···ACCA.

Applied skilts .

Audit and·
Assurance
Exam&
Practice Kit
For exams in September
2024,-December 2024,
March 2025 and June 2025

·@aPP
I
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·contents-
Findlng_ questions
Question iqdex_ iv
...
·.Topic ·index viii·
About this Exam Practice Kit X

The ex-am- X

Introduction to Audit and Assurance (AA) X

Format of the exam xiii

Helping you with your revision- xiv
Essential skills areas to be successful in Audit and Assurance XX

Questions and answers

Questions 3

Answers 145

Exam Practice ·

Mock exam 1(September 2016 (amended))

Questions 379

Answers 391

· Mock exam 2.(Specimen Exam (amended))

Questions 413
Answers 427

Mock exam 3 (December 2016)

Questions 449
Answers 463

· .Mock exam '+ (Section B from Sep/De~ 2023 Hybrid Exam)

Questions 483
Answers 497

Additionai-CBE Mock Exam 515

 Question index
The headings in this checklist/index indicate the mdin topics ofquestions, but questions are
expected to cover several different topics. -
Questions set under the old-syllabus Auditand _Assurance (F8) and Audit and Internal Review (A.IR)
exams are included because their style and content are similar to those which appear in the Audit
and Assurance exam. The questions. have been amended to reflect the f?Urrent exarn format.

Pflge number

f 1'H"'+II"ff% M1i 1

PGII\Il~tadit framewOrk and .au~

.,
;{~, ~::.;

Section A Questions

1--5 BJM Co ) 10 18 3 145

:
gerine Tech Co 10 18 5 146

11-15 Orange 10 18 7 147

!
16-20 GCC s .................... ......................................
10 18 9 148

21-25 Doge &Co 10 18 11 150

26-30 Kamari Co ' 10 18 13 152

.If~~ IJJjnnt~g and nstc ~at :}~

.f'•
Section A Questions

31-35 Bridgford i 10 18 16 153

:
..........'··-~,-

36-40 EuKaRe 10 18 18 154

,.....

41-45 South 10 18 21 155

46-50 Mason 10 18 23 157
·. .....

51--55 Severn 10 18 2b 158

,... .....,. ~-Y'''~'A''"'''~'<'.'' ~ . ..... .......-
_.

56-60 Goofy Co 10 18 27 159

•.w.,·•• ,.•o•• ~-.-··~·••••v,_,," ,,,_,, .
..,_,...,,,,.......,.,,...,~,"""~ ,.,.'
:
61-65 Carlise : iO 18 30 161
1........... . ·- ~· --~-·-· . .......... ..- ......

Section B Questions
·,,,,,.........
i
66 Peony (Mar/Jun 19) 20 36 33 163
i

67 Harlem (Sep/Dec 19) -30 54 34 167

,.... ....... , ... __ ., ........ ·-- .. ·~~ .... ·- ___ ................. . .... ,_ .. ________ ....... ,. .. ...... ~ ..... .. .....

68 Scarlet (Mar/Jul20) '30 54 36 173.

69 Corley Appliances Co (Mar/Jun 21) 20 36 38 179

:--- ...

70 Hart Co (Sep/Dec 20) 30 54 39 184 I

.. ..C...- ..........
\

71 Prancer Construction Co (Sep/Dec 17) 20 36 40 189

.. ~ ... _... _...._. __ ,_..... ~--~ ---~ ........

72 Blackberry Co (Mar/Jun·18) 20 36 41 194 (

..........·..............
73 Dorjeeling Co (Sep/Dec18) 30 54 42 198
i - ........ _.... __ __ ,

74 Hurling Co (Mar/Jun 17 amended) \ ... 30 54 44 205

lv Audit anrl A~::~IJrnnr.P.

@aPP
 76 Esk Co (Mar/Jtm 22) .. 54 46 217
r77·M;~-~i~~c~ (;:i~~~c;~~22)·---~-· ·· 20 36 48 223
, ......•., ........ :; .. -:: ---~------------···· ......... .. , ..._.."····--·· _ ..
! 78 Lapis Co (Mar/Jun ?3) 20 36 50
·················-····· ................. ···--·····--···· ~· ,_;• ....... N-~ ,L.'"-"'v

: Section A Questions
;., .... ,.....-.-.....,.." " ' ' ' . •.,•,•oOy,C•,••,••y,,•,','•"''''''V,·,,••A•,,..c-•o•• ·········---·······-----~, ..••·
i
•. J
1 '~
79-83 Flowers Anytime 10 18 52 232
···-··-··r·1. ··-
! 84-88 KLE Co 10 18 55 233
,..
...... ,.........1 , , ' - ' ' " ' ' ' .I
' '
~:
! 89-93 Southlea 10 f 18 234
................·.·-· · · · · . . . . . . . . .-·. L . J. <,...... __ , • ' . --··
i
... !
i 94~98 ch~;~~--- i
10 18
j
59 235 l
;
., .....,·,.v·J"""'".

: 99-103 Swan l 10 18 61 236

... :...... ·-·~--- ....... ·-·· ' . ... .. , .....·-.....-" .. ~----~ ...... ...._.
;

! Section B Questions
-·-- ............. ,....... .. ....................... . ................. ..... ..
,

i
I 104 Freesia (Mar/Jun 19) 30 54 i
63 237
································· : .......... ,.................. .
j 105 Castle Courier Co (Mar/Jun 21) 30 54 i
65 j
243
. ~ .... . ......................... !..... i
67 ....... !····
l106 Bluesberry (Dec 10) ·20 36 i
248 ~
,, ,,,,,, ,,,,•,,,,v,,),,.,, "'"''''' .,,, 0 ,,vo•·•••• •• ..........}
'
l-107 Snowdon (Mar/Jul20) 20 36 68 1- 254 ~ .

1108 Swift Co (Sep/Dec 20 amended) 36 69 258

.............................. ..........: ... · .... : ........... ~: .... .. . . . . . . . . . . !. . . ..
i 109 Amberjack (Sep/Dec 19) 36 71 l 261'

110 Raspberry Co (Mdr/Jun 18) 54 71 265

[111 Camomile Co (Sep/Dec 18) 36 73 ' 271

: 112 Fox Industries Co (Jun 13 amended) 54 7'+ 276

; .............. , ...... ... .., j......
i 113 Pomeranian Co (Sep/Dec 21 amended) 36 76 281

: 114 Whittaker Co (Mar/Jun 22) 36 77 284

i 115 Daley Co (Sep/Dec 22) 54 78 290 i

· 116 Petra Co (Mar/Jun 23) 54 80 297 I'

;
-;

Part D: Audit evidence

. Section A Questions
..............................................................

! 117-121 Expert ·

308

Introduction v
@BPP
 1142-146 Porthos 10
!''""~r•~'"''"''''''-'''"',_'·~--''""'•• ·•••·~,,1.,·-··-·••·-••·•-•·••••·~··'
..
.................................... ............... .!.........................................;........................................_____ :.....-;.,......._.. _____________________________ ,____ ................................................ ,, .... !
1
! 147-151 Lancaster Co io 18 96
i··-··-····--··-·····--~--- . . . -----------~·-::·--·"-----~·-·"' ........... '''''i"" .......................................!.
! 152-156 Willow 8 Co 10 ; i8 ! 97
L_,._.._._ ............................_.. ----~---- ~- .'
j 157-161 Pickering
!........................ ..............................:''"'
& Co
.......... ·-·· ..., _...... ~ ..-
! 10 18
- .........._.. __________ !.._ ....... _....,_.. ____ ........, .... ___....._.,_, ________________ , __ ..
99
! Section 8 Questions
j:1~~~Liiy~c~~~-~~)~-:~~~- ~ -------····---·--·--·---·----·· ------i---·--------------------
30 54 102
1163 Purrfect Co (Mar/Jun 21)
j
20 36 103
•••••-••· •o·L~~ •••• ,,~.,..._,..._.,., , , , , __ ,_,.,.....,.,~._,,_,.., •-•- .. ~•-•••"J••••·•'"''

i
! 164 Rose (Dec 12 amended) 20 36 104 323
!-·-----..--·----·-··--------··-- ...................... --------------------- --------- ·--··---------------··------------------ -------------·----· --·-··--------···---....;..........................._.... _..+-------···------------·----·---·--··-------:--------------------..-·---·--·------i-------·---·----·--·------·-·--·-·r
[ 165 H!:Jacinth (Mar/Jun 19) 20 36 104 327
!.....-----------------·-------·----··---- , ,
........ ................................... .......................................................... , ........... .

! 166 Sagittarii 8 Co (Sep/Dec 20) 20 36 i 106 330

········r -..." . . . . ····--·y.,,·--·--··---·-----
'
j 167 Encore (Mar/Jul 20) 20 36 107 333
........ --------------··------·---- -·-··--------------..·-------------------·-- --- ................................ -·--'-----·---------·--·------ ·-----;--- --··----------------·----··- ····+·-------- ...............................-. ·--------~-------·----- ................... ·---·-----i

1..__~~8 -~-~~-~~-~erry Co (M~.:.~~~~--~--8) ... -~?. . . _ 36 !_ -----------~?-~ . . . . . . . ! 336

. ~
i
! 169 Spadefish 20 36 1 - 109 340
}..__. ........... .,.._._..•...,,...... ,,.._ ..,_~--·- ............... ~----···-... ··---~.................. .
__ ....................................•....• ·································j·····-···

j 170 Danube Co (Sep/Dec 21) 20 36 110

i' ··-··-~ _
...., .... --------·~- ..,.... ,. . . . . ,................ A>.,,,..,________ ,.,.,____, ..................._..-.,_..__ ..... ····""" -·~"'·-·-"" .. .

l----~~~---~-~~-~-~~~-Co (Mar/Jun 22) .

20 :
36
................. ~........~-·-·-f·· ··~·"·----·""----..--;-----~------·-..;._~-~~---·· ·~· •·.. -·----.. -~--- .............
\
111
h •• _ . , .. .

)172 Pacific Co (Sep/Dec 22) 20 36 112

t··-··-·-.. ---····-·-··~ . ~··-·- .................-.. -·· . . ............................................
1173 Heron Co (Mar/Jun 23) 20 36 113
1(•· ........................... ,.. .......................... , , ...................... ..
,., ... _
.:- .. ·-'·-··-·-·-·-·----·--·-·-·-··-·····'"...
;

S~ction A Questions
>--------------··--------·----------·---·-----------·----------·------------- --·--------------------------·-----
174-178 Chestnut 10 18 115 357
! .
: 179-183 Humphries '10 18 t17 358

