable debts).
Risk: Inappropriate recording of a contingency
Factor: Legal proceedings against consultants
Audit work:
 Inspect legal correspondence with solicitors
 Review compliance with IAS 37 Provisions, contingent liabilities and contingent
assets
 Obtain written representations from management on completeness of
disclosures.
Risk: Failure to identify significant events or transactions which impact on the
financial statements
Factor: Limited time for review of period after end of reporting period, new client, lack of
familiarity
Audit work:
 Second partner review of high risk areas.

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(b)
Audit work Reasons
(1) Damages claim
 Ask the directors how they  The matter is potentially material – even
propose to treat the claim in the a claim of just ₦100k represents 12.5 %
financial statements (and on what of trading profit.
grounds).
 Inspect the invoice/contract with  The customer’s claim may be invalid if
the customer to ascertain the they were responsible for insurance or if
terms and conditions and whether high-value items should have been
the antiques collection is identified. specified.
 Review correspondence with the  In order to obtain consistent third party
customer and with solicitors and evidence to support internal evidence.
the accident report/damage
record.
 Examine Barnet Removals’ own  Barnet Removals may have its own
insurance cover documentation. insurance cover to cover such claims
from customers.
 Enquire whether the damage was  To ascertain whether there may be other
an isolated incident. similar claims for which provision is
needed.
(2) Bad/doubtful receivable
 Ask Barnet Removals’ directors for  The matter is material as full provision
their views on the recoverability of would reduce trading profit by 37.5%.
the receivable.
 Analyse Safe Storage’s account to  This may highlight specific matters for
ascertain whether it is still active investigation. If current invoices are
and whether any cash has been being settled, this could indicate that the
received. ₦300k is being disputed or is invalid
(and therefore irrecoverable).
 Select a small sample of  To ensure that a bona fide receivable
transactions and vouch to exists.
supporting documentation (e.g.
invoices and remittance advices).
 Inspect Barnet Removals’ contract  Special credit terms may exist (though
with Safe Storage and the these are unlikely to extend to six
correspondence file. months). Correspondence may reveal
disputed amounts and steps taken to
recover them (e.g. warning letters).
 Conduct a company search on  To confirm that the company exists and
Safe Storage. appears solvent. To ascertain whether
the two companies are related parties.
 Review the equivalent balance (if  If Safe Storage’s balance has previously
any) in last year’s working papers. been circularised (without any
repercussions), permission to confirm
the balance directly with Safe Storage
may be sought from a higher authority
(than the financial accountant).

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Written representations
(1) “No provision is considered necessary in respect of a legal claim by Mr X for
damage to reproduction furniture. No amounts are expected to be paid, and no
similar claims have been received or are expected to be received.”
Note: the representation for the legal claim assumes that audit work will validate
the assertion that the collection is not antique.
(2) Written representations on the debt from Safe Storage are not appropriate. If
sufficient evidence cannot be obtained to confirm the recoverability or otherwise
of this debt, the inability to gain sufficient appropriate audit evidence will result in
a qualified audit opinion.

Question 2
(a) Threats to independence
Rotation of audit partner
SportAfrica Co has had the same audit partner for the last seven years. An audit
partner’s independence might be impaired where that position is retained for more than
seven years for a listed company. The reason for this is that the partner might become
too close to the directors and staff in the firm and this may impair his judgement on the
financial statements. However, SportAfrica is currently not listed so this requirement
does not apply.
As SportAfrica is now being listed, Light & Co should rotate the audit partner this year
to avoid any familiarity threat. However, given that SportAfrica was not a listed
company up to this audit, may imply that the partner could continue this year, but would
be recommended to be rotated before the 20X6 audit.
Preparation of financial statements
Apparently Light have been preparing SportAfrica’s financial statements as well as
carrying out the audit in previous years. While this may not have been an
independence issue in the past, as a listed client the auditors may not provide certain
other services to their audit clients (including accounts preparation). Preparing financial
statements as well as auditing them would provide Light with a self-review threat, that
is they may not see any misstatements, or want to report misstatements in financial
statements that they have previously prepared.
Light shall therefore decline to prepare SportAfrica’s financial statements.
Attendance at social event
Attending the social event with respect to the new listing may be inappropriate as Dark
may be seen as supporting SportAfrica in this venture. There is an advocacy threat to
independence. Support for a client might imply that the audit firm are “too close” to that
client and might therefore lose their independent view regarding the audit. There is also
a familiarity threat.
Dark shall therefore politely decline the dinner invitation, clearly stating their reasons.
Unpaid taxation fee
The unpaid fee in respect of taxation services could be construed as a loan to the audit
client. Audit firms shall not make loans to or receive loans from audit clients. An
outstanding loan will affect independence as closure of the loan might be seen as more
important than providing an appropriate audit opinion.