.- .... ) ;~.-~
,. . --------....... . . . . . ............... .". . . . . . . ,.,I'-.·- """'" . ,. . . . . . ..,.' . . . . . . . . ,.................. '" __ _. . . . . . ! -- •'"""'"···------ ·-· --- . . . . . . l - - .. ,.__,.,.,!

~~~:~J:i~~::~~rry ~-- -~~ i···--~~i---i . --:~··--i

t. . "''"""' , . ,.. . , , . . ,.. -., . ,. ., .,.,.,. . . .,. ,.,_, .,.,.,.,., . ,.,_,. ,.,. . , . .,.,. . ~,,..,.,,..., . ~..,.,.,. . , ..,,,,..,.,~.•-·•·• '"' •___., . ,. ._.._,.. __..._""-''~""""~•'"- ,._, ,_,._,,....__,,h•0"'"-••·1·~·•-'"-"-'"'"""'''""''•-•·-.,-•.-~ ~ },,,_.._,~_...,,,
..... .. • '""'" o- "'''A"'·'-"''"'"''-•f,. ••·•• _,.,_,.. ,.... ., .. ''"''

! 194-198 Czech & Dawson

!----"'·--· .... ... ... ........ . .
10 18
-.................... - - _____
l 124 1
362
l.,.. ....., .... _______._ _____............... -·-· ._1... .............................. -_____
,
j
1199-203 Medimade
i - - ... .. . . . . . . . . . . . . . . . . . . . . . ................. . . ..................... . 10 18 i 125 363 i
-........ --- ____ :. . . . . . _, ________________________;_______________________________________ , I
! 204-208 Brown 8 Green Co 10 18 127 ! 364 !
i........... ----·--·--·----------....-................- .............:.... .............. .. -.. - -.............. .. . ---------- . . .,. .. .. .... ......... ... .......... ... .. ................ ..... -· ............................... ----- ...................L....... _.. _________ .... __ ---------~
lL Section B Questions
................................................
··----·-2a··-·----,---------------·36--~---,-------------·---131·----------,----------·---- 367- -----------1
I 209 Po nda (Dec 13)- ----------··-------··----··. _,, ____ ............. .-.·,...... ' . . - ......... , ,...................,..........- - - .........,...L. ..•._........................ _....................,
1-··------- ··--·--·-·----····-·---·--·------··---------·--·

.· .· .......:....:.f

'
r'
;
i

'! 210-211 June 2018 4 ! . . 7,,,• . , , "l'' 132" "l:

... , 370
!------------------'----- _____ .... ,............................ .......................................................................................................!.......... ------·--·1-------- ·-----------·-j--------·-·---------'--------~--+-·-·------------------- -------:-l
j212-213 September 2018 _ , 4 ,
,---·-·-------:--·----·---·-----------.-···---·------..--------------------· . . . . . . . --·--·------··--·----------.............,......... -------·j··--··--· . . . . . . . . . . . . -·--j·------............ .....
7 I 133
--·1----
! 370 l
........................ ~ .........................................______ ...c ...!

! 214-215 December 2018 i 4 ! 7 1 133 l 371 -

1

, ____ -------.·------"-""'""''""""•"·'"·-•---••--··-----•.--------····•··•••·-----"•·-""v-•·-· ...-..... .-..... ·-·•-•·L ...............................,_.,,..,,.~-------- .... J. .,. "'"""""""'"''·'""-•·""""''•·-·-••.J...-....:•. ~--w·""'""""''"·"'·'•·"-·-'"'~'1

vi Audit and Assurance @BPP

 .r ~ -I ····,··7· · · .........,. . · .. ,.......................1. .3. . 6
. .:...................;......... .
----------·····'"'"'"''''"' .. ''''..,M.,, ............ _______ .... ______ ) ________ , ..• •.• : . , .. --·-··i···.-·······-····"···· ..····"''

....... : ' ·~·-·. J 7

4
..
........ ,.,, ... , , .... ,._ ...,. i

~ 4 7

4 i 7

. Mock exam 1 (September 2016 (amended)) 379 391

..... )

·Mock exam 2 (Specimen Exam (amende~)) 413 427

..... ··········---- --~................ ... 1
! Mock exam 3 (December 2016) 449 463 i

........................................................................................................................................., " " ' ' ' .......... ~.......,................ .. .. , ................................- ...........;............................................... ,
J .Mock exam lt (Section B from Se~_(~_::. ~?.~~ ~~~r~d Exam~.. ... .... .j _4..~~- .. .... L.... .. 497 .l

@sPP Introduction vii

· Topic index
Listed below are the key Audit and Assurance syllabus topics and the numbers of the questions in
this Kit covering those topics. If you·need to concentrate your practice and revision on certain
topics or if you want to attempt all available questions that refer to a particular subject, you will
find this index usefu I.

! Accounting estimates i
;
140

: Analytical procedures j 33, 73a, 73b,.146, ME313; ME4 7,.ME4 12

1 Assurance engagement l"1, 3, 4, 21, 22, 23, 25, 26, 29, 209a
t.......,,._,,, ................ .... ,'
Audit acceptance, engagement and tendering l 51, 52, 53, 54, 55, 58, 59, 68a, 68b, 69a, 71a,
! 76a, 77a, ME3 i6a
l Audit evidenc~· ··~·~ d··~-~~~;~·~~·~·~····-···-···---·~---·~··-···-·-··. ··-····t·····1·21·~--125~·1'32~·13·6:-141·: .1.44~·-145:·1'52·:··1.53:·-157,····· . . . .,
! 158, 159, 167c, ME2 7, ME2 8, ME2 9, ME3 11,
.................-
I ME3 12, ME315, ME4 6, ME410
... , •• , .. ,. ..._.., ...., . ...... . , , ...... , ...., . , . . . . . _. .... , .... , . , . . ... . . . . . . . . . . . • · · - w• .........., ...... , . . . . . . . , .. , ... , ••• , ...,....... • .. ;

t Audit planning and documentation I 31, 41, 65, 70a, 71b, 127, ME118a, ME216c, i

; l ME2 16d, ME2 16e

; . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ._.. . . . . . . . . . . . . . . . . . .+----.. ~-----·-·-- . --·-······----·-··--·-.. . . . -._. . ,,_. __. ___. ._. . . . . . . . . . . -.. ···-·!1
---~-

: Audit regulation I! 60
: Auditor's report ; 163d, 166d, 167d, 168d, 170d, 171d, 172d, 209c, ,
. i ME1 9, ME110, ME2 11, ME2 15, ME218d, ME3
f 10. ME318b, ME415 !
__ ,,, .......................... _

l Audit risk
.............. .
·· · · · -· · · ·-. _. _. . ._. · · · · · · · ·.- · · --·-~ ···34~-·35.-·;:;:·38:··-4-4._4.6~···47...4-8:·49~·-5·a~-·66·b·:·67~:-······;
i 68c, 69b, 70b, 71c, 72b, 73c, 74a, 74b, 75a,
76c, 77c, 78b, ME118b, ME2 16a. ME2 16b,
ME316c
t-A~t~·~~~~d ~~~~s-and techniques ···-·~---·-··-·· ··-·r··12-8~ 14~·:·143~·1·6·2~,ME1·5 . . . . .-.. . . . . . . . . . . . . . . ..
...... , _ , , __ \ ............. _.,,. __ ...................... , .. _ ............! .................. . ......... _ . ., ...1

1 Cash and bank l111b, 112e. 114c, 115c, 135·, 155, 160, 173b
......... , ..•.· ··-·"""' .................. ···" .... _._., ...... _..... ~-..! .-.. .,. -., , _..,..~.yvo,~
l
,_~--.. ·'•·''~. ~
....-. •.w •.y--,..,..... ·' c·•· -·· .. ,,,.,..,_,,.. ..- ..,,.,.._.._,._, ,, .•. ,,,-._,.,,....... ;,.,-. .. ,..., .. .... ,_, ., ·.,•,.,,,._.,..,, "·"·"''' '''''·•• ·.

l.?ommunica~~~.~-~i~~ ~~~~~.~e~ent i 111a, 112b

!
: ' . . .
"Y","'\"'"'" --~ ... _..,.,.,_,, '"""-O'"""A ...,., .. , ~ ....... _ _.• _ , . "'"""'"' '"'"" 0," '"'"'-' ~~""•"'"'Uo .............. ._ .... J
l
• Corporate governance ~ 6, 7, 8, 9, 15, 16, 17~ 18104d, 115d, 116o, ME3 1,
j ME3 2
j......... ............................... _.... ., ...................... ,,,_,_, .......- .... --... -...... - .... -...... ,...... .. ..................................... ,_,.,., ........................ _..,... .

1 Directors' emoluments
L...... _ .......,. ···-·-··~..---~--.-~ ... ~ .. -... ..
I 70c, 168c
·~---~·---··--· ·-----~,---·-·-~---·-··"•••"'~"---·-----~ ----~----- ~-- ·-·-·-·-~~----~-~ ·------~~-~-----·-.-~ -----·-·--·~--···- ~--
.. ... ... ......- ... .. .. .... - ......... ~-- ... -.....- ............~ ...- ....- ........... __..._._,.........................
II
\ Ethics ; ·5, 11, 12l 13, 14l 24, 27, 56, 57, 74c, 75c, ME1 11, i
!I ME112, .ME113, ME114, ME115, ME21, ME2 2,
j ME2 3, ME2 5, ME316d
J.. ..... .. ..1.................................................................................................................. _ .. ____ .. ~· ............................... ~·-·-·-·--·-;

! Experts
1_____ ,_, . . . ,,..._,. ___,,._,,
! ?Od. 120, 151, ME2 18d
l! Fraud, laws and regulations ! 2, 39, 67a, 72a, 75b,-126, 154
..................... ........... .. ...................... J........................................ ........ ........................................................ ......................_.......... _.

l. . ~~~!.j~.~~~~-~.-~.~~. ~~~~-=v:_·-·-·-···--····· . . . . . -----··-····--.. .,. ._. ___[. . .~.=~--~~.~.::. :.~:. ~~-~. ~. ~··=~-. ~~. . . . . . . . . . . .
l Going concern l169c, 169d, 184, 185,.187, 190, 191, 192, 199,
Ii 200, 201, 210, 219, 223, ME117d, ME3 6, ME3
~ 8, ME3 9
j -...-··,.,~·"''-''""'_,_, ___ ......,_ ......~,..._,_..,.~,._._.,. ___ ............ , ........ , ..""'_._ ... , ... _,,,,, ....... , ........ - .......... __. .......... .,. .......................... ; ...... , .. , .. ,.,-~.,·-~ .................., ....... - .. -•.....,.·-~·- ..- .... --•.-,- .... ,....,..,,.. ____ ,.,.,... __ ,_., _ _ _ , ___ ,._ __ , _ _ _ _..,,.._,_,. __ , , , •....,_...... w ... - ... ~

llnterim audit ! 61,62

L. . . ._._ . . .,. . . . . . _. . _----------.. --.. - . . . -.. . .. --.. --.. --..--.--.. --.. -~ . . -----·---~"--·----·--------------. --.~--------------·--- . .----·---............-.--..-----.. . . . . . . -..............-.. . . . .-....................................

viii Audit and Assurance @BPP

Internal audit

Internal audit- using work 63} 64,130

Internal controls 40, 79, 80~ 81, 82, 83, 84,,85, 86, 90, 93, 94,
95. 96, 97, 98, 102, t03,-.104a, 104bs 105a,
107o~ 107b, 107c; 108o, 108b, 112a, 112c, 112d.
113d, 113b, 114a, 114b, 114c, 114d, 115a, 115b,
162a. ME116b, ME116c, ME217a, ME317a,
ME317b, ME317c

Inventory 73d, 122,123, 131, i62b, 163a, 165a, 171b, ME1

17b, ME218c

Materiality and misstatements 32, 66a, 189, 194, ME414

Non-current assets 43, 67d, 75d, 106c,117, 118, 119, 147, 148, 149,
150, 165b, 167a; 168a, 168b, 170a, 173a, 195,
213, 214, ME117a, ME2 6, ME217b, ME218b,
ME413

Purchases, payables and accruals 110d, 116d, 133, 134; 164a, 165c, 166c, 172a,
227, ME11,-ME1 2, ME1 3, ME117c, ME4 8, ME4
9
Professional scepticism and judgement 69c

45, 68d, 124, 163c, 164c, 166b, 167c, 170c,

t72b} 173c, 206, MEt 8

67d, 73e, 99, 100,101, 138, 139, 163b, 164b,

166a, 169a, 169b; 170b, 171a, 172c, 186, ME1
16d, ME210, f0E318a

104b, 109a; 109b, 116a, 116c, ME116a

Value for money audit

Wages systems

. Written representations

Introduction ix
@BPP
 About this Exam Prac;tice ~it
This E.xam Prdctlce Kit is valid for exams in September 2024~December 2024, Ma.rch 2025 ~nd.
June 2025 and, in this Exam Practice Kit, you will tind·questions in the style found within the
computer:..based exams (CBE). This includes objective test questions (OTQs) and constructed
response questions.
OTQs include a variety of questTon types·including multiple choice, multiple response and drag
·and drop. Constructed response questions are written questions. Information on these question
types will be available on the ACCA website.
Furthe·r information on the types of questions and the exam format can be found in the_section
headed 'Format of the Exam'.
BPPLeorning Media do everything possible to enst,Jre the material is accurate and up to date
when publishing it. In the event that any errors are found after the publication date. the!:J are
uploaded to the following website: learningmedia.bpp.com/pages/errata

The exam

:I~J) Videos can be viewed by accessing your ebook version on VitalSource.

Computer-based exams ·
Since the June 2019 exam sitting all Applied Skills exams have been computer-based exams (CBE) .

. Introduction to Audit and Assurance (AA)

Overall aim of the syllabus
This exam requires students to develop knowledge and understanding of the process of carrying
out the assurance engagement and its application in the context of the professional regulatory
·framework.

Brought forward knowledge

The Audit and Assurance syllabus. assumes prior knowledge and understanding of the accounting
topics in Financial Accounting (with the exception of group financial statements). A summary of
such knowledge is included in the Essential reading: in the AA Course Bqok.

The syllabus
The broad syllabus headings are:
A Audit framework and regulation
8 Planning and risk assessment
C · Internal control
D Audit evidence
E Review and.reporting
F Employability and technolog!:J skills

Main capabilities
On successful completion ofthis exam. candidates should be able to:
• Explain the concept of audit and assurance and the functions of audit, corporate-governance,
including ethics and professional conduct.
• Demonstrate how the auditor obtains and accepts audit engagements, obtains an
understanding of the entity and its environment, assesses the risk of material misstatement
(whether arising from fraud or other irregularities) and plans an audit of financial statements.

X Audit and Assurance @IIPP

 • Describe and evqluate internal controls, techniques and audit tests, including IT systems:~o
identify and communicate control risks and their potential consequences, making appropriate
recomm~ndations, Describe the scope, rol~·and function o(intema~ audit.
Identify and desqribe the work and evidence obtained by the auditor' and others required to.
meet the objectives of audit engagements and the application of the International Standards
on Auditing (ISAs).
• Explain how· consideration of subsequent events and the going concern principle can inform
the conclusions from audit work and ore reflected in different types of auditor's report, written
representations and the final review and report.
• Demonstrate employability and technology skills.

Displaying the right qualities and avoidir:-ag weaknesses

In order to pass Audit and Assurance it is important that you get some of the basics right. These
include the following:
Read the question
Again this sounds obvious but is absolutely critical. When you are reading the question think
about the following:
• Which technical area ·is being tested?
This should let you identify the relevant areas of technical knowledge to draw on.
• What arn I being asked to do?
(We will take a more c;fetailed look at the wording of requirements later.)
• Are there any key dates?
This is important in questions on inventory. If the inventory count takes place at a time other
than the year-end you need to be aware of this.
• What is the status of your client?

. I
For example, is it large or small~ is it a new or existing client? This might affect issues such as
risk. ·
:) • What is the nature of the business?
This is particularly relevant in planning questions as it will have an impact on risk areas.
• How many marks are allocated to each part of the question so approximately how many
points do I need to make?
When you think about the number of points you need to achieve you need to consider this in
relation to the requirement. If you are asked for explanation it is likely that you will score.more
marks per point than if you ore simply asked for Cl list of points.
You also need to think about the order in which you read information in the question. Particularly
in Section 8 it is impOrtant that you read the requirement first so that as you read through the rest
of the information you are aware of the key matters/issues which you are looking out for. ·For
example if you are asked for risks in a scenario !:JOU can try to identify as many risk factors as
possible as you read the detailed information.
Understand the requirements
It is important that youcan understand and differentiate between the requirements and terms
that the examining team typically uses. _Here are some examples: ·
) '

Requirement Meaning

Give an account of something, irwlyding the

kev features

Give the meaning of

Introduction xi
@BPP
 Recommend Advise the appropriate actions to pursue in
the recipient will understand
--
Discuss
__
________ ,
Critically examine an issue

List Normall-y punchier points than 'explain' or

'disouss'
-·-·-- ......,.._ .. __ .,

Illustrate Explain by using examples

f--···· ..
Audit procedures/audit tests Actions
'·-·--··
Enquiries Questions

Evider,.ce Sourc.e (eg document) and what it proves

,,_._._._.._._'-'•-··-··•••·

Think and plan

No matter how well prepared you are, you are going to have to do some thinking in the exam.
Obviously you will be under time pressure-but, if used effectively, thinking and planning time
should not be seen as a waste of time.
Generating ideas can often be a problem at this stage. Remember that your knowledge of key
ISAs can serve as a good starting point.
In audit evidence questions you may think about the financial statement assertions
(completeness, accuracy, existence etc). You could also think about the different types of
procedures (inspection, observation, inquiry, confirmation, recalculation/reperformance and
analytical procedures).
In risk questions it might be helpful to think about the different elements of risk (inherent risk,
· control risk, detection risk).
Repeating this knowledge will not be sufficient in most cases to pass the question but these ideas
can form a very sound basis for developing a good answer.
Keep going.back to the requirement and make sure that you really are answering the question.
One of the most common errors in auditing exams is fdentifying the correct point but using it in
the wrong way. You can· use the highlighting tool in the word processor on the· assessment
platform to highlight key words in the requirement. Make sure that each answer is focused on the
related requirement. It may be tempting to type everything you know about d particular point but
this will not help you to pass the exam. This tscattergun' approach will attract few, if any, marks.
Producing your answer
Although much of the hard work has been done by the time you get to this stage you need to .
think carefully about how you put down each point. The way you make the point can make a
difference to the numberofmarks scored. You need to make sure your answers do not suffer from
a lack of clarity and precision. This is particularly the case regarding questions on audit evidence.
For example, lists of tests stating 'check this' and 'check that' without explaining what is being
ch~cked and why is likely to score few marks. If you find it difficult to gouge the right level of
detail try to imagine that you are explaining the procedure to a junior member of staff. Would
they be able to perform the procedure based on your description~
Think about your sttjle. A well-structured an·swer with clearly identifiable points is generally
preferable to long paragraphs of text. However, do not fall into the trap of producing note-form
answers. This is rarely ~ufficiently detailed to score_ marks. ·

xii Audit and Assurance @BPP

\_
' 'i Format of the exam
The exam will comprise two exam sections:

Objective test (OT) 3 questions x' 10 "30

case marks.
_) Each question will ·
contain 5 subparts
each worth 2 marks

Constructed response
(written questions)

Total

Section A questions will be selected from the entire syllabus. The responses to each question or
subpart in the case ofOT cases are marked automatically as either correct or incorrect by
computer.
SectionS questions will mainly focus on the following syllabus areas but a minority of marks can
be drawn from any other area of the syllabus
• Planning and risk assessment (syllabus area B)
.. Internal control (syllabus area C)
• Audit evidence (syllabus area D)
The responses to. these questions are human marked.
For exam sittings from September 2019 onwards, questions have used a dating convention
whereby the 'current' date is 1 July 20X5.

Syllabus and study guide

The complete AA Syllabus and study guide can be found by visiting the exam resource finder on
the ACCA website: https://www.accaglobal.com/gb/en.html
You canfind the latest ACCA Audit and Assurance syllabus within the Audit and Assurance area of
study resources: ·
https://www.acoaglobal,com/gb/en/student/exam-support-resources/fundomentols-exams-
study-resources/f8/syllabus-study-guide.html
You can find details of the most recent ACCA Syllabus changes on the BPP Resources for Students
page:
https://leorningmedia.bpp.oorn/pages/resouroes-for.,.students
l.nterchangeable terminology
. The Fincmcial Accounting syllabus recently changed to reflect computerised systems. The impact
on Audit ond Assurance is that some terminology may be used interchangeably within learning ...
materials and exams:·
" Cosh book and-bank ledger accounts
• Sales day book and detailed sales listing
The trade receivables control account and trade receivables account
• The receivobles ledger and list of 1ndfvidual customers
Purchases day book and detailed purchases listing
• The payables ledger control occpunt and trade poyables account
• The purchase ledger and list of individual suppliers

Introduction xiii
@BPP
 Integrated sales and purchasing systems
The ACCA have stated the following (applicable to exams from September 2021+ onwards)~
In line with changes introduced to Financial Accounting (FA) in 23-24regording computerisation
of _accounting systems, the level of system integration within AA will be increased for 24'-25. ·
This will mainly impact questions covering syllabus area C- Internal Controls, particularly those
. including the s9les and purchases cycles where candidates are asked to identify direct controls;
control deficiencies, recommendations and tests of controls.
Bank and cash, non-current assets and pawoll systems will not be integrated. The level of
integration with the inventories system - including how this interacts with the accounting system
.;_ will be clearl!:J indicated within an AA scenario. The specimen exam will be updated to reflect the
changes and will be available on the Practice Platform.
The ACCA have also confirmed that there will be an indication of system integration from
September 2024 within each controls question scenario.
As a result, BPP has updated a proportion of examples and questions in our learning materials
relating to internal controls over the sales and purchasing systems to reflect a certain level of
·integration'.
Important: Please note due to printing and publication dates the revised specimen exam referred.
to in the ACCA note will not have been available to BPP ahead of publication, so the updates in
this Exam Practice Kit (including to the specimen exam) will be based on BPP's interpretation of
the ACCA statement above, and an~ other relevant information available to us prior to
publication. ACCA past exam questions have also been updated by BPP to reflect the increased
integration of systems expected from September 2024 and for syllabus updates. This means that
the ACCA past exam questions found online in the CBE environment may differ from the updated
versions found in this Exam Practice Kit.

Helping you with your revision

BPP Learning Media - ACCA Content Partner
As an ACCA Content Partner, BPPlearning Media gives you the opportunity to use the revision
materials created by BPPs expert team of Subject Matter Experts who have years of experience
. authoring Professional Qualification Content. The Subject Motter Experts ensure the content
covers the depth and breadth of the syllabus and provides excellent support for your revision.
BPP Learning Media do everything possible to ensure the material is accurate and up to date
when sending to print. In the event that any errors are found after the pr.int datet they e~re
uploaded to the following website: learningmedia.bpp.com/pages/errata ·
Question practice
This is the most important thing to do if you want to get through. Many of the most up-to-date
exam questions are in this Kit. Practice doing them under timed conditions, then go through the
answers and go back to the Course Book for any topic you are reaii!:J having trouble. with. Come
back to a question a week later and try it again - you will be surprised at how much better you
are getting.· Be very ruthless with yourself at this stag~ - you have to do the question in the time
given, without looking at the answer. This will really sharpen your wits and make tne exam·
experience less worrying. Just keep doing this and you will.getbetter at·doing questions and you
will really find out what you know and what !:JOU don't know. ·
Selecting questions
To help you plan your revision, we have provided a full topic index which maps the questions to
topics in the S!:JIIabus.
Making the most of question practice
At BPP Learning Media we realise that you. need more than just questions and model answers to
get the most from your question practice.
Our Top tips included for certain questions provide essential advice on tackling questions,
presenting answers and the key points that answers need to include.

xiv Audit ond Assurance @BPP

 We include marking gu-ides to ~h;w you what the examining team ~ewor~s.
We tnclude ~omments from the e~(]11Jining team to_ show you where .students struggled or
_ performed well tn the actLial exam. ·
Comments horn the exa.mining team can be found on the ACCA website in the study support
resources area.
https://www.accaglobal.com/gb/en/student/exam-support-resources/fundamentals-exams-
study-'resources/f8/exa miners-'reports1.html -
Attempting mock exams
There are four mock exams that provide practice at coping with the pressures of the exam day ..
We ;>trongly recommend that you attempt them under exam conditions. Mock exam 1 is the
September 2016 exam; Mock exam 2 isthe Specimen exam; Mock exam 3. is :the -December 2016
exam and Mock exam'+ includes the Section B questions from the September/December 2023
Hybrid exam.
Topics to revise
The Audit and Assurance exam assumes knowledge ofFinancial Accounting. It is important,
therefore, that candidates can apply the knowledge they have gained in Financial Accounting to
the Audit and Assurance exam.
All questions are compulsory so you must revise the whole syllabus. Since the exam includes three
10 mark OT case questions (each comprising five OT questions of 2 marks each) in Section A, you
should expect questions to cover a large part of the syllabus. Selective revision will limit the
number of questions you can answer and hence reduce your chances of passing. It is better to go
into the exam knowing a reasonable amount about most of the syllabus rather than concentrating
on a few topics to the exclusion of the rest.
In Secti6n B, all questions will require a written response but there may be questions requiring the
calculation and interpretation of some basic ratios in the context of audit planning or review. _
In short, remember that all the questions in this exam are compulsory. Therefore, we strongly
advise that you do not selectively revise certain topics- any topic from the syllabus could be.
examined. Selective revision will limit the number of questions you can· answer and hence reduce
your chances of passing this exam.
Question practice
Practising as many exam-style questions as possible will be the key to passing this exam. You
must do questions under timed conditions and ensure you write full answers to the discussion
parts as well as doing the calculations.
Avoldlooking at the answer until you have finished a question. Your biggest problem with Audit
and Assurance questions may be knowing how to start, and this needs practice.
Also ensure that you attempt all four mock exams under exam· conditions. Gaining the easy marks
in this exam tend to fall into two categories.
Objective test questions (OTs) in Section A
Some OTs are easier than others, particularly MCQs. Answer those that youfeel fairly confident
about as quickly as you can. Come back later to those you find more difficult. This-could be a
way of rna king use of the time in the examination most efficiently and effectively.
Make sure that you Lmderstond the wording of OTs before selecting your answer.
Di$cussions in Section B questions
A Section B question may separate discussion requirements from calculations, so that you do not
need to do the calculations f(rst in order to answer the discussion part. Thi-s means that you
should be able to gain marks from making sensible, practical comments without having to ·
complete the calculations.
Discussrons that are focused on the specific organisation in the question will gain rnore marks .
than regurgitation of khowledge. Read the question carefully and more than once, to ensure you
are qctually answering tho specific requirements.
Pick out key words such as ·describe', 'evaluate' and 'discuss'. These all mean something specific,

Introduction XV
@BPP
 'Descril:?e' means to communicate the key features
~Evaluate' means to assess the value
•- 'Discuss' means to examine ifl detail by _argument _
Clearly label the points you make in discussions so that the marker can identify them all rather
than getting lost in the detaiL ·
_ Provide answers to Section 8 in the-template the word processor on the ACCA assessment
platform. For tabular tmswers you should find a blank-table ready for you to input your answers.
- For example, for a question that asks for audit risks and related responses there will be a two-
column table with headers for each of the risks and responses. Make sure your related risks and
responses appear on the same row within the table and each is in the correct column. Enter each
new risk and response on a separate- row. The table should have the same number of rows as the
number of risks and responses you are asked for. If you are asked for four risks and four
responses, you will have four rows in your two-column table.
Remote invigilated exams
In certain geographical areas it may be possible for you to take your exam remotely. This option,
which is subject to strict conditions, can offer increased flexibility and convenience under certain
circumstances. Further guidance, including the detailed requirements and conditions for taking
the exam by this method, is contained on ACC/J:s website at
https://www.accaglobal.com/an/en/student/exam-entry-and-administration/about-our-
exams/remote-exa ms/remote..;session-exa ms. htm I.
Tackling Objective Test Case Questions
You will see a variety of question styles in addition to MCQs; including number entry, multiple
response and drag and drop.
First~ read the whole case scenario. Take note of any specific instructions or assumptions, such as
ke!d dates.
Some of the questions will be easier than others. For example, !:JOU may be asked to identify risks
to independence from a given scenario.
Other questions will be more difficult and/or complex. There are two typ_es of question that may
take you longer to answer.
The first more time-consuming question is one where you are asked to consider two related issues.
The best approach to adopt here is a step-by-step approach, dealing with each issue in turn. For
example you could be asked to consider whether a potential adjustment is material and the
impact of this on the audit report based on circumstances set out in the scenario. The first step
would be to assess the materialit!d of the adjustment using your technical. knowledge. but also
appi~:Jing any information given to you in the_ scenario. Having made a decision it should be
possible to discount at least one of the distracters. Then think about the impact on the auditor's
report. Does the audit opinion need to be modified or not? If it is, is the issue pervasive or not? If
possible, try to come to your own conclusion before looking at the options available, then check
whether your answer is one of the options listed. (Obviously if you are struggling looking at .the
remaining available options may help to jog your memory.) Having selected your answer always
check the remaining distracters to ensure that you haven't made a common mistake.
The second more time-:-consurning question is one where you are asked to consider a i1umber of
statements and identify which one (or more) of them is cor:rect. Mak~ sure that you read each
statement at least twice before making your selection. Be careful to follow the requirements of the
question exactly, for example if you are asked to identify two correct statements; Make sure that
you have spotted any negative questions, eg 'Which TWO of the following are NOT.... '
Analysis of past exams
The ACCA have released a 'hybrid' exam every two sittings which shows only exam questions set
in Section B of the exam.

xvi Audit and Assurance @BPP

The table below provides details of when each elern~nt of the syllabus appeared~~- Section 8 of
the _rno~t. recent hybrid exams (from-2020 onwards) and which Course Book Chapter covers- the
syllabus area tested. Note that one .requirementin-theexcm) may cover more than one syUo~us _
area and ifis likely that areas not covered _in recent exams 'in-SeCtion B would have been examined
in Section A. ·-
The question names have been provided so that .yo.u can search the Exam Pn;mtice Kit for these
=
questions. _(M/J = March/June, S/D September(December) ·

Syllabus topic Course Book Question Exam

chapter

The concept of audit and other

assurance engagements

External audits 2
Corporate governance 3 S/D22
M/J 23

Professional ethics and ACCA's Code 5 SID 21

of Ethics and Conduct S/020

Obtaining, accepting and continuing 6 S/022

audit engagements M/J 22
Cqrley Appliances Co (a) M/J 21
Scarlet (a), (b) M/J 20
Objective and general principles 1
Corley Appliances Co (c) M/J 21
Assessing audit r_isks 6 S/D 22
M/J 22
S/D 21
Corley Appliances Co (b) M/J 21
Hart Co (b) S/020
M/J 20
M/J23
Understanding the entity and its
environment and the applicable
financial reporting framework

Peach Co (b)

S/D22
The use and evaluation of systems of · 9 Petra Co (c) M/J 23-
internal control by auditors DC11ey Co (b) S/022
Whittaker Co (a). (c) M/J 22
Pomeranian Co (a); (b) S/D 21
Castle Courier Co (a)_, (c) M/J 21

Introduction xvii
@BPP
 , .. ! ...
•. ;
Syllabus topic Course Book Question
' Exam '
·- .- '
chapter -.-···
:
:
..
·, .::::· :
' .. ........:.....

Snowdon Co (a), (c) M/J 20

Tests of controls 10 Petra Co (a). (b) M/J23

Daley Co (b) S/022
Whittaker Co (b) M/J 22
Castle Cour-ier Co (b) M/J 21
Swift (a), (b) S/D 20
Snowdon Co (b) M/J 20

Communication on internal control 10

Internal audit and governance and 4

the differences between external
audit and internal audit

The scope of the internal audit 4

function, outsourcing and internal
audit assignments

Audit evidence

Assertions and audit evidence 8

Audit procedures 11

Auditsampling and other means of 11

testing

The audit of specific items:

.
,......

Non-current assets 12 Peach Co (d) SID 21

Danube Co (a) SID 21
Heron Co (a) M/J23
. Inventory 13 Spinach Co (b) M/J 22
Purrfect Co (a) M/J 21
. Receivables (and revenue) 14 Pacific Co (c) S/D22
Esk Co (d) M/J 22
Spinach Co (a) M/J 22
Danube Co (b), (c) SID 21
Purrfect Co (b) M/J21
Sagittarii & Co (a) S/D20
. Bank and cash 15 Daley Co (c) SID 2.2 ·
Heron Co (b) M/J 2.3
. """''·~---~v.·.···_·..,

Payables and accruals (and

.... ~·~'-''• .~ ........... ·····~.-····.¥-···---·--··· .......

16 Pacific Co (a)
. .. -·---~ .............,......

S/022
purchases/expenses) Castle Courier Co (d) M/J 21
Petra Co (d) S/023
....................... ..... ·'"'"'''"''''''' ..... --~---······ ....

.xviii Audit and Assurance @BPP

 . Non-current liabilities 17 Pacific Co (b) S/D2~
(6) S/D21
Purrfeci Co (c). M/J 21
Sagittorii &Co (b) S/D20
Scarlet Co (d) M/J 20.
Heron Co (c) · M/J23

17 Spinach Co (c) M/J'22

• Directors' emoluments S/020

Going concern 19

Written representations 19

Audit finalisation and the final review 19

The Independent Auditor's Report 20 Pacific Co (d) S/D22

Spinach Co (d) M/J 22
Danube Co (d) S/D 21
Purrfect Co (d) M/J 21
Sagittarii & Co (d) S/D20

BPP provide debrief videos of previous exam qu13stions. The latest available at the time of writing
this Exam Practice kit were for the March/June 2023 Hybrid exam. ·

Introduction xix
 Essential skills areas to bt! su-ccessful in Audit and
Assurance

(I ® 0 Videos con be viewed by accessing your ebook version on VitalSource.

We think there are three areas you should develop in order to achieve exam success in Audit and
Assurance (AA):
(1). Knowledge application
(2) Specific AA skills
(3) Exam success skills
These are shown in the diagram below:

Specific AA skills
These are the skills specific to AA that we think you need to develop in order to pass the exam.
There are five skills that are key to succeeding in the ACCA Audit and Assurance exam. A brief
summary of each skill is given below:
Skill1: How to approach your AA exam

iJ ® J). Videos can be viewed by accessing your ebook version on VitoiSource.

Passing AA is about a combination of exam technique with detailed knowledge. Therefore. it is

important that you plan \.:JOUr approach to the exam~ and practise this approach, before you sit
your exam.
A step-by-step technique for ensuring_ that you have a planned approach to your AA exam is
outlined below:
Step 1 Attempt Section Afirst. Read the requirements to each of the OT questions before
reading the OT case scenario.
Do not rush through this section of the exam.

xx Audit and Assurance @aPP

 Step 2 Then attempt Section B. Read all requirements in detail and use the scenario fully.
Skills Checkpoint 1 in the BPP Course Book covers this technique in detail.
Skill 2: How to approach audit risk question~- .
:.. ,,:-.: -~- .·.·. ':· . . '

,(~1 ® fl Videos can be viewed by accessing your ebook version onVitaiSo~rc:e.

~---·-.... ::··-~:

In the exam, it is highly likely that you will need to attempt a scenario basedquestion on .audit
risk.
Step 1 Allow some of your allotted time to read the requirement and the sc·enario. Don't rush
into starting to write your answer.
Start by analysing the requirements so that you know what you are looking for when you
read the scenario. ·
Step 2 Re-read the scenario and plan your answer using the risks you identify as you read
through. Work through each paragraph of the scenario identifying specific audit risks.
Remember you haye a highlighter tool available in the assessment platform and a
scratch pad tool is available too for you to make notes as you read through the scenario.
Each risk is worth one mark and the auditor's response is also worth one mark, so you
would need five properly explained risks and responses to gain ten marks.
Step 3 Where there are more than the required number of audit risks, choose those that you can
best explain.
Describe the audit risk in detail explaining the potential impact on the financial
statements. Also remember to explain the practical steps the auditor would take and the
work they would do.
A blank table will be provided for audit risk ahd response questions._ One column will be
for risks and one column for responses. Start each risk or response in a new cell of the
table provided in the appropriate column. Enter the related risks and responses on the
same row.
Skills Checkpoint 2 in the BPP Course Book covers this technique in ·detail through
application to an exam-standard question.
Skill 3: How to approach internal control questions

'.J ·® 1:\ Videos cari be viewed by accessing your ebook version on VitoiSource.

Similarly, to Skill 2, it is likely that ~ou will need to attempt a scenario based question on internal
controls in your exom. -
A step-by-step technique for attempting such questions is outlined below.
·Step 1 Allow some of your allotted time to read the requirement and the scenario. Don't rush
into starting to write youranswer.
Start by analysing the requirements so that you know what you are looking for when you
r~adthescenari~ ·
Step 2 RH-read the scenario and plan your am~wer using the points you identifbJ as you read
through.
Work through each paragraph of the scenario identifying specific points to make. for
example deficiencies. Each deficiency is worth one mark and the recommendation is also
worth one mark, hence why you would need six properly explained deficiencies and
recomrnendations to gain 12 marks.
Step 3 Oft on there ore rnore than the' required number of deficiencies in a scenario, therefore ·
choose the ones for which you can provide a recommended control.
Explain the deficiency in terms of its impact on the entity. Also remember to explain the
recornrnendotion, what internal control should be implemented and by whom.

@aPP Introduction xxi

 A blank table. ~ill be provided for deficiency and recommendation questions~ One column
will be for deficiencies and one column for recommenc;lations. Start each point in a new
_cell of the table provided in the appropriate columJ!. Enter-the related deficiencies and
recommendations on the same row. - - -
Skills Checkpoint 3 in the BPP Course Book covers this technique in detail through
applicationto-an exam-standard question.
Skill '+: How to approach audit evidence questions

,--~~'~,, Videos can be viewed by_ accessing your ebook version on VitaJSource.

These questions can appear in both sections of the exam. It is very important that you discern
exact!~ what the requirement is asking for and that you use any scenario provided in the exam.

A step-by-step technique for approaching audit evidence questions is outlined below.

Step 1 ldentif~ exactly what you are being asked for in the requirement: audit procedures. tests
of controls or substantive procedures.
Also identify whether the requirement is testing audit procedures that relate to a
particular assertion.
Step 2 Now that you have understood what the requirement demands you are much better
placed to answer it. Consider the following:
Is there a scenario you should use?
Can you remember the accounting treatment for the item? Would that give you a
starting point?
What audit procedures have you learnt/used at work?
Can you use the mnemonic AE!OU to help you to generate audit procedures?
Step 3 Enter your audit procedure using the word processor on the platform using the 'verb-
document-reason• approach.
What do you want to be done (eg recalculate, agree> vouch)?
To which document (eg invoice, physical asset, board minutes)?
Why (eg to ensure that receivables are recoverable (valuation))? You might choose to link
this to an assertion.
Start each audit procedure on a new line.
Skills Checkpoint 4 in the BPP Course Book covers this technique in detail through
application to a sample of exam-standard questions.
Skill 5: Approach to objective test (OT) questions

I® Lf Videos can bevie~ed by accessing your ebook version on VitaJSource•

.. <
· Section A comprises 30% of the exam and consists· of three OT case questions. Candidates can be
tempted to rush through this section in order to make up time for Section Bhowever this is a risky
approach because there ore a lot of marks you could lose.
A step-by-step technique for approaching OT questions is outlined below:
Step 1 Answer the questions you know first.
If you're having difficulty answering a que9tion, move on and come back to tackle it once
you've answered all the questions you know. It is often quicker to answer discursive style
OT questions first, leaving more-time for calculations. The AA exam doesn't have man~
calculations but you may be asked to calculate financial stotementratios.

xxii Audit and Assurance . @BPP

·Step 2 Answer all questicms. ·
There is no p~nalty for aoincorrect answer in ACCA exarns~ there is nothing to be gained
a
by leaving an OT question i . monswered. If you are stuckon question, as. a last resort. it
is worth selecting the optiol1 you consider most likely to be correct~ and moving on. Make
a note of the question, so if you have time after you have answered the rest of the
questions. you can revisit it.
Step 3 Read' the requirementfirst!
The requirement w.ill be stated in bold text ih the exam. Identify what you are being asked
to do, any technical knowledge required and whattype of OTquestion you are dealing
with. Look for key words ih the requirement such as -''which TWO of the following," or·
"which-of the following is NOT".
Skills Checkpoint 5 in the BPP Course Book covers this technique in detail through
application to an exam-standard question.

Exam success skills

Passing the AA exam requires more than applying syllabus knowledge and demonstrating the
specific AA skills. It also requires the development of excellent exam technique through question
practice ..
We consider the following six skills to be vital for exam success. The skills checkpoints show how
each of these skills can be applied in the exam.

Exam success skill1

Managing information
Questions in the exam will present you with a lot of information. The skill is how you handle this
information to make the best use of your time. The key is determining how you will approach the
exam and then actively reading the questions. ·
· Advice on developing Managing information
Approach
The exam is three hours long. There is no designated 'reading' time at the start of the exam.
However, one approach that can work well is to startthe exam by spending 10-15 minutes
carefully reading through all of the questions to familiarise yourself. with the exam.
Once you feel familiar with the exam consider the'order in which you will attempt the questions;
always attempt them in your order-of preference. For example, you may want to leave to last the
question ~ou consider to be the most difficult.
If you do take this approach, remember to adjust the time available for each question
appropriately - see Exam success skill 6: Good time management.
If you find that this approach doesn't work for you, don't worry because you can develop your
own technique.
Active reading
You must take an active approach to reading each question. In Section B questions irf<'particular,
focus on the requirement first, taking note of key verbs such as 'explain' and 'discuss\ to ensure
you answer the que·stion proporf!J. Then read-thE~ rest of the question, making notes on irnportcmt
and relevant information you think you will need.

Exam success skill 2

Correct interpretation of the requirements
The active verb used often dictates the approach that written answers should-take (eg 'explainr.
'discusst). It is important you identify and use the verb to de-Fine uour approach. The correqt
interpretation of tho requirements skill means correctly producing only what is being asked for by
a requirement. Anything not requfred will not earn ,marks.
Advice on developing the Correct interpretation of the requirements
This skill can be developed by analysing question requirements and applying this process:

Introduction xxiil ·
@BPP
·step 1 Read the requi~ement

Firstly, read the requirement.a couple of times slowly and carefully and note the active
verbs. Use the active verbs to define.what you plan to do. Make sure you identify any
sub-requirements. · ·
Step 2 Read the rest of the question
By reading the requirement first. you wil[ have an idea of what !:JOU are looking out for as
!:JOU read through the case overview and exhibits. This is a great time saver dnd means
you don't end up having to read the whole question in full twice. You should do this in an
active way- see Exam success skill1: Managing Information.
Step 3 Read the requirement again
Read the requirement again to remind yourself of the exact wording before starting !:JOUr
written answer. This will capture any misinterpretation of the requirements or any missed
requirements entirely. This should become a habit in your approach and, with repeated
practice, you will find the focus, relevance and depth of your answer plan will improve.

Exam success skill 3

Answer planning: Priorities_, structure and logic
This skill requires the planning of the key aspects of an answer which accurately and cotYJpletel!d
responds to the requirement.
Advice on developing Answer planning: Priorities, structure and logic
Everyone will have a preferred style for an answer plan. You can use the scratch pad tool provided
in the assessment for you to make notes on. Choose the approach that you feel most comfortable
with, or, if you are not sure, try out different approaches for different questions until you have
found !:JOUr preferred st!:Jie. ·

Exam success skill 4

Efficient numerical analysis.
This skill aims to maximise the marks awarded by making clear to the marker the process of
arriving at your answer. This is achieved by laying out an answer such that. even if you make a
few errors, you can still score subsequent marks for follow-on calculations. It is vital that bJOU do
not lose marks purely because the marker cannot follow what !:JOU have done.
Advice on developing Efficient numerical analysis
- . -
There are not man!J marks available for numbers in tho AA exam. however you may need to
calculate ratios such as the receivables collection period. This skill can be dev~loped by applying
the following process: -
Step 1 Use the provided template/standard formula where relevant
If answers can be laid out using a standard formula then always pion to do so. This will
help the marker to understand your working and allocate the marks easily. It will also
in
help you to work through the figures a methodical and time-efficient wa!:J. For
question$ _asking you calculate ratios, you are likely to be given a table with the names of
the rat los you are being asked to calculate in one column and a space to enter the
answer in the other column. The requirement will tell you whether-or not formulae are
required.
Step 2 Show your workings
Keep your workings as clear and simple as possible and ensure they are cross-
referenced to the main part of-your answer. Where it helps, provide brief narrative
explanations to help the marker understand the steps in the calculation. This means that
if a mistake is made you do not lose any subsequent marks for follow-on calculations. <

xxiv Audit and Assurance (i~BPP

Step 3 - Keep moving!
·It is important to.remernber that~ in an exam situatio"n~· it ~an sometim~~ be difficult t·o
·get-every number "100% c_orrect. The key is therefore ensuring you do not spe.ndctoo·long
on any-single-calculation. Tf !:JOU are strwggling with osolution then maf<e a sensible. -
ossLJrnption, state it and move on.

Exam success skill 5

Effective writing and presentation
Written answers should be presented so that the marker can clearly see the points you are
making, presented in the format specified in the question. The skill is to provide efficient written
answers with sufficient breadth of points that answer the question, in the right depth, in the time
available. . · - ·
Advice on developing Effective writing and presentation
Step 1 Use headings.
Using the headings and sub-headings from your answer plan will give your answer
structure~ order and logic. This will ensure your answer links back to the requirement and
is clearly sign posted, making it easier for the marker to understand the different points
you are making. Making your headings bold will also help the marker.
Step 2 Enter your answer in short, butfull, sentences.
Use short, punchy sentences with the aim that every sentence should say something
different and generate m.arks~ Use full sentences, ensuring your style is professional.
·Step 3 Do your calculations first and explanation second.
Questions sometimes ask for a discussion or explanation with suitable calculations. The
best approach is to prepare the calculation first then add the explanation.
Performing the calculation first should enable you to explain what you· have done.

Exam success skilf6

Good time management
This skill means planning your time across all the requirements so that all tasks have been
attempted at the end.of the three hours available and actively checking on time during your
exam. This is so that you can flex your approach and prioritise requirements which, in your
judgement. will generate the maximum marks in the available time remaining~ ·
Advice on developing Good time management
The exam is three hours long~ which translates. to LB minutes per mark. Therefore a 20-m ark
requirement should be allocated a maximum of 36 minutes to complete your answer before you .
move on to the next task. At the beginning of a questiont work out the amount of time you should
be spending on each requirement and note the finishing time for that question. -if you take the
approach of spending 10-15 minutes. reading atld planning at the start of the exam, adjust the
time allocated to each question accordingly.
Keep an eye on the·clock
Aim to attempt all requirements, but be prepared to move on if your answer is not going as
planned. The challenge for man!:J is sticking to planned timings. Be aware this is difficult to ..
achieve in the early stages of your studies and be ready to let ·this skill develop pver time. If you
find yourself running short on time and· know that ct full answer is not possible in the time you > • _ •

have, consider recreating your pion in overview form andthen add key terms and details as time
allows. Remember, some marks may be availoble, for example, simplbJ stating a conclusion which
you don't have time to justify in full.

Question practice
Question practice is a core part of learning new topic areas. When you practice questions, you
should focus on improving the Ex-am SL!ccess skills ··- personal to your heed$ --by obtaining
feedback or through a process of self-assessment.

Introduction xxv
@BPP
 Sitting this exam as a computer-baseo exam and practicing as many exam:..style questions as
possible in the ACCA GBE practice platform will be the key to passing this exam. You should
attempt questions undE3r timed conditions ·and ensure you produce full answers to the discussion
parts as well as doing th_e calculations. Also ensure thaiyou attempt all mockexoms undeF exam
conditions. -
ACCA have launched a free on-:demand resource designed to mirror the live exam experience
helping you to become more familiar with the exqm format. You can access the platform via the
Study Support Resources section of the ACCA website navigating to the CBE question practice
section and logging in with your my ACCA credentials.

:; I® I} Videos can be viewed by accessing your ebook version on VitaiSource.

xxvi Audit and Assurance ·@BPP

)

-·.· .....

Questions
2 Audit and Assurance
@aPP
 PART A: AUDIT FRAMEWORK AND -REGULATION
Questions 1-30 cover Auditframewqrk and regulation, the subjeCt of Part Aof the BPP
Course Book for Audit and Assurance.-

Section- A Questions
BJMCo (18 mins)
The following scenario relates to questions h-5.
You are an audit senior of YHT & Co and ha:ve worked on the external audit of BJM Co (BJM), an
unlisted company~ since your firm was appointed external auditor two years ago.
BJM owns a chain of nine restaurants and is a successful company. BJM has always been subject
to notional hygiene regulations, especially In relation to the food preparation proc(?ss. Non-
compliance can result in a large fine or closure of the restaurant concerned.
The board of BJM has recently notified you that the national hygiene regulations have been
updated and are now much more stringent and onerous than before.
With this in mind, the board has asked yourJirm to conduct a review of BJM's compliance with
hygiene regulations, in order to allow the board' to assess whether the appropriate processes have
been implemented at each of the nine restaurants. The review is not expected to include the
provision of accounting advice or the preparation of figures in the financial statements.
The work is likely to be very lucrative. Your firm has sufficient experience to undertake the above
review engagement.

Despite running a successful company~ BJM's board has often needed to be reminded of
some fundamental principles and you often have to explain key concepts. .
Which of the following statements best defines the external audit?
0 The external audit is an exercise carried out by auditors in order to give an opinion on
whether the financial statements of a company are fairly presented.
0 The external audit is an exercise carried out in order to give an opinion on the
effectiveness of a company's internal control system.
0 TI1e purpose of the external audit is to identify areas of deficiency within a company
and to make recommendations to mitigate those deficiencies.
·0 The external audit provides negative assurance on the truth and fairness of a
companu's financial statements. (2 marks)

@BPP 3
2 The board has also struggled to differentiate between its responsibilities and those of the
external a!Jditor in circumstances such as the prev~ntion and detection of fraud and error,
and compliance with regulations. ·
Which of the following statements best describes YHT S Co's responsibility regarding
BJM's compliance with hygiene regulations, in line with ISA 250 (Revised) Consideration
of Laws and Regulations in an Audit of Financial Statements?
0 YHT S Co should actively prevent and detect non-compliance with the regulations.
0 YHT S Co should perform specific audit procedures to identify possible non-
compliance.-
0 YHT S Co should obtain sufficient appropriate audit evidence about BJM's compliance
with the regulations as they have a direct effect oil the financial statements.
0 YHT S Co does not have any responsibility as the hygiene regulations do not have a
direct effect on the financial statements, (2 marks)

3 The partner responsible for the review of hygiene compliance has informed you that the
engagement is an assurance engagement.
Which of the following would NOT have been relevant to the partner in forming this
opinion?
0 The existence of a three-party relationship
0 ·The existence of suitable criteria
0 The determination of materiality
0 The subject matter (2 mar~s)

4 The partner responsible for the review engagement has asked you to tell him what level of
assurance you believe YHT S Co should provide, and also what type of opinion the firm
should give.
What is the level of assurance and type of opinion that c·an be provided on this review
engagement?

Level of assurance Report wording

0 Reasonable Positive
0 Reasonable Negative
0 Limited Positive
0 Limited Negative

(2 marks)

Audit and Assurance @aPP

 I

! I

5 The oudit engagement partner has told yot.Hhot the independence threat~ aris_ingfrom
YHTB Co performing the review engagement·shouldb13r:nonitored carefully. ·
Which of the following-is likely to cause the audit engagement pqrtner rnost conce~n?
0 According to the ACCA Code of Ethics a~d.Conduct, YHT G Co is prohibit~d from -
I, ,I
· providing other assurance services to an audit clienL
0 The review engagement is likely to give rise to a self-review threat~ as the outcomes of ·
the review could form the basis of th_e financial statemehtswhich the audit team will.
audit.
0 The lucrative nature of the review engagement may make the external audit team less
incline-d to.require management to make adjustments or to issue a modified audit
opinion, for fear of losing the review engagement. - ·
0 If the new review engagement causes YHT &Co's fee income from BJM to exceed 15%
of the firm's total fees~ the ACCA Code of Ethics and Conduct states that the new
engagement must be turned down. (2 marks)

(Total= 10 marks)

I~ Tangerine Tech Co (Mar/Jun 16 amended) (18 mins)

The following scenario relates to questions 6-10.
You are an audit manager of Satsuma & Co and have been assigned to the audit ofTangerine
Tech Co (Tangerine), a company which is planning to list on a stock exchange within six months.
The listing rules of the stock exchange require compliance with corporate governance principles;
and the directors are unsure whether they are following best practice in relation to this. They have
(~ asked the audit engagement partner for their view on this matter.
,._
,Jj Tangerine's board is comprised of six executive directors, a non-executive chair and three other
non-executive directors (NEDs). The chair and one of the NEDsare former directors of Tangerine
and on reaching retirement age were asked to take on no I)-executive roles. Tho company has
establishedan audit committee, and all NEDs eire members including the chair who chairs the
committee. All four members of the audit committee were previ01jsly involved in sales ot
production-related roles.
All of the directors have been members of the board for at least four years. As the chair does not
have an executive role, he has sole responsibility for liaising with the shareholders and answering
their questions. The company has not established an internal audit function to monitor internal
controls.

tl 6 Which of the following features ore corporate governance deficiencies which Tangerine
Co would need to address prior to their listing?

:J (1) The chair has sole responsibility for liaising with shareholders.
(2) The company has not established an internal audit function.
(3) The chair and one of the NEDs ar-Edormer executive directors of Tang_erine Co.
0 1 and 2 only
0 1 and 3 onllJ
0 2 and 3 only
0 1, 2 and 3 (2 marks)"

__ )

@BPP Questions 5

}
7 . The audit engagement partner's review has identified the following additionol corporate
- ··govern a nee deficie.ncies:
(1) All the directors ha.ve been members of the board for at least four years.
(2) The board is-comprised of six executive and four non-executive directors.
Which of the following ·would the audit engagement partner recommend to address these
deficiencies to ensure compliance with corporate governance .principles?

Deficiency 1 Deficiency 2

0 The direQtors should be subject to annual At least 50% of the board, excluding the
re-election . chair, must be comprised of non-
executive directors whom the board
considers to be independent
0 The directors must be reappointed At least 75% of the board must be
annually by the chair comprised of executive directors
0 The directors should be subject to annual At least 75% of the board must be
re-election comprised of executive directors
0 The directors must be reappointed At least 50% of the board, excluding the
annuallbJ by the chair chair, must be comprised of non-
executive directors whom the board
considers to be independent

{2 marks)

8 The audit engagement partner has assessed the make-up of the audit committee.
Which of the following would be valid conclusions from this assessment?
(1) It is acceptable for the Chair to chair the audit committee.
(2) A new member of the audit committee_ with relevant financial experierrce must be
recruited.
0 1 only
0 2 only
0 1 and 2
0 Neither 1 nor 2 (2 marks)

9 The directors are aware that in accordance with corporate governance provisions thel::J
have responsibilitles for internal control but are unclear as to the extent of these
responsibilities.
Which of the following correctly describes their responsibilities?

To revie~ internal controls annually To report on internal controls to

shareholders

0 No No
0 Yes No
0 No Yes
0 Yes Yes

(2 marks)

6 Audit and Assurance @BPP

10 The board of Tangerfne is considering establishing-dn-internalaudit function.
-Which of the following factors woyJd be releva_nt in making this decisi.on?
(1) . -It would help the-audit committee to discharge its responsibilities for monitoring
internal control.
(2) The board would no longer need to take responsibility for the prevention ahd
detection of fraud and error.
(3) · The costs of establishing an -internal audit function should be considered against the
benefits _gained. ·
-0 1 and 2 only
0 1 and 3 only
0 2and3only
0 1. 2and 3 (2 marks)

(Total= 10 marks)

Orange (Jun 12 amended) (18 mins)

The following scenario relates to questions 11-'15.
You are the audit manager of Currant 8- Co and you are planning the audit of Orange Financials
Co (Orange)) which specialises in the provision of loans and financial advice to individuals and
companies. Currant & Co has audited Orange for many years.
The directors are planning to listOrange on a stock exchange within the next few months and
have asked if the audit engagement partner can attend the meetings with potential investors. In
addition~ os the finance director of Orange is likely to be quite busy with the listing, he has asked
if Currant 8 Co can produce the financial statements for the current year.
During th~ year, the assistant finance director of Orange left and Joinecl CurrantS Co as a
partner. It has been suggested that due to his familiarity with Orange, he should be appointed to
provide an independent partner review for the audit.
Once Orange obtains its stock exchange listing it will require severar assignments to be
undertaken; for example,obtaining advice about corporate governance best practice. Currant 8
Co is very keen to be appointed to these engagements; however, Orange has implied that In order
to gain this work Currant 8 Co needs to complete the external audit quickly and with minimal
questions/issues.
The finance director has Informed you that once the stock exchange-listing has beencompleted,
he would like the engagement team to attend a weekend awa~J at o luxury hotel with his team, as
a thank you for all their hard work. In addition, he has offered a senior member of the
engagement team a short-term loan at a significantly reduced interest rate. :::r:
Orange is aware that subsequent to the stock exchange listing it will need to establish an audit
committee, and has asked for some .advice in relation to this.

Questions 7
· 11 As part of your planning work you have identified .a tiu.mber of potential risks to
independence.
Indicate whether each of the following potential risks could give rise to an advocacy
threat.

Yes No
The audit engage.ment partner has been asked to attend 0 0
meetings with potential investors.
Currant 8 Co has been offered the opportunity to provide 0 0
. other services to Orange Financials.
Currant 8 Co has been asked to produce the financial 0 0
statements of Orange Financials.
There is a suggestion that a partner who previously 0 0
worked for Orange Financials should be the review
partner.

(2 marks)

12 CurrantS Co has been offered work by Orange Financials. This is dependent on the audit
being completed with minimal issues.
Which TWO of the following threats does this situation create?
0 Intimidation
0 Self-interest
D Familiarity
0 Advocacy (2 marks)

13 The finance director has made two offers to member.s of the audit team:-
(1) Weekend away
(2) Loan at reduced rates
Which of the following correctly summarises which of the offers, if any, can be accept~d?
(1) Weekend away . (2} loan at reduced rates

0 Accepted Accepted
0 Accepted Not accepted
0 - Not accepted Accepted
0 Not accepted Not accepted

(2marks)

8 @aPP
14 .In accordance with ACCA'sCode of Ethics and Conduct you have. concluded that ifyou
. win, the additional Work you. will need'tO disclose the proportion. of fe~S obtained from .
Orange Firiancicd$ to those charged with governance and conduct a post-rss~gnce review.
. . Whicfl ~of the followin_g explains the basis for your conclusion?
0 Total fees from Orange Financials will make up more than 10% ofCurrant &Co's total
fees for the first time since !J'?Ur appointment.
0 Total non:-audit fee$ from all Currant & Cds clients make.up more thah 5% oft_he total
fees of the firm. ·
0 Total fees from .Orange Financials make up more than 15% of CurrantS Co's total fees
for the ·second consecutive year.
0 The disclosu~e and review are required in all circumstances where services other than
audit are offered, irrespective of the level of fees. . (2 marks)

15 The board has noted down a number of statements relating to the audit committee and
has asked you to confirm whether their understanding is correct.
Indicate whether the following statements are true or false.
True False
The audit committee should be made up of independent 0 0
non-executive directors
The audit committee normally appoints the external 0 0
auditors at the AGM
The audit committee monitors and reviews the internal 0 0
audit function
The audit committee sets out the scope of the external 0 0
auditor's work

(2 marks)

(Total =10 marks)

SGCC (18 mins)

The following scenario relates to questions 16-20.
You are an audit manager in HTQ 8 Co. One of your clients, SGCC, has recently become a listed
company and has asked for your advice regarding the changes they should make to achieve
appropriate compliance with corporate governance cod¢s. ·
The board
Mr Sheppard is the Chief Executive Officer and chair of the board-of SGCC. He appoints and
maintains a board.of.five executive and two non-executive directors.. While tho board sets
performance targets for the senior managers in the company, no formal targets are set for each
director and no review of board policies is carried out. Board salories are therefore set and paid
by Mr Sheppard based on his assessment of all the board members, incfuding himself, and not
their actual performance.
Internal controls
Internal cor1trols in SGCC are monitored by the senior accountant, althoughthe-company
assumes that, as external auditors, uour firm will carry out a detailed review of ihternal controls.
·sGCC does- not have on internal audit department or an audit committee.
Annual financial statements are produced. providing detailed information on past performance.

@BPP Questions 9
16. From a review.of the information above. your audit assistant has highlighted some
deficiencies in SGCC's corporate govern-ance arrangements, especially in relation to the -
compositi,on of the- board. -·
Which of the following actions wo~ld be appropriate to improve SGCC's corporate
governance cqmpliance?
0 SGCC should appoint an external consultant to review board policies.
0 SGCC should appoint a new chief executive officer or board chair.
0 SGCC should create a remuneration committee to oversee the appointment of new
directors.
0 SGCC should implement a formal and rigorous evaluation of its directors' performance
once every two years. · {2 marks)

17 Which of the following statements is correct with regards to the composition of the board
atSGCC?
0 SGCC should appoint three new non-executive directors to the board.
0 SGCC should reappoint two of its executive directors as non-executive directors.-
0 SGCC should appoint three new executive directors to the board.
0 SGCC should reappoint three of its executive directors as non-executive directors.
(2 marks)

18 Your audit assistant does not feel that SGCC's approach to internal controls is sufficiently
robust to comply with corporate governance principles and has drawn up a list of
recommendations.
Which TWO of the following recommendations ore valid?
0 SGCC should establish an audit committee with at least four directors as is required for
all listed companies.
0 SGCC must establish an internal audit department as is required for all listed
companies.
0 Once SGCC has an audit committee and an internal audit department, the head of
the internal audit department should report to the audit cornmittee.
0 SGCC should not rely o_n the external audit to inform them of deficiencies in internal
controls. (2 marks)

19 You are aware that SGCC is considering establishing an internal audit department.
With which of the following activities should the internal audit function NOT b~ involved?
0 -Monitoring of management's performance
0 Reviewing adequac1:1 of-management Information for decision-making purposes
0 Taking responsibility for the implementation of a new receivables ledger system
0 Assessing compliance with regulation relevant to SGCC
(2 marks)

10 Audit ann Assmcmce @BPP

 20 lfSG"CC's boar-d decides to establish an- internal audit departm.E:lnt then it will also need to
decide whether it will (:!mploy-rnembers of staff directly, or will outsource the cJepartrnentt'?
an external firm. You hav~Jound 9 list in your study notes of the advaAtages of ciutsourcing
as compared with the advantages of employing staff directly. The list includes the
following points~
(1) Greater availabiiity of specialist industry skills bs required--
.. ..;:11--.

(2) Fl~xibility regarding .St(J~f numbers in response to changing circumstances

· -(3) Elimination of dire~ftraining costs .
(4) · Development or'skiUsincreasing the human resmnce strength of the entity-
- -

For each consideration, iJiclicate whether it r~lates to the employment ~finternal auditors
by SGCC, or to the outsourcing of the department.

Consideration Employed Outsourced

Greater availability of specialist industry skills as required 0 0
Flexibility regarding staff numbers in response to 0 0
changing circumstances
Elimination of direct troining costs 0 0
Development of skills increasing the human resource 0 0
strength of the entity

(2 marks)

(Total =10 marks)

Doge &Co (Mar/Jun 22) (18 mins)

The following scenario relates to questions 21~25.

It is 1 July 20X5. You are an audit manager at Doge & Co~ a medium:..stzed firm with several
offices. As part of your role, you are responsible for undertaking procedures relating to the -
acceptance of new clients. You are currently involved in the acceptance of four new clients.
Bradgate Co
Bradgate Co has invited Doge &Co to perform a limited assurance review ofitsfinancial
statements. Doge S Co does not provide any other services to the company.
Trimp Transport Co
The board of directors of Trimp Transport Co have set target key performance ii1d_icat_grs (KPis)to
assess the company's perforrncmce for the. year ended 31 March 20X5. The board ha~..-?skedDoge
G Co to perform an assessment of performance to 31 March 20X5 and-to preparea report for the
board as to whether the KPis have been achieved. The board will provide access to books and
· records -relating to the KPis. Doge &Co cloes.not provide aoy other services to Trimp Transport Co.
Keegan Co
Keegan Co, an existing auditclient, is considering setting up anirJ~ernalaudit department. The
directors are unsurE:n.Vhether to hire staff or to outsource the function. Keegan Co has·
approm;;hed Doge 8 Co to enquire as to whether it could provide internal audit services.-

@spp Questions 11
LetteCo
Doge & Co has recently accepted a new Cli~.?nt, Lette Co. The previous auditor,.Catt SCo,
resigned from the audit in. May 20X5. Doge 8 Co was appointed on 4 June 29X5. Lette Co is in
the early stages of legal action againstCatt 8 ~o for failing to detect a fraud.
. .
21 An assurance engagement can provide limited assurance or reasonable assurance.
Indicate, by clicki'ng on the relevant boxes in the table below, whether each of the
following:statements is true of limited assurance, reasonable assurance or both. ·

An audit is an example of
this type of assurance LIMITED REASONABLE BOTH
engagement

It provides a lower level of

LIMITED REASONABLE BOTH
assurance

Judgement is required to
determine the
appropriate procedures LIMITED REASONABLE BOTH
required to obtain this
level of assurance

A negative form of
LIMITED REASONABLE BOTH
conclusion is provided

(2 marks)

22 Which TWO of the following tests would Doge & Co carry out as part of the limited
assurance review of Bradgate Co's financial statements?
0 Enquire of management as to large and unusual items within the financial statements
0 Perform analtjtical procedures to understand the relationship between items within the
financial statements
0 Perform tests of control to understand the controls that are operating within the
company
0 Perform extensive tests of details over all balances (2 marks}

23 The IAASB's Framework for Assurance Engagements (Framework) requires certain elements
to be present in every assurance engagement.
Which of the elements required by the Framework is NOT present in respect of the
proposed engagement for Trimp Transport Co?
0 There must be a three-party relationship
0 There must be appropriate subject matter relevant to the engagement
0 There must be the ability to collect sufficient and appropriate evidence
0 A conclusion must be formed and expressed in a written report (2 marks)

12 Audit one @BPP

24 Identify; by clicking on the relevant boxes below, whether each of the statements relating
-to the possible provision of internal audit-services to Keegan Co by Doge S Po is TRUE of
FALSE.

True Fatse

The risk of Doge & Co:assumlng management 0

·responsibility would be reduced by using a separate team
of staff who are not involved in the external audit.
Doge & Co should consider whether Keegan Co has 0 0
appointed-a responsible official to-oversE3e internal audit
activities. -

The materiality of the financial statement amounts 0 0

affected by the internal audit service should be
considered when evaluating the significance of any self-
review threat.

(2 marks)

25 Catt & Co's lawyers argued that the firm failed to detect the fraud in Lette Co's finans;ial
statements due to the inherent limitations in the audit and that it had, in fact, obtained
sufficient and appropriate evidence to enable it to detect material misstatements due to
fraud.
Which of the following would be an inherent limitation of the audit?
0 Cott & Co was auditing the company for the first time and the business was new to
them
0 Due to tight reporting deadlines, Catt & Co had a limited amount of time to complete
the audit
0 Catt & Co had relied on the truth of information given to them by the compony•s staff
0 Catt & Co had used audit sampling in performing tests of details (2 marks)

(Total = 10 marks)

Kamari Co- (Mar/Jun 23 amended) _(18 mins)·

The following sce0ario relates to questions 26-30.
Komori Co, a manufacturing company, has just reached the size at which local legislation
requires it to have an external audit. You work forThira SCot and the directors of Kqmari Co hove.·
asked your firm to consider appointment as "external auditors and also to provide some additional
non-audit services.
Financial forecasts
-To fund its next growth phase, the directors are applying for a bank loan and have prepared-
finaricidl forecosts to supportthe application. They have asked if Thira S Co can carry out an
addition-al Os$uronce engogerr1ent to review the finoncial forecaststheyhove produced.
Internal audit
As the company is growing. it is also considering establishing an internal audit fur)ction. The
directors o-f Karnari Co have asked Thiro & Co to provide the company with internal audit services.
They have outlined that one of the first tasks to be completed by internal audit will be to review
the procedures around raising sales orders and the processing of sales ihvoices·as a new-system is
being used and it hm~ been identified that procedures in this area could be improved. -

Questions 13
26 . Identify, by clicking on the relevant box in the table below, whether each of the
. statements about audit and assurance eng(]gements is true or false.·
r
l Audit engagements always provide reasonable_ - TRUE FA~SE·
i_ assurance

! True and fairview means the: financial statements TRUE FALSE

contain no misstatements
,.......•....•..•.....
Most non-audit engagements provide reasonable
assurance
TRUE FALSE-
... ....... ~--··--······•·------~

~·-.
There are four elements to an assurance engagement TRUE FALSE

(2 marks)

27 Which of the following statements about the non-audit service to review the financial
forecasts and the statutory audit engagement is TRUE?
0 Thira S Co cannot accept both engagements for ethical reasons
0 Limited assurance will be provided by the review of the financial forecasts
0 The intended users in the engagement to review the financial forecasts will be Komori
Co's shareholders -
0 Both engagements will be conducted under International Standards on Auditing
(2 marks)

28 Which TWO of the following are potential DISADVANTAGES of Komori Co outsourcing

internal audit to Thira & Co?
0 A greater range of experience would be brought to the internal audit team
0 It could create a self-review threat during the external audit
0 It could create a conflict of interest with the financial forecast review
0 The intern-al audit _function would have less understanding qf the business (2 marks}

29 Which TWO of the following procedures would Thira & Co carry out if it was to accept the
engagement to review the financial forecasts of Komori Co?
0 Enquire with Komori Co's bank as to the format of financial forecasts needed to
support the application
0 Perform analytical review on previous year fina.ncial statements to ensure the forecasts
are ~onsistent with past trends
0 Obtain a written representation from management stating that they have fulfilled their
responsibilities for the preparation of the financial forecasts
0 Enquire of Komori Co's directors as to any assumptions which have been made in ·
preparing the forecasts (2 marks)·

1'+ Audit and Assurance @BPP

 - .- . .. . -- .

30- Wh.at type of internal audit assignment does the review of procedures around· soles -
.Prders and the processing of sales invoices represent? ·
0 An operational audit
0 A financial audit
0 A value for money audit
0 An IT audit (2 marks)

(Total =10 marks)

@BPP Questions 15
 ·PART 8: PLANNING AND RISK ASSESSMENT
Questions 31-78 cover Audit planning and risk assessment, the subject of Port 8 of the BPP
Course Book for Audit and Assurance.

Section A Questions.
(18 mins)
The following scenario relates to questions 31-35.
You are an audit senior of Ovette S Co and your firm has recently been appointed as the auditor
to Bridgford Products (Bridgford). a large company which sells televisions, DVD players and Blu-
ray Disc players to electrical retailers. -
You are planning the audit for the year ended 31 January 20X9 and your audit manager has
asked you to produce both the audit strategy document and the detailed audit plan. including an
assessment of materiality.
In order to assist you in your planning work you have visited Bridgford, where l:JOU obtained the
following information.
Sales have increased during the year ended 31 January 20X9 following a move to attract new
customers by offering extended credit. The new credit arrangements allow customers three
months' credit, rather than the one-month credit period allowed previously. As a result of this
change, l:JOU have calculated that the receivables collection period has increased from 49 days to
127 days.
Bridgford installed a new computerised inventory control system, which began operating on 1
June 20X8. Since the inventory control system records both inventory movements and current
inventory quantities, Bridgford is proposing to use the inventorl:J quantities on the computer to
value the inventory at the year-end rather than carrying out an inventorl:J count.
The production director informed wou that in the last month or so there have been reliability
problems with the company's products which have resulted in some customers refusing to pay for
the products.
As part of the planning process you also undertake a risk assessment. Based on the information
you have obtained to date you have identified several audit risks which you feel your team will
need to address. The first risk relates to the extended credit terms offered by Bridgford to its
customers, and the recent product reliability problems resulting in customers' refusal to pay.
A second audit risk relates to the computerised inventory control system which was implemented
on 1 June 20X8. You ore concerned about whether data was accurately transferred into the new
system, and whether it is sufficientlld reliable to determine the quantity of inventorl:J for the year-
end financial statements.

16 Audit and Assurance @aPP

 31 The audit manager ha~ reque;ted that you cover a number of spec~fied areas in the audit.
planning document<?tion. . .
· For each·areo, indicate whether the information would be .included in the ai,Jdit ~trotegy
. document or in the detailed audit plan. .
I ,.
Au-dit
strategy Detailed ·
Area document· audit plan

The availability of the__ client's data and staff (including 0 0

internal audit) · ·

The alfocation of responsibility for specific audit 0 0

procedures to audit team members
The audit procedures to be undertaken for each area of 0 0
the financial statements
· The potential for using automated tools and techniques to 0 0
gather evidence

(2 marks)

' I

I 32 You have set the level of materiality for the financial statements as a whole, and now need
to determine performance materiality.
' I

Which of the following statements about performance materiality is NOT true?

i 0 Performance materiality is used to reduce the risk that the aggregate of uncorrected
and undetected misstatements exceeds materiality for the financial statements as a
~ i
whole to an acceptable level. ·
: I
0 Performance materiality refers to the amounts set by the auditor at higher than the
1
) materiality level for particular classes of transactions. account balances or disclosures
~
where the .materiality level might otherwise mean that such items are not tested.
I
0 Once the level of materiality for the financial statements as a whole has been set, a

•
~
~
I

0
lower level of performance materiality is determined by the auditor using their
professional judgement.
The performance materiality level is affected by the auditor's understanding of the
~ •/
entity and the nature and extent of misstatements identified in prior audits. (2 marks}
~ J

33 ISA 520 Analytical Procedures states that where analytical procedut·es identify fluctuations
or relationships that are inconsistent with other relevant information or that differ
significantly from the expected results. the auditor shall investigate the reason for this.
Which of the following auditor responses to the increase in the receivables coltectlon
period of Bridgford is the LEAST relevant?
0 Make enquiries of management to understand the likely reoson Wh!::J the receivables
collection period exceeds the extended credit period ·
.0 Perform detailed substdntive testing on 'the aged receivables listing, to determine
whether any an"'ounts should be written off
0 Perform a trend analysis on currentyear and prior year monthly revenue. to identify
whether revenue is overstated as a result of fraud or error
0 ·Perform further working capital ratio onolysis, to determine the effectofthe extended
credit on ~ridgford's cash position (2 marks)

@BPP ()uestions 17
34 Which of the following statements summarises your key concern regarding the risk
relating to the extended credit terms" and refusal of certain customers to pay?
0 That the directors may have pr~pared Bridgford's financial statements on the goiiig
concern basis when this is not applicable_--
0 That the financial statements include a~ounts due from credit customers which are not
valid debts
0 That there are balances due from credit customers which have not been included in the
financial-statements
0 That the financial statements include balances due from credit customers which are
not recoverable (2 marks)

35 Which TWO of the following procedures are relevant responses to the risk that inventory
quantities are misstated by the new computerised inventory system?
0 Review a sample of purchase requisitions to determine whether the quantity of
inventory held per the inventory system was verified before the requisition was
approved
0 Determine how often inventory counts are performed and the level of corrections
required to the inventory S!:JStem
D Review sales prices of inventory sold after the year end to identify inventori:J where cost
exceeds net realisable value
D Test the operation of the inventor!:! system using CAATs (2 marks)

(Total = 10 marks)

EuKaRe (Dec 08 amended) (18 mins)

The following scenario relates to questions 36--4-0.
You are an audit senior of TEY & Co and are responsible for planning the audit of EuKaRe for the
year ended 30 September 20X8.
EuKaRe is a charity which was established over five years ago. The charity's aim is to provide
support to children from disadvantaged backgrounds who wish to take part in sports such as
tennis, badminton and football. -
EuKaRe has a detailed constitution which explains how the charity's income can be spent. ·rhe
constitution also notes that expenditure-relating to the administration of the charity cannot
exceed 10% of the charity's income in ani:J year. EuKaRe currently emploi:Js three permanent
members of staff. At present, 100 volunteers work for EuKaRe: some commit up to 3 dai:JS a week
I
and others help out on an ad hoc basis. The organisation, including its finance department; is
primarily run b!:J volunteers.
The charity's incpme is derived wholly from voluntary donations. Sources of donations include -the .
public in the form of cash collected in buckets by volunteers in shopping areas. and from
generous individuals.

18 Audit and Assurance @aPP

 · 36 ~~Based on.yourunderstanding of the nature of EuKaRe, you have identified that income is
_received primarily .in the form of cosh arid this will affect oudit risk; -
By clicking on. the refevant box indic;:ate whcether the folfowing statements regt;Jr~ing the .-.
effect on audifrisk are true or.faJse. - ·

increase due to the increased risk of

misapf>ropriated and revenue -TRUE FALSE-

Inherent risk Will increase as the nature of EuK¢Re's

transaCtions means that income may be misstated either TRUE FALSE
in error or deliberately

Control risk will incrf;}ase as internal co_ntrols may be

weak due to the large number of volunteers used by TRUE FALSE
EuKaRe

Business risk will increase due to the level of volunteers

used by EuKaRe
TRUE FALSE

(2 marks)

37 Your audit partner has highlighted to you that it is imperative that TEY & Co acts in line
with ISA 315 (Revised) Identifying and Assessing the Risks of Material Misstatement. This
means it must identify and assess the risks of material misstatement at both the overall
financial statement level and the assertion level, for classes of transactions, events and
their related disclosures, and account balances and theirrelated disclosures.
Indicate which of the following statements gives a true explanation of why ISA 315
(Revised) requires a risk assessment to be carried out at the planning stage.

True False
The risk assessment will help the audit team gain an 0 0
understanding of the entity for audit purposes
The risk assessment will enable the audit senior to 0
•-- produce an accurate budget -for the audit assignment

• The risk assessment will form the basisof the audit

strategy and the detailed audit plan
Once the risks have been assessed, TEY &Co 9011 select
0

0
0

0
audit team members with sufficient skill and experience to
rT'Iaxirnise the chance of those risks being addressed

(2 marks}

@BPP Questions 19
· 38 You have identified several audit risks which you feel your team will need to address. One
·such. audit risk relates to the risk that income ma!:J be understate9 in the financial
statements. You are concerned that not all income may be recorded.
Which of the following statements is NOT a·valid response to this audit risk?
0 Obtain a breakdown of the income recorded from the cash that was collected in
buckets, and vouch a sample of entries back to the volunteer in order to determine
which volunteer collected the relevant donations · .
0 Perform analytical procedures on the level of donations in shopping areas per volunteer
0 Review the internal-controls relating to cash collected in buckets to determine whether
buckets are sealed, sequentially numbered and signed in and out by EuKaRe's
volunteers
0 Observe the counting and recording of proceeds from collections, to determine whether
appropriate segre_gation of duties is in place (2 marks}

39 Another identified audit risk is the susceptibility of EuKaRe's business to fraud due to the
high levels of cash involved.
Use the drop down lists to complete the following sentence to correctly describe the
auditor,s responsibilities in accordance with ISA 2'+0 The Auditor's Responsibilities
Relating to Fraud in an Audit of Financial Statements. <!P
I

The auditor is not responsible for the (_1)______~----'i of fraud or error.

.· - ·-. . . . . .
._I

However, thel:J are responsible for obtaining r~·- ----~-1 that the finoncial

stdtements are free from material misstate~ent whether caused bl:J fraud or error.

Pull down list 1

• Detection
• Prevention
• · Prevention or detection
Pull down list 2
• Absolute assurance
• Evidence
• Reasonable assurance
(2 marks)

40 The audit manager has noted in the detailed audit plan that EuKaRe's control environment
may be weak.
Which TWO of the following statements are valid reasons as to why EuKaRe may have a
weak control environment?
0 EuKaRe has a detailed constitution which explains how the charitl:J~S income can be
·spent.
0 EuKaRe's finance department relies on volunteers who may not have accounts
experience.
0 A high proportion of the income of EuKaRe is ·cash.
0 Understaffing in the finance-department at certain times is due to the ad hoc n·ature of
volunteer working hours. (2 marks)

(Total= 10 marks)

20 Audit and Assurance @aPP

 South (18 mins)
·The following scenario relates to questions 41-4!3 .
. You ore an audit senior of KLT S Co, and your firm has recently been appointed as the auditor to.
South, a p.rivate company that runs seven supermarkets in the UK. You are currently planning
your firm's audltof South'and are shortly due to make a· preliminary visit to South's head office.
Four months before the year end, the company installed o new till system in all superhiarkets. The
new till system is Iinke~ to the acc~unting system .at head office and autornatically posts
transactions to the accounting system. Previously journals were made manually based on totais
on till rolls. The cost of the new till system which South has installed is capitalised as a non-current
asset.
The audit engagement partner has also said that she is concerned that the new till system may
not be reliable, and that consequently not all sales have been recorded, resulting in an
understatement of revenue. She is also concerned that staff may not yet be familiar with the
system, leading to an increased risk of errors relating to data entry.
Finally, after a number of people living close to one of South's stores became seriousl!d ill, the
source of the illness was traced back to meat the customers had purchased from South. Legal
proceedings were commenced against South by a number of customers during the financial !:lear~
demanding $1 million in ~ompelisation.

41 Indicate which TWO of the following statements describe the objectives of planning the
audit of South. ·
D To ensure appropriate attention is devoted to important areas of the audit
0 To assist in the co-ordination of work done by any auditor's experts
0 To ensure that the audit engagement is only accepted if this is permissible by the ACCA
Code of ethics and conduct
0 To ensure .the auditis completed within budget restraints (2 marks)

~:.)

@aPP Questions 21
42 You ore about to begin work on the share capital section of the South audit file.
Match each of th~ followir,g audit procedures to the financial statement assertion to
which· it..is mo·st closely related. (Drag each box from the left into position to match the
relevant box ohthe right.)

Procedure Assertion

Recalculate the
closing balance on. I I Presentation I
the share capital
account
I I Completeness I
Review financial Accuracy~ valuation
statement notes and allocation
I
Review Memorandum
and Articles of I I Existence
Association and
compare their
requirements with
is$ued share capital

Read minutes of
board meetingsfor
evidence of share
issues

(2 marks)

43 In relation to the capitalised costs of the new till system, you are concerned that South may
have included within the capitalised costs some items which are-revenue in nature, leading
to the overstqtement of non-current assets.
Which of the following statements is a valid response to this audit risk?
0 Obtain a copy of the training manual relating to the new till system and discuss with
directors the extent of training staff have received on the new system
0 .Agree the capitalised costs from the trial balance back to invoices to confirm their value
0 Inspect invoices capitalised within the cost of the new till SlJStem to determine whether
they are directly attributable to the cost of the new till system
0 Recalculate the depreciation charged on the new till system (2 marks)

22 Audit and Assurance @app

 44~· The auditengagement partner
.
has stated that the ri'ew'till-system
. .
may hot be reliable~
·which.T\11(9 of the-following st~tements r~present valid responses to this audit risk?
;· 0 .Perform dnalytical procedures by comparing daily/weekly sales by store.with both,the
prior year and with expectations, in order tO determine whether any unusual patterns
have occurred following the installation of the new system "· -
0 Vouch~the sales revenue per the syst~m to the till receiptsto·confinn the _occ.uracy of ...
the sales
d Obtain a copy oft he training manuai: relating to the new till system and discuss with
directors the extent of training staff have received on the new system
0 - Agree sales revenue from till receipts to the cashbook to determine the accuracy of till
receipts (2 marks)

45 You plan to review the legal correspondence relating to the claims made by those
customers to whom South sold contaminated meat.
Which TWO of the following are valid objectives of this audit procedure?
0 To determine whether South's reputation will have been damaged within the local area
0 To confirm whether there are deficiencies in South's internal controls relating to food
hygiene
0 To assess whether a provision for customer compensation is required in South's
financial statements
D To determine whether disclosure of the nature and,financial effect of the legal claim is
required in South's financial statements (2 marks}

(Total = 10 marks)

Mason. (18 mins)

•- The foltowing scenario relates to questions 46-50. ·

You ore an audit senior of IBN & Co and you are planning the audit of Mason Air Services Co
(Mason) for the gear ended 31 December 20X3.
Mason is a company that provides speciaflst helicopter support to public services. such as the
police force and the ambulance service. Mason has four of these contracts, which contain very
similar terms and are equal in value. Mason owns and maintains the belicopter fleet which is held
at cost. Each aircraft carries specialist equipment and Is operated by a highly skilled specialist
pilot. Under the terms of these contracts Mason charges the customer on annual fee· to cover the
maintenance, storage and testing of the aircraft and equipment. The annual fee ispa~:Jable in
advance each year with the first annual payment being paid on the date thecontrc:ict
commences.
Mason has not purchased any new helicopters during the year to 31 December 2QX3; however.
there has been a lot of refitting, replacement and adding of specialist equipment to some·of the.
existing aircraft. This has been necessary to keep up with the latest developrnents"in search and·
rescue, and to maintain the aircraft to the high standard required under the contracts in_place.
The original pUrchase of each aircraft was funded with a secured loan carrying substantial
interest charges. The loan is in the process of being renegotiafed and the bank has indicated that
finance costs wHI increase further. Furthermore~ the directors have told you that Mason's contract
with the pt)lice force expires in March 20X4. at a time when, in tho. wake of government cuts, the
police are tr-ging to substantially reduce the amount they pay. ltis thought that the contract will
be put out to tender, and it is possible that another dircraftprovider·may also bid for the contract.

@BPP Questions 23
Mason also holds around $2 milljon of aircraft spares which are included within-inventory. Mason
sells the aircraft spares to amateur flying associdtions. Aircraft spares which are not sold after
three years are scrapped. ·
Approximately one quarter otthis value is made up of specialist equipment taken. out of aircraft
when it was replaced by newer or r:nore advanced equipment. Such specialist equipment is
transferred from non-current assets to inventory without adjustment. arid continues to be
recognised at amortised cost. . ·

46 In relation to the specialist helicopter support contract~, which of the following

statements summarises a key audit risk?
0 Mason's assets could be undervalued if the market value of the helicopter fleet exceeds
its cost.
0 Mason could breach the terms of its contracts with its customers and be liable to pal::J
penalties, so provisions mal::J be understated.
0 Revenue may be overstated if it is recognised according to the contract date rather
than over the relevant accounting period.
0 An expert valuer is required to value the helicopters in the financial statements.
(2 marks)

47 Given the large amount of refitting of existing aircraft, you are concerned that property,
plant and equipment may be overstated in the financial statements.
Indicate which TWO of the following statements represent valid responses to this audit
risk?
0 Perform a proof in total calculation of the depreciation charge for the !Jear and
investigate an!J significant differences
0 Review minutes of training meetings to determine whether the pilots have been trained
. how to use the specialist equipment
0 Obtain a breakdown of the capitalised costs and agree a sample of items to invoices to
determine the nature of the expenditure
0 Inspect management's review of whether the value of the aircraft has been impaired
(2 marks)

'+8 In relation to Mason's secured loan, which is the MOST important audit risk that should
be documented in the detailed audit plan?
0 Disclosure relating to the secured loan may be omitted from the financial statements
0 Mason's going concern status may be at risk if the contract is not renewed
0 Interest charges may be understated
0 .The bank will rely on the audited financial statements when deciding whether to renew
the loan {2 marks)

21t Audit and Assurance @aPP

49- ,Which TW9 of the following are valid responses to the foct_that Mason•s contract with
the police force is due for renewal? ..
0 Review Mason's contracts with itS otb~r three customers tc:> determine whether they
to
:contain a break-clause, .in order determine the llke.lihood of losing any further
contracts to oth~r aircraft providers
0 Contactthe pdlice force directly and request confirmation os to whether the contract is-
to be renewed
-0 Review the short-term and long;..;term funding facilities wh~ch are available to Mason
0 Consider whether the financial statements contain appropriate disclosures in relation
to the matter -- (2 marks)

50 In relation to the aircraft spares held by Mason, indicate which of the following correctly
describe ·areas of audit concern? ·

Audit Not audit

concern concern
Non-current assets 0 0
Inventory 0 0
Completeness 0 0
Accuracy, valuation and allocation 0 0

(2 marks)

(Total =10 marks)

Severn (18 mins).

The following scenario relate_s to questions 51-56.
You are an audit manoger of Rivers & Co. Yourfirm has been invited to tender for the audit of
Severn Co, a l.isted company. Your- firm does not have any other listed clients, and Severn Co will
represent the biggest client of your firm (by client annual revenue) if your tender is successful.
A member of the audit committee of Severn Co informed your audit engagement partner that the
current auditors were not being invited to stand for re-election as the audit committee felt that the
relationship between tho firm and the company hod begun to lose qbjectivity due to
overfamiliarity. You have reviewed past financial statements of Severf1 Co and have noted that the
company applies IFRS, and that the ciudit committee reports on its responsibilities With regard to
interna I control annually. The director confirmed that the board would be happy to c;onfirrn their
responsibilities in writing with Rivers S Co as they are aware of the relevant audit re.S:~irements.

@BPP Questions 25
51 · The audit engagement partner has asked you to prepare some information ready for the
tender. ·
Identify, by clicking on the relevant box in the ·tabl·e below, if the following items should
be included In, or excluded from, the tender for the audit of Severn Co.

The proposed fee for the initial audit of Severn Co INCLUDE EXCLUDE
..............
A description of Rivers S Co, including the_ curriculum
INCLUDE EXClUDE
vitae of key staff likely to be assigned to the client

.Overall level of materiality to be qsed in the audit INCLUDE EXCLUDE.

......... :

A summary of potential other services Rivers 8 Co could

INCLUDE EXCLUDE
1 provide to Severn Co '
·--· .........

(2 marks}

52 You have identified a number of issues which should be considered prior to tendering for a
new client.
Given what you already know of Severn Co, which TWO of these are most important to
consider further prior to tendering for the audit?
0 The firm is independent of the potential client
0 The firm has the appropriate resources to conduct the audit of the potential client
0 The preconditions of audit will be met
t:J The outgoing auditors will give Rivers 8 Co access to working papers (2 marks)

53 You are reappraising whether it is appropriate for the firm to accept the engagement.
Which of the following issues arising would cause Rivers S Co to decline the engagement?
0 The engagement letter not being received by Rtvers & Co
0 Rivers &Co losing a major client meaning Severn's audit fee would represent 20% of
annual firm income ·
0 A reply from the outgoing auditors stating that they declined to seek reappointment to
the audit of Severn Co due to a disagreement over accounting policies
0 A request from Severn Co that the audit b~ carried out in March~ wheq Rivers 8 Co
already works at maximum capacity (2 ma.rks)

26 Audit and Assurance @aPP

54 You are_ drafting an engagement letter in respe-ct of Severn Co, and are aware that ISA 210
Terms of Audit Engagements requires certain issues to be included. · -
Indicate w~ich of the following issues must be !ncluded in the engagement Jetter.

Do not
lnc.lude in inClude in
engagement" engogemen~
letter - - letter

Scope of the audit · 0 0

Responsibilities of management of Severn Co 0 0
Timetable for the provision of accounting information by 0 0
Severn Co
Fees and billing arrangements 0 0

(2 marks)

55 Complete the following sentence using the options from the drop down lists.

Before accepting the audit of Severn Co, Rivers 8 Co should L..l(_1)______..._.1· Once

the audit has been accepted) then Rivers 8 Co should begin to ~-------·-·-.............·----·;] .

Pull down list 1

Appoint a quality reviewer
Obtain references concerning the directors
Submit the letter of engagement

Pull down list 2

Determine audit materiality levels
·Obtain references concerning the directors
Submit the letter of engagement
(2 marks)

(Total = 10 marks)

Goofy Co (Jun 11 amended) (18 mins)

The following scenario relates to questions 56-··"60.
You are an audit manqger in NABS Co, a large audit firm which specialises in the audit of
retailers. The firmcurrently audits Goofy Co (Goofy), a food retailer; but Goofy's main
competitor, tv1ickey Co (Mickey), has approached the audit firm to act as auditors. Both Goofy
orid Micke~J ai·e listed com ponies. Goofy is concerned that if NAB & Co audits both companies
then confidential information could pass across to Mickey. ·
The audit engagement partnedor Goofy has been in place for approximately six years and her
daughter, Emma~ has just accepted a job o'ffer -From Goofy as a warehouse manager: Emma's