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Dark need to discuss the situation with SportAfrica again, suggesting that a payment
on account could be made to show that the whole fee will be paid. Alternatively, audit
work on the 20X4 financial statements can be delayed until the taxation fee is paid.
Inheritance
Under ICAN’s Code of Conduct, audit partners may not hold beneficial shares in a
client company. This provision includes audit staff where they are involved in the audit.
The independence issue is simply that the shareholder (the auditor in this case) may
be more interested in the value of the shares than providing a “correct “opinion on the
financial statements.
The shares should be disposed of as soon as possible. However, given the inside
knowledge of the listing, disposal now, or delaying disposal a few days to obtain a
better price may be considered “insider dealing”. It may be better that the audit
manager resigns from the audit immediately to limit any real or potential independence
problems. Professional advice may be needed on when to sell the shares.
(b) Meeting corporate governance requirements
Currently, the only action that the directors appear to have taken is to establish an audit
committee. Given that SportAfrica is going to be listed on a recognised stock
exchange, then there are other corporate governance requirements to be met. These
requirements include:
 Ensuring that the chairman and the company chief executive officer (CEO) are
different people.
 Appointing non-executive directors (NEDs) to the board of SportAfrica. The
number of NEDs should be the same as the number of executive directors less
the chairman.
 Ensuring that at least one NED has relevant financial experience.
 Appointing the NEDs to the audit committee, remuneration committee and
possibly an appointments committee. The chairman will also have a seat on
these committees.
 Establishing an internal audit department to review SportAfrica’s internal control
systems and make reports to the audit committee.
 Ensure that SportAfrica has an appropriate system of internal control and that the
directors recognise their responsibilities for establishing and maintaining this
system.
 Establishing procedures to maintain contact with institutional shareholders and
any other major shareholders. The evening reception for shareholders could
become a regular event in this respect.
 Checking that the annual financial report contains information on corporate
governance required by the stock exchange (e.g. a report on how directors
monitor the internal control systems).
(c) Communication with the audit committee
Under most systems of corporate governance, the external auditor’s primary point of
contact with a company is the audit committee. There are various reasons for this:
 Initially, to ensure that there is independence between the board of directors and
the audit firm. The audit committee consists of non-executive directors (NEDs),
who by definition are independent of the company and can therefore take an
objective view of the auditor's report.

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 The audit committee will have more time to review the auditor's report and other
communications to the company from the auditor (e.g. management letters) than
the board. The auditor should therefore benefit from their reports being reviewed
carefully.
 The audit committee can ensure that any recommendations from the auditor are
implemented. The audit committee has independent NEDs who can pressurise
the board to taking action on auditor recommendations.
 The audit committee also has more time to review the effectiveness and
efficiency of the work of the external auditor than the board. The committee can
therefore make recommendations on the re-appointment of the auditor, or
recommend a different firm if this would be appropriate.