employment contract states that if a bonus is to be paid it will be awarded as shares in Goofy·
rather than in cash. Goofy is offering NAB &Co a 5% bonus on top of the audit fee if this year's
audit can be completed. three weeks earlier than last year. This is to reduce the demands on the
finance director's time as he is busy wor"king on other projects.

@BPP Questlons 27
56 The ACCA Code of Ethics and Conduct requires that an external· auditor implement
appropriate-safeguards to ensure that a conflict of interest is properly managed.
Which TWO of the following .actic:ms should NAB ·s Co take regarding the potential
confidentiality issue?
D Inform the audit committees of both Goofy and Mickey of the potential conflict of
interest and obtain their consent to act for both parties
D Use separate audit teams for each audit with o common independent review partner to
determine whether confidentiality has been maintained
D Draw up confidentiality agreements to be signed by the board of directors of Goofy .
and Mickey
0 Prevent unauthorised· physical access to the information relating to both companl::J
audits (2 marks)

57 From a review of the information above, your audit assistant has highlighted some
of
potential risks to independence in respect the audit of Goofy.
Indicate the appropriate category to which each of the threats to independence should
be allocated. ·

Threat to independence · Familiarity Self-interest

Audit engagement partner has been in the position for six 0 0

years
Audit engagement partner's daughter works for Goofy 0 0
Audit engagement partner's daughter's bonus would be in 0 0
the form of shares
5% bonus offered if audit is completed three weeks earlier 0 0
than last year ·

(2 marks)

28 Audit and Assurance @aPP

58 NAB GCo hal? decid~d that it would like to accept nomination as Mickey's auditors -and
Mickey's existing auditors have ag~eed to resign rather than be removed from office." The
audit manager in charge of the tender has set out a list of procedures that the firm must
·undertake before Mickey can be approved as an au~lit client. - -
_(1) Ensure that the existing auditor's resignation has been properly conducted
·(2) Communicate.with Mickey's existing auditors _ _
(3) Submit an engagement letter to Mickey's management
(4) Perform client screening procedures:- including an- assessment of Mickey-'s risk profile
Drag each of the- four options below to the righthan·d side to show the correct ordet in
which the above procedures should be undertaken. (Drog f:)ach box from the left into
position to match the relevant box on the right.) · -

Order Procedure

(1) Ensure that the

existing auditor's
resignation has_ been
(2)
I .·
properly conducted

(3) Communicate with

Mickey•s existing
auditors
(4) I
Submit an
engagement letter to
Mickey's
management

Perform client
screening
procedures, including
an assessment of
Mickey's risk profile

(2 marks)

59 Before NAB G Co can accept appointment as Mickey's auditors it must determine whether
the preconditions for an audit are met and obtai11 management's qgreement that it
acknowledges ond understands its responsibilities.
Which of the following is NOT included- in the agreement obtained bg the auditor?
0 Management's responsibility for preparing the financial statements
0 Management's responsibility for internal control to enable the preparation. of fihancial
statel11ents which ore free from material missfatement
0 Management's responsibilitt:j to provide the auditqr with all information relevant to the
preparation of the financial stotemeiits
0 Managemenfs responsibility to prevent and detect fraud (2 marks)

@BPP Questions 29
60 lndic~te which of the following statements are true regarding the regulation of the audit
profession? ·

The auditor has the ri"ght of access to the. books, records

and vouchers of the compan-y
TRUE FALSE· i
The auditor has the. right to be heard at general meetings
TRUE FALSE
on matters relating to the audit

The auditor is appointed by, and answerable to, those

TRUE. FALSE
charged with governance of the company

An auditor can be removed by a simple oral resolution in

TRUE FALSE
line with the common law
............. ~·-···-

(2 marks)

(Total= 10 marks)

· Carlise (18 mins)

The following scenario relates to questions 61-65.
You are an audit senior of UYE 8- Co and your firm is the external auditor of Carlise, a large private
companlJ that runs major sports venues in the UK. Carlise has a year end of 31 December and you
are currently planning the interim audit of Carlise for the six months ended 30 June 20X4.
This year you will have another audit senior, James, who has recently joined UYE 8- Co, working
with you. James did not work on any interim audits with his previous audit firm, and your audit
manager has asked you to train him to use the different approach used in interim audits.
James has drawn up the following list of audit procedures:
(1) Update documentation relating to Carlise's accounting systems which has been prepared in
prior year audits.
(2) Obtain third-party confirmations relating to receivables, payables and cash at bank.
(3) Review the directors' assessment of whether Carlise is a going concern. ·consider whether the
assumptions made bbl the directors are reasonable and whether it is appropriate to prepare
the accounts on the going concern basis.
(4) Perform preliminary analytical procedures in orderto identify any major changes in the
business or unexpected trends.
In July 20Xlt Carlise established an internal audit department. The board is still planning the
exact responsibilities the internal audit department will have, but it is likely that, among other
things, they will be involved in monitoring the internal controls relating to Carlise'sonline ticket
sales system.
It is the policy of UYE S Co that audit files for both interim and final audits are assembled within
60 days of the date when the auditor's report was signed. The files are then locked and cannot be
amended after this date, but it is sometimes deemed necessary for further minor procedures to be
added to the files after the auditor's report is_ issued. The files are then retained for 3 years, at
which time they are disposed of securely.

30 Audit and Assurance @aPP

61 Indicate whether the procedures identified by James above will be conducted during the
interim or_ the final audit. -
.· Audit procedures Interim audit Final audit
Update documentation relating to Carlise's accounting 0 0
systems which has been prepared in prior year audits.
Obtain third-party confirmations relating to receivables, 0 0
payables and cash at bank.
Revie~ the directors' assessment of whether Carlise is a 0 0
going concern. Consider whether the assumptions made
by the directors are reasonable and whether it is
appropriate to prepare the accounts on the going
concern basis.
Perform preliminary analytical procedures in order to 0 0
identify any major changes in the business or unexpected
trends.

(2 marks)

62 During the interim audit, you performed internal controls testing and the results of this
indicate that~ to date, the control environment is strong and internal controls are operating
·effectively.
James has asked you to explain the factors that will determine the extent of further work
on internal controls that will need to be performed at the final audit.
Which of the following should be taken into account when determining the extent of the
additional work needed at the final audit?
(1) The significance of the assessed risks of material misstatement at the as_sertion level
(2) The specific controls that were tested during the interim ·period, and significant
changes to them since they were tested, including changes in the information . ·
system, processes, and personnel·
(3) The length. of the remaining period
0 1 and 2 only
0 2 and 3 only
0 1 and 3 only
0 1, 2and 3 (2 marks)

63 Which of the following considerations is the MOST important when deciding whether or
not to rely on the work performed by Carlise's internal audit department? .~ .
0 Whether any members ofCarlise's internal audit department hold a professional
qualification ,
0 Whether the work performed by the internal audit department relates to specific audit
assertions over which UYE 8 Co has concerns
0 Whether a separate audit committee exists
0 Whether Carlise's internal oudit department has a work plan which ·schedules the work
they should perform to the end of the year (2 marks)

@BPP Questions 31
64 Carlise's internal audit team is likely to be involved in monitoring the internal controls·
relating to Carlise's onli11e tic::ket sales system. UYE & Co may use the internal audit
department to provide qirect assistance to it In the audit. of this systerri.
Indicate which ·of the following statements are true, if dirept assistance is used?
True False

Carlise.'s internal auditors would perform audit 0 0

procedures under the direction. supervision and review of
UYE 8 Co's audit team
UYE 8 Co should only use direct assistance if the risk of 0 0
material misstatement in relation to the online ticket sales
system is high
UYE & Co's audit team should document its review of the 0 0
work performed by Carlise's internal auditors
Carlise's internal auditors will be separately liable for any 0 0
material misstatements in the work they have performed

(2 marks)

65 Indicate which of the following are true of UYE & Co's policies regarding the assembly
and retention of audit files.

True False

UYE 8 Co's policy of assembling files within 60 days of the 0 0

auditor's report is stricter than what is required b!:! ISAs
It is incompatible with ISAs for even minor further 0 0
procedures to be added to the audit files after the 60-day
period
It is acceptable to make administrative changes to an 0 0
·audit file after 60 days~ so it is not strictly necessary to
'lock' the files to comply with ISAs
It is acceptable for files to be disposed of after 3 !:!ears 0 0
have passed·since the date of the auditor's report

- (2 marks)

(Total.= 10 marks)

32 Audit and Assurance

@"PP
 Section B Questions
66 Peony (Mar/Jun 19) (36mins).
It is 1 July 20X5. You.are an audit supervisor of DaffodilS Co and.are planning the audit of Peony
Co for the year ending 31 May 20X5. The company is a food .retailer with a large, network of ~to res ·
acrpss the country and four warehouses. The company h~s been a client of your firm for-sev~ral
years and the forecast profit before tax is $28.9 million. The audit manager has attende~ a
planning meeting with the finance director and has provided !:JOU with the following notes of the
meeting.
Planning meeting notes
. .

Peony Co has an internal audit (lA) 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 auditteam may rely on the controls te.sting
which is undertaken bl:l lA.
During the meeting, the finance director provided some forecast financial information. Revenue
for the year is expected to increase by 3% as compared to 20X4; 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 inventorbJ records showed a higher quantit!d 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~ lA performed a review of the non-current assets physicallbJ 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 companbJ launched a significant TV advertising campaign in January 20X5 in order to
increase revenue. The directors have indicated that at the year end a current asset of $0.7 million
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 20X5.
Peony Co decided to outsource its payroll function to an external service organisation. This
service organisation handl.es all elements of the payroll cycle atid sends monthly reports to Peony
Co which detail wages and salaries and statutory obligatlqns. Peony Co maintained its own
payroll records until31 December 20X4, 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 20X5 and in order to fihance this, in March 20X5 the company obtained a $3 rnWion bank
loan. This is re-payable 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 ernplobJees 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 20X5. ·
Required
(a) Define .and explain materiality and performance materiality .. (4 marks)

(b) Describe EIGHT audit risks and explain the audito(s response to each risk in pla~~ing the
audit of Peony Co.
Note. Use the below table structure to format !:JOUr ar1swer itt the CBE software.

(16 marks)

@BPP Questions 33
 Audit risk Auditor's response

(16 marks)
(Tot~ I = 20 marks)

67 Harlem (Se-p/Dec-.19) (Sit mins)

This scenario relates t<? five requirements.
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 statements 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 iteiTls 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 quantity 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 good being dispatched and
management is investigating whetherthe issues can be rectified and the tyres can subsequently
be sold.
Harlem Co's finance director has informed you that in March 20X5 a significantcustomer 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 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. quy trình mua hàng
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:

31t Audit and Assurance @aPP

 ,_,

Finoncicfl statemen~s.extracts for year ending 39 September

Forecast 20X5 - ·Actual 20Xlt
·_ $'0.00 $'000
Revenue 23~~0 2'1,900
· Cost of sales (18,700) .(17,300) ·. -~

Gross profit lt,500 '+,600

Finance costs 290 250

Profit before tax It50 850

Intangible asset 800 800

lnventor!d 2,100 1,600

Long and short-term borrowings 13,000 11.000

Totol equit!J 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 do~::~s.

Required
(a) Describe the auditor's responsibilit1es in relation to the prevention and detection of fraud and
error. ('+ marks)

(b) Calculate the FOUR ratios listed In the table below, for 80TH years} to assist !:-JOU in planning
the audit ofHarlem Co. ·
Note. Use the below table structure to format you'r answer in the CBE software.

Ratio 20X5 20X4

Grossprofit margin

Inventory holding period

Gearing

Interest cover

(If marks)
(c) Using the information provided andthe ratios calculated) describe EIGHT a Ltd it risks and
-- explain the auditor's response tq each risk in planning the audit of Harlem Co.
Note.-Use the below table structure to format your answer in the CBE so~twore.

Audit risk Auditor's response

{16 marks)
(d) Describe the substantive procedures the auditor should perform to obtain sufficient
appropriate audit evidence in relation to the VALUATION of trade receivables in the current
year. · {3 marks)

@aPP Questions 35
 (e) Describe the substantive procedures the auditor should perform to obtain sufficient
appropriate audit evidenc~ in relation to the DISPOSAL of plant .and machinery in the currerit
year. - · (3 marks)

(Total =30 marks)

68 Scarlet (Mar/Jul20) {Sit mins)

This scenario relates to fo~r requirements.
It is 1 July 20X5. You are on audit supervisor of Orange S Co pkmning the audit of a new client,
Scarlet Co, for the year ended 31 May 20X5. Scarlet Co manufactures chemicals for use in
domestic; and commercial cleaning products. ··
The company's financial accountant was taken ill suddenly in May 20X5 and is unable to
undertake the preparation of the year-end draft financial statements. As a result, the company
recruited a temporary financial accountant in early June 20X5 who will prepare the draft
financial statements. The year-end financial statements need to be finalised quickly as the
company is looking to raise finance through a bank loan to replace three machines in the
production facility. The bank has asked for a copy of the audited !::Jear-end financial statements
b!::J the end of September 20X5 before they will agree to the loan and the directors are keen to
report strong results in order to obtain this financing.
In the year, the company also purchased a specialised machine to develop a new range of
chemicals for a major customer. Only trained staff are allowed to operate this machine and staff
members had to undertake two days of training, followed by an assessment at the end of the
training period. The training costs of $15,000 have been capitalised as part of the cost of the
asset.
The company sources many of its raw materials to be used in the chemical manufacturing
process from an international supplier and goods can be in· trahsit for up to three weeks. The
agreement with the international supplier contains a clause which states that Scarlet Co is
responsible for the goods as soon as they leave the supplier's warehouse.
You have carried out a preliminary analytical review which indicates that the receivables
collection period has increased from the 38 days to 52 days. The credit controller has confirmed
that some customers are currently taking longer to pay than in previous years as they are
awaiting payment from their customers.
On 29 May 20X5, the directors announced that one ofits brand was being discontinued due to a
fall in demand for the product. This resulted in four staff members being made redundant. The-
payroll department has calculated the levels of termination· costs associqted with the redundancu
and they will be paid in the July 20X5 payroll run.
The directors each received a significant bonus in the year which has been included in the payroll
charge for the year in the statement of profit or loss. Local legislation requires separate disclosure
of directors' bonuses in the financial statements.
During the year the company sold a batch of chemicals to a customer for $120,000. At the
beginning of May 20X5, the customer returned these chemicals because the chemical mix was not
in line with the customer's specifications. A credit note is yet to be issued to the customer and the
· chemicals have been written down to ~heir scrap value within.inventory.
The company usually pays its suppliers by the ehd of each month. However, due to the financial
accountanfs illness, the payment run for May 20X5 was not performed unti11 June 20X5. The
finance director has informed yo~ that in order to show consistent resurts with the prior year~ this
payment run is shown as an unpresented item on the year-end bank reconciliation.

Required
ISA 210 Agreeing the terms of audit engagements requires auditors to issue an engagement letter.
(a) Explain the PURPOSE of an audit engagement·letterand list FOUR items which should be
included in an audit engagement letter. ('+ marks)

36 Audit and Assurance @BPP

.
(b) Explain WHY the following factors should. havebeenconsidered> bkJ Orange S Co prior to
accepting Scarlet Co as a new audit client. ·
· Note. Use.the below table structure to format go1.1r answer in the CBE software.

Pre-acceptance factors Explanation

(5marks)
(c) Describe EIGHT audit risks~ and explain the auditor's r~sponse to each risk, in planning the
audit of Scarlet Co;
Note. Use the below table structure to format your answer in the CBE software.

Audit risk Auditor's response

(16 marks)
(d) Describe substantive procedures the auditor should perform to obtain sufficient and
appropriate audit evidence in respect of the redunddncy costs. (5 marks)

(Total ::: 30 marks)

@BPP Questions 37
69 Corley Appliances Co (Mar/Jun 21) (36 mins)
This scenario relate~ to three requrrements.
It is 1 July 20X5. You are an audit-supervisor with Woodward &_Co ahd you are in the process of
planning the audit of Corley Appliances Co. a company which sells domestic electrical appliances __
such as fridge freezers, TVs, and washing machines. The company's .year end is 31 August 20X5
and _forecast revenue for the !::Jear is$12.2 million, total assets are $6.8 million and profit before tax
is $2.8 million. The audit manager held a meeting with the finance- director and the notes from
that meeting are provided below.
Notes from meeting with finance director
The company operates nationwide with 20 branches located across the Qountr!:J and sells goods
to members of the public and to retailers. The company has returns policy which allows a
customer to return goods within 28 days of purchase if they are not satisfied with the product.
Historicaii!::J, 5% of customers returns goods within the return period. The company also provides a
six-month warranty on its products which requires Corley Appliances to repair any defects, at its
own cost, which arise within the warranty period. It is anticipated that the warranty provision in
the draft financial statements will be lower than the prior year as the directors are confident the
products will be sold by the company are built to a very high standard.
The company is based in Europe and its main supplier of appliances is based in Asia. Goods are
shipped to the company's central warehouse by sea and are usually in transit for up to one
month. Corley Appliances Co has responsibility for goods in transit from the points of dispatch by
the supplier. The central warehouse and all20 branches will be carrying out a full year-end
inventory count on 31 August 20X5 and it is expected that the value of ihventor~J in Corley
Appliances Co's financial statements will be $0.95 million.
Over the last six months, the finance director has noticed that the compan!:J's receivables
collection period is now an average of 55 da!:JS, whereas the company•s target is 42 days. The
credit controller't1as informed the finance director that she is confident that all receivables will
eventually pay as increases in receivables collection periods are starting to become common in
the industry. The finance director believes it is unlike that any increase in the allowance for
receivables will be necessary at the year end as compared to the prior year.
In June 20X5, a fraud was uncovered in the finance department. A pa!:Jables ledger supervisor
had diverted funds from the company's bank account using a fictitious supplier on the payables
ledger. The employee was immediately dismissed, and the value of the fraud will be recognised as
an expense in the statement of profit or loss. Since the dismissal of the supervisor~ purchase
invoices have not been recorded in the payables ledger and it is unlikely that this backlog on
Invoices will be cleared by the year end.
Du6ng the year, the company purchased and installed a new automated dispatch system for its
· central warehouse. The cost of the dispatch system was $0.9 million and hos been recognised as .
an addition to property, plant and equipment. These capitalised costs include the purchase price
of $0.6 million~ installation costs of 0.2 million and staff training costs of $0.1 million.
Due to the costs incurred in purchasing the new dispatch system and the increase in the
receivables collection period, the company's overdraft facility has increased significantly and at
one point went over the agreed limit of $0.7 million in early June 20X5. The bank has expressed
concern about the wa!::J that the company is operating its bank overdraft facility, which the
company is dependent on. The auditor's report is due to be signed in October 20X5.
ISA_210 Agreeing the Terms of Audit Engagements states that auditors should only accept, or
continue an existing audit engagement, of the preconditions for an audit are present.

Required
(a) Describe the PRECONDITIONS required for an audit. (3 marks) -

(b) Describe SEVEN audit risks and explain the auditor's response to each risk in planning the
audit of Corley Appliances Co. ·
Note. Use the below table structure to format your answer in the CBE software.

38 Audit and Assuranc~

 Audit risk Auditor's response

~(14 marks)

, (c) Define the term 'professional scepticism• and expldin TWo· examples from the audit of Corley
Appliances Cowher~ the-audita( should apply p~nfessional sl?epticism. . (3 marks)

(Total = 20 marks)

70 Hart Co (Sep/Dec 20) (Sit-mins)

This· scenario relates to four requirements.
It is 1 July 20X5. You are an audit supervisor with Morph 8 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 recently 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 ore 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 to 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 progre~s (WIP) at 30 June 20X5 is $7.6 million in respect of the
playgrounds under construction. A Vv'IP count and valuation will be carried out at all sites on 30
September 20X5. Arrangements have been mode 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 $1.8 million relating to the research and development of-a
new type of environrnentally:-friendly building material. $0.6 million of the expenditure to date has
been written off to the statement of profit or loss: The remaining $1.2 million 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 $2.4 million. l.t paid $1.
million on signing the contract to secure the machineru. which was due to be deliver~e. in ,July
20X5. Due to a supplier probl~rn. the delivery is delai:Jed and is now scheduled to be delivered in
October 20X5. In order to finance the research and development costs and the machiner~:J
purchase,. Hart Co made a rights issue to existing shareholders at a price of $0.75 for each $0.50
share.· ·
Hart Co's. pqyroll functfon i~ 6utsourced to an external service organisation, Chaz Co. which is
responsible for.aH elements of payroll process1ng a!ld maintenance of payroll records.
Hart Co's directors correcti!J disclosed tf1eir remuneration details in the forecast financial
statements in line with.WRS 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.
ISA 300 Planning an audit of financial-statements. provides guidance to assist in planning an
audit.

@sPP Questions 39
 Required

(a) Explain the b,enefits of audit planning. . ('+marks)

(b) Describe EIGHT audit risks and explain_ the auditor's response to each risk in planning the
audit of Hart Co.
Note. Use the below table structure to format your answer in the CBE software.

Audit risk Auditor's response

(16 marks)

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

(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 S Co was appointed as auditor was because of
its knowledge of the industry. There were some concerns however, as to how Morph S 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.

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

(Total = 30 marks)

71 Prancer Construction Co (Sep/Dec 17) (36 mins)

It is 1 July 20X5. You are an audit supervisor of.Cupid S Co, planning the final audit of a new
client, Prancer Construction Co, for the year ending 30 September 20X5. The company
specialises in property construction and providing ongoing annual maintenance services for
properties previously constructed. Forecast profit before tax is $13.8 million and total assets ar~
expected to be $22.3 million, both of which are higher than for the year ended 30 September
ffiX~ -
You are required to produce the audit strategy document. The audit manager has met with
Prcmcer Construction Co's finance director and has provided lJOU with-the following noh;s, o coplJ
of the August management accounts and the prior year financial statements.
Meeting notes
The prior year financial statements recognise work in progress of $1.8 million, which was
comprised of property construction in progress as well as ongoing maintenance services for
finished properties. The August 20X5 management accounts recognise $2.1 million inventory of
completed properties compared to a balance of $1.4 million in September 20X4-. A full year-end
inventory count will be undertaken on 3.0 September at all of the eleven building sites where.
construction is in progress. There is not sufficient audit team resource to attend all inventory
counts.
In line with industry practice, P·rancer Construction Co offers its cus~omers a five-year building
warranty,. which covers any construction defects. Customers are not required to pay any
additional fees to obtain the warranty. The finance director anticipates this provision will be lower
than last year as the company has improved its building practices and therefore the quality of the
finished properties.

ItO Audit and Assurance @BPP

 ~customers who wish to purchase a p-roperty are r~quiredto place ari order and pay a 5% non-
refundable deposit prior to the completion of the building. When the ·6uHding is. complete,. ··
customers pay a further 92.5%, with-the finol2.5% due to be paid six m6oths later. The finance
'director has informed youthat although anallowance fofreceivables has historically befm.
maintained, it is anticipated that this can be_ significantly reduced.
Information from management accounts _ __
Prancer Construction Co's prior year finanoial statements and August 2PX5 management·
accounts contain a material overdraft balance. The finance director has oqnfirmedthat there are
minimum profit and net assets covenants attached to the overdraft.
A review of the management-accounts shows the payables payment period was 56 days for
August 20X5, compared to 87 days for September 20X4. The finance director anticipates that the
September 20X5 payables payment period will be even lower than those in August 20X5.
Required
(a) Describe the process Cupid S Co should have undertaken to assess whether the
PRECONDITIONS for an audit were present when accepting the audit of Prancer
Construction Co. (3 marks)

(b) Identify THREE main areas, other than audit risks, which should be included within the audit
strategy document for Prancer Construction Co 1 and for each area provide an example
relevant to the audit. (3 marks)

(c) ,Using all the information provided, describe SEVEN audit risks, and explain the auditor's
response to each risk, in planni'ng the audit of Prancer Construction Co.
Note. Use the below table structure to format kJOUr answer in the CBE software.

Audit risk Auditor's response

(14 marks)
(Total= 20 marks)

72 Blackberry Co (Mar/Jun 18) (36m ins)

You are an audit senior of Loganberry 8 Co and are planning the audit of Blackberry Co for the
year ending 31 March 20X8. The company is a manufacturer of portable musio players and your
audit manager has alreadbJ had a planning meeting with the finance director. Forecast revenue-is
$68.6 million and profit before tax is $4-.2 million.
She has provided \::JOU 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 tfl'e purchase
price of raw materials and costs of conversion, including labour, production and ged~lfbl
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 It April, and any necessary
adjustments wHI be ma-de to reflect post year-end movements of inventory. The internal audit-
team will attend the counts.
During the year Blackberry Co paid $1.1 million to purchase a patent which allows the company
the exclusive right for three years to custorr1ise their portable music players to gain a cornpetitive .
edge in their industry. The $1.1 million has been expensed in the cur-rent ~Jear statement of profit or
loss. In order to finance this- purchase, Block~erry Co raised $1.2 million thrbugh 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 receivables 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

Questions lt1
 subsequently dismissed. As a result of the vacancies inthe receivables _ledger department;.
Blackberry Co decided. to outsource its receivables ledger'process~ng to an external service.
organisation. This service provider handles all elements of the receivables ledger cycle, including
·safes invoicing and chasing of receivables balances and sends monthly reports to Blackberry Co
detailing the sales and receivable amounts. Blackberry Co ran its own receivables ledger until3i
January 20XB~ ·at which point the- records were transferred to the service orgc.:misation.
In December 20X7 the financial accountant of Blackberry Co was dismissed. He had been
employed by the company for nine years, and he hd·s threatened to sue the companbJ 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 have been
performed. ·
In January 20X7 a receivable balance of $0.9 million 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 ~vas 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 finahcial position and other
income in the statement of profit or loss.
Required
(a) Describe Loganberry S Co's responsibilities in reJation to the prevention and detection of
fraud and error. (Lt marks)

(b) Describe EIGHT audit risks and explain the auditor's response to each risk in planning the
audit of Blackberry Co.
Note. Use the below table structure to format your answer in the CBE software.

Audit risk Auditor's response

(16 marks)
{Total = 20 marks)

73 Darjeeling Co (Sep/Dec 18) (51f. mins)

It is 1 July. 20X5. You are an audit supervisor of Earl & Co and are plannihg the audit of Darjeeling
Co for the t-Jear ending 30 September 20X5. 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 preliminart~ analytical procedures using the financial statement extracts.
Planning meeting notes
During the year Darjeeling Co has spent $0.9 million, 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. AU costs incurred fn the purchase and installation of that
asset have been included within property, plant and equipment. These capitalised costs include
the purchase price of $2.2 million, installation costs of $0.4 million and a five-year servicing and
maintenance plan costing $0.5 million. In order to finance the development projects and the new· ·
manufacturing line~ the company borrowed $4 millioh 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.

lt2 Audit and Assurance @aPP

The company storted a number of initiatives during the yeqr in order to boost' reVef1Ul3 .. 1t ~ffered
extended credit t~rms tq !ts-customers_onthe condition that their sales order"·quQ':'ltities were·
increased. In addition; Darj~ellng Co made an announQement in October 20X4 ofits 'price
promise', thatit would match the prices ofany competitor for similarproducts pu~chased..
Customers who are. able to prove that they could purchase the products cheaper elsewhere are
asked to claim the difference from··oarjeeling Cot within one month of the date. of purchase of_
goods, via its website. The company i_ntends to include _a refund liability of $0.25 million, which i$
based on t~e monthly lev€):1 of claims to date. in the draft financial-statements.
The finance director informed the audit manager that a problem arose in June 20X51n 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 cor1sistency 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 e~ding 30 September

Forecast Actual

20X5 20X4
~·

$'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

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

(b) Cal_culate the following THREE ratios, for BOTH years, which would assist you in planning the
audit of Darjeeling Co. ·
Note. Use the below table·structure to fonn?t your answer in the CBE software.

20X5 20X4

Quick ratio ·

(3 marks)
(c) Using the inforrnation provided~ the ratios calculated" and the financiaf extracts, describe ·
EIGHT audit risks and explain the auditor's response to each risk in planning the oudit of
Dorjeeling Co.
Note~ Use the below table structure to format your answer in the CBE software.

Audit risk Auditor's response

Questions lt3
 (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 prpceduresthe auditor should perform to obtain sufficient and
appropriate evidence in relation to Darjeeling Co's revenue. (5 marks)

{Total·=. 30 marks)

7lt Hurling Co (Mar/Jun 17 amended) (Sit mins)

·It is 1 Julu 20X5. You are an audit supervisor of Caving S Co and you are planning the audit of
Hurling Co, a listed company, for the year ending 30 September 20X5. The company
manufactures computer components and forecast profit before tax is $33.6 million and total
assets are $79.3 million.
Hurling Co distributes its products through wholesalers as well as via its own website. The website
was upgraded during the year at a cost of $1.1 million. Additionally, the company entered into a
transaction in August to purchase a new warehouse which will cost $3.2 million. Hurling Co's legal
advisers are working to ensure that the legal process will be completed by the year end. The
compan!:J issued $5 million of irredeemable preference shares to finance the warehouse purchase.
During the year the finance director has increased the useful economic lives of fixtures and
fittings from three to four years as he felt this was a more appropriate period. The finance director
has informed the audit engagement partner that a revised credit period has been agreed with one
of its wholesale customers, as they have been experiencing difficulties with repa!:Jing the balance
of $1.2 million owing to Hurling Co. In Jui!:J 20X5, Hurling Co introduced a new bonus based on
sales targets for its sales staff. This has resulted in a significant number of new wholesale
customer accounts being opened by sales staff. The new customers have been given favourable
credit terms as an introductory offer~ provided goods are purchased within a two-month period.
As a result; revenue has increased by 5% on the prior !:Jear.
The company has launched several new products this !:Jear and all but one of these new launches
have been successful. Feedback on product LugeJ launched four months ago, has been mixed.
and the cornpan~ has just received notice from one of their customers, Petanque Co, of intended
legal action. The~ are alleging the product sold to them was faulty, resulting in a signifkant loss
of information and an ongoing detrimental impact on profits. As a precaution, sales of the Luge
product have been halted and a product recall has been initiated for any Luge products sold in
the last four months.
The finance director is keen to announce the company-'s financial results to the stock market
earlier than last l:Jear and in order to facilltate this, he has asked if the audit could be completed in
a shorter timescale. In addition, the company is intending to propose a final dividend once the ·
·financial statements are finalised.
Hurling Co's finance director has informed the audit engagement partner that one of the
company's non··executive directors (NEDs) has just resigned, and he has enquired if the partners
at Caving S Co can help. Hurling Co in recruiting a new NED. Specifically he has requested the
engagement quality reviewer, who was until last year the' audit engagement partner on Hurling
Co, assistthe company in this recruitment. Caving S Co also provides taxation services for
Hurling Co in the form of tax return preparation along with some tax planning advice. Ihe finance
director has recommended to the audit committee of Hurling Co that this l:Jear's audit fee should·
be based on the compan!:J's profit before tax. At toda!:J's dote, 20% of last !:lear's audit fee is still
outstanding and was due to be paid three months ago.

Required
(a) Describe EIGHT audit risks$ and explain the auditor's response to each risk, in planning the
audit of Hurling Co. ·
Note. Use tl~e below table structure to format your answer in the CBE software.

ltlt Audit and Assurance @BPP

 Audit risk Auditor's response

(16 marks)
(b) Identify and explain FIVE ethical threats which may affect the independence of CavingS Co's
audit_ of Hurling Co; and for each threat, suggest a safeguard to reduce the risk to an - - -
acceptable level. (10 marks)

(c) The ACCA Code of Ethics and Conduct (ACCA Code) explains what an .audit firm should do if
they discover the independence provisions of the Code have been breached.
Required
Describe FOUR matters that Caving 8 Co should communicate in writing to those charged
with governance at Hurling Co if the firm discovers that an independence provision set out in
the ACCA Code is breached. ('+ marks)

(Total =30 marks)

75 Peach Co (Sep/Dec 21) {5lt mins)

This scenario relates to five requirements.
Co
It is 1 July 20X5. You are an audit supervisor with Apricot & 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 hod 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 $0.8 million. On 1 May 20X5, the food safety authority approved the process and production
of the new reduced-sugar soft drinks cornrnenced. ·
Peach Co has inventories of high.:.sugar drinks costing $227,000 which-it can no longer self in its
home market due to a lack of demand. The directors believe Peach Co can sell the remaining
at
inventories to an-international customer a price that marginally exceeds cost but Peach Co will .
be responsible for all costs relating to the delivery tmd shipping of the drinks.
Peach co replaced twq items of machinery in its production line to accommodate a change ir1 the
_ type of bottles used. There were significant staff costs involved ih preparing the site fqr the new
. machinery and in testing that the new machinery was operating correctly. These co~~:have been
included within the wages and salaries expense for the period. Despite the old machinery being
sold at o significant loss, during the yeqr the directors of Peach Co decided to extend the useful
li>Jes of plant and machinery by an average of five years.
A member of the finance team was dismiss(3d 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 bcginningof June 20X5 by reconciling all physical assets to
the non-current asset register but will not hove completed the reconciliation by the year-end
date: -

@BPP Questions lt5

 . . ..

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 beeri accou.rited-for to date as no amOLH)ts are payable
. ·for the first six_ months. Three equal instalments qre 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 thatit is likely tq lose the case and have estimated the amount
payable to be in the region of $0.3 million. ·- ·
In order to fund the development of the new production and the--purchase of new machinery.
Peach C9 obtained an interest-bearing bonk loan of $1.2 million 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 $pacific sales targets.
Required
(a) Describe EIGHT audit risks. and explain the auditor's response to each risk, in planning the
audit of Peach Co.
Note. Use the below table structure to format !:JOUr answer in the CBE software.

Audit risk Auditor's response

(16 marks)
(b) Describe Apricot 8- Co's responsibilities in relation to the prevention and detection of fraud
and error. (It marks)

(c) Peach co has been an audit client of ApricotS Co for the last 15 years. The audit staff of
Apricot & Co and the client staff of Peach Co have always enjoyed a meal 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 had also suggested that the current !:Jear audit fee is renegotiated to be based
on a percentage of Peach Co's net profit for the bJear.
This year, for the first time, Apricot & Co has been approached by Peach Co to help identify
potential targets. Discussions are currently at an early stage and no work has been
undertaken at presen-t. The total fees in relation to th~ gudit and other work would. fail within
acceptable levels in line with ACCA's Code of Ethics and Conduct. ·
(1) Identify and explain TWO ethical threats which rnay affect the independence of Apricot
& Co's audit of Peach Co; and
(2) For each threat, recommend an appropriate safeguard to reduce the threat to an
acceptable level.·
(It marks)
(d) Describe substantive procedures the auditor should perform to obtain sufficient and
appropriate audit evidence in relation to Peach Co"s development expenditure. (6 marks)
(Total = 30 marks)

76 Esk Co (Mar/Jun 22) .(51+ mins)

T~is scenario relates to four requirements.
It is 1 July 20X5. You are an audit St.1pervisor with Bann0ck S Co and are responsible for planning
the audit of a new client, Esk Co, for the year ending-31 August 20X5 .. Your audit manager
recentty met with the finance director of Esk Co and has provided !JOU with the following planning·
meeting notes and financial statement extracts:

lt6 Audit and Assurance @BPP

 Planning meeting notes
Esk-Co is a manufacturer and wholesaler qf plumbing suppli~s. lt-~p~rates from two warehouses
which are situated in the north and south ofthe country. E~troctsfrom the fo~ecost f"irTahoial
_&iatements for the yeor ending 31 August 20X5 and the·finaLtinanciol statements for 2QX4 pre as
follows: -

Forecast 20X5 - Finoi20XIt

$m $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 payobles 2.4 3.5

In September 20X4) Esk Co purchased a patent for $2,6 million 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 patentand 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 loanof $2.5 million during the year. The bank loan is payab!o 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 b~en recorded as trade payab!es. This error has now been corrected
but investigations ore still ongoing to determine how this happened and whether anu 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
inventorg count immediately following the fire identified that inventory costing $1.1 million required
to be fully written off. The damaged inventory has not yetbeen replaced- as there is sufficient
inventory in the north warehouse to sati9fy 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 ore confident that the full amount
claimed of $1.1 million will be received and have included this amount as other receivables within
current assets.
Esk Co 1s sales staff receive bonuses if they meet soles targets each quarter. A higher l.evel of sales
bonus ls available in the quarter to 31 August each year as Cl reward for efforts during the year as
a whole .. Esk Co offers its regular custorners discounts of up to 10%, which are negotiated and

·--· documented biJ the soles 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 safes. In previous years~
revenue has been recorded-net of the discount.
The manager in Esk Co's credit control department has been off work slnce Dec~rnber 20X4 due
to Ill health and hos been replaced by on inexperienced temporary manage·r. As o result~ Esk Co.
has riot been -monitoringthe ageing of its receivables and only follows up on 6utstqnding invoices
vvhen the system alerts credit control that a-customer invoice has·been outstanding for 90 days·qr
more. The standard credit terms ore 30 days. ·
During the year, Esk Co-was informed by the tax authorities that it was under investigation foro
breach of legislation relating to sales tax. Esk Co has appointed a tax consulttmt who·hos advised
that there does appeartohqve been a breach qf tax legislation and has estimated that d fine .and -
penalty totalllng $0.6~-mlllion will be payable. The directors do not intend to record anything in the
financial statements until final notification is provideclbythe tox authority. which is d~e to be
received on 31 January 20X6.

@BPP Questions l.t7

 Required
ISA 210Agreeing the Terms of Audit Engagements requires an auditorto establish whether the
· preconditions for an audit are· present prior to accepting an audit engagement.
(a) Describe the PRECONDITIONS for an audit that Bannock 8 Co should ha~e established prior
to accepting the audit of Esk Co. (It marks)

(b) Colc.ulote the following FOUR ratios~ for BOTH ~ears, to assist ~ou in planning the audit of
Esk Co: gross profit margin, inventor~ holding period, receivables collection period and ·
pa~ables payment period.

Notes.
1 Formulas are not required to be shown.
2 Use the below table structure to format !:JOUr answer in the CBE software.

Ratio 20X5 20X4

Gross profit margin

lnventor!::J holding period

Receivables collection
period

Pa!::Jables pa!::Jment
period

(It 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 Esk Co.
Note. Use the below table structure to format your answer in the CBE software.

Audit risk Auditor's response

(16 marks)
(d) Descrfbe substantive procedures the auditor should perform to obtain sufficient and
appropriate audit evidence in relation to Esk C6 1s trade receivabl.es. .(6_ marks)

(Total =30 marks)

77 Magpie Co (Sep/Dec 22) (36 mins)

This scenario relates to three. requirements.
It is 1 July 20X5. You are the audit supervisor at Crow 8- Co and are finalising the planning for
your new c:lient Magpie Co for the forthcoming audit for the year ending 31 Jul~ 20X5.
Magpie Co is o reta_iler of garden supplies which operates from 20 stores across the countr~ and
employs 400 staff. The audit manager has attended a meeting with the finance director and has
provided !::JOU with the following notes of that meeting and financial statementextracts:
. Notes of planning meeting
During the year the company spent $0.75 million on. refurbishing its stores to improve the
customer experience. All of this expenditure has been recognised in the statement of financial
position as property, pfant and equipment. In addition, the company also installed a new sales
s~stem during the year which records all sales and receivables. The s~stem en~bles 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 wos not felt necessary to
run the old and the new s~stems in parallel.

lt8 Audit and Assurance @BPP

Customers o.re able to pay for their goops using either cash or credit card. At the end ofthe
working day., the storernoAager generates.a report from each cash regfster which confirms the
CQ$htaking,s~. The; cash is th~n counted· and compared to the report. srnce the new sales system
was installed, head office nowreceives·daily cash takihg§3 reports Which have sho.wn Or") 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 b~y·goods on 90 day credit terms and
the level of receivables which are 'overdue for payment has increased from the prior year.
Hqwever, the finance director has said she does ndt 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 humber 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 $0.1 million 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:

20X5 20X4
Forecast Actual
$m $m
Revenue 22 26
Cost of sales (10.9) (14.5)

Gross profit H.1 11.5

Operating profit 0.4 1.2

Inventory t6 1.1
Trade receivobles 9.0. 7.2
Cosh in hand 1.3 4.2
Trade payables 1.9 3.2

The audit assistant has already calculated some key ratios for Magpie Co which !:JOL! have
qonfirmed as accurate. ,·

Gr?SS profit margin . 50% 44%

lnventoqj holding period 5~ days 28 days
Receivables collection period 149 days 101d_ays

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

Required
Explain the PURPOSE of an audit engageme-nt letter -and list FOUR items which should b&
included in an audit engagement letter. · · · (It marks)

(b) Using the toble below, calculate tl1e following TWO ratios, for BOTH years; to assist you in
planning the audit of Magpie Co: operating profit margir} and payables payment period.

@BPP Questions l.f.9

 Ratio 20X5 20X4

Payables payment period

(2 marks}
(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.
Note. Use the below table structure to format your answer in theCBE software.

Audit risk Auditor's response

(14 marks)
(Total = 20 marks)

78 Lapis Co (Mar/Jun 23) (36 mins).

This scenario relates to two requirements.
It is 1 July 20X5. You are an audit supervisor with IndigoS Co and are planning the audit of your
client, Lapis Co, for the year ending 30 September 20X5. Forecast profit before tax for the year is
$68.9 million and forecast revenue is $192.3 million. 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
Lapis Co manufactures televisions at six factories located across Europe and purchases most of
its raw materials from overseas suppliers. These raw materials are shipped directly to one of the
company's factories and the goods are usually in transit for up to six w:eeks. Lapis Co has
responsibility for goods in transit from the point of dispatch by the supplier. The company's ·
internal audit department undertakes controls testing across all factories~ visiting each site at
least once every year. The audit manager has discussed with the finance director that the
. external audit team may rely on the controls testing which is carried out by the internal audit
department. '
The company sells televisions to wholesale customers and directly to individual members of the
public via the company's website. A significant wholesale custon1er hasrecently informed Lapis
Co that it is experiencing financial difficulties, however the tlnance director indicated that an
allowance for receivables is not required in the year-end financial statements.
Lapis Co offers customers a three-year warranty on any new televisions purchased. The finance
director has confirmed that the warranty provision for the year ended 30 September 20X5 will
remain at a similar level to the prior year. In December 20X4Lapis Co changed one of its
television speaker suppliers to a cheaper alternative .. This has resulted in an increase in warranty
claims for television speaker deficiencies.
In May 20X5, a payroll clerk was dismissed after it was discovered that they had carried out a
number of fraudulent transactions. Controls have since been implemented to prevent this -
reoccurring.
The finance director has informed the audit manager that she only intends to disclose the amount
of remuneration payable to each director in the financial statements. Local legislation in the
country in which Lapis Co is based requires disclosure of the names of the directors and the total
amount of remuneration payable to each director.
One of Lapis Cds suppliers is offering the company an annual rebate on the condition that it
purchases a minimum number of units by 30 September 20X5. The amount of the rebate will be
claimed in November 20X5. It is likely from orders placed to date and forecaf)t orders that Lapis
Co will exceed the minimum volume required to claim this rebate, therefore. it is anticipated that