Question 3
Tutorial note: Note that as well as the 20 marks for addressing five matters, there are also
‘pervasive’ issues which can be brought out as overall conclusions on QC policies and
procedures at the level of the audit firm. Remember, it is a professional skill to recognise
causes and effects or other linkages between the findings.
(a) Analytical procedures
Applying analytical procedures at the planning stage, to assist in understanding the
business and in identifying areas of potential risk, is enshrined in an auditing standard
(ISA 315) and therefore mandatory. Analytical procedures should have been performed
(e.g. comparing the draft accounts to 30 June 20X4 with prior year financial
statements).
The audit senior may have insufficient knowledge of the waste management service
industry to assess potential risks. In particular, Scrubbed may be exposed to risks
resulting in unrecorded liabilities (both actual and contingent) if claims are made
against the company in respect of breaches of health and safety legislation or its
licence to operate.
The audit has been inadequately planned and audit work has commenced before the
audit plan has been reviewed by the AIC. The audit may not be carried out effectively
and efficiently.
Tutorial note: An alternative stance might be that the audit senior did in fact perform
the analytical procedures but was careless in completion of the audit planning
checklist. This would have quality control implications in that the checklists cannot be
relied on by the reviewer.
(b) AIC’s assignments
The senior has performed work on tangible non-current assets which is a less material
(17% of total assets) audit area than trade receivables (58% of total assets) which has
been assigned to an audit trainee. Non-current assets also appear to be a lower risk
audit area than trade receivables because the carrying amount of non-current assets is
comparable with the prior year (₦6m at both year ends), whereas trade receivables
have more than doubled (from ₦9m to ₦21m). This corroborates the implications of (a).
The audit is being inadequately supervised as work has been delegated
inappropriately. It appears that Jeffrey & Co does not have sufficient audit staff with
relevant competencies to meet its supervisory needs.
(c) Direct confirmation
It is usual for direct confirmation of customers’ balances to be obtained where trade
receivables are material and it is reasonable to expect customers to respond. However,

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it is already six weeks after the end of the reporting period and, although trade
receivables are clearly material (58% of total assets), an alternative approach may be
more efficient (and cost effective). For example, monitoring of after-date cash will
provide evidence about the collectability of receivables (as well as corroborate their
existence).
Tutorial note: Jeffrey was only appointed in July and the audit started two weeks ago
on 1 August. This may be a further consequence of the audit having been inadequately
planned.
Furthermore, supervision and monitoring of the audit may be inadequate. For example,
if the audit trainee did not understand the alternative approach but mechanically
followed circularisation procedures.
(d) Inventory
Inventory is relatively immaterial from an auditing perspective, being less than 2.4% of
total assets (20X3 – 2.1%). Although it therefore seems appropriate that a trainee
should be auditing it, the audit approach appears highly inefficient. Such in-depth
testing (of controls and details) on an immaterial area provides further evidence that
the audit has been inadequately planned.
Again, it may be due to a lack of monitoring of a mechanical approach being adopted
by a trainee.
This also demonstrates a lack of knowledge and understanding about Scrubbed’s
business – the company has no stock-in-trade, only consumables used in the supply of
services.
(e) Prior period error
It appears that the subsequent events review was inadequate in that an adjusting event
(the out-of-court settlement) was not taken account of. This resulted in material
misstatement in the financial statements to 30 June 20X3 as the provision for ₦4.5
million which should have been made represented 18% of total assets at that date.
The AIC has not taken any account of the implications of this evidence for the conduct
of the audit as the overall audit strategy and audit plan should have been reconsidered.
For example:
 the oversight in the subsequent events review may not have been isolated and
there could be other misstatements in opening balances (e.g. if an impairment
was not recognised);
 there may be doubts about the reliability of managements’ written
representations if it confirmed the litigation to be pending and/or asserted that
there were no events after the reporting period to be taken account of.
The misstatement has implications for the quality of the prior period’s audit that may
now require that additional work be carried out on opening balances and comparatives.
As the matter is material it warrants a prior period adjustment (IAS 8 Accounting
Policies, Changes in Accounting Estimates and Errors). If this is not made Scrubbed’s
financial statements for the year ended 30 June 20X4 will be materially misstated with
respect to the current year and comparatives – because the expense of the out-of-court
settlement should be attributed to the prior period and not to the current year’s net
profit or loss.
The need for additional work may have a consequential effect on the current years’
time/fee/staff budgets.
The misstatement should have been brought to the attention of Scrubbed’s
management when it was discovered, so that a prior year adjustment could be made. If

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the AIC did not feel competent to raise the matter with the client he should have
discussed it immediately with the audit manager and not merely left it as a file note.
QC policies procedures at audit firm level/conclusions
That the audit is not being conducted in accordance with ISAs (e.g. ISA 300 Planning
an Audit of Financial Statements, ISA 315 Identifying and Assessing the Risks of
Material Misstatement Through Understanding the Entity and Its Environment and ISA
520 Analytical Procedures) means that Jeffrey’s quality control policies and procedures
are not established and/or are not being communicated to personnel.
That audit work is being assigned to personnel with insufficient technical training and
proficiency indicates weaknesses in procedures for hiring and/or training of personnel.
That there is insufficient direction, supervision and review of work at all levels to
provide reasonable assurance that audit work is of an acceptable standard suggests a
lack of resources.
Procedures for the acceptance of clients appear to be inadequate as the audit is being
conducted so inefficiently (i.e. audit work is inappropriate and/or not cost-effective). In
deciding whether or not to accept the audit of Scrubbed, Jeffrey should have
considered whether it had the ability to serve the client properly. The partner
responsible for accepting the engagement does not appear to have evaluated the firm’s
(lack of) knowledge of the industry.
The staffing of the audit of Scrubbed should be reviewed and a more experienced
person assigned to its completion and overall review.

Question 4
(a) Internal controls
1 The lack of investment, and the associated lack of revenue, is a major problem
for HAGM. Internal controls that might help to deal with the problem include the
following:
 Closer monitoring of revenue from the various different sources and from
different types of day visitor.
 The total numbers of day visitors, analysed by type.
 Annual membership (analysed into new members and members who have
renewed their membership).
 Non-renewals of membership.
 Sponsorship revenue.
 Revenue from the café and shop.
There should be a budgeting system, so that management can compare actual
revenue with budget. This system may help management to plan for higher levels
of revenue in the future and take appropriate measures when actual revenue is
less than budget.
2 Internal controls may be applied to improve the detection risk and prevention risk
of unrecorded sponsorship revenue. Detection risk can be improved by making
regular comparisons between the expected and the actual recorded amounts of
sponsorship revenue. Expected sponsorship revenue should be estimated from
agreements that have been reached and other sponsorship records. These
comparisons should help to identify significant differences between actual and
expected amounts. Errors may also be prevented, over time, by recording

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instances of failure to recognise sponsorship revenue, the reasons for the

mistake and the corrective measures that were taken to deal with the failure. By
recording cases of error and the corrective measures taken the frequency of
errors should lessen over time.
3 HAGM should separate sponsorship revenue from advertising expenditure and
account for them separately. A control to ensure that these items are recorded
separately might be to check sponsorship revenue that has been accounted for
with the sponsorship payments that were negotiated with each sponsor, to make
sure that the agreed sponsorship amount was actually invoiced. In addition there
should be regular checks between the budgeted advertising expenditure and the
actual advertising expenditure recorded, to identify any unusual discrepancies.
4 A variety of internal controls are needed to reduce the risk of cash being lost,
mainly stolen.
 All cash desks at the door of HAGM should be occupied during all opening
hours, and desks with cash must never be left unattended. Assistants
working at cash desks should record the time they begin and the time they
finish their work at a desk.
 All cash receipts from ticket sales and in the café and shop must be
counted and recorded in a register. A receipt must be produced for the
customer, with a copy for HAGM.
 Cash registers should be able to distinguish between different types of
customer or different types of sale, and different methods of payment.
 Cash and a copy of receipts must be transferred securely to the cashier’s
department.
 There should be a daily reconciliation between quantities sold (tickets and
café/shop items) with actual cash takings.
 There should be an additional physical check on entry into the art gallery
and museum, between the cash desks and the museum. This is to make
sure that everyone entering HAGM is either an annual member or has
bought a ticket.
5 There should be a contingency plan or back-up plan for when the internet
booking system is unavailable to customers. This may be provided by the
telephone booking system, although customers need a way of obtaining the
HAGM telephone number for bookings. This might be provided by advertising on
a web search engine such as Google. There should also be regular maintenance
and servicing arrangements to reduce the downtime of the booking system to a
minimum.
(b) Financial statement risks
The numbers used in this part of the answer relate to the same numbers in the
previous part of the answer.
1 If HAGM is earning insufficient revenue to invest in new exhibits and
maintenance and repairs, a related risk may be failure risk (going concern risk). If
HAGM is unable to meet the requirements of IAS 1, the uncertainty about its
going concern status would have to be disclosed. The financial statement risk is
the risk of failure to disclose this fact when disclosure should be required.
2 Revenue may be materially understated because of a failure to account for all
sponsorship revenue.