the draft financial statements will include a receivable of $0.8 million.

50 Audit and Assurance @aPP

81 - Tick the appropriate box to show whether the internal control activities identified in the
audit junior's notes would satisfy the objective of preventing/detecting a material
misstatement if it is operating effectively. - · .

Audit junior's notes Yes No.

All orders are generated in the sales m9dule within the 0 0
accounting system by inputting the details into qn_
electronic sales order form. Once saved by the sales clerk~
one copy is automatically forwarded by email to the
warehouse for the dispatch of inventory~ and one copy is
emailed to the customer as evidence of the order.
The sales clerk regularly performs reviews of the standing 0 0
data on the system, matching the price of flowers against
an up to date price list.
To ensure completeness of orders, a sequence'check is 0 0
performed on the sales invoices by the sales clerk using a
report generated from the sales module. Any missing
documents are investigated.
Sales invoices are posted on a weekly basis to the detailed 0 0
sales listing and accounts receivable ledger.

(2 marks)

82 You instruct the audit junior to confirm whether the post is opened by more than one
individual.
Over which of the following internal control objectives would this provide assurance?
(1) Cash receipts are not misappropriated
(2) All cash receipts that occurred are recorded
(3) Cash receipts are recorded at the correct amounts in the ledger
(4) Cash receipts are posted to the correct receivables accounts and to the general
.ledger
0· 1 only
0 2 only
0 3 and 4
0 1 and 4 (2 marks)

51t Audit and Assurance @aPP

 Purchases
The company has a purchasing department based at its head office. When raw materials are
'required, the productign supervisors raise an electronic requisition form in the purchasing module.
The purchasing department receives an· email alert each _time an electronic requisition form is
raised asking them to review the details and raise a purchase order. A purchase order is generated
in the purchase module and printed. 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
t'he purchase order and check th~ quantity and the quaiity of the goods. On completion of those
checks a goods received note (GRN) is generated from the system. One copy of the GRN is
printed, then signed and filed in the warehouse. Another copy of the GRN is emailed to the
finance department.
A payables ledger clerk enters the purchase invoices in batches of20 into the detailed purchasing
listing 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 performed on a monthly basis. All differences are fully
investigated, and the financial controller reviews these reconciliations. Invoices ore 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.
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 controls are narrative
notes, flowcharts and questionnaires.
Required
(a) For each of the THREE methods identified in the table:
(1) Describe the method for documenting systems of internal control; and
(2) Explain an ADVANTAGE of usiQg this method.
Note. Use the below table structure to format your answer in the CBE software.

Description Advantage

(6 marks)

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

(1) Identify and explain SEVEN DIRECT CONTROLS which the auditor may seek to place
reliance on; and
(2) Describe a TEST OF CONTROL the auditor should perform to assess if each of these
direct controls is operating effectively.
Note. Use the below table structure to format your answer in the CBE software.

Direct control Test of control

(1'+ marks)
{Total = 20 marks}

70 Audit and Assurance @aPP

·109- Ami:)erjack (Sep/Dec 19) (36-mins)
This sc~~ario relates to two- requirements.
Amberjack Co ma~~factures and distributes car tyres to a wide c~stomer base both in· its 9ountry
and across the rest of the continent. Its year end was 30 April 2QX5. It is '1 July 20X5. You are an -
audit manager of Pinfish S Co a11d you are revi~wing extracts of. the documentation .descri_bing
AmberjackGo's sales.and dispatch system following completion of.the interim audit. -
The soles systefn_is an integrated module within the accounting system. Both systems are
integrated with the inventory-system to the extent needed to be able to read data from the
inventory system.
AmberjO<;k 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 and set credit limits in the. master data file. A unique
customer- number (I D) is automaticall~ generated by the accounting system.
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, email or telephone the company's sales order department and
provide their unique account details. Sequentially numbered sales orders are generated Tf allowed
by the sales module after an automatic check against available inventory levels showing in the
inventory system. One electronic copy saved to the sales ordering team's shared drive to enable
them monitor progress of the sales orders, one copy is emailed to the customer, one copy is ·
emailed toone of the company 1s warehouses for dispatch and the final copy is emailed to the
finance department. Upon dispatch, a three-part goods dispatch note (GDN) is generated by the
system and printed. The GDN 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 scanned, attached to an
email and sent to the financ.e department.
Due to the recent growth of the company, and as there are a large number of sales invoices,
additionol temporary staff membe-rs have been appointed to help the sales clerks to raise the
sales invoices. The sales invoices are raised using quantities from the GDNs and prices from the
authorised sales prices Hst) 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 sales clerks· when
generating the sequentially numbered invoice from the sales module.
Customer statements are no longer being generated and sent out. The company only reconciles
the receivables ledger control account at the end ofApril in order to" verify the year-end balance.
Required
(a) List FOUR control objectives of Amberjack Co's saies and despatch system. (Lt marks)

(b) As the external auditor of Arnberjack Co, write a report to management in respeot of the sales
and despatch system described which: .~
(1) Identifies and explains SEVEN deficiencies in the sales and despatch S!:JStem."c;;md
recommends a control to address each of these deficiencies. ·
(2) lncludes.a covering letter.
Note. Two marks will be awarded within this. requirement for the covering letter. (16 marks)

(Total= 20 marks)

-110 Raspberry Co (Mar/Jun 18) (51+ mins)

Raspberry Co operates an electric power station, which produces electricity 24 hours a day,
seven days a week. The company's year-end is 30June 20X8. You are an audit manager of
Grapefruit 8 Co, the auditor of Raspberry Co. The interim audithos been completed and you are
reviewing the documentation describing Raspberry Co's payroll s~:Jstem.

@aPP Questions 71
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 em.ployees working eight.
hours each. The production emplob)ees 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) departmen~. responsible for setting up all new-joiners.
Pre-printed forms are completed by HRfor all new employees and. once verified, a copy is sent to
the payroll department for the employee to be set up)or 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 mon~hs for production staff. The pi·oduction supervisors determine the
amounts to be paid and notify the payroll department. This quarterly bonus is er:ttered 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 emplob)ee 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 totax 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 b!J 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 pasis, for employees paid by bank transfer, the senior payroll manager reviews the
list of bank payments and agrees this to the payroll records priorto authorislng the payment. If
any errors are noted, the payroll senior manager amends the records.
For production employees paid in cash, the necessar!:J 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
emplo\:jees at the end of the employees' shift. as they know each member of their production
team.
Monthly manage merit 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.

Required
(a) In respect of the payroll system for Raspberry Co:
(1) ldentifyandexplain FIVE DIRECT CONTROLS which the auditor may seek to place
reliance on; and
(2) Describe a TEST OF CONTROL the auditor should perform to assess if each of these
direct controls is operating effectively.
Note. Use the below table structure to format your answer in the CBE software.

Direct control Test of control

(10 marks)

72 Audit and Assurance @BPP

 (b) ·lc;!entify ond explain·HVE DEFICJENCIES in Raspberry Co's payroll system and provide a-
·recommeridotion' to address-eden
--
ofthese deficiencies. - .
.. . -

to format yo~~ answer tn the CBE software.

Control deficiency Control recommendation

(10 marks)
!:
(c) The finance director is interested in establishing an internal audit d~partment(IAD): In the
company she previously worked for the lAD carried out inventory counts, however as this is
!:, hot relevant for Raspberry Co, she has asked for guidance on what other assignments~ah lAD
l
could be asked to perform.
1i
R~quired

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

(d) Raspberry Co deducts employment taxes from its employees' wages on Q weekly/monthly
basis and pays these to the local taxation authorities in the following month. At the year end
: J~ the financial statements will contain an accrual for income tax payable on employment
income.

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

(Total = 30 marks)

111 CamC)mile Co (Sep/Dec 18) ·(36 mins)

(a) ISA 260 Communication with Those Charged with Governance provides guidanceJo 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 importantfor auditors to communicate througll()ut the audit with those
charged with governance·; and (2 marks)

(ii) Identify TWO examples of ma-tters which the auditor may communicate to those charged
with governance.
Note. The total marks will b~: split equally between each part. (2marks)

(b) Camornile 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 preporati<m
for the interim audit, which will involve visitin_g anumber dfthe venues as well as the h~ad
. office. The company has a small internal audit (lA) department based at head office.
The purchasing departrnent based at the company's head office is responsible for ordering
. food pnd 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 maf1ager, purchase
the sundries and return any excess rnoneycmd the receipt to the manager. At any time, the
pett!J cash sum held and mceipts should equal the float of $400 but it has been noted by the
company's lA department that on some occasions this has not been the case.

@BPP Questions 73
 . . .
Each venue has five cash 1;ills (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 creqitcard vouchers or cash ore placed in
the till by the employee operating the till. T() 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 ore closed down by the restaurant ma.nager who
counts the total cosh In all five tills and the sum of the credit card vouchers a.nd these totals
are reconciled with the aggregated doily readings of ~ales taken from each till. Any
discrepancies are noted on the doily sales sheet. The daily sales sheet records the sales per
the tills, the cash counted and the total credit card vouchers as well as anbJ 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 pabJ 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 bonk via daily collection by a security company. The security ·
companbJ 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 securitbl company receipts, the cashier
agrees the cash transferred by the security company has been banked for all venues. She
agrees the cash per the 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 monthi!::J 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 bbJ bank transfer. At the relevant pobJment 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. Use the below table structure to format your answer in the CBE software.

Control deficiency Control recommendation

(16 marks)
(Total= 20 marks)

112 Fox Industries Co (Jun 13 amended) (Sit mins)

Introduction
ltis 1 July 20X5. Fox lndustriesCo manufactures engineering parts. It has one operating site and
a customer base spread across Europe. The company's year-end was 31 March 20X5. Below is a
description of the purchasing and payments system. The purchase system is an integrated
module within the accounting system.

71t Audit and Assurance

 Purchqsing system
. .

WheneveT productio_n mciteiials are required. the relevant department submits an electronic·
requisitkm_ form to the_ ordering department. An ·ord~r clerk use.s the information from this to·
generate 6 purchase order irdhepurchases module with a status of 'draft'. The clerk then
contacts o number of suppliers to see which can dispatch the goods first and this supplier is then
chosen. Tbe order Clerk finatises the electronic purchase order by. inputting the sup-plier details.
Saving the order with q status of 'final.' triggers an email copy of the order being sent to the·.
suppl~er. The system generated order number has not been configured to be sequential and only-·
orders above $5,000 requfre authotisati~n.
Purchase invoices are input daily 'by the payables ledg_er clerk, who has been in the role for many
years and, as an experienced team member, does not apply any information processing controls
over the input process. ·
Payments system
Fox Industries Co maintains a current account and a number of saving (deposit) accounts. The
current account is reconciled weekly but the saving (deposit) accounts are only reconciled every
two months. ·
- In order to maximise their cash and bank balance, Fox has a policy of dela!Jing payments to all
suppliers for as long as possible. Suppliers are paid b!d a bank transfer. The finance director is
given the total amount of the payments list, which he authorises and then processes the bank
payments.
(a) ISA 315 (Revised) Identifying and Assessing the Risks of Material Misstatement requires the
auditor to understand the system of internal control insofar as it ls relevant to the preparation
of the financial statements. One component of the system of internal control is control
activities.

Required
(i) List the other FOUR components of a S!Jstem of internal control. (2 marks)

(ii) Explain the auditor's responsibilities in relation to understanding the controls within-the
control activities component during their risk assessment. (3 marks)

(b) As the external auditors of Fox Industries Co, in respect ofthe purchasing and payments
system described above, identity FIVE DEFICIENCIES in the S!Jstem and recommend a control
to address each of these deficiencies..
Note. Use the below table structure to format !JOUr answer in the CBE software.

Control deficiency Control recommendation

(10 marks}
(c) Identify and explain FOUR information processing controls that should be adopted by Fox
Industries Co to ensure the completeness and accuracy of the inputof purchas~ invoices.
(It marks)

(d) Describe_ FIVE substantive procedures the auditor shouldperforrrr to confirm the bank and
cash balance of Fox Industries Co at the ~ear end. (5 marks)

(e) A member of the audit teom _mentioned to youthe~ recently overhea-rd a colleague speaking
about: how data anal~tics could revolutionise auditing. They wanted to know more about it.

Required
(i) Describe what is meant by the terms 'big data' and 'data qnal~tics·. (2 marks)

(ii) Explain how data analytics could benefit the audit process·and give TWO examples of
where the auditor might use data analytics. (It marks)

(Total = 30 marks)

@BPP Questions 75
113 Pomeranian Co (S~p/Dec_21 amended) (36 mins)
This scenario relates to two requirements.
It is 1 July 20X5. Pomeranian Co is-a manufacturer of fizzy drinks and operates.across the
country. The compan1/s year end is 30 September 20X5. You are an audit sup.ervisor with Poodle
S Co and !:JOU _c;1re reviewing .extracts from the internal controls documentation in preparation for
the forthcoming audit.
The sales and purchases S!:Jstems are fully integrated modules within the computerised
accounting S!:Jstem. Pomeranian Co uses a perpetual inventory system.
Sales
All new customers of Pomeranian Co are required to pass suitable credit checks. Upon passing the
creditcheck 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.
Customers orders are processed by Pomeranian Co's sales ordering department in the sales
module and goods are dispatched from one of the company's warehouses. Sequentially·
numbered goods dispatched notes (GDNs) are generated from the sales system and a copy Is
printed and filed in the warehouse when the goods are dispatched, although the electronic file
remains and can be reprinted if needed. Each time a new GDN is generated, a hyperlink to an
electronic cop!:J of that GDN is added to a 'pending, accounts email. rhe pending email is then
sent on a weekly basis to the sales ordering department and the finance department containing
links to all the GDNs from that week. This allows the two departments to view or print off the GDNs
for the week.
Pomeranian Co's credit controller is cwrrently on maternity leave for six months dnd no one has
taken over h~r duties. As part of the month-end procedures, a clerk reconciles the receivables
ledger control account total to the total shown on the Sk)stem generated report listing individual
customer balances. 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 $0.5 million. Capitol expenditure below this level can be authorised by the·
relevant head of department.
. -

Pomeranion Co has o head office and five factories, each of which includes o warehouse. The
compan!:J has an internal audit (lA) 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 com pony's 11 sites. The programme of visits far the current
year means that b!d the year end, lA wlll only have completed this comparison at one factory and
one warehouse.
Purchases and inventorv
Pomerankm Co maintains a perpetual inventory SbJstem in which finished goods and raw
materials~ stored in the warehouses, are counted monthly throughout the year rather than just
. being counted at the blear end. Each of the five warehouse managers are responsible for
supervising the inventory counts at their sites and ensuring that the counting t_eams 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 deportment 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 date is automatically generated and then filed by a
purchasing clerk. ·

76 Audit and Assurance @aPP

 .. Sequentially numbe-red goods re.ceived notes (GRNs) are generated by the warehouse department
.when goods are received, a copy.o.f which immediately and automatically emailed to the ·
purchases and finance departments. On receipt of-the purchase invoices. the finance clerk
a
matches. the invobas to pdhted copy of the relevant purchase order before providing the
documents to the finance director for authorisation prior to input. ·

. Required
In order to obtain sufficient appropriate audit evidence, an auditor cannot place corriptete
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 fililitations of internal
control. ·
(ci) Describe the LIMITATIONS of internal control.
Note. You do not need to refer to the scenario to answer this requirement. (4 marks)

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

(Total =20 marks)

11'+ Whittaker Co (Mar/J~11 22)- (~6 mins)

This scenario relates to four requirements.
It is 1 July 20X5. You are an audit supervisor with Walsh S 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 soles system in May 20X5. The new system is now an integrated
module within the computerised accounting system. It 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 (lA)
department is responsible for comparing the output from the old and new syster11s, investigating
·any discrepancies otid 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 order!). She evidences her approval in the system.
On a .monthly basis; the receivables ledger clerk downloads the aged receivables· report and
reviews it for outstcmding 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 accountto 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 .PIJ the
· financial controller. -· ·
Payroll
Whittaker Co hqs a human resources (HR) dE-:partment 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 req.uired at short notice, joiners forms are not completed and instead~ the ·production
supervisor notifies the payroll department by email on the day thetJ commence-employment.
Staff are required to work overtime on a regular basis in order to meet production targets.
Overtjme 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 b.y the production supervisor offer the overtirrw has
been paid. Reviews of overtime reports are evidenced by signature of the production director.

. @BPP Questions 77
 The payroll S[Jstem automatically calculates wages and deductions for al·i employees based on
standing data. The standing ·data is reviewed regularly to ensure it is stilt accurate however no
checks are performed on the mo-nthly 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 dgree 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.
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.
Required
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 fn internal control.
(a) Describe FOUR matters the auditor may consider in determining whethera deficiency in
internal control is significant.
Note. You do not need to refer to the scenario to answer this requirement. (lt marks)

(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
(2) 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)

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

(Ta tal =20 rna rks)

115 Daley Co (Sep/Dec 22) (5Lt mins)

This scenario relates to slx 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 on audit supervisor with CooperS Co
and you ore 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 factorbJ who are paid on a weekly basis by ba.nk 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 electron really
using the key card s~stem which is linked to the payroll s~stem. Each week the hours worked are
automatically transferred to the payroll system. As
the process is automated, no checks over this
transfer are 'performed.

78 Audit and Assurance

 The payroll is run on a weekly basis and the system autorriatically ·calculates the wages to be
paid. On a sample basis, a payroll clerk bhecks gross to net pay calculations and compares these-
! \
to the system-generated balances to ensure the accuracy of the payroll system,. If .afl~Jchanges
to the payroll data are required 1 the payroll clerk makes the amendment. An edit report of dny
a~endments 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 inclucled at each factory. The
company has an internal-audit (lA) department which carries out a comparison between all of the
· assets recorded on the non-current assets register to-those physically present in ~mch .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 tl~at by 30 September 20X5, !A will only have completed this
comparison at one .factory and one warehouse.
During the year. the financial controller changed the compan~fs capitalisation accounting policy.
In accordance with the revised policy, only Items of a capital nature exceedlng $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 ore written off to the statement of profit or loss as an
I~
expense.
!i Bonk and cosh
On a weekly basis, a bank payments Jist is generated for supplier pgyments. The finance director
review~ the total am·ount of the bonk payments Jist and authorises it. She then posses it to the·
financial controller who processes it for payment.
I~ 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
reconciliatioi1s are· reviewed by the finance director who evidences this review.
(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 cortrol·activities ...
Required
Describe the five components of an entity's system o·f internal control. .

Notes.
1 Use the below table structure to format your answer in the CBE software.
2 You do not need to refer to the scenario to answer thls requirement

Component of internal control Description

· Entit!/S process to rnonitorthe system of

internal control · ·

Control acUvities

(5 marks)

@BPP Questions 79
 (b)- In -respect of the system of.interna"!"control of Daley Co:
.Identify and explain FIVE deficiencies;
... Recommend a-cor--.trol to ciddress each of these deficiencies; and
.Describe o TEST OF CONTROL th~ external auditors should perform to assess if each of
these controls. ifiinplemen~ed, is operating e~fectively.

,. Notes.
1 Use the belo~ table structure to formatyour answer in the CBE software~
·2· Thetotal marks will be split equally between each part.

Control deficiency Control recommendation Test of control

(15 marks)
(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)

(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
~stablished.

Required
Describe THREE corporate governance deficiencies faced by Daley Co and provide a
recommendation to address each deficiency to ensure compliance with corporate
governance principles.
Note. Use the below table structure to format your answer in the CBE software.

Deficiency Recommendation

(6 marks)
(Total = 30 marks)

116 Petra Co (Mar/Jun 23) (Sit mins)

This .scenario relates to six requirements.
It is 1 July 20X5. Petra Co is a company listed ~:m a stock exchange. It manufactures handbags
which it-supplies to retailers across the country. The company,s year end is 30 September 20X5.
You are an audit supervisor with Babylon & Co. preparing the draft audit programmes and
reviewing the internal controls docun:entation in preparation for the forthcoming interim audit.
The sales and purchases systems are fully integrated modules within the computerised
accounting system. The payroll systems is a not an integrated module (journals are posted to the
accounting system to reflect payroll related expenses and liabilities reported by the payroll .
·system). ·

80 Audit and Assurance @aPP

Payroll
- - -
Petra Co employs factor~ staff, who a repaid based on the- number of hours worked. They are·
paid in cash on a weekly basis due to commercial reasons. These staff each have a unique clock
card which they use to ~n.ter and exit the factory at-the beginning-and end of their shift. andthis
process is supervised by security staff. Th_~.clock card s~stem and the_ payroll system are ·nnked.
- -

The payroll system automatically calculates the gross and n~tpay along with relevant deductionS-
and generates employee payslips. The payroll supervisor selects a sample of the payslips,
reperformsthe gross to l)et pay calculations andJnvestigates any d~screpancies. The sampled
pay slips are then signed as evidence of this review.-
Factory staff receive an annual inflation.:.based pay increase every ApriL The revised hourly wage
rates are communicated to the payroll department. The revised pay rates are entered into the
system in April by a. payroll clerk and each entry is checked by a senior clerk for input errors prior
to processing that week's wages. The senior clerk signs a payroll listing of factory staff employees, -
which includes the revised hourly wage rates as evidence of undertakir'lg this review.
Two members of the payroll department produce the cash pay packets. One member is
responsible for preparing the pay packets by reference to the payslips generated by the s!:-jstem.
The second member recounts the contents of the finished pay packets and confirms that this
agrees to the payslips. Both members of staff are required to sign the weekly payroll listing on
completion of this task.
Sales
Petra Co carries out credit checks for all new customers. Upon passing these checks, new
customers are set up by an accounting clerk in the sales module's master file. The finance director
is alerted automatically by email that a new customer has been added. The email provides a link
for the director to access the system and to log in where they can set a credit limit for the new
customer. Only the director has access rights to edit the credit limit screen in the sales module
and the customer account is inactive until a credit limit is set. Once the customer account is active
and invoices can be raised, the credit limit is only subsequently reviewed if an increase is
requested by the customer.
Petra Co generates revenue through visits by members of its sales department to customers;
premises. When acustomer places an order, the sales system automatically checks that the
customer is within its credit limit and that the inventory is available and then generates an
electronic order form. One copbf is emailed to the customer, a second is emailed to the warehouse
and a third copy emailed to the finance department. The soles staff have monthly sales targets
and are able to use their discretion in granting discounts up to a maximum o-f 8%. No review is
undertaken of discounts granted. -
Purchases
The company has a purchasing deportment based at its head office: All members of this
department have full edit access-to the supplier master file data and are-able to make changes.
When goods are received from a supplier they are processed by the warehouse team, who agree
the delivery to the purchase order, checking the quantity and the quality of goods, and generate
on electronic sequentially numbered goods received note (GRN). The electronic GRNs are printed
and matched to the purchase orders and are filed in the warehouse.
On receipt of the purchase invoice from the supplier, a payables ledger clerk logs them into the
payables ·ledger using documenecount controls to-ensure that the correct number of invoiCes has
beeninput. The total on the payables ledger is not comparecJ to the control accountin the general
ledger at the end of each month as the payables ledger clerk believes this process is unnecessary.

_Required
(a) List FOUR control-objectives of Petra Co's sales system._
Note. You do not need to refer to the scenario to answer this mquirement. ('+marks)

·(b) .. In respect .of the PAYROLL SIJStem of Petra Co:

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

Questions 81
 (2) Describe a TEST OF CONTROL the auditor should perform to assess if each of these key
· controls_is operating. effectively. ·

Notes.
The marks will be split equally between each part.
2 Use the below table structure-to format your answer inr the CBE software.

Direct control Test of control

(6.marks)

(c) Identify and explain FIVE DEFICIENCIES in Petra Co's SALES AND PURCHASES S!Jstems and
provide a recommendation to address each of these deficiencies.
Note. Use the below table format as an example of how to present your response.

Control deficiency Control recommendation

(10 marks)
(d) Petra Co produces monthly management accounts which include a detailed analysis of key
expense categories.

Required
Describe substantive procedures the auditor should perform to obtain sufficient and
appropriate audit evidence in relation to Petra Co 1s purchases and other expenses. (It marks)

(e) Petra Co has been a listed company for six years and the directors are aware of the need for
compliance with corporate governance principles. The finance director has requested that
the aUdit team undertakes a review of whether the company complies with the principl~s.
·The board of Petra Co is appropriately comprised of executive and independent non-
. executive directors (NEDs). The Chair is planning to retire at the end of the financial year, and
it is proposed by the nomination committee that the current marketing director is. appointed
into this role and that a new marketing director is recruited. Two directors are subject tore- ·
election at each annual general meeting.
The NEDs are all members of the audit committee and ore-highly experienced in the industry
in which Petra Co operates. Before joining Petra Co the!J were all previously involved in sales
or purchasing roles. The level of executive directors' pay is set by the remuneration
committee, comprised of independent NEDs. The remuneration for the NEDs is in the form of
an annual bonus based on profit growth over the prior year.
Required
Describe THREE corporate governance deficiencies faced by Petra Co and provide a
recommendation to address each deficiency to ensure compliance with corporate
governance principles. ·
·Note. Use the below table structure to format your answer in the CBE software.

Deficiency Recommendation

(6 marks)
(Total= 30 marks)

82 Audit and Assurance @BPP

Section A Questions
Expert (Dec 08 amended) (18 mins)
The following scenariorelates to questions 117-121.
You are the audit manager in the firm of WSD & Co, an audit firm. You are planning the audit of
Truse Co, which operates as a high street retailer and has 15 shops.
All of the shops are ownedb!::J Truse Co and have always been included in the financial statements
at cost less depreciation. The shops are depreciated over 50 !dears. However, you know from
discussions with management that the company intends to include one of the shops. the flagship
store, at a revalued amount rather than cost in the current accounting period. The revalued
amount is expected to be materially above the carrying value of tl:le shop. The valuation will be
based on a management estimate.
Management has explained that the reason for the revaluation is because the flagship store is
located in an area where property prices have risen much more quickly compared to other shop
locations. They consider the flagship store to be significantly undervalued on the statement of
financial position.
Management will not depreciate the revalued amount allocated to the flagship store's building
because they maintain the building to a high standard.

117 In his notes for the audit planning meeting, the audit junior made several statements in
relation to the valuation of tho shops!
Which TWO of the below statements are correct?
D Truse Co is allowed under lAS 16 Property, Plant and Equipment to revalue the flagship
shop while continuing to measure its three other shops at cost less depreciation.
0 The revaluation constitutes a change in accounting policy, so we will need to consider
the adequac\:j of the disclosures made in respect of this.
0 The flagship store should be depreciated on its revalued amount.
0 We must confirm that all repairs and maintenance costs have been capitalised.
(2 marks)

118 Indicate-whether the following assertions are releval'1t to the audit of tangible non-current
assets.
Assertion Yes No
Existence 0 0
Occurrence 0 0
Classification 0 0
Presentation 0 0

(2 mark~)

@BPP Questions 83
119 Which of the following procedu-res will provide appropriate audit_ evidence in respect of
the completeness of non-current assets? ·
0 For a sample of assets selected by physical inspection'" agr~e that they are listed on
the non"7current assets register ·
0 For a sample of non-current assets listed on the non-current assets register, physically
inspect the asset·-
0 For a sample of assets on the assets register, re~alculate the carrying amount in
accordance with the entity's accounting policies
0 For a sample of assets on the assets register, inspect relevant purchase invoices_or
deeds (2 marks)

120 At the planning meeting~ it was decided that an auditor's expert should be sought in
relation to the valuation of Truse Co's properties as the company has not used an
independent valuer.
ISA 620 Using the Work of an Auditor;s Expert states that the nature, timing and extent of
audit procedures to evaluate the work of the auditor's expert depend on the circumstances
of the engagement.
Which of the following matters should the audit team NOT consider in determining the
nature, timing and extent of these audit procedures?
0 The risk of material misstatement associated with Truse Co's properties
0 WSD G Cds experience with previous work performed by the expert
0 Whether the expert is subject to WSD & Co's quality management policies and
procedures
0 The existence of any interests in or relationships with Truse Co that might pose a threat
to the expert's objectivity (2 marks)

Sit Audit and Assurance @BPP

121 . The audit junior has been assigned to the audit oftbe bank and cash !?a lances of Truse co·~
He has.noted down the audit evidence he plai1S to obtain in respect of the bank and cash
balances: . · · . ·

(1) Bank reconciliatron carried out by the cashier

(2) Bank confirmation rep?rt from Truse Co's bank .
(3) Verbal c.onfirmotion from the directors that the overdraft limit is to be-increased
(4) Cash ·count carried. out by the audit junior himself
Rank the reliability of the audit evidence, starting with the most reliable first. (Drag each
box from the left into position to match the relevant box on the right.) ·

Audit evidence Order

Bank reconciliation (1)

carried out by the
cashier
(2)

Bank confirmation
report from Truse (3)
Co's bank

(4)
Verbal confirmation
from the directors
that the overdraft
limit is to be
increased

Cash count carried

out by the audit ·
junior himself

(2 marks)

(Total= 10 marks)

Newthorpe (18 mins)

The following scenario relates to questions 122-126.
You are an audit manager, auditing the financial statements of Newthorpe Engineering Co, a
listed company, for the year ended 30 Aprii20X7.
Newthorpe's management ho~ provided you with a scheduie of the realisable values of the
inventories. A full inventory count was carried out at 30 April 20X7. ·
Audit tests have confirmed that the inventor!:) counts are accurate and there are no purchases or
sales cut~off errors. ·
One of the company's factories was closed on 30 April 20X7. The plant and equipment and
inventories were to be sold. By tho time the audit work commenced in June 20X7, most of the
inventortJ had been sold. ·
You have instructed the auditjunior to evaluate the valuation of the inventor!J related to the
closing factory at the year end. The audit junior has sent you a list cif planned audit procedures.

Questions 85
On i7 March 20X7, Newthorpe's managing director was dismissed for gross misconduct. It was
decided that the managing director's salary should stop from that date, and that no redundancy
o"r compensation payments should be made. ·
The managing director has claimed unfair dismfssal and istaking legal action against the
company to obtain compensation for loss of his employment. The managing director says he has ·
a service contract with the company which would entitle hirn to two years' ·salary at the date of
dismissal. The directors believe that there is a 35% chance of the managing director succeeding in·
his claim..
The financial statements for the b)ear ended 30 April 20X7 record the resignation of the director.
However. they do not mention his dismissal and no provision for any damages has been included,
in the financial statements.

122 Which TWO of the following statements are true regarding the auditor's attendance at
the inventory count?
D It is the auditor's responsibilitb) to organise the inventory count.
0 The auditor observes client staff to determine whether inventory count procedures are
being followed.
0 The auditor reviews procedures for identif~;Jing damaged, obsolete and slow-moving
inventory.
0 If the results of the auditors' test counts are not satisfactorbJ, the auditor should insist
that the inventor!:!· is recounted. (2 marks)

123 Which of the audit procedures below is NOT appropriate in auditing the valuation
assertion for Newthorpe's inventory?
0 Agree the selling prices of inventor!:J sold since the year end to sales invoices and the
bank ledger account.
0 Assess the reasonableness of management's point estimates of realisable value of
inventory that has not !:Jet been sold bf.d reviewing sales before. the b)ear end, comparing
the values with inventory that has been sold since the !:JOar end and considering offers
made which have not yet been finalised.
0 For a sample of inventorbJ sold just before and just after the bjear end; match dates of
sales invoices/date posted to ledgers with date on related goods dispatched notes.
0 For unsold inventor!:J. assess reasonableness of provisions for selling expenses by
c:ornporison of selling expenses with inventory sold. (2 marks)

86 Audit and Assurance @aPP

124 Using the drop down lists, .complete the...sentenc~ below to show the correct accounting
treatment for the legal claim made by the managing director for unfair dismis_sal_ and the
reason for this treatment.

The legal claim should r·(1)·-:---·-·-···. --.. . ·-····-;-l b'ecause

r2)········'·.········-··:············•n••••·:····~·~·:···:;····].

Pull down list 1

· Be recorded as a.provision·
Not be recorded a_s a provision but disclosed as a contingent liability

Pull down list 2

• A possible obligation exists, deper1ding on >vyhether or not some uncertain future event
occurs
• A present obligation exists, but the outflow of economic resources is not probable
(2 marks)

125 Which of the following audit procedures is likely to provide the auditor with the MOST
reliable audit evidence regarding the legal claim?
0 ,Review the minutes of the disciplinary hearing to understand whether the company has
acted in accordance with emplol::Jment legislation and its internal rules
0 Review correspondence between the company and its lawyers regarding the likely
outcome of the case
0 Request a written representation from management supporting their assertion that the
claim will not be successful
0 Send an enquiry letter to Newthorpe's lawyers to obtain their view as to the probability
of the- claim being successful · (2 marks)

126 The dismissal of Newthorpe's managing director has alerted you to the possibility that the
company mal::J not have complied with employment regulations. You therefore need to
determine the impact that such non-compliance may have on the audit.
ISA 250 (Revised) Consideration of Laws and Regulatior1s in an Audit of Financial
Statements sets out the responsibilities of the auditor in relation to the entity's compliance
with laws and regulations.
Which of. the following responsibilities is CORRECT regarding the responsibilities of
Newthorpe's auditors. in relation to compliance with employment regulations?
0 To obtain sufficient appropriate evidence regarding compliance, as they have a direct
effect on the financiaJ statements
0 To perform specific audit procedures to identify possible non-compliance
0 The auditors do not have any responsibility, as the employment regulotions do not
have a direct effect on the financial statements
0 ro prevent and detect all non~cornpliance with the regulatior~s (2 marks)

(Total =10 marks)

@BPP Questions 87
Tirrol (Jun 09 am.ended) . (18 mins)
·The following scenario:relates tb questiomr127-131.
Your audit firm Cal S Co has just gained a new audit ~!tent, Tim)l C_~, i.n a lender in which Cal s-
Co offered competitively low -audit fees. You are the manager in charge of planning the audit
work. Tirrol Co's yearend is 30 June 20X9 with a scheduled date to complete the audit of 15
August 20X9. The date now is .3 June 20X9.
Tirrol Co provides repair services to motor vehicles from 25 different locations. All inventory, sales
and purchasing systems· are computerised, with each location maintaining its own computer
system. The software in each location is the same because the programs were written specifically
for Tirrol Co by a reputable software house. Data from each location is amalgamated on a
monthly basis at Tirrol Co's head office to produce management and financial statements.
You are currently planning your audit approach for Tirrol Co. One option being considered is to
rewrite Cal & Co's audjt software to interrogate the computerised inventory systems in each
location of Tirrol Co (except for head office) as part of inventory valuation testing. The testing will
need to take place while the system is live. You are aware that July is a major holiday period for
Tirrol Co.

127 The audit junior is concerned about various circumstances of the audit, which are likely to
increase audit risk. He has written to you with some suggestions.
Which TWO of the following suggestions are valid?
0 We should budget for the extra time required to document an understanding of the
entity, its environment and its systems, and to verify material opening balances.
0 Given the tight reporting deadline, a combined approach should be adopted on the
audit, relying on tests of controls wherever possible.
0 We must agree a clear timetable with the client for the testing of the computerised
inventory systems, setting out availability of access to the system, files and personnel
required to complete testing.
0 As this is our first l:Jear of audit. we should agree separate fees· with the client for any
additional audit procedures required. If the client refuses, we should consider
withdrawing from the audit as Cal S Co would be deemed to be lowballing. {2 marks)

128 Which TWO of the following are benefits of using audit software.in auditing the inventory
of Tirrol Co? . · .
0 The ability to test all 25 of Tirrol Co's locations using the same audit software, resulting
ln time and cost savings ·
0 The ability to test internal controls relating to the input of data, thus giving greater
assurance over the existence of i~ventory ·
D The ability to select and extract a sample of inventory data for testing, thus reducing
sampling risk
0 The ability to calculate the error rate in sample and thus determine whether further
audit procedures are required (2 marks)

88 Audit and Assurance @BPP

129 It has been decided t~atsystematic sampling would be applied to the audit of Tirrol Co*s ·
invento-ry. · · · · · ·
Which of the following sampling methods correctly describes systematic· sampling?··-
0 . A sampling method which i~ a type of value-weighted selectron in which sample size,
selection and evaluation results in a conclusion in monetary amounts _ , __
-0 A sarripling metltod which involves having a constant sampling interval; the starting
point for testing is determined randomly ·
0 A sampling method ln which the auditor selects a block(s) of contiguous _items from
within the population -
0 A sampling method in which the auditor selects a sample without following onQ
particular structured technique (2 marks)

130 Tirrol Co's internal audit department is going to assist with the statutory audit. The chief
internal auditor will provide you with documentation on the computerised inventory·
systems at Tirrol Co. The documentation provides details of the software and shows
diagrammatically how transactions are processed through the inventory system. This
documentation can be used to significantly decrease the time needed to understand the
computer systems and enable audit software to be written for this year's audit.
Which of the following is NOT a matter the audit team should consider in determining
_whether or not the internal auditor•s work is adequate for the purposes of the audit?
0 Whether the work was properly planned, performed, supervised, reviewed and
documented
0 Whether there are any significant threats to the objectivity of the internal auditor
0 Whether sufficient appropriate evidence was obtained to allow the internal auditors to
draw reasonable conclusions
0 Whether the conclusions reached are appropriate in the circumstances and the reports
prepared are consistent with tho results of the work done (2 marks)

131 The auditjLmior has obtained the following extract of the aged inventory report: ·

Inventory Days in ·selling Costs to Carr!Jing

code inventory ·original cost price sell.- amount
$ $ '$ $
X070003 98 12,000 20,200 2;000 12,000
X079001 127 14,500 16,000 2,500 14,500
X084000 109 18.000 . 26,000. 3,000 23,000

What is the impact on the value of inventory if no adjustments are made to the carrying
amounts above?
0 Inventory should be $44,500, inventory is overstated
0 Inventory should be $43,500, inventory is overstated
0 Inventory should be $54,700, inventory is understated- ·
0 Inventory should be $62,200, inventory is ut~derstated. (2 marks)

(Total= 10 marks)

-@BPP Questions 89
Wright (18 mins)
The following scenario_ relates to questions 132-136.
You are the audit manager in. the firm of Wright & Co, a large accountancy firm with 30 offices.
It is January 20X6, and a new intake of graduates and apprentices has recently started work at
the audit department after completing their first ACCA exams. Julie. one of the new recruits. has
been allocated to the audit of Wilbur Co, your audit dieilt, for the year ended 31 December 20X5.
You are responsible for providing guidance to her and have asked her to assist in the audit of
trade payables and cash at bank. ·
Trade payables
Julie has performed a reconciliation of key trade payables balances as follows and has concluded
that no further work is required:

Balance per
Balance per supplier
payables ledger Cash in transit Goods in transit statement
$'000 $'000 $'000 $'000
Supplier XX1 400 100 (1) 500
Supplier XX2 650 50 (2) 700

Supplier XX3 100 100

1,150 1,300

Notes.

Agreed to GRN dated 31 December 20X5

2 Agreed to cheque posted in the bank ledger account 30 December 20X5
Your follow-up. work on this identifies that: ·
• The goads in transit received from supplier XX1 were recognised in inventory at 31 December
20X5 ·
• The cheque payment to supplier XX2 appeared on the bank statement on 2 January. 20X6
• There is a nil balance on the purchase accruals account
Cash at bank
In order to gain assurance over the company's bank balance, you asked Julie to arrange tor a
bank confirmation letter to be sent to Wilbur Co's bank.
Julie has also prepared a bank reconciliation. This shows a significant number of lodgements
which were recorded in the bank ledger account on 31 December 20X5. You are concerned that
the bank ledger account may have been kept open to include remittances actually received after
the year end.

90 Audit and Assurance @aPP

132 Julie has approached you with the following query:-
in to
'I know that as auditors. we_ have to collect."au.dit evidenGe order. support our audit·
opinion. But how can we tell how m1.,1ch audit eviderice we ·ne_ed to get?' ~- _ - _
Which o.fth.it below factors influence the auditor's judgement regarding the sufficiency of
the evidence obtained?
(1} · The materiality of the account
(2) The size of the account
(3) The source and quality of the evidence avaitable
(4) The amount of time allocated to the audit
0 1 and 3
0 2 and 4
0 2 and 3
0 i and 4 (2 morks)

133 Which of the in-transit items included in the supplier statement reconciliations indicate
that there is a cut-off problem?
(1) Cash in transit
(2) Goods in transit
0 1 only
0 2 only
0 1 and 2
0. Neither i nor 2 {2 marks)

134 What further evidence_, if any, is required in relation to the balance dueto XX3 to
·determine if trade payables is understated?
6 A review of post year end purchase orders from supplier XX3
.0 A confirmation request must be sent to supplier XX3
0 No .further evidence is required
0 A review of credit notes issued by Wilbur Co should be performed (2 marks)

135 Which of the following summarises the steps Julie should take in preparing the bank
confirmation letter you have requested?
0 Written on the audit finn's headed paper; information requested tci be sent directly to
. the auditor ·
0 Written on the client's headed paper; information requested to be sent directly to the
auditor
0 - Writt~n on the audit firm's headed paper; information requosted to be sent directly to
the client · ·- ·
- .

0 Written on the client's headed paper; information requested to be sent directly to the
client (2 marks)

Questions 91
· 1"36 Which of the following pieces of audit evidence would provide the most reliable-audit
evidence that the lodgements recorded on 31 Dec~mber 20X5 do not relate to amounts
received after the period end?
0 Bank statement showing the lodgements cleared by the bank
0 ·The date on the cheque paid by the supplier
0 The date on the remittance advice
0 The bankts date stamp on the paying-in slip (2 marks)

(Total = 10 marks)

Lodestar (18 mins)

The following scenario relates to questions 137-141.
You are an audit senior of Beacon & Co and are currently conducting the audit of Lodestar Co
(Lodestar) for the year ended 30 September 20X1. You are reviewing the work of your au~it
assistant.
Trade receivables
Your audit assistant has carried out a direct confirmation (a receivables circularisation) on trade
receivables at Lodestar. She selected the 10 largest balances, representing 85% of the' receivables
ledger at year end, including 2 items that were individually material. Seven customers agreed the
receivables ledger balance. two replied noting discrepancies which she has followed up and one
has not replied.
The audit working papers contain the following work in respect of the two balances with
discrepancies.

Balance-is payment sentout on 30.

September, agreed to cash book 2
October.

Balancing item is- credit requested for

goods customer claims were defective
in February. Production manager
confirms no credit will be issued.

Allowance for doubtful accounts.

The company has an accounting policy of creating an allowance for doubtful accounts at 2% of
year-end receivables ledger balance.

137 You are analysing the sample selection with regard to the direct confirmation.
Which of the following statements in relation to the sample selection is TRUE?
0 The sample is appropriate and, at 85% of the balance. gives good assurance about the
overall balance. ·
0 As 15% of the ledger balance has not been sampled, the sample is inappropriate. ··
0 The sample selection does not·address the risk of understatement (lS it has focused on
the ten l()rgest balances.
0 The sample should have been stratified to provide a representative sample. (2 marks)

92 Audit and Assurance @aPP

 138 The audit assistant has identified further procedures to be carried- outinrespectofthe
customer who has__ not responded to the circula"risation "n3c:t_uest as follows. '
(1)- . Send out a follow-up re~uest.
(2) Inspect the sales invoices in the customer account at year end.
(3) Ask the credit controller whether the customer exists.
(It) Reconcile cash receipts after date with pre year end-invoices in the customer account.
Which ofthese procedures would provide audit evidence of the EXISTENCE ofthls
receivable?
0 1, 2 and 3
0 1. 2 and.4
0 3 and 4
0 1 and 2 (2 marks)

139 You are reviewing the work carried out on the disputed balances.
What is the mis$tatement arising from the above issues and the resultant impact on
current assets?
0 Trade receivables should be $10,150 lower, current assets are overstated.
0 Trade receivables should be $6,000 lower. current assets are overstated.
0 Trade receivables should be $4,150 lower, no net effect on current assets as balance is
in cash.
0 Trade receivables should be $10.150 higher. current assets are understated. (2 marks)

140 Your audit assistant has heard that auditing accounting estimates can be problematic and
~I has asked you to explain why this is the case.
Which of the following statements concerning auditing accounting estimates is
INCORRECT?
0 .It can be difficult to obtain evidence concerning accounting estimates as management
use judgement in their estimation. ··
.0 Accoun"ting estimates are high risk as they can be subject to management bids.
0 Auditors can formwlate d point estimate to compare to management's estimat·e.
0 Auditors should use their own estirnate iri the financial statements, as auditor;..
generated evidence is more conclusive than management-generated evidence.
(2 marks)

@BPP Questions 93
141 The audit junior has sugg_esteq the following tests could be carried out to test the. allowance
fqr dol:Jbtful acco.Wnts:>·
r•._

- (1) . Review cash receipts after I:Jear end

(2) Review an aged debt anali:Jsis of the receivables ledger
(3) Ask. the credit controller what debts are considered to be doubtful
(4) Review sales invoices relating to overdue accounts
Which of the following correctly ranks these tests in terms of their appropriateness to the
VALUATION assertiqn (most appropriate being listed first)?
0 1, 2~ 3, 4
0 2, 4, 3,1 ..
0 1, 2, 4, 3
0 3, 2,1, 4 (2 marks)

(Total = 10 marks)

Porthos (18 mins)

The following scenario relates to questions 142-·146.
Porthos, a limited liability company, is a retailer of sports equipment, specialising in racquet
sports such as tennis. squash and badminton. The company purchases equipment from a variety
of different suppliers and then resells this online. Customers place their orders directii:J on the
compani:J website. The ordering/sales software automaticaiii:J verifies the otder details, customer
address and credit card information prior to orders being verified and goods dispatched.
Oncethe order has be.en verified the SI:JStem produces a pre-numbered picking note. The order is
then picked in the warehouse and a goods dispatched note (GDN) is produced. A copy of this is
scanned into the SI:Jstem and a sequentia111:J numbered invoice is automatically produced and sent
to the customer.
You are the audit senior working on the audit of Porthos for the year ended 31 December 20X7.
As the sales system is highly automated the audit manager has decided that computer-assisted
audit techniques (CAATs) should be used where possible in the audit of the sales account. You
identified the key steps to be taken in planning the application of CAATs, ?S follows:
(1) Defino the t!)pes pf trcmsactions to bo testGd
(2) Set the objective of the CAAT application
(3) Define the procedures to be performed on the data
(4) · Determine the content and accessibility of the entity's files
The manager has also decided that test data would be used to test the input of details into the
ordering sustem; You identified the following test data which could be used:
(i) Orders for unusually large quantities
(H) Orders with fields left blank
(iii) Orders with invalid inventori:J· codes
(iv). o·rders with complete and valid details
In addition to the sales income generated from the sale of sports equipment Porthos earns a small
amount of rentar income by renting out surplus warehouse space to a local company. The rental ·
agreement shows that the annual_re11t from 1 March 20X7was $24,000, Increased from $21,600-
per annum.

91t Audit and Assurance @aPP

.j

142 Which of the following identifies the correct order in which the steps' to be taken in
planning the appiication of CAATs should be pelformed? ·
0 2,4,1,3
0 1, 4, 2, 3
0 2, 1, 3, 4
0 4, 2, 3,1 (2-marks)

143 Which of the test.data identified by the audit junior should be used to confirm the
completeness and accutocy of input into the sales system?
0 (ii) onl!::j
0 (ii) and (iii) only
0 (i), (ii) and (iii) only
0 (i), (ii)~ (iii) and (iv) (2 marks)

144 Which of the following procedures would provide evidence that sales cut-off for Porthos
has been applied correctly?
0 For sales invoices issued before31 December 20X7 use audit software to determine
whether there is a matching GDN doted before 31 December 20X7
0 For sales invoices issued before 31 December 20X7 use audit software to determine
whether there is a matching GDN dated after 31 December 20X7
0 For picking notes issued before 31 December 20X7 use audit software to determine
whether there is a matching GDN dated before 31 December 20X7
0 For picking notes issued before 31 December 20X7 use audit software to determine
whether there is a·rnatching GDN dated after 31 December.20X7 (2 marks}

146 You ore using a proof in total calculationto assess the accuracy of the rental income.
. . - . -

Which of the foilowing correctly shows the calculation which would be used?
0 $24,000 X 12/12
0 $21,600 X 12/12
0 (21,600 x 2/12) + (24,0QOxiO/i2)
0 (21,600 x 10/12) ·i· (24,000 x 2/12) (2 marks).

(Total = 10 marks)

@BPP Questions 95
Lancaster Co- (Mar/Jun 21) (18 mins)
The following scenario relates to questions 147-151.
Itis 1 July 20X5. You are an audit supervisor at YorkS .Coand you are involved in the audit of -
Lancaster Co for the year ended 31 May 20X5. The company owns a significant amount of non-
current assets including a number of properties. -
Additions, disposaJ and depreciation
Lancaster Co depreciates its properties, on the straight-line basis, at a rate of 5% per annum. The
draft depreciation charge on buildings for 20X5 is $2 million· compared with $1.7 million in 20X4.
On 31 May 20X5, Property A was sold for sales proceeds equal to 40% of its original cost. The
property jnitially cost $6 million and had been owned and depreciated for seven years.
The audit programme includes the following tests to be carried out in relation to additions made
during the year:
(1) Agree a sample of additions recorded in the non-current asset register to the bank ledger
account and purchase invoice ensuring that the purchase date is accurate and it is recorded
at the correct amount
(2) Compare total budgeted additions to actual additions in the year and investigate and
corroborate any significant differences
Revaluation
On 31 May 20X5, the directors had all of the company's remaining buildings revalued by an
external expert. In the detailed audit approach it states that York & Co will rely on this valuation
as part of the current blear audit procedures.

147 Which TWO of the following audit procedures would test for OVERSTATEMENT of
Lancaster Co's non-current assets?
0 Agree disposals recorded in the non-current asset register to bank ledger account and
sales invoice
0 Phk:Jsically inspect .a sample of assets selected from the non:-current asset register
D Inspect a sample of assets found at a location and agree to the non-current asset
register
D . Inspect the condition of assets held to determine the need for any impairment
(2 marks)

148 Whjch of the following assertions ore tested by.the procedures inch,Jded in the audit
programme for additions?
(1) . Completeness
(2) Classification
(3) Exi~tence

(4) Accuracy, valuation and allocation

0 '1 and 3 onl!d
0 2 and 4 only
0 1, 3 and 4 only
0 '1, 2~ 3 and 4 (2 marks)

96 Audit and Assurance @BPP

 . .
149 You are now considering substantive audit procedures for depreciation across all _
cate~ories of non-current ass~ts held.~y_Ldncaster.Co. . .
Which_ TWO of the following_ are substantive audit procedures for testing _depreciption?
D Review the non..:current asset register to ensure that all assets are assigned a useful life
D Perform a proofin total fo-r the depreciation charge of $2m included in the financial
sta.temet1ts and investigate any significant differences
D Reviewthe board minutes for ev_idence of approval of useful lives
0 Discuss with management the reasons for the $300.000 difference in the current year -
depreciation ·compared to the prior year (2 marks)

150 Recalculate the expected loss on disposal of Property A, giving vour answer to ONE
decimal place.

(2 marks)

151 . In respect of the revaluation, which TWO of the following statements regarding reliance
on the external expert are TRUE?
0 In line with ISA 620 Using the Work of an Auditor's Expert~ reliance can only be placed
on.an expert appointed by York 8 Co
.0 Obtaining the valuation report would constitute sufficient and appropriate evidence
over the carrying amount of the buildings
0 Reference to the work of the external expert should not be. included in the audi~or's
report
0 The objectivity of the valuer must be assessed before placing reliance on the valuation
report · (2 r:narks)

(Total = 10 marks)

Willow S Co (Sep/Dec 21) (18 mins)

The following scenario relates to questions 152-156.
It is 1 July 20X5. You are an audit supervisor of WillowS Co and you are involved in the audit of
Ash Co for the year ~nded 3i May 20X5. You have-been allocated responsibility for the audit of
bank and cash and share capital.. ·
Bank and cash
Ash Co has various accounts with two banking institutions. It holds a number of longstanding
accounts with Silver Oak bank and a nun)ber of new accounts have been opened during the year
with Moneytree bank. However, the management of Ash Co
has refused to grant Willow 8 Co
permission to obtain a bank confirmatiori letter from Moneytree bank. You have asked for on
explanation but have not received-a sati$factory response.
The area of bank and cash has been deemed as high risk due to u number of errors which were
found during the prior year audit. The audit engagement partner has therefore emphasise<) the
importance of the procedures performed in this area of the financial statements.
Shore capitol
.During the year to 31 May 20X5, Ash Co issued 100,000 $1 equity shores. Ash Co mointains all of
its. own r-ecords in this .area. The audit engagement partner has raised concerns over whether the
transaction has been carried out in compliance with appropriate laws and regulations.

@BPP Questions 97
152 You are reviewing the audit plan for Ash Co and have allocated a number of ·procedures to
be performed on bank and pashto yo~r audit assistant. lnorderto help_y_our audit
. assistant perform the work you want to give them more detail regarding the procedures.
Which type of audit proce~ure is being demo11stroted_by each of the following tests
included in the audit plan of Ash Co?

Obtain Ash Co's bank ..... EXTERNAL-\

reconciliation and cast to REPERFORM RECALCULA
INSPECTION CONFIRMATI
ensure mathematical ANCE TION
ON
accuracy

Obtain a bank EXTERNAL 1

REPERFORM RECALCULA
confirmation letter from INSPECTION CONFIRMATI
ANCE TION
Ash Co's bankers ON
•.• -- --<'~ .• • -

Perform a cash count for

:
EXTERNAL
comparison with the REPERFORM RECALCULA
INSPECTION CONFIRMATI
results of the cash count ANCE TION
ON
conducted by Ash Co
...................

(2 marks)

153 Your audit assistant has gathered the following audit evidence in relation to bank and cash:
(1) Print out from Ash Co's online banking system provided by the accounts clerk
(2) Bank reconciliation prepared by the audit assistant using client documents
(3) Results of cash count performed by internal audit
(4) Bank confirmation letter received from Silver Oak bank
In order to respond to the increased level of risk you want to make sure you ore using the
most reliable evidence.
Which of the following options correctly· ranks the audit evidence, starting with the MOST
reliable?
0 2~ 4, 1, 3
0 2$3, 4,1
0 4, 3, 1, 2
0 4. 2, 3, l (2 marks)

154 Which TWO of the following actions should WillowS Co take following Ash Co,s refusal to
allow Willow S Co to seek a bank confirmation from Moneytree bank?
0 The risk of material misstatement including fraud risk needs tb be re-evaluated
0 The audit plan must be revised ond alternative procedures considered
0 · A modified o'pinion must be issued on the grounds that insufficient evidence i·s available
0 Send the bank confirmation request without authorisation as the bank communicates
directly with the auditor (2 marks)

98 Audit and Assurance @BPP

 155 You h<JVe been given the following bank reconcifiqtion pr~pared blJ Ash Co:
MONEYTREE BANK.:.. CURRENT A/C

$'000-

Balance per bank stateme!!_t ot_31 MaH 20X5 .4,200

Adjusted for:

Unpresented cheques (1,200)

Outstanding lodgements 3,200

Balan¢e per cashbook at 31 May 20X5 6,200

The following issues have been identified during the testing of the bank reconciliation:
(1) Cheques totOIIing $300,000 which were not posted until 2 June 20X5 are included in
the bank ledger account at the year end
(2) Customer pdyments totalling $700,000 which were paid into the bank on 3 June 20X5
are included in the bank ledger account at the year end
(3) Bank charges for May 20X5 totolling $100,000 were not charged by the bank until
June 20X5
What is the resultant. effect on the bank and cash balance as aresu_lt of these issues?
0 Bank and cash is overstated by $400,000
~I
0 Bank and cash is understated by $300,000
0 Bank and cash is overstated by $500,000
0 Bonk and cash is understated by $400,000 (2 marks}

156 Which of the following procedures would address the audit engagement partner's
concern in relation, to the share issue?
0 Inspect board minutes for evidence of review regarding the terms of ond approval of
the share issue
0 Inspect Ash Co's constitution documents fOr evidence that the share issue is permitted
0 Obtain a written representation from management to confirm that the share issue is in
compliance with laws and regulations
0 Agree the quantity and recipients of the share issue to Ash Co's share register
(2 marks)

(Totcl'l =10 marks)

~-~·.~

Pickering S Co (Mgr/Jun 23)

The following scen~rio relates to questions 157-161.
You are an audit supervisor at the firm Pickering & Co, currenti!J working on the audit of Walker
Co, which is a long-standing-audit client'ofyour firm. You have been assigned responsibility for
auditing bank and cash and shme capital.
Bank and cash
Walker Co operates a number of retail shops in one country 1 selling outdoor leisure clothes~
footwear qnd other walking-reloted accessories. Each shop accepts cash or debit card
~I transactions. As a result, at any one time, the company holds a significant amount of cosh at its
head office. Walker Co performs a year end cash count to verify the year end cash balance.

~:

@BPP Questions 99
 From the audit planning meeting with Walker Go, you have ascertained thd1 it has_four bank
accounts with International Bank Co which consist of a current account, a deposit account and
two loan accounts. International Bank Co has provided direct confirmation to Pickering S Co of
the. balances in each account at the year end. During the !Jear, Walker Co op~ned a deposit
account witn a foreign bank, Southern Bank Co, and at the !dear end a material balance is held in
this account. Southern Bank Co provided a letter to the financial controller of Walker Co to
confirm the balance at the year end.
· Share capital
Walker Co plans to expand its operation into online retailing next year and has- undertaken a
rights issue in the current !:Jear to fund the new venture.

157 Auditors use a variety of methods to obtain evidence, using procedures detailed within ISA.
500 Audit Evidence.
Which of the following statements demonstrates the use of the audit procedure 'enquiry'
when auditing bank and cash?
(1) The auditor watches the cashier performing the doily bonk reconciliation process
(2) The auditor reviews year end bank balances against prior year total to identify
significant fluctuations and discusses any unusual movements with management
(3) The auditor confirms directly with management whether any new bank accounts
have been opened in this financi9l year
(4) The auditor obtains a standard bank letter from each bank used by the company
0 2 and 3
0 3 oni!J
0 1 oni!J
0 2 and 4 (2 marks)

158 In relation to the bank account with Southern Bank Co, which of the following factors will
reduce the reliability of the evidence which can be obtained?-
(1) Southern Bank Co issued the standard bank confirmation letter to the financial
controller of Walker Co
(2) The original year end bank statement has been lost but a photocopy has been
provided by the accounts clerk
(3) The account was. only opened in the year and therefore was not subject to prior year
audit procedures
(4) The year end bank reconciliation shows an immaterial unreconciled difference which
·the accounts clerk has advised will not be investigated ·
0 1 and 2 only
0 2 and 3 oni!J
0 1, 2 and 4 only
0 1, 2, 3 and 4 (2 marks)

100 Audit and Assurance @BPP

159 In re.spect.of the loan ac.counts held yvithJnternational Bank Co, which ofthe.following
audit procedures would provide the best evidence to verify accrued interest at the
accounting· period end? ··. · - · . ... . · · .
.0 Inspect tha.yeorend bonk recon~iliation and confirm accrued intetest~is included
0 Agree the interest charges per the bank ledger account to the pre year end bank
statements
·0 Inspect the bank confirmation letter to ~on firm the loan account interest rate is
consistent with prior year
0 Recalculate the accrued interest based on the outstanding loan value, interest rate and
accrual period · · .· · {2 mark~)

160 Which of the following audit procedures included in the audit programme tests for the
EXISTENCE of bonk and cash?
0 Attend the cash count at the year end and reperform the count
0 Review all relevant bank statements to verify that the accounts are held under the
name of Walker Co
0 Agree a sample of account balances detailed on the bank confirmation letters to the
trial balance
0 Review the disclosure included in the financial statements to verify only bank accounts
per the bank letters are disclosed (2 marks)

161 Which of the following audit procedures provide relevant evidence for the ACCURACY,
VALUATION & ALLOCATION assertion for share capital in the financial statements of
Walker Co?
(1) Review board meeting minutes to identify matters relating to shore capital, including
ensuring proper authority was given for any share capital changes
(2) Agree the authorised share capital disclosed in the financial statements to the
company's constitution documents
(3) Agree closing share capital balances in the trial balance to statutory records and
current year draft financial statements
(4) ln~pect bank ledger account toconfirm cash receipts from rights issue have been
appropriately recorded ·
0 1 and 2
0 1 arid 3
0 2 and 4
0 3 and 4 (2 marks)

(Total =10 marks)

@BPP Questions 101

 Section B Questions
162 Lily (Dec 12) (Sit mins).
It is 1 July 20X5. Lilbl Window Glass Co (Lily) is a glass manufacturer, which operates from a large
production facilitbj, where it undertakes continuous production 24 hours a dabJ, 7 dabJS a week.
·Also on.this site are two warehouses, where the company's -raw materials and finished goods.are
stored. Lily's year end is 31 JulbJ.
lilyJs finalising the arrangements for the year-end inventory count, which is to be undertaken on
31 July 20X5. The finished windows are stored within 20 aisles of the first warehouse. The second
warehouse is for large piles of raw materials, such as sand, used in the manufacture of glass. The
following arrangements have been made for the inventory count.
The warehouse manager will supervise the count as he is most familiar with the inventory. There
will be ten teams of counters and each team will contain two members of staff, one from the
finance and one from the manufacturing department. None of the warehouse staff, other than
the manager, will be involved in the count.
Each team will count an aisle of finished goods by counting up and then down each aisle. As this
process is systematic, it is not felt that the team will need to flag areas once counted. Once the
team has finished counting an aisle, they will hand in their sheets and be given a set for another
aisle of the warehouse. In addition to the above, to assist with the inventory counting, there will be
two teams of counters from the internal audit department and they will perform inventory counts.
The count sheets are sequentially numbered, and the product codes and descriptions are printed
on them but no quantities. If the counters identify any inventory which is not on their sheets, then
they are to enter the item on a separate sheet, which is not numbered. Once all counting is
complete, the sequence of the sheets is checked and any additional sheets are also handed in at
this stage. All sheets are completed in ink.
Any damaged goods identified by the counters will be too heavy to move to a central location,
hence they are to be left where they are but the counter is to make a note on the inventory sheets
detailing the level of damage.
As Lily undertakes continuous production, there will continue to be movements of raw materials
and finished goods in and out of the warehouse during the count. These will be kept to a minimum
where possible.
The level of work in progress in the manufacturing plant is to be assessed by the warehouse
. manager. It is likely that this will be an immaterial balance. In addition, the raw materials
quantities are to be appmximated bbJ measuring the height and width of the raw material piles. In
the post this task has been undertaken by a specialist; however, the warehouse manager feels
confident that he can perform this task.

Required
(a) For the inventory count arrangements of Lily Window Glass Co:
(i) Identify and explain SIX deficiencies; and
(ii) Provide a recommendation to address each deficiency.
The total marks will be split equally between each part. (12 marks)

(b) You are the audit senior of Daffodil S Co and are responsible for the audit of inventory for
Lily. You will be attending the year-end inventory count on 31 July 20X5.
In addition, your manager wishes to utilise computer-assisted audit techniques for the first
time for controls and substan~ive testing in auditing Lily Window Glass Co's inventory.

Required
Describe the procedures to be undertaken by the auditorDURING the inventory count of Lily ·
·Window Glass· Co irt order to gain sufficient appropriate audit evidence. (6 marks)

(c) For the audit of the inventory cycle and year-end inventory balance of Lily Window Glass Co:

102 Audit and Assurance @BPP

 Required·
(i) Describe FOUR audit procedures that could be ·ca~ried out using autornated tools- cind
techniques . ~.{l.f.. marks)

(ii) Expl~in the poter1tial advantages of using mitomated tools and te9hniques;. and
(Lt.marl<s) ··

· (iii) Explain the p~tential disadvantages of ~sing outomated t~Ois and techniques. (lt mark~)
{T(?tal = 30 marks)·-

163 Purrfect Co (Mar/Jun 21) , (36 mins)

This scenario relates to four requirements.
It is 1 July 20X5. Purrfect co manufactures and sells a variety of food for dogs and cats. Your firm,
Kirano 8 Co, has audited the company for a number of years. You are about to commence the
final audit for the year ended 31March 20X5 and the draft financial statements show profit before
tax of $23.1 million and total assets of $99.2 million.
Vego Dog -- inventory valuation
Purrfect Co launched a new brand of vegan dog food, Vego Dog, in December 20X4 but sales
have been lower than expected and the directors are considering a discounted sales price. Vego
Dog products are valued using a standard costihg method and the standard costing comprises
raw materials, labour costs and production overheads. As at 31March 20X5, Vego Dog products
with a standard cost of $2.4 million were included as finished goods in inventortl.
Receivable - Ellah Co
One of the Purrfect Co's major customers, Ellah Co, operates a chain of pet stores with 23 stores
across the country. There have been reports in the press for several months that Ellah Co's sales
and profits have been falling and, in March 20X5, Ellah Co announced that 11 of its stores were to ·
close in May 20X5. As at 31 March 20X5, Purrfect Co's trade receivables include $2.6 million
outstanding from Ellah Co and no allowance has been included for this balance at the year end.
Contamination - legal claims
On 25 February 20X5, it was discovered that a batch of canned cat food had been_contaminated
with insecticide, which could be harmful to cats. This batch had been dispatched in November .
20X4· to 2Lt7 retail stores. By 31 March 20X5, Purrfect Co had received legal claims. totalling $1.9
million from consumers whose cats had eaten the contaminated food.
Required
(a) :Describe s~bstantive procedures the auditor should perform to obtain sufficient ~nd
appropriate audit evidence in relation to the matters identified regarding the Inventory
valuation of Vego Dog products. (6 marks)

@BPP Questions 103

••
 Req.uired ·
Discuss the issues and describe the impact on the auditor's report ofPurrfect Co of both
adequate AND inadequate disclosure ofthe contingent liability. (5 marks)

(Total= 20 marks)

16lt Rose (Dec 12 amended) (36 mins)

Rose Co operates a chain of health and fitness clubs. Its year end wgs 31 March 20X6. You are the
audit manager and the bJear-end audit is due to commence shortly. The following three matters
have been brought to your attention.
Trade payables and accruals
Rose Co's finance director has notified you that an error occurred in the closing of the payables
ledger at the year end. Rather than it closing on 1 April, it accidentally closed one week earlier on
25 March. All purchase invoices received between 25 March and the year-end have been posted
to the 20X7 year-end payables ledger.
Receivables
Rose Co's trade receivables have historically been low as most members pabJ monthly in advance.
However, during the year a number of companies have taken up group memberships at Rose and
hence the receivables balance is now material. The audit senior has undertaken a receivables
circularisation for the balances at the year-end; however, there are a number who have not
responded and a number of responses with differences.
Reorganisation
The company recently announced its plans to reorganise its health and fitness clubs. This will
involve closing some clubs for refurbishment, retraining some existing staff and disposing of some
surplus assets. These plans were agreed eta board meeting in March and announced to their
shareholders on 29 March. Rose is proposing to make a reorganisation provision in the financial
statements.

Required
(a) Describe substantive procedures the auditor should perform to obtain sufficient and
.appropriate audit evidence in relation to the issues identified with the trade poyables and
accruals balance. (6 marks)

(b)· Describe substantive procedures the auditor should perform to obtain sufficient appropriate
evidence in relotion to tl1e voar-end receivobles ·balance. (5 marks)

(c) Describe substantive procedures the auditor should perform to obtain sufficient appropriate
evidence in relation to the proposed reorganisation. (4 marks)

(d) Exptain the purpose of, and procedures for, obtaining written representations. (5 marks)
(Total= 20 marks)

16.5 Hyacinth (Mar/Jun 19) (36 mins)

Hyacinth Co develops and manufactures computer components and its year end was 31 March
20X5. It is 1 July 20X5. The company has a large factory, and two warehouses, one of which is . ·
off-:-site. You are an audit supervisor of Tulip S Co and the final audit is due to commence shortly.
Draft financial statements show total assets of $23.2 million and profit before tax of $6.4 million.·
The following three matters have been brought to your attention:

·101t Audit and Assurance @aPP

 . Inventory valu(Jtion
Your firfD attended the year-end inventory count forHyac.inth Co and confirmed that the_controls
and processes for recordin.g work in progress (WIP) and finished goods were acceptable. WIP and
finished gbods are both ·material to the financial statements and the audit team was able to
confirm b-oth the quaritity and stage of com-pletion. of WIP.
Before goods are dispatched, they are inspected by the companbf's quality control department.
Just prior to the inventory count, it was noted that.o batch of product line 'Crocus', which hod
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 lAS 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 $1.9 million.
In the current year, Hyacinth Co spent $0.8 million developing three new products which are all at
different stages of development.
Salestax 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 tdx is payable to the tax authority. When
purchasing row materials and incurring expenses in the manufacturing process, the company
pays 15% sales tax on any items purchased at1d this can be reclaimed from the tax authority. The
I~ company is required to report the taxes charged and incurred by completing a tax return on a
quarterly basis, and the net arnount owing to the tax authority must be remitted within four weeks.
of the quarter end. The draft financial statements contain a $1.1 million liability for sales tax for
the quarter ended 31 March 20X5. ·

Required
(a) Describe substantive procedures the auditor should perform to obtain sufficier.~t 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 perforrn to obtain sufficient and
appropriate audit evidence In relation to Hyacinth co•s year-end soles tax liability. (It marks)

(d) 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 attentiom
On 3 Ma!:.J 20X5, a flood occurred at tho off:-site warehouse. This resulted in some damage to
·inventory and property, plant and equipment. However, there have been··no significant delays
to customer deliverfes or complaints from customers. Hyacinth Cds management has
investigated.the cause of the flooding and believes that the company Js 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 $0.7 million and that it now has
no scrap yalue.

Required
(1) Explain whether the 20X5 fin~ncial statements of Hyacinth Co require amendment in
relation to the flood; and
.(2) Describe audit procedures which should be performed in order to forrn a conclusion on
any required amendment.

@BPP Questions 105 ·

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

(TotaJ = 20 marks)

166 Sagittarii S Co (Sep/Dec 20) (36 mins)

This scenario relates to four requirements.
It is 1 July 20X5. You are an audit manager of Sagittarii S Co and you are in charge oftwo final
audits which are due to commence shortly. Vega Vista Co and Canopus Co are both existing-
clients with d finanda~year ended 30 March 20X5. Vega Vista Co is a not-for-profit charitable
organisation which raises funds for disadvantaged families and the draft financial statements
shoe revenue of $0.8 million. Canopus Co manufactures paint products in seven factories across
the country and the draft financial statements show .total equity and liabilities of $11.6 million.
The following matters·have been brought to your attention for each company:
Vega Vista Co
Income
Vega Vista Co generates income in a number of ways. The main source of income is via an annual
food and music festival held in September ever!:J !:Jear. Tickets, which cost $35, are sold in the nine-
month period prior to the event and can be purchased in advance online or on the day of the
evei1t for cash. Approximately 15,000 people attended the September 20X4 event and more are
anticipated for 20X5. At the event there are a number of stalls selling food and the charity
receives a fixed percentage of these sundry sales. Also, during the festival, volunteers of the
charity sign up individuals to make monthly donations.• and these are paid by bank transfer to the
charity. During the audit planning, the completeness and cut-off of income was flagged as a key
audit risk.
Canopus Co
Restructuring provision
Canopus Co recently announced plans to fundamentally restructure its production processes due
to a change in the focus of the company's operations. It has included a $2.1 million restructuring
provision in the draft financial statements. The restructure involves a refurbishment of the
factories, the purchase of new plant and equipment and retraining -of existing staff. These plans
were finally agreed at a board meeting in March 20X5 and announced to shareholders and
employees just before the year end.
Bank loans
In readiness for the operational changes, the directors of Canopus Co decided to restructure the
company•s bank loans. As a result, several long-term loans were repaid early and a new ten-year
bank loan of $4.8 million was taken out of 1 Januarg 20X5. Repayments of $150.000 are due
quarterly in arrears which includes interest.

Required
(a) Describe substantive procedures the auditor should perform to obtain sufficient and
appropriate audit evidence in relation to Vega Vista Co's income.
Note. You should assume that the charity adopts International Financi9l Reporting
Standards. (5 marks)

(b) Describe substantive. procedures the auditor should perform to obtain sufticfent and
appropriate audit evidence in relation to Canopus Co's restructuring provision. (5 marks)

(c) Describe substantive procedures the auditor should perform to obtain sufficient and
appropriate audit evidence in relation to Canopus Co's bank loans. (5 marks)

106 Audit and Assurance @BPP

 (d) During th~ OLJdit of Caf:lopus Co's .restr~cturing provision, the audit team discovered that
$270,000 of costs included did notm~et the criteria for inclusion as per lAS 37Provisions,
Contingent Liobilities.~ndCoritingent Assets. The finance director has sugg·ested that no
adjustme[lt is made in the 20X5 financial staiements osthe provision is o matter of
jl.ldgement and theprovision has been de~med reasonable by the board.

Required - ...

Discuss the issue and describe the impact on the-auditor's report,jftmy, should the issue
remain unresolved. (5 marks)

(Total= 20 marks)

167 Encore (Mar/Jul 20) (36mins)

This scenario relates to four requirements.
It is 1 July 20X5. You are an audit supervisor with Velo S Co and you are working on the final audit
of Encore Co for the year ended 30 April 20X5. Encore Co is a waste management company,
supplying its services to a variety of governmental and business organisations. Er1core Co's draft
profit before tax is $5.3m (20X4-: $4.6m) and total assets are $40.1m (20X4: $33.9m). You have
been provided with the following information regarding the draft financial statements.
Vehicle additions and disposals
On 1 February 20X5, Encore Co replaced 20 of its recycling vehicles. The old vehicles had a
carrying amount of $1.8 million, as recorded in the non-current assets register and were given in
part-exchange against new vehicles costing $4.6 million. Cash consideration of $3.9 million was
also paid.
Trade receivables
Encore Co's credit controller left the company in January 20X5 and has only rec~ntly been
replaced. The trade receivables collection period increased from 49 days as at 31 December 20X4
to 66 days as at 30 April 20X5. Year-end trade receivablesamownted to $9:1m (20X4: $Z1m) and .
an allowance for irrecoverable receivables of $182,000 (20X4: $142,000) has been made.
Potential breach~ of transport regulations
In March 20X5. a former employee of Encore Co made ocomplaint to the transport authority,
alleging that Encore co· has breached the regulations concerning moximum driving hours and
compulsory rest breaks for drivers on a number of occasions. The transport authority has
launched an investigation but the directors of Encore Coare not intending to disclose this issue or
make any provision as they do not believe that the potential fine. which is $50,000 per breach, is
material.

Required
(a) Describe substantive procedures the auditor shouldperform toobtain sufficieiltand
appropriate audit evidence in relation to Encore Co's Vehicle additions and disposals.
· "-' (6 marks)

(b) Describe substantive procedures the auditor~ should perform to obtain sufficient and
appropriate audit evidence' in relation to the VALUATION of Encore Co's trade receivables.
· (5 marks)
- ~ -. -

(c) Describe substantive procedures the auditor should perform to obtain sufficie.nt and
appropriate audit evidence in relation to the potential breach oftransport regulationsby
Encore Co~ · (4 marks)

(d) It is now 26 August 20X5 and the auditor's report for Encore Co is being finalised. Orr 12
AugUst 20X5, the transport authority announced that it was taking legal action against
·Encore Co in respect of 17 breaches of the regulations. Encore Co's lawyers have advised :that
it is probable that Encore Co will be found guilty of all the breaches. Encore Co's directors
have informed you that no provision will be made in respect of this matter~ as the dectsion by

@BPP Questiohs 107

 the authority to take legal action was made after the year end, but they· have agreed _to
disclose the issue in the notes to the financial statement.
Required·
Discuss the issue and describe the impacf on the auditor's report, if any, should this issue
remain unresolved. ·. (5 marks)

(Total = 20 marks)

168 Gooseberry Co (Mar/Jun 18) {36 mins)

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 $6.4- million and total assets
are $37.2 million 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 $1.9 million 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 lAS 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 believe that this amortisation
policy is a reasonable approximation of the assetst 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 yearend, was
paid to each director in FebruartJ 20X8 and the costs were accrued and recognised withi.n wages
and salaries for the year ended 31 Januarl:J_20X8. Separate disclosure of the bonus, by director, is
required by local legislation.
Required
(a) Describe substantive procedures theaudltor 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)

(d) During the audit, the team discovers that the intangible assets balance includes $4-4.0,000
related to one of the nine new healthdnd beauty products development projects, which does
-not meet the criteria for capitalisatiorl.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 oqpltalisation in 20X9.

108 Audit and Assurance @aPP

 Inventory count
Spinach Co is forecasting a year-end inventory balance of $9.3 million. The company undertakes
conUnuous production and full yeor-e.nd inventory, counts w.ill be carried out on 31 July 20X5.
Spi_nach Co's raw materials and finished goods inventory are stored in it~ 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 depart-ment. There will be, no movements
ofgoods in and out of the warehouses during the counts. Sweetcorn 8- Co will only attend some of
the counts. ·
The largest warehouse is located at the factor!d 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-part!:J inventory is located in one specific area of the
warehouse.
Issue of share capital
The company is looking to expand its operations b!:J securing an additional factor!d site in January
20X6. In order to raise sufficient capital to fund the factor!d purchase. Spinach Co issued ordinary
shores at a premium in May 20X5, raising a sum of $4.3 million.
Required

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

(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)

(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. (It marks)

(d) It is now 12 November 20X5. During the audit of Spinach Co's inventory_~ the audit team
identified five product lines which were ver!d slow moving and concluded that the net
realisable value of these goods was below cost. A significant write down of inventory was
requked in order to comply with lAS 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
Auditor'sReport.
Required
(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)

(Total =20 marks)

172 Pacific Co (Sep/Dec 22) (36 mins)

This scenario relates to four requirements.
It is 1 Jul!d 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 8- Co and the final audit is
due. to commence shortly for the year ended 31 May 20X5. Draft financial statements show . .
revenue of $45.2 million and profit before tax of $4.1 million. 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.

112 Audit and Assurance @aPP

 205 . .Explain, by choosing the relevant boxes in the statements IJelow, how the issue of share:·
capital should be treated if) the fingndal statements of Strawberry Co,

The issy~·pf share capital is j.(1) ..........~J event because it !.-~~!.. ___:. : :. . ··~---·····...,.·;,_,···]
. ,- _q nd.
·'it is materia.! therefore it requires 1._<_3_)__..;._____
•_.1·

Pull down Jist 1

A non-adjusting
An adjusting

Pull down list 2

i Gives new information about an event that did not exist ot ~ear-end date
J.·
• Was approved prior to year end and so gives information about events existing at year-
end date

Pull down list 3

I·
~? -
No treatment in the current year financial statements
!~ • To be accounted for in the current year financial statements
I'

~~ • To be disclosed in the current year financial statements

(2 marks)

206 The audit team has performed varloU$ substantive procedures in order to obtain sufficient
and appropriate audit evidence relating to the potential fine for environmental damage.
Which TWO of the following are appropriate audit procedures to perform in respect of
j! the letter from the government environmental agency?
D Send 6 letter addressed to the government environmental agenc!:J to confirm the matter
D Examine post year-end board meeting minutes to identif~J any reference to further
. developments of the case
D Review the correspondence with the company's legal advisers to assess the probable
outcome of the case
D. Test the effectiveness of the client's s~:~stem of internal control in relation to the
prevention of environmental damage · (2 marks)

@BPP Questions 129

207 ·Assuming •rssue 2• is a material subsequent event, match the rel~vant ·a.udit opinion to the
following two outco01es. (Drag a relevant opinion from the left into position to match
.each of the outcomes on the right.)

Audit opinion Outcome 1

.•

Unmodified with It is probable that the

emphasis of matter government agency
will win the case> but
as the letter was
Qualified received after the
year end, the
directors did not plan
Adverse to account for or
disclose it in the
ffnancia I statements.
Disclaimer

Outcome 2
Modified with
emphasis of matter

It is possible but not

probable_ that the
government agency
will win the case and
therefore the
directors· have
disclosed the matter
in the financial
statements.

(2 marks)

208 The two issues will be included in a written representation from management. All audit work
will be·finish•3d by 31 July 20X5. The auditor's report is due to be signed by Brown 8- Green
Co on 28 September 20X5. Strawberry Co's board plans to issue the financial statements
on 21 October 20X5 which will be followed by an annual general meeting on 30 October
20X5.
Which of the following would be the most appropriate dote for the directors of
Strawberry Co_ to sign the written representation?
0 31 Jul~:~ 20X5
0 28September 20X5
0 21 October 20X5
0 30 October 20X5 (2 marks)

(Total= 10 marks)

130 Audit and Assurance @sPP

 Sectio.n ·B Questions

209 Panda (Dec 13) -(36mins)

Pand9 Co manufactures chemicals and has a fact()r.tfand four offsite storage locations for
firlished goods. Panda Co's year end'wos.30 A-prlt20X3. The final audit is almostcompfete and
the financial statements and auditor's report Ore due to be signed next week. Revenue for the year
is $55 millic~mdnd profit before taxation is $5.6 million.
The following two events have occurred subsequent to the year end. No amendments or
- disclosures have been made in the financial statements.
Event 1 ..., Defective chemicals
Panda Co undertakes extensive quality control checks prior to the dispatch of any chemicals.
Testing on 3_ May 20X3 found that a batch of chemicals produced in April was defective. The cost
of this batch was $0.85 million. In its current condition it can be sold at a scrap value of $0.1
million. The costs of correcting the defect are too significant for Panda Co's management to
consider this an alternative option.
Event 2 - Explosion
An explosion occurred at the smallest of the four offsite storage locations on 20 May 20X3. This
resulted in some damage to inventory and property, plant and equipment. Panda Co's
management have investigated the cause of the explosion and believe that they are unlikely to be
able to claim on their insurance'. Management of Panda Co has estimated that the value of
damaged inventory and property, plant and equipment was $0.9 million and it now has no scrap
value.
Required
(a) Explain the five elements of an assurance engagement. (5 marks)

(b) For each of the two events above:

(1) Explain whether the financial statements require amendment; and
(2) Describe audit procedures that should be performed in order to form a conclusion on
any required amendment.
Note. The total marks will be split equally between each event. (10 marks}

(c) The directors do not wish to_ make any amendmonts or disclosures to the-financial statements
for the explosion (Event 2). ·

Required
Disc(JSS the issue and explain the impact on the auditor's report, if any~ should this issue
remain unresolved. (5 marks)

(Total= 20 marks)

@BPP Questions 131

 Sample questions from the examining team . .
Questions 210-227comprise sample Section A questior~s·from the examining team and CQver
different syllabus areas.. · .· ·

June 2018 (7 mins)

Comments from the examining team (June 2018)
Sect1gn A in the June 2018 examination included, but was not 11mited to, questions on ·the
following areas: ·
Professional ethics and application ofACCA's Code of Ethics and Conduct
• The level of assurance provided by review engagements
• Substantive testing including testing on revenue, trade receivables and tangible assets
• Going concern
• Audit finalisation and the final review; and
• Auditor's reports
The following questions are reviewed with the aim of giving future candidates an indication of the
types of questions asked, guidance on dealing with exam questions and to provide a technical
debrief on the topics covered by the specific questions selected. Candidates are reminded that
there will be a mix of application and knowledge questions in Section A and it is imperative that
they ensure their knowledge of the lnterr1ational Standards on Auditing (ISAs), and important
areas of the syllabus such as audit procedures and going concern is at an appropriate level.

210 Which of the following statements summarise the auditor's responsibilities in relation to
going concern?
(1) Evaluate management's assessment of the entity's ability to continue as a going
concern
(2) Determine whether or not ah entity can prepare its financial statements using the
going concern basis of accounting
.(3) Remaih alert throughout the audit for events or conditipns which may cast
significant doubt on the entity's ability to continue as a going concern
·(4) · Obtain evidence to determine whether a material uncertainty exists if events are
identified which may cast doubt on the entity's ability to continue as d going
concern
0 (1), (3) and(4) only
0 (1). (2) and (4) only
0 (2) and (3) only
0 (1). {2), (3) and (4) (2 marks)

211 Which of the following describes the level of assurance, which will be provided by Red &
· Co following the review of the five-year profit forecast?
·0·· Limited assurance, positive conclusion
0 Reasonable assurance, negative conclusion
0 Limited assurance, negative conclusion
0 No assurance (2 marks)

(Total= lt marks)

132 Audit and Assurance @aPP

 Sep~_ember 2018 (7mins).
· Comments from the examining tearn,(September 2018)
Section A hi the September 2018 examinations incll)ded, but was not limitedto, questions on the
following areas:
• ·Professional et~ics and application ofACCA's Code ofEthics and Conduct
• Corporate Govern a n-ee
• Substantive testing including testing on tangible and intangible non-current assets and
·Investments -
• · Subsequent events
• Audit finalisation and review
Auditor's reports
Tho following qwestions are reviewed with the aim of giving future candidates an indication of the
t~:Jpes of questions asked, guidance on dealing with exam questions and to provide a technical
debrief on the topics covered by the speCific questions selected. Candidates are reminded that
there will be a mix of application and knowledge questions in Section A and it is imperative that
they ensure their knowledge of the International Standards on Auditing (ISAs), and important
areas of the syllabus such as audit procedures is at an appropriate level.

212 Which TWO of the following are objectives of the external auditor?
q To c0nsider the adequacy of the accounting records which have been maintained
0 To confirm the company will continue trading for the foreseeable future
0 To obtain an understanding of the inh~rnal control system in place
0 To access the books and records of the company {2 marks)

213 X Co has a year ended 30 June 20X8. At the end of June 20X8 the cornpan~:J's corporate
headquarters building was revalued by a reputable firm of surveyors.
Assuming a reliable valuation Is obtained, which of the following procedures should be
performed to obtain sufficient appropriate substantive evidence about the carrying
1
amount of X Co s corporate headquarters?
(i) Review the board minutes to ensure that the decision to revalue the headquarters
was ·approved by the board.
(2) Agree the revalued amount in the valuation statement to the amount recorded in the
non-current asset register.
(3) Recalculate the revaluation 'adjustment and agree that it is correctly recorded in the
revaluation surplus.
(4) Confirm with the directors. that all other assets in the same class as the headquarters
have been revalued and agree this to 1:he accounting policy disclosure.
0 2 and-3 only
0 1, 2 and 3
0 2, 3.and 4
0 i and 4only (2 marks)

(Total='+ marks)

@sPP (,)uestions 133

·oecember 2018- (7 mins)"
Comments trom the examining team (December 2018)
Section A in the December 2018 examination included, but was not limited to, que.stions_on the
following areas: ·
Professional ethics and application ofACCA's Code of Ethics and Conduct
Corporate governance
• Substantive testing including analytical procedures, revenue, bank and ·cash and trade
payables
Subsequent events
" Audit finalisation and review
• Auditor's reports
The following questions are reviewed with the aim of giving future candidates an indication of the
tbjpes of questions asked, guidance on dealing with exam questions and to provide a technical
debrief on the topics covered by the specific questions selected. Candidates are reminded that
there will be a mix of application and knowledge questions in Section A and it is imperative that
they ensure their knowledge of the International Standards on Auditing (ISAs), relevant financial
accounting and important areas of the syllabus such as audit procedures is at an appropriate
level.

214 Which of the following details should be disclosed in respect of the revaluation of the
head office if the auditor is to conclude that the disclosures are adequate?
(1) Effective dote of the revaluation
(2) Name of the valuer
(3) The amount of the revaluation increase
(4) Carrying amount of the head office under the cost model
0 1, 2 and 3 onl!d
0 1, 3 and 4 only
0 2, 3 and 4 only
0 1, 2, 3 and 4 (2 marks)

215 All adjustments required bt,J the auditors of X Co have been made to the financial
statements with the exception of an adjustment relating to faulty goods held -in inventory at
the year ond. the audit work concluded that the cost of this inventory exceeded its net
realisable value by $2.9 million. The directors dispute the audit team's figures and believe
that the realisable value of the inventory still exceeds its cost. Profit before-tax for the bJ6ar
was $131.4 million.
Which of the fo~lowing correctly describes the effect of this matter on the auditor's
~~~ .