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3 By failing to separate sponsorship revenue from advertising expenditure,

because sponsors have set one amount against the other, the financial
statements are at risk of understating (sponsorship) revenue and understating
(advertising) expenditure.
4 The risk for HAGM is mainly that cash revenue will be understated because it has
been stolen. If cash is taken by management and used for business purposes,
there is a risk that both cash revenue and expenditure will be understated. There
is also some risk that if visitors are able to get into HAGM without buying a ticket,
revenue from ticket sales will be lost.
5 The risk of the booking system being unavailable does not give rise to any
obvious financial statement risk, provided that there are no significant risks with
the back-up booking system. The main risk is the business risk that HAGM will
lose revenue during the period that the on-line booking system is unavailable,
because potential customers are unable to buy tickets when they want to.

Question 5
(a) Need for ethical guidance
 Accountants (firms and individuals) working in a country that criminalises money
laundering are required to comply with anti-money laundering legislation and
failure to do so can lead to severe penalties. Guidance is needed because:
 legal requirements are onerous;
 money laundering is widely defined; and
 accountants may otherwise be used, unwittingly, to launder criminal funds.
 Accountants need ethical guidance on matters where there is conflict between
legal responsibilities and professional responsibilities. In particular, professional
accountants are bound by a duty of confidentiality to their clients. Guidance is
needed to explain:
 how statutory provisions give protection against criminal action for
members in respect of their confidentiality requirements;
 when client confidentiality over-ride provisions are available.
 Further guidance is needed to explain the interaction between accountants
responsibilities to report money laundering offences and other reporting
responsibilities, for example:
 reporting to regulators;
 auditor’s reports on financial statements (ISA 700);
 reports to those charged with governance (ISA 260);
 reporting misconduct by members of the same body.
 Professional accountants are required to communicate with each other when
there is a change in professional appointment (i.e. ‘professional etiquette’).
Additional ethical guidance is needed on how to respond to a ‘clearance’ letter
where a report of suspicion has been made (or is being contemplated) in respect
of the client in question.
Tutorial note: Although the term ‘professional clearance’ is widely used,
remember that there is no ‘clearance’ that the incumbent accountant can give or
withhold.

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 Mock examination 1: Answers

 Ethical guidance is needed to make accountants working in countries that do not

criminalise money laundering aware of how anti-money laundering legislation
may nevertheless affect them. Such accountants may commit an offence if, for
example, they conduct limited assignments or have meetings in a country having
anti-money laundering legislation (e.g. Nigeria, UK, Ireland, Singapore, Australia
and the United States).
(b) Difference between fraud and error and how the given issues could be
categorised
ISA 240 is concerned with the issues of fraud and error. Fraud relates to intentional
acts that may involve falsification of documents and records, misappropriation of assets
or misapplication of accounting policies. Error relates to unintentional acts that may
result in misapplication of accounting policies, oversights or misinterpretations of fact
and clerical errors. Failure to correct an identified material misstatement results in an
unintentional act becoming an intentional one. The audit procedures for fraud or error
may be the same but fraudulent activity may result in the need to disclose illegal acts to
the regulatory authorities.
(1) Double financing of yachts
There may be a significant issue with DYM’s procedures resulting from this. The
auditor will need to ascertain whether this was an unintentional act caused by
poor record keeping or a lack of understanding of the financing arrangements.
However, with the amount of money involved, this could be a major fraudulent
activity or a mechanism to disguise the seriousness of the company’s financial
position.
(2) Missing yachts
The missing yachts may be a clear case of deliberate misappropriation of assets
and therefore fraud. However, they could also arise from erroneous accounting
and asset records and due to the poor arrangements for capturing revenue.
(3) Reconciliation differences
These may have arisen through error rather than fraud, but failure to act on such
differences could mean that the situation becomes more in the nature of an
irregularity.
(4) Overstatement of revenue
This could arise from unintentional application of policies or poor records.
However, it may also arise from fraudulent activity.
The reasons behind the absence of the financial director need to be considered. His
absence could indicate guilt (with the stress being caused by the worry of being caught
or the pressure he has been placed under to commit fraud). However, his absence
could be unrelated to fraud and these issues could have arisen in his absence as staff
struggle to deal with the accounting system and controls.
(c) Roles in the prevention and detection of fraud and error
Management is responsible for the prevention and detection of fraud and error through
the implementation and operation of effective control systems and accounting policies.
The auditor has no responsibility for the prevention and detection of fraud and error
although the annual audit may act as a deterrent.
The auditor’s role is to assess the potential for financial misstatement and to establish
with management whether there are any factors such as fraud that may result in such a
misstatement. To do this requires effective planning and control, assessing risks
associated with the company and directing audit attention to the areas of risk. Audit