0 Unmodified opinion with no further disclosure

0 Unmodified opinion with disclosure in an emphasis of matter parcig_raph
0 qualified opinion due to material misstatement"·
0 Qualified opinion due to inability to obtain sufficient appropriate audit evide.nce
· (2 marks)

{Total = 4_ marks)

13&f.. Audit and Assurance @aPP

 )

: l

March-2019 .(7 mins)

Comments fram th.e examining team (M~rcl:! 2019)·
. - - -

Section A in the March 2019 examination inCluded, but was not limited to~ questions on the ·~
following areas:
• ·Concepts of assurance·
• Professional ethics and application of ACCA•s Code of Ethics and Conduct
• Substantive testing including analytical procedures, revenue, expenses, PPE and estimates
• Written representations
• Auditor's reports
The following questions are reviewed with the aim of giving future candidates an indication of the
types of questions asked, guidance on dealing with exam questions and to provide a technical
debrief on the topics covered by the specific questions selected. Candidates are reminded that
there will be a mix of application and knowledge. questions in Section A and it is imperative that
they ensure their knowledge of the International Standards on Auditing (ISAs). relevant financial
accounting and important areas of the syllabus such as auditor•s reports is at an appropriate
level. Recent Examiner's reports have noted that performance on knowledge questions was poor
and this continued to be the case in March 2019. Questions mabj test specific details of an ISA,
therefore candidates must ensure that they have studied the ISAs in sufficient depth.

2i6 Which of the fbllowing must be included in an unmodified auditor's report?

(1) A statement that the auditor believes the audit evidence obtained is sufficient and
appropriate
(2) Title indicating the report is that of the independent auditor
(3) Description of the meaning of materiality
(4) A statement that the auditor is independent of the entity and has fulfilled their
ethical responsibilities
0 1. 2and 3 only
0 1 and 3 only
0 2 and 4only
0 1, 2, 3 and 4 (2 marks)

@BPP Questions 135

 217 -~ . The auditors have discovered that _the cha~r's report of XYZ Co, a listed company, is ·
inconsistent with the financial statements and it has been determined that the material
inconsistency is in the chair's report.
Complete the following sentence by dragging and dropping ttte appropriate audit
opinion and type of communication in the auditor's report.

If the directors refuse to amend the inconsistency, th~n the auditor's opinion will be

and the inco~sistency will be explained in a [..(2) _-_ -·--·--·~~ .

l..Q~--·. -··------~ -
Pull down list 1
• Adverse
• Disclaimer of opinion
• Qualified on the grounds of a material misstatement
• Qualified on the grounds of an inability to obtain sufficient appropriate audit evidence
• Unmodified

Pull down list 2

• Emphasis of matter paragraph
Key audit matters section
• Other information section ·
• Other matters paragraph
(2 marks)

(Totaf = 4 marks)

June 2019 (7 mins)

. Com-ments from the examining team (June 2019)
· Section A in the June 2019 examination included, but was not limited to~ questions on the
following areas:
• - Corporate governance
• - Substantive procedures including onal!dtical procedures, revenue, expenses, bank and cash_
and share capital
• Written representations
• · Going concern
• Subsequent events
• Auditor's reports
The foilowing questions are reviewed with the airn ofgiving future candidates an indication of the
types of questions asked, guidance on dealing with exam questions and to provide a technical
debrief on the topics covered by the specific questions selected. Candidates are reminded that
there will be a mix of application and kno·wledge questions in Section A and it is imperative that
they ensure their knowledge of the International Standards on Auditing (ISAs), relevcmt financial
accounting and important areas of the Sk)llabus such as OL1ditor's reports is at an appropriate
level. Recent Examiner's reports have noted that performance on knowledge questions was poor
and this continued to be the case in June 2019. Questions may test specific details of examinable
documents including ISAs, ACCA's Code of Ethics and Conduct and the Corporate Governance
Code, therefore candidates must ensure that they have studied these in sufficient depth.

136 Audit and Assurance @aPP

2H,3 X Co is a liste9 company and has-on auditcommittee.. ·
Identify~ by olicki~g -o~ the rele~a-nt box in the table-bel_ow, whether each of the following
statements is tru~ or fCJise.

The audit ·committee's terms of reference should include

reviewing and mor)itoring the external auditor's TRUE -.FALSE
inr'it:>t"\On.rlo.r-.·r' 0 and objectivity .

-TRUE

TRUE FALSE

(2 marks)

219 AS Co is the auditor of Z Co for the year ended 31 December 20X8. The detailed audit
work is due to be completed by 30 June 20X9. The directors are planning to approve the
financial statements on 31 July 20X9 and then issue them to the shareholders on 15 August
20X9. The management of Z Co has performed an assessment of the companbJ's abilitbl to
continue as a going concern based on a cash flow forecast prepared to 31 December 20X9.
Complete the following sentence by dragging and dropping the appropriate date.

A 8- Co's evaluation of management's assessment of Z Co's ability to continue as a going

concern must cover the period up to r···· ............:..--....···-··-:·u··--·-;J.

Pull down list

• 15 August 20X9
• 30 June 20X9
31 December 20X9
• 31 July 20X9
(2 marks)

(Total='+ marks)

September 2019 (7 mins)

Comments from the examining team (September 2019)
It was very pleasing to see that once again almost·all candidates attempted all15 questions,
across the three OTcasos. Candidates preparing for future sessions are advised to work through
the pastexarns which are available and to carefully review how each of the' correct answers were
derived. Sectiori A questions aim to provide a broad coverage of the syllabus. and future
candidates shouJd aim to revise all areas of the Audit and Assurance syllabus, rather than_
attempting to question spot. .
Section A in the September 2019 examination included, but was not limited to) questions on the
following areas:
• Professional ethics and application of ACCA's Code of Ethics and Conduct
• Substantjve procedures including bank ar1d cash, share capital and inventory
• Audit finalisation and review
• ·Auditor's reports

@BPP Questions 137

The following questions are reviewed with the aim of giving future candidates an indication o_f the
t!Jpes of questions asked, guidance on de_aling with-exam q-uestions and to provide atechnical
debrief on ~he topics covered by the specific questions selected. Candidates are remfnded that
therewHLI;:>ea mix of application and knowledge questionsin Section A and it is imperative that
they ensure their knowledge of the International Standards on Auditing (ISAs), relevant financial
accounting and important oreos of the syllabus such as auditors' reports is at an appropriate
level. QuesUons mo!:J test specific details of examinable documents including fSAs, ACCA's Code
of Ethics and Conduct and the Corporate Governance Code, therefore candidates must ensure .
that they have studied these in sufficient depth. Candidates must also ensure that they have
studied all areas of the syllabus. The syllabus includes audit evidence learning outcomes relating
to a wide range -of specific items, an!:J of whkh ma!:J be examined.

220 You have been assigned to the audit of bank and cash for X Co. X Co has a number of
bank accounts and due to the nature of its business will hold a significant amount of cash
at head office at the year end .
. Which of the following audit procedures included in the audit programme will test for
EXISTENCE of bank and cash?
0 Agree a sample of accounts detailed on the bank confirmation letters to the trial
balance
0 Review all relevant bank statements to verify that the accounts are held under X Co
0 Attend the cash count at the !:lear end and reperform the count
0 Review the disclosure included in the financial statements to verify only bank accounts
per the bank letters are disclosed (2 marks)

221 One objective of the final overall review stage of the audit is to ensure that the evidence
gathered in the course of the audit supports the audit opinion.
Which of the following·questions, which are answered as part of the final review, support
this objective?
(1) Was the audit plan suitably modified to allow for changing circumstances?
(2) Has the audit firm's continued independence been considered?
(3) Have all deficiencies in internal control been communicated to management?
(4) Has work been performed in accordance with relevant auditing, legal and
professional standards?
0 1 and 4
0 1 and 2
0 2 and 3
0 3 and 4 {2 marks)

(Total.= 4 marks)

December 2019 (7 ·mins)·

Comments from the examining team (December 2019)
Section A ltwas very pleasing to see that once- again almost all candidates attempted all15
questions, across the three OT cases. Candidates preparing for future sessions are advised to
work through the past exams which are available and to- carefully review how each of the correct
answers were derived. Section A questions aim to provide a broad coverage of the syllabus, and
future candidates should ahn to revise all areas of the Audit and Assurance syllabus, rather than
attempting to question spot. Section A in the December 2019 examination included, but was not
limited to, questions on the following areas: ·

138 Audft and Assurance @aPP

• Prin.ciples of assurance
• Corporate Governonc_e ,
• . Substantive procedures including non-current assets
• Audit finalisation and review
. . . -

222 You are an audit managerV\Iorking for W 8. Co which has audited X Co fortf1e last seven
years. The board has decided that X Co should be listed on a stock exchange ~nd the
board has asked W 8 Co to advise the companl:J on hnw to become compliant with
corporate governance guidelines.
Which of the following are typical requirements contained within best practice corporate
governance guidelines? ·
(1) The remuneration committee should only consist of independent non;,.executive
directors
(2) The chief executive officer should be responsible for leadership of the board and
ensuring its effectiveness
(3) The non-executive directors should provide constructive challenge and strategic
guidance
(4) The audit committee's key role is appointing and liai~ing with the external auditor
0 1 and 3 only
0 2and 4only
0 1l 3 and 4
0 2, 3 and 4 (2 marks)

223 It is 1 July 20X5. You are arl audit supervisor of Y &Co and have been assigned
responsibility for completing. the detailed going concern testing for Z Co for the year ended
30 April 20X5. Z Co's audit should be finalised and the financial statements signed by 30
September 20X5. Management's assessment of Z Co's ability to·oonti.nue as a going
concern coversthe period to 30 November 20X5.
Which of the .following actions should Y & Co take-in :relation to Z Co's going concern
assessment? ·
0 Request that management extends the assessment period to 30 September 20X~
0 Request that. management extends the assessment p~riod to 30April 20X6
0 Perform additional audit procedures to confirm Z Co~s going concern status
0 Review management's assessment to 30 November 20X5 and only request that it is .
extended if it raises doubt that Z Co is a going concern (2 marks)

(Total = 4 marks)

March 2020 . (7 mins)

Comments from the examining team (March 2020)
It was very pleasing to see that once again almost all candidates attempted aii15 questions.·.
across the three OT cases. Candidates prepari_ng for future sessions are advi's~dto work through
the past exams which are available and to carefuii!:-J review how each of the correct answers were
derived. Section A questions aim to provide a broad coverage of the syllabus~- and future ·
candidates should aim to revise all areas of the AA syllabus, rather than a_tternpting to question
spot. .
Section A in the March 2020 examination included, but was not limited to, questions on the
following areas:

@BPP Questions 139

 Proft:)ssional ethics and application of ACCA's Code of Ethics and Condt.(ct
Substantive procedures including poy~bles and inventory
Audit finalisation and review
Auditor's reports

224 Which TWO of the following statements should be included in a written representation
letter? - ·

0 All tra{"lsactions have been recorded in the accountingrecords dnd are reflected in the-
finoncial'statements
0 Due to inherent limitations of the audit, there is a risk that some material misstatements
will not be detected
0 Professional judgement and scepticism have been exercised throughout the course of
the audit
0 Significant assumptions used in making accounting estimates are reasonable
(2 marks)

225 It is 1 July 20X5. You are an audit manager at X S Co, currently finalising the audit of Y Co
for the year ended 3i March 20X5. You are performing the final review in preparation for
signing the auditorts report. During the year one of the company's properties was revalued
by an independent expert valuer.
Which TWO of the following are audit procedures X S Co should perform in conducting
its overall review of the financial statements of Y Co?
0 Make an assessment of Y Co's ability to continue as a going concern
0 Design and perform analytical procedures to confirm the financial statements are
consistent with the auditor's understanding of the entity
0 Undertake money laundering identification procedures to reconfirm the identity of the
directorsofY Co-
D Assess the information obtained from the external expert in respe.ct of the propert!J
revaluation ·
0 Obtain and retain documentation to confirm the legal title of all non-current assets
D Reassess materiality to confirm whether it remains appropriate in the context of YCo's
final financial statements · · (2 marks)

(Total = '+ marks)

July 2020 (7 mins)

Comments from the examining team (July 2020)
It was very pleasing to see that once again almost all candidates attempted all15 questions.
across the three OT cases. Candidates preparing for future sessions are advised to work through
the past exams which are available and to care-Fully review .how each of the correct answers were
derived. Section A questions aim to provide a broad coverage of the syllabus, and future
candidates should aim to revise all areas of the AA syllabus; rather than attempting to question
spot.
Section A in the July 2020 examination included. but was not limit~d to, questions on the following
areas~

1'+0 Audit and Assurance \iJBPP

 Principles of assurance.
• ,_Substantive procedures including non-current assets, provisions OJid contingencies
G:oing concern
• Auditors' reports

226 It is 1 July 20X5. You are on audit supervisor and are condu~ting the year-end audit ·of X·
Co. You are currently undertaking the audit testing in relation to non-current assets. ·
Which TWO oft he following procedures would pr9vide substantive audit evidence in
respect of the COMPLETENESS assertion for plant and machinery?
0 For a sample of assets held in the factory and_ warehouse record the asset identity
number as marked on the asset and trace back to the relevant entry in the non-current
.' asset register
0 Review board minutes to confirm that all major items of capital expenditure are noted
and have been authorised
0 Trace a sample of costs recognised in the repairs and maintenance account to invoices
and determine the nature of the expenditure and assess whether any capitol items
hove been expensed
0 For a sample of fully depreciated assets, enquire with management to confirm whether
.~ the assets are still being used in the operations ofX Co (2 .marks) .

227 It is 1 July 20X5. A &Co are the external auditors of B Co for the year ended 31 March
20X5. B Co has sourced external finance for the first time during the year. The draft
financial statements show non-current liabilities in relation to loon finance of $1.2 million.
Which of the following procedures should be performed to confirm the loan liability
balance at the year end?
(1) Review directors' board minutes for evidence of approval of the external finance
(2) Agree the loan payments recorded in the general ledger to the bank statement to
confirm capitol has been repaid
(3) Agree the year-end loan liability balanqe to the bonk confirmation Jetter
I" (4) Compare loan liabilities at the end of the year to balances in the previous year
~;J

0 1 and2
0 3 and 4 only
!/
0 1, 3 and 4
0 2 and 3 (2 marks)

(Totol = 4 marks)

@sPP Questions 141

11t2 Audit and Assurance
@aPP
Answers
11tlt Audit and Assurance
@aPP
-I_

Section A Questions
BJMCo
,-The correct answer-is! The external audit is an exercise carried out by auditors in order to
give an opinion on whether the financial statements-ofa company are fplrly presented.
·The external audit is carried out by external auditors, who are independent of the company
so that they can provide an independent opinion oi1 whether the company's fipancial
statements are prepared, in all material respects, in accordance with an applicable
financial reporting framework. The principal aim .of the audit is not in relation to the control
system in place or to identify othe~ areas of defiqiency, although deficiencies and
recommendations may be suggested by the external auditors as a by-product of the
external audit in a report to management at the conclusion of the audit.
2 The correct answer is: YHT 8- Co should perform specific audit procedures to identify
possible non-compliance.
ISA 250 (Revised) distinguishes between regulations which have a direct effect on the
financialstatements (in the sense of directly affecting the determination of balances) and
those which do not have a direct effect but can still have a material effect (such as an
operating licence).
The hygiene regulations do not have a direct effect but they may have a material effect.
The external auditor must therefore perform audit procedures to help identify any non-
compliance which might. have a material effect on the financial statements, ie any
breaches of the hygiene regulations that could result in material fines or restaurant
closures.
3 The correct answer is: The determination of materiality
This review engagement is an example of an assurance engagement. There are five
elements to an assurance engagement: criteria, report, evidence, subject matter and
three---party relationship (CREST) (IFAC; 2016),
4 The correct answer is:

Level of assurance Report wording·

. Limited Negative

A review engagement, such as a review of compliance with hygiene regulations, is an

assurance engagement where the practitioner carries out limited procedures onBJM's
internal controls relating to hygiene compliance.
As the procedures are limited, the practitioner Will gain only enough evidence to provide a
negative expression of opinion. This means the practitioner gives assurance that nothing
has come tq_ their attention which indicates that BJM's internal controls relating to hygiene
compliance are not, in all material respects, compliant with national regulation. ·

@BPP Answers 1'+5

5 The correct a'nswer is: The lucrative nature of the review engagement may make the·
external audit team less inc;Uned to require management to make adjustments or to issue a
modified audit opinion, forfear of losing the review engagement.
a
Th-s fees from the review engagement are likely to be very lucrative, so there is risk that ·
YHT & Co will not seek adjustments during the external audit process forfear of upsetting
the board of BJM and losing the 'review engagement work.
The provision of non;..audit services to unlisted audit clients is not specificaliy prohibited.
While YHT & Co should be alert to self-review threats, in this case it seems unlikely: the
scenario states that the review engagement does not include the provision of accounting
advice or the preparation of figures ir1 the financial statements. A firm is not required to
turn down work when a 15% limit is exceeded. Where fee income from a listed audit client is
expected to exceed 15% of the audit firm's total fee revenue, this fact should be disclosed to
those charged with governance and a separate review may be required (ACCA Code of
Ethics and Conduct! para. R410.4-6). However. the 15% fee cap is not a major concern to
YHT 8 Co in this instance because BJM is unlisted.

Tangerine Tech Co
6 The correct answer is: 1 and 3 only
The board as a whole should take on the responsibility for liaising with shareholders, not
just the chair. (The board should state in the annual report the steps it has taken to ensure
that the members of the board, and in particular the non-executive directors, develop an
understanding of the views of the major shareholders about the company (FRC UK
Corporate Governance Code: Introduction).)
As the chair and one of the NEDs are former executive directors they were previously
employed blJ the company and as a result this raises questions about their independence.
Independent non-executive directors should be appointed to the board of Tangerine.
Tangerine is not required to have an internal. audit function (however, where there is no
internal audit function, the audit committee is required annually to constder the need for
one).
7 The correct answer is:

Deficiency 1 Deficiency 2

The directors should. be subject to annual At least 50% of the board, excluding the ·
re-election chair, must be cqmprised of non-executive
directors whom the board considers to be
independent

The directors should be subject to annual re-election by the shareholders (FRC UK

Corporate Governance Code: para. 18). They are' re-elected by the shareholders, not the
chair.
There should be an appropriate balance of executives and NEDs to ensure that the board
makes the correct objective decisions. At least half of the board, excluding the chair, should
be comprised of NEDs whom the board considers to be- independent (FRC UK Corporate
Governance Code: para. 11).
8 The correct answer is: 2 only
The audit committee is supposed to be made up of independent NEDs. The chair should not
be a member of the audit committee (FRC UK Corporate Governance Code: para. 24).
All .four members of the audit committee were previously involved in sales and production-
related roles. At least one member of the audit committee should have recent and relevant
financial expBrience (FRC UK Corporate.Governance Code: para. 24~.