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procedures should be designed to obtain reasonable assurance that material

misstatements have not occurred or that where they have occurred they have been
corrected or properly disclosed in the financial statements.
(d) Further steps for investigation
(1) Double financing of yachts
Clearly, this could have a material effect on the financial statements, since it
involves double financing of around 30% of yachts. The auditor will need to
perform additional procedures to establish how and why this occurred, and
whether it was a one-off intentional situation. These problems should be factored
into the risk assessment process and consideration given to the reliability of
management evidence. The timing of the problems will be important, in particular,
in establishing whether there is a link with the absence of the finance director on
sickness leave for the last five months. The full scale and impact of the problem
needs to be established and whether this problem leads to a question mark over
the company’s future viability.
(2) Missing yachts
The level of assets missing is ₦50 million, which is likely to be material to the
financial statements. The auditor will need to carry out further audit procedures
and in particular, understand how assets are controlled and whether missing
yachts are an isolated occurrence.
The auditor will need to understand whether these are ‘missing’ because of poor
accounting, poor inventory control or fraudulent activity. It may be that the yachts
were sold but not correctly reflected in the accounts. It will be important to
establish the true facts as far as possible. It will also be important to understand
what controls should normally operate to prevent such occurrence, how these
controls have been operating (particularly in the absence of the financial director)
and the length of time since the problems have occurred. Yachts are large assets
– not ones that would be easy to mislay or miscount.
(3) Reconciliations
Reconciliations have not been performed for four months – so may be linked to
the finance director going on sick leave. The lack of control over reconciliations
including the failure to investigate and address differences that have occurred
suggests poor management of risk in the company. The auditor needs to:
 establish responsibilities within DYM for undertaking reconciliations
 ensure that reconciliations are completed and that the full differences are
identified
 review whether the other problems identified with inventories and financing
are linked to these reconciliation problems
 establish whether the lack of reconciliations provides further evidence of
fraud
 fully understand the impact on the financial statements.
(4) Overstatement of revenue
Again, the auditor needs to conduct additional audit procedures to understand
the impact of this situation. Revenues are overstated by ₦10 million in the current
financial statements, which is likely to be material. The auditor needs to:
 confirm when and how this problem has occurred
 ascertain the reasons for the overstatement

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 Mock examination 1: Answers

 confirm what prior year investigations were undertaken and whether there
were any earlier indications
 establish what controls exist over revenue and to what extent these are in
operation.
Overall impact on the financial statements
For all of the items referred to, the auditor will need to consider the overall impact
on the financial statements. The significant nature and size of the problems may
impact on the going concern status of the company and added together, may be
an indication of lack of control, poor risk management or fraudulent activity. It is
important that the auditor discusses the issues with management to keep them
informed of his concerns and to ascertain:
 whether they were aware of the problems
 how they have addressed their concerns
 what other issues may have arisen
 the impact of these issues and the likelihood of other risks materialising
 what reports they have received on the management of risk and the
operation of internal controls
 how the role of the finance director has been managed since his absence
on sick leave
 what explanations have been received for the absence of the finance
director and what contact has been maintained in the five months of
absence
 whether the absence is linked to fraudulent activity or to stress arising from
the control issues that have subsequently been discovered.

Question 6
(a) Fire at warehouse
(i) Audit procedures
 Discuss the matter with the directors checking whether the company has
sufficient inventory to continue trading in the short term.
 Enquire whether the directors are satisfied that the company can continue
to trade in the longer term. Ask the directors to sign an additional written
representation letter to this effect.
 Obtain a schedule showing the inventory destroyed and if possible check
this is reasonable given past production records and inventory valuations.
 Enquire that the insurers have been informed. Review correspondence
from the insurers confirming the amount of the insurance claim.
 Consider whether or not Portvale can continue as a going concern, given
the loss of inventory and potential damage to the company’s reputation if
customer orders cannot be fulfilled.
(ii) Amendment to financial statements
 Enquire whether the directors have considered whether the event needs
disclosure in the financial statements. Disclosure is unlikely given that the
inventory was not in existence at the year-end and on the assumption that
insurance is adequate to cover the loss.

© Emile Woolf International 13 The Institute of Chartered Accountants of Nigeria

Advanced Audit and Assurance

 Amendment is not required as the fire did not affect any company property
and the inventory would not have been in existence at the year-end
(inventory turnover being very high).
(iii) Modification of auditor's report
 If the going concern status of Portvale is in uncertain, but disclosure of the
uncertainty is adequate, a Material Uncertainty Relating to Going Concern
paragraph must be added to the auditor's report. This paragraph is placed
after the Basis for Opinion paragraph and draws attention to the note in the
financial statements disclosing the material uncertainty. It also states that a
material uncertainty exists, and that the auditor's opinion is not modified in
respect of the matter.
 If the disclosure made by the directors is considered to be inadequate, then
the auditor's must modify the audit opinion using a qualified (“except for”) or
adverse opinion.
(b) Batch of cheese
(i) Audit procedures
 Discuss the matter with the directors, determining specifically whether there
was any fault in the production process.
 Obtain a copy of the damages claim and again discuss with the directors
the effect on Portvale and the possibility of success of the claim.
 Obtain independent legal advice on the claim from Portvale’s lawyers.
Attempt to determine the extent of damages that may have to be paid.
 Review any press reports about the contaminated cheese. Consider the
impact on the reputation of Portvale and the ability of the company to
continue as a going concern.
 Discuss the going concern issue with the directors. Obtain an additional
written representation letter on the directors’ opinion of the going concern
assumption of Portvale.
(ii) Amendment to financial statements
 The event should be disclosed in the financial statements in accordance
with IAS 37 Provisions, Contingent Liabilities and Contingent Assets as it
may have a significant impact on Portvale. Over two-thirds of Portvale’s
customers have either stopped purchasing products from the company or
are considering taking this action.
 No adjustment is required for the event itself as it was not a condition at the
end of the reporting period.
 However, the event may become adjusting if company’s reputation has
been damaged and the amount of the legal claim is significant. In this
situation the directors may decide that Portvale is no longer a going
concern so the financial statements may have to be re-drafted on a break-
up basis. This action complies with IAS 8; the break-up basis is used where
the directors have no realistic alternative but to liquidate the company.
(iii) Modification of auditor's report
Modification of the auditor's report depends on the director’s actions above.
 If the financial statements are prepared on an alternative basis (e.g.
liquidation basis), and the auditor agrees with that assessment, then an

© Emile Woolf International 14 The Institute of Chartered Accountants of Nigeria

 Mock examination 1: Answers

unmodified report can be issued with an emphasis of matter paragraph

drawing attention to the accounting basis used and the reason for its use.
 However, if the financial statements are prepared on a going concern basis,
and the auditor agrees with this, then he needs to include a Material
Uncertainty Relating to going Concern paragraph after the Basis for
Opinion paragraph. This paragraph draws attention to the going concern
uncertainty and the disclosure of the note on the fire in the financial
statements. It also states that the auditor's opinion is not modified in
respect of the matter.
 If Portvale is not a going concern, and the financial statements have been
prepared using this assumption, the auditors must give an adverse opinion
stating that the company is not a going concern.

© Emile Woolf International 15 The Institute of Chartered Accountants of Nigeria