11t6 Audit and Assurance @aPP

9 The correctanswer·i~: -

. To review internal controls annually To ~eport on intern~l controls to

shareholders
Yes Yes

• The dir~ctors are responsi!Jie forimplementing and monitoring.the-company's system of.

internal controL An annual assessment of internal control should be .conducted to cqnffrm
that the board has con-sidered all significant aspects of internqlcontrol. The directors
should report on its review as part of the annual report (FRC UK Corporate Governance
Code: para. 29). . .

10 The correct answer is: 1 and3 ooly

The board is responsible for a company's internal control. The establishment of an internal
audit function is one of the practical ways in which the board can meet its responsibility to
monitor and review internal controls. However. as with all keu decisions, costs versus
benefits will be assessed too.
The directors are responsible for the prevention and detection of fraud. Whilst the internal
audit function may assist the directors in this, the directors retain the ultimate ·
responsibilitu,

Orange
11 The correct answers are:
• The audit engagement partner has been asked to attend meetings with potential
investors. - Yes
Currant & Co has been offered the opportunity to provide other services to Orange
Financials. - No
Currant &Co has been asked to produce the financial statements of Orange Financials•
._No ·

• There is a suggestionthat a partner who previouslu worked for Orange Financials

shoulq be the review partner. - No. ·
Risk (1) represents an advocacy threat as·this may be interpreted as the audit firm
promoting investment in Orange Finantials Co.
Risk (2) Currant 8 Co would like to conduct other assignments for Orange Financials Co.
This gives rise to a potential self-interest threat as the total fees generated from this clien~
may form a substantial proportion of the fees of the firm which may have an impact on the
finn's objectivity.
Risk (3) Currant 8- Co have been asked to produce the financial statements of Orange _
Financials Co.
This represents a possible self-review threat as Currant & Co would be both·~eparing and
auditing the same information. _ .
Risk (4) The assistant finance director of Orange Financiols Co has joined Currant 8 Co as
a partner and it has been suggested that he should be the independent review partner.
This represents a self-review threat as the same individual would be responsible for
reviewing the audit of financial statements which he has been involved in· preparing.
12 The correct answers are:
l'ntimidation
• - Self-interest
This gives rise to onintimidation threat as the audit team may feel under pressure not to
perforrn a thorough audit in order to comply with this request. There is also a self-interest
threat as Currant & Co will be keen to win the additional work.

@BPP Answers 1Lt7

13 The correct answer is:

(1) Weekend away (2) Loan at reduced rates

Not accepted· Not accepted

· As the .value ofthe hospitolit~ is unlike!~ to be inconsequential no safeguards would be

adequate to reduce.the threat to an acceptable level. The offer of the weekend away ..
should be declined politely ..
If the loan had been made at normal.commercial rates then the senior would be able to
accept without any consequences for independence.
In this case as the terms are preferential the loan must be declined.
14 The correct answer is: Total fees from Orange Fiti.ancials make up more than 15% of
Currant S Co,s total fees for the second consecutive ~ear.
The mandatory safeguards appi!:J to public interest entit!d audits. therefore would be applied
to the audit of Orange Financials Co when it is listed.
15 The correct answers are:
• The audit committee should be made up of independent non-executive directors -True
• The audit committee normally appoints the external auditors at the AGM- False
* The audit committee monitors and reviews the internal audit function -True
• The audit committee sets out the scope of the external auditor,s work- False
The audit committee makes recommendations about the appointment of external auditors
but the shareholders are responsible for appointing them at the AGM.
The scope of the external auditor's work is determined by the audit engagement partner on
the basis of the requirements of auditing standards. The scope of the audit ma~ be
discussed with the audit conimittee but the audit committee does not set out the scope of
the work as the audit.must be an independent exercise.'

.I ® I Videos can be viewed by accessing bJOUr ebook version on VitaiSource.

SGCC
16 The correct answer is: SGCC should appoint a hew chief executive officer or bo01~d chair.
Corporate governance codes indicate that there should be a clear division of
responsibilities between running the board of directors and running the company,s
business ?O that no individual has unfettered powers of decision (FRC UK. Corporate
Governance Code: Principle G).
17 The correct answer is: SGCC should appoint three new non-executive directors to the
board.
Corporate governance codes indicate that the board should have a balance of executive
and non-executive directors. SGCC currently has five executive and two non-executive
directors arid should therefore appoint a further three non-executive directors in order to
balance the board. This is so that at least half the board, excluding the Chair, will be non-
executive directors whom the board considers to be independent (FRC UK Corporate
Governance Code: para. 11).

11+8 Audit and Assurance @app·

18 ·. The CQrrect answers are:-
- . .. - - ...
Once SGCC has an audit committee: and an internaraudit department, the head of the
internal audit department should report to the auditcomm!ttee.
SGCC should not rely on the external audit to inform them ofdefidericiesin internal
controls.
· SGCC should establish an audit committee with o.t least three independehtnon,..executive
, directors (FRC UK Corporate Governance Code: para. 2'+)~ · ·
Listed companies should review the need for dn internal audit departmel}t at least
annually. They are not automatically required to have an internal audit department(F-RC
UK Corporate Governance Code: para. 25).

19 The correct answer is: Taking respoilsibilityforthe implementation of a new receivables

ledger system
The internol audit function is a review and monitoring function. It should not take
operational responsibility for any part of the accounting or information systems.
20 The correct answers are:
Greater availability of specialist industry skills as required "'" Outsourced
Flexibility regarding staff numbers in response to changing circumstances - Outsourced
Elimination of direct training costs - Outsourced
• Development of skills increasing the human resource strength of the entit\;J - Employed
Where the internal audit department is outsourced to an external finn, SGCC is likely to
benefit from specialist industry skills and will benefit from the greater flexibility in staffing
numbers as the team can be modified dependihg on the workload at a particular point in
time. SGCC will also be shielded from the direct costs of training staff. However. If the staff
are employed by SGCC, this increases the skills held within the business and therefore
increases the value of the workforce which is a strength of the company.

@sPP Answers 1Lt9

Doge&.co_.
21 The correcfqnswers are:

An audit isan exampl_e of

this t!:jpe of assurance REASONABLE
engagement

It provides a lowertevel of
·LIMITED
assurance

Judgement is required to
determine the
appropriate procedures BOTH
required to obtain this
level of assurance

A negative form of
LIMITED
conclusion is provided
......•...· ,._,.. _,.,......
_
.-~- ..... --..... ~.--.-.·-···--· ....... , ..,., ..........,"4-'"'""""

A reasonable assurance provides a high but not absolute level of assurance and therefore
the external audit is a key example of this.
Limited assurance engagements provide a lower level of assurance than reasonable
assurance engagements.
Although the nature, timing and extent of the procedures carried out in a limited assurance
engagement would be limited compared to those for a reasonable assurance engagement,
both require planning of the procedures to obtain a level of assurance which is sufficient in
the practitioner's professiona I judgement.
The conclusion formed in any report relating to a reasonable assurance engagement would
usually be expressed in a positive form whereas a negative form would be typical of a
limited assurance engagement.
22 The correct answers are:
• Enquire of management as to large and unusual items within the financial statements
• Perform analytical procedures to understand the relationship between items within the
financial statements
Limited assurance engagements provide a lower level of assurance and the conclusions
convey whether a matter has come to the practitioner's attention. to -cau~e the practitioner
·to believe the subject matter hi formation is materially misstated. Both enquiry of
management and performing analytical procedures are appropriate tests to carry out as
part of a limited assurance review.
Performing tests of controls to understand the controls that are operating within the
company and performing extensive test of details over all balances are tests which would
be carried out only as part of on audit. not a limited assurance engagement.
23 The correct answer is: ThE?re must be a three-party relationship
One of the key elements.of an assurance engagement is the three-party relationship with
an intended user, a responsible party and a practitioner. The practitioner is the reviewer of
the subject matter and who provides assurance, in this case Doge S Co.
The intended users are those who use the subject matter to make economic decisions and
the responsible party is the party responsible for preparing the subject matter. However. in
this instance. the directors of Trimp Transport Co are both the responsible party and the
user therefore there is no three-party relationship.

150 Audit and Assurance @aPP

 24 . The correct answers are:
The risk of Doge & Co assuming management ·responsibility would pe reduced bl:J using
a separate team of staff who are not involved in the.ex:ternal_eu~it. ~ False·
; Doge S Co should consider wheth~r Keegan Co. has appolht~d ~-responsible official to
overse_e internalaudit activities.-: True . . .. .
• The materiality.of the financial statement amounts affected by the internal audit service
should be colisidere,d when evakioting the significance of any _self-reviewthreat. -True
Using a separate team of staff may rqduce any potential self-review threat but would not
. reduce the risk of Doge & Co taking on management responsibility,therefore statement 1 is
false. The ACCA Code of Ethics and Conduct(the Code)_prohlbits a firm or network firm
from assuming management responsibility for an audit client (R600.7) and also states that
'performing a significant part of tne client•s internal audit activities increases the possibility
that firm or·network firm personnel providing internal audit services will assume a
management responsibility'. (R605.4 A1)
In line with the Code. both statements 2 and 3 are true, stating:
"When providing an internai audit service to an audit client, the firm shall be·satisfied that
the client designates an appropriate and competent resource, preferably within senior
management, to:
Be responsible at all times for internal audit activities; and
• Acknowledge responsibility for designing, implementing, monitoring and maintaining
internal control' (R605.4)
'Factors that are relevant in evaluating the level of such a self-review threat include:
• The materiality of the related financial statement amounts
• The risk of misstatement of the assertions related to those financial statement amounts
• The degree of reliance that the audit t<;:lamwill place on the work of the internal audit
service, includfng in the course of an external audit: (R605.4 A4)
25 The correct answer is: Catt & Co had. used audit sampling in performrng tests of details
In this requirement, further information is presented in addition to the main scenario.
·Where this type of information is provided, candidates must ensure that they read it
carefully before attempting the question.
This question requires candidates to apply their knowledge, considering the limitations of
external audit. The external audit provides reasonable assurance that the financial
statements are free from material misstatement due to inherent limitations which result in
the auditor forming an opinion on evidence that is persuasive rather than conclusive.
The auditor will not test 100% of all balances and transactions therefore audit sampling is
considered an inherent limitation. The other potential options in this question represent
detection risks orfailure to carr~ out work proper!~ which could have. been avoided.

@aPP Answers 151

KamariCo
26 · The correct answers are:

Audit engagements always provide reasonable

assurance
TRUE

True an¢Hair view means the financial statements

contain no misstatements
FALSE

Most non-audit engagements provide reasonable

assurance
FALSE

There are four elements to an assurance engagement FALSE·

Audits are required byiSAs to provide reasonable assurance but most non audit
engagements only provide limited assurance. The concept of true and fair indicates that
the financial statements contain no material misstatements, although immaterial ones may
remain. There are five (not four) prescribed elements to an assurance engagement, these
. are criteria, report, evidence, subject matter and three-party relationship (CREST).
27 The correct answer is: Limited assurance will be provided by the review of the financial
forecasts
Thira S Co could accept both engagements with any necessary ethical safeguards in
place, The projections are looking into the future and so oni!:J limited assurance can be
given.
When reviewing the projections, Thira S Co will be acting as the practitioner. The
responsible party would be the directors who have put the projections together and the
intended user would be the bank.
Only the external audit would be conducted under ISAs. The projections review may be
conducted under a~ternative standards designed for that purpose.
28 The correct answers are:
It could create a self-review threat during the external audit
• The internal audit function would have less understanding of the business
Having internal audit services provided by a third-party firm means that the team can be
picked from a wide range of people and skill sets. However, as they only visit the client
periodicplly, they would not understand the client business- as well as a team that works
there full tirne. -
· If the service is outsourced to the client's current external audit provider, a self-review·
threat is created as there is an expectation that the external auditor will place reliance on
the work performed by the internal auditor. This is sometimes incorrectly construed .as the
audit firm representing the client, creating some sort ofadvocacy threat. which.is not true.

29 The correct answers are:

Perform analytical review on previous year financial statements to ensure the forecasts
are consistent With past trends
• Enquire of Komori Co's directors as to any assumptions which have been made in
preparing the forecasts ·
The review ofthe forecasts will require discussions with management to understand the:
assumptions they have made and the use of analytical procedures to verify that trends
followed are reasonable. ·

30 The correc~ answer is: A financial audit

As sales orders and sales invoice processing are a part of the financial reporting process,
this is a financial audit.

152 Audit arid Assurance @_BPP

 PART B: PLANNING AND RISK ASSESSMENT

Sec.tion ~ Que~tions
.Bridgford
31 ·The correct answers are:
• The availability of the client's data··and staff (including internal audit) -Audit strategy
document ·
• The allocation of responsibility for specific audit procedures to audit team members-
Detailed audit plan
• The audit procedures to be undertaken for each area of the financial statements-
Detailed audit plan
The potential for using automated tools and techniques to gather evidence- Audit
strategy document
The audit strategy includes areas such as identifying the characteristics of the
engagement, the reporting objectives. timing and nature of communications, knowledge
gained from previous audits and during the preliminary risk assessments and the nature.
timing and extent of resources in terms of using appropriate personnel.
The availability of the client's data and staff (including internal audit) and the potential for
using CAATs are included in the characteristics of the engagement.
The auditor will take the overall audit strategy and convert it into a more detailed audit
plan. This will include the allocation of work to audit team members and the audit
procedures to be undertaken for each area of the financial statements.
32 The correct answeris: Performance materialitu refers to the amounts set bbl the auditor at
higher than the materiality level for particular classes ()f transactrons, account balances or
disclosures where the materiality level might otherwise mean that such items are not
tested.
The auditor sets performance materiality at on amount which is lower than the materiality
level for the financial statements as a whole. This is so that the impact of misstatements for
particular classes of transactions, account balances or disclosures will be considered even
if they are not material to the financial statements as a whole (ISA 320).
33 The correct answer is: Perform a trend analysis on current year and prior year monthly
revenue, to identify whether revenue is overstated as a result of fraud or error
An overstatement of revenue would result in a reduction, not an increase in the receivables
collection period.
. 34 The correct answer is: That the finanoiai statements include balances due from credit
customeFS which are not recoverable
The audit risk r~lates to the concern about receivables taking 127 days to settle their.
· invoices rather than the permitted 90 daus (3-month credit terms), and that some
customers are refusing to pa~J for products duel to the reliability issues encountered. This
means that the fina.nclal statements may include balances from receivables that are not
recoverable. This would result in an overstotemc-mt of assets, and gives· rise to concerns
about the valuation of receivobles.
Despite the worsening working capital position indicated by the increase in the receivables
collection period, on its own it is unlikely to give rise to doubts over Bridgford's going
concern status. ·

@aPP Answers 153

35 The correct answers-are:
.. - .. ·-

DetBrmine how often inventory coynts are performed and the leyel of corrections
required to the inventory ·stJstem _ ·
Test the bperatfon of the inventory- system using_CAATs
The _risk which has been identified relates to inventory quantities. Testing the operation of
the inventory system usi.ng CAATs and reviewing the level of corrections required to the
sbJstem would.provide evidence regarding the operation of the system.used to record the
number of units of inventory held. ·
Reviewing purchase requisitions is a test to determine whether authorisation controls are in
place to prevent orders of unnecessarbJ items. The comparison of cost cmd net reali:sable
value is a valid audit procedure; however, it provides evidence regarding the valuation of
inventory rather than quantity.

EuKaRe
36 The correct answers are:

Detection risk will increase due to the increased risk of

cash donations being misappropriated and revenue FALSE
being overstated.

Inherent risk will increase as the nature of EuKaRe's

transactions means that income may be misstated either TRUE
in error or deliberately

Control risk will increase as internal controls may be

weak due to the large number of volunteers used by FALSE
EuKaRe

Business risk will increase due to the level of volunteers

FALSE
used by EuKaRe
···········

Inherent risk is the. risk that an item will b(3 misstated due to the characteristics of that item.
High levels of income in the form of cash increase the risk that income mabl be misstated
either in error or deliberately. In addition. there may be no other independent source to
show what the income should be. For example in this instance there would notbe anbJ
formal record to support the majority of the takings (eg invoice or receipt) collected in the
buckets.
Detection risk is the risk that the auditor's substantive procedures will. not detect material
misstatements. This is likely to increase but the principal risk is of ·revE)nue being
understated (since some of it may be stolen/misappropriated). ·
Control risk is the risk that EuKaRe's internal controls will not prevenfor detect
misstatements. Howeverl the explancition.statesthat this will be highdi.Je to the reliance on
volunteers rather than due to transactions being In the form of cash.
Business risk is the risk thdt the busines~ will not achieve its objectives.cmd is not an element
of audit risk. ·

151t Audit and Assurance @aPP

37 The correct qnswers _a.re:
• The Fisk assessment will help the audit team gain an UQdBrstanding ofthe entity for
audit purposes- True · · . . .
·
The risk ass~ssn1ent will
enable the audit senior to produce 6.n dccumte ·budget fm the.
audit assign~en~ : F.alse · · .
The rtsk assessment will form the basis of the audit strategy and toe detailed audit plan
-True ·
Once the risks hove been as-sessed, TEY 8 Co can select audittearri members with
sufficient skill and experience· to maximise the chance of those risks beipg addressed-.
True ·
Whilst an audit firm is acommercial and profit-making organisation, 1SA'315 (Revised) is
not concerned with the auditorls budget but rather with ensuring that the auditor has a
sufficient understanding of the business. This is so that thei:J can select appropriate audit
procedures in order to minimise the risk of undetected material misstatements,
38 The correct answer is: Obtain a breakdown of the income recorded from the cash that was
collected in buckets, and vouch a sample of entries back to the volunteer in order to
determine which volunteer collected the relevant donations
This will provide evidence of the occurrence of income, but the ke!:J risk here is completeness
of income.

39 The auditor is not responsible for the [P-;~~;~-t~~~J of fraud or error.

.
However, they are responsible for obtaining 1....~=-~-~.?.~~~-~~= ·~-~~-~.:..?. ~ ~·=.J that the financial
..
statements are free from material misstatement whether caused by fraud or error.
The directors, or rather here the trustees, are ultimatell:J responsible for the prevention and
detection of fraud and error within EuKaRe. The auditor needs to obtain reasonable
assurance that the· financial statements are not materially misstated due to fraud or error.
40 The correct answers are:
EuKaRe's finance department relies on volunteers who mold not have accounts
experience.
Understaffing in the financ.e department at certain times is due to the ad hoc nature of
volunteer working hours. - ·
The fact that EuKaRe has a detailed constitution which explains how the charity's income •
can be spent is a positive influence on the control environment, as it indicates that there is
a benchmark in place against which the suitability of EuKaRe's expenditure can be
measured.
The fact that the income of EuKaRe is primaril!d cash increases 1nherent risk but does not
automatically mean that the control envkonment is weak.

South
41 The correct answers are:·
To ensure a·ppropriate attention is devoted _to important areas of the oudJt
To· assist in the- co.:.ordination of work done by-any auditor's experts
The main aim of planning is rtot to ensure the audit is completed within budget restraints,
but to ensure that it is carried out in an effe_ctive manner as described by the other ·
statements (I SA 300). ·
The determination of whether the audit engagement is ethicall!d acceptable should hove
been done before the planning stage, and is not therefore ari objective of planning.

@BPP Answers 155

42 The correct answers are:

Procedure Assertion

Review financial staternent notes I· Presentation

Read minutes of board meetings for
evidence of share issues
I Completeness

Recalculate the closing balance on the Accuracy, valuation and allocation

share capital account

Review Memorandum and Articles of Existence

Association and compare their
requirements with issued share capital

Comparing issued share capital with the Memorandum and Articles of Associatior_l relates
to existence because 'equity' that is not issued pursuant to those documents does not
legally exist.
43 The correct answer is: Inspect invoices capitalised within the cost of the new till system to
determine whether they are directly attributable to the cost of the new till system
The audit risk relates to the concern that South may have capitalised costs which are
revenue in nature. As such the appropriate response is to review the invoices which have
been capitalised not just for their amount but also to determine the nature of the expense
to which the invoice relates.

44 The correct answers are:

Perform analytical procedures by comparing daily/weekly sales by store with both the
prior year and with expectations, in order to determine whether any unusual patterns
have occurred following the installation of the new system
Obtain a copy of the training manual relating to the new till S~:Jstern and discuss with
directors the extent of training staff have received on the new Sl:jstem
The audit l'lsk relates to the concern that the S!JStem may not be reliablej that not all
invoices have been recorded and that stoff may not be familiar with the system.
Vouching the revenue per the system back to till receipts is not a valid response to the audit
risk. Given that one concern is that revenue is understated,testing should befrom the till
recefpts to the system to ensure that all sales have been recorded. Similarly, agreeing
revenue from till receipts to the cashbook is also the wrong way around- this test should
begin with the cashbook in order to test for completeness.

45 The correct answers are:

• To assess whether a provision for customer compensation is required in South's financial
statements
To determine whether disclosure of the nature and financial effect of the legal claim is
required in Southts financial statements
The concern over deficiencies in Southts internal.controls is. a valid concern. but the review
of legal correspondence is unlikely to be on appropriate response to this as the auditor
would need to review intern a·! controls. The impact on. the r-eputation of South is also a valid
concern as it could have implications for the viability of. the company but again it is
unlikely that information specifically relating to this would be available in the legal
correspondence reviewed.

156 Audit and Assurance @aPP

 Mason
- ·46.. The correct answer is: Revenue may. be overstated if it is recognised accb~ding to the
con-tract date rather than over the. relevant accounting period ..- _·
There is a risk that the revenue for_thc{()nnual fees is not properly recognised in the period
to whichifrek:ites, leading to revenue (aqd de.ferred income) being materially misstated in
the. fingncial statements. Revenue should be recognised according to the accoljnting _
period in which the rela!ed performar~ce obligations of the contract are met.-
47 The correct answers are:
Obtain a breakdown of the capitalised costs and agree a sample of items to invoices to
_determine the nature of the expen~iture
Inspect management's review of whether the value of the aircraft has been impaired
The auditor should obtain a breakdown.of the capitalised costs and vouch them back to
invoices to determine whether they relate to a capital or revenue expense. They can then
determine whether they have been recognised appropriately in accordance with lAS i6
Property, Plant and Equipment.
The large amount of refitting workcould also indicate that something is wrong with the
aircraft and that their value has become impaired.
48 The correct answer is: Mason's going concern status ma\d be at risk if the contract is not
renewed
The key risk here is going concern. It is possible that the company will lose one of onl\d four
customers. In addition, a bank loan is being renegotiated and it is expected that costs will
increase. This may threaten Mason's ability to continue as a going concern. ·
49 The correct answers are:
Review Mason's contracts with its other three customers to determine whether they
contain a break clause, in order to determine the likelihood of losing any further
contracts to other aircraft providers
Review the short--term and long-term funding facilities which are available to Mason
The main risk here is to the going concern assumption~ if Mason loses other key sources of
· revenue .. The auditor would therefore want to consider whether this is likely, by reviewing
the other contracts. If, as appears likely;, they do, then Mason would need a source of
funding to survive.
It would not be appropriate to contact an audit client's custorner directl\d .in relation to a
matter such as this. · -
The issue of disclosure would only need to be considered once the going concern status of
Mason had been determined.
50 The correct answers are:
Non-current assets - Not audit concern
Inventory,.. Audit concern
Completeness - Not audit concern
Accuracy, valuation and allocation '- Audit concern
·Specialist equipment has been removed from the aircraft and is now included in inventory.
lnventoryshould be valued at the lower of cost and net realis.oble value. not atarnorti$ed
cost. The foot that the equipment has been repiClced suggests that its net realisable value
is lower than its cost. This may mean that inventory is overstated ln the financial
statements.

J
8
e
@BPP Answers 157
Severn
51 The correct answers are:
'.

The proposed fee for the initial audit of Severn Co INCLUDE

, ...............

A descripti~m of Rivers S Co, including the curriculum . INCLUDE

· ..
vitae of key staff likely to be assigned to the client

Overall level of materiality to be used in the audit EXCLUDE

A summary of potential other services Rivers & Co could

INCLUDE
f provide to Severn Co

The materialit~ level used is included in the audit plan. not the audit tender document. The
proposed fee is a critical part of the tender, as is a description of the firm and the key
personnel to be associated with Severn.
While there will be limits associated with what other services can be offered to Severn (as it
is a listed entity)~ it would still be appropriate for the firm to list the services it offers,
tailored to areas where it might be possible to offer services, as this might be a critical
factor for Severn.
52 The correct answers are:
• The firm is independent of the potential client
• The firm has the appropriate resources to conduct the audit of the potential client
These two issues are important-when tendering for any audit, but particularly in this case,
where Severn Co would represent a major client, and therefore self-interest issues might
apply (for instance, the firm might consider it would become over-reliant on the fee).
In addition, given the significance of Severn Co to Rivers S Co, it is particularly important
to consider whether the firm has the resources (eg number of audit staff available at the
appropriate time of year) to provide this audit service.
While the ·existence of preconditions of audit is an essential part of accepting an audit, in
this instance the firm has already identified that the company applies an applicable ·
financial reporting framework, acknowledges its responsibilities and is prepared to confirm
·this in writing, so this is of less significance to consider prior to tendering in this
circumstance.
While the issue. of access to working papers might influence the audit approach in the first
year and hence-? impact on budgeting and fee s~tting, it is not a reason not to ter'lder) so
again is less important to consider than items 1 and 2.

158 Audit and Assurance .@BPP

53 Thecqm3ct answer is:· A reply from the outgo.ing auditors stating that they declined to seek
reappointment to thefaudifof Severn Co due to a di$agreementoveraccounting policies
This would imply a-l.ack of· integrity· on the part of the directqrwho asserted thefirrn:had
riot been re-eiected due to familiarity issues. Dfsagree!llent over accounting· policies . .
suggests the opposite of familiarity risk, which was the reason the company gave. the firm
for.the change in auditors. It also raises the threat of possible future intimidation, if-there.
mabfbe disagreementscpn.cerningaccounting policy. It is even possible that the company
has deliberately asked a relatively small fi_rm to te.nder in order i:o hcive more sway over"
them. · - ··
It is not:necessary to have an engagement letter set up prior to acceptance, although this
should be dealt with soon after acceptance.
Although the ACCA Code of Ethics and Conduct contains a 15% benchmark in relation to
fees from one audit client, it recommends safeguards which could be implemented to
rnitigate the threat, and the firm could actively seek other clients to replace the lost client
and hence lower the proportion represented by Severn Co (ACCA Code of Ethics and
Conduct: para.· 41 O.A3).
Similarly, although the apparent lack of resources in March is an issue, it is an issue that
the firm may be able to work around, by negotiating different audit timetables with other
clients~ or by coming to a different arrangement with Severn Co. It is not a reason to
automatically decline.
54 The correct answers are:
• Scope of the audit ""Include in engagement letter
• Responsibilities of management of Severn Co -Include in engagement letter·
• Timetable for the provision of accounting information by Severn Co - Do not include in
engagement letter
• Fees and billing arrangements- Do not include in engagement letter
The scope of the audit and the responsibilities of Severn Co's management must be
included in the engagement letter. The remaining options may be included, but they are
not mandatory elements according to ISA 210 (ISA 210) ..
r··:~ . . . . . . . . . . . . . . . . . . -.. . ········-··--·-------·-···-----~----

55 setore accepting the audit of Severn Co, Rivers 8 Co should obtain references concernin~
1
····-··--..··--·--···---·--1 . . .
. .
~-~-~ ?.~!.:_~:~.~~ .J . Once the audit .has been accepted, then Rivers &Co should begin to

1... ~~-.~~~~--~-~,~---~-=~~=~-·~-~--~-~-~~~:...~.:~_:..1·
References concerning the direc_tors should be obtained before the ehgagement is
accepted. The letter of engagement is then submitted after acceptance but before.
beginning to perform procedures.

·Goofy Co
56 The correct answers are:
InfOrm the audit committees of both Goofy and Mickey of the potential conflict of
inte.rest and obtain their consent to act for both parties
Prevent unauthorised physical access to the information relating to both company
audits_
The management of both Goofy and Mickey should be informed and their consent
obtained. ' ·
Separate audit teams should be used including audit partners and independer1t review
partners.
Confidentiality agreements should be signed by NAB 8 Co's staff, not by the client.

@BPP Answers 159

57 The correct answers are:
• Audit engagement partner hasbeen In the position forsix years - Familiarity
• · Audit engagement partner's daughter works for Goofy- Familiarity
• Audit engagement partner's daughter's bonus would be in the form of shares,.. Self-
interest
• 5% bonus offered if audit is completed three weeks earlier than last year.,. Self-interest
The long association of the audit engagement partner with Goofy represents a familiarity
threat as she may not maintain professional scepticism and objectivity. Simtlorly the audit
engagement partner's daughter being emplo!::Jed by Goof!::! is also a familiarity threat.
although there would not be a need for additional safeguards as a warehouse manager is
unlikely to influence the financial statements.
A self-interest threat arises from the financial interest in Goofy which the audit
engagement partner's daughter will receive if she is awarded a bonus. As on immediate
family member of the partner this creates an indirect interest in a client which is not
permitted by the ACCA (ACCA Code of Ethics and Conduct: para. R510.4). ·
A bonus relating to the audit.being completed three weeks earlier than last year creates a
self-interest threat. as there is a danger NAB 8 Co will be less thorough in order to achieve
the deadline and not risk losing the client as a result of not meeting it.
58 The correct answers are:

Order Procedure

(3) Ensure that the existing auditor's

resignation has been properly
conducted

(1) Communicate with Mickey's existing

auditors

~<'+_)----~------1 Submit an engagement letter to

Mickey's management

(2)
J Perform client screening procedures,
including an assessment of Mickey's
risk profile

NAB & Co should contact the existing auditor before accepting nomination, in order to firid
out whether there are any reasons behind Mickey's decision to change its auditors about
which NAB & Co should be aware. Once this is done, client screening must be performed.
Ensuring that the existing auditor's resignation has been properly conducted and issuing
an eng.agement letter are procedures which should be taken after accepting. nomination.
59 The correct answer is: Management's responsibility to prevent and detect fraud
Although management is responsible for the prevention and detection of fraud, this is not
one of the matters included in the agreement obtained by the auditors to establish that the
preconditions of an audit exist.

160 Audit arid Assurance @aPP

60 The correct answers are;

The auditor ~he right of OCCf~SS -to the pooks~ records

company

The auditor has the right to be heard at general meetings

TRUE
on matters relating to the· audit

The auditor is appointed by, arid answerable to, those

-FALSE
charged with governance of the company

auditor can be removed by a simple oral resolution in

FALSE
line with the common law

Carlise
6i The correct answers are:
• Update docurnentation relating to Carlise's accounting systems which has been
prepared in prior year audits. - Interim audit
• Obtain third-party confirmations relating to receivables, payables and cash at bank. -
Final audit
• Review the directors' assessment of whether Carlise is a going concern. Consider
whether the assumptions made by the directors are reasonable and whether it is
appropriate to prepare the accounts on the going concern basis.- Final audit
• Perform preliminary analytical procedures in order to identify any major changes in the
business or unexpected trends. - Interim audi_t
Audit procedures performed during an interim audit are likely to include analytical
procedures, tests of controls, updating risk assessments and substantive testing of
transactions which have occurred during the first part of the ~ear. ·
When it comes to the final audit a trial-balance or draft set of financial statements will be
available, so detailed substantive testing of l:Jear-end balances will be conducted. This isin
addition to completing the tests ofcontrols and substantive procedures started during the
interim audit.

62 The correct answer is: 1, 2 and 3

All of the factors should be taken into account.
63 The correct answer is: Whether the work performed by the internal audit department
relates to specific audit assertions over which UYE S Co has concerns
Where the external auditor plans to rely on the work of the internal audit department. they
must ensure that the internal auditors' work has been performed to a good standard .
. However, most important is the requirement that the work performed by the·lnt:ernal audit
department must be relevant to the evidence the external auditor is trying t~ather.

@BPP Answers 161

64 The correct answers are:
• Carlise's internC!I. auditors would perform audit procedures under the direction,
supervision and review of UYE 8 Co's audit team -True - -
• UYE S Co should onJy use direct assistance if the risk of material misstatement in
relation to the online ticket sales system is high- False
• UYE S Co's audit team should document its review of the work performed by Carlise's
internal auditors - True
• Carlise's internal auditors will be separately liable _for any material misstatements in the
work they have performed - False
Direct assistance describes the use of internal auditors to perform audit procedures under
the direction, supervision and review of the external auditor (ISA 620).
The external auditor should document their review of the work performed by the internal
auditors.
The external auditor is likely to be less inclined to use direct assistance where the assessed
risk of material misstatement is high, as this increases audit risk. The auditor must take full
responsibility for their audit opinion regardless of whether they rely on the work of others.
65 The correct answers are:
• UYE S Co's policy of assembling files within 60 days of the auditor's report is stricter
than what is required by ISAs - False
It is incompatible with ISAs for even minor further procedures to be added to the audit
files after the 60-day period - True
It is acceptable to make administrative changes to an audit file after 60 days, so it is
not strictly necessary to 'lock' the files to comply with ISAs- True
It is acceptable for files to be disposed of after 3 years have passed since the date of
the auditor's report - False
ISA 230 Audit documentation requires the assembly of the final audit file within 60 days of
the auditor's report, so UYE S Co's policy.is in line with this (and is not therefore stricter
than required).
·Once this time has passed, it is acceptable for changes to be made where they are
administrative in nature- but further procedures would-not be administrative and would
thus not be acceptable. The files do not necessarii!:J have to be 'locked'.
It is not acceptable to dispose of audit files after just 3 !:Jears - ISA 230 requirE;ls audit files
to be- kept for 5 t~ears from the date of the auditor's report.

162 Audit and Assurance @BPP

 Section B Questions
66 Peony

Course Book references

Chapter6.

Top tips
Part "(a), on materiality and performance materiality, involved an element of recall. The more
difficult marks-were far the explanation. particularly of performance materiality. b_utyou
should be aiming to score at least three marks on a requirement like this._
Part (b) was an application-based requirement. It is essential that you only include eightaudit
risks in your solution; the 16 marks available divide themselves into one each for describing the
audit risk and then for the auditor's response to it. Your description of the audit risk should say
what is happening and then, crucially, why this poses an audit risk. This statement ofwhy
could address a problem that could be encountered during the audit (eg due to lack of
available information), or simply which balances could be over- or understated. The auditor•s
response is then focused on reducing the audit risks.

Ecsy marks
There are marks in (b) for giving a simple description of each audit risk from the scenario (the
marks for identification), and these are easy to get.

Examining team's comments.

As noted in previous Examining team's reports a fundamental factor in planning a_nd assessing
the risks of an audit of an entity is an assessment of audit risk, and this remains a highly
examinable area. Audit risk questions typically require a number of audit risks to be identified
(~ marks each), explained (12 marks each) and an auditor's response to each risk (1 mark
each). Typically candidates can be required to identify and explain in the regionof six to eight
risks and responses.
A significant minority of candidates stated the risk was_'under/?ver stated' whenitwas clearly
· one or the other. They were not awarded credit and this scattergun approach Is not
recommended. Additionally, candidates must state the specific area of the financial-
statements impacted, as opposed to a general statement. As an example, a significant loss on
disposal is indicative of an inappropriate depreciation poUcy resulting in 'propertg, plant and
equipmef')t being overstated or depreciation being understated'. No credit would be awarded
just for stating 'assets are overstated' or 'profit is overstated\
An auditor's response does not have to be a detailed audit procedure, rather an approach the
audit team will take to address the identified risk. In common with previous sessions, auditor
responses were sometimes too weak eg 'discuss with management' or 'obtain a breakdown
and confirm it is reasonable'. In addition, it was noted that some candidates focused on what
managen1ent should do rather than the auditor, and/or, gave responses that were
inappropriate to the scendrio. For example, in this session a con1pany had encountered _
significant fraud in its warehouse; some candidates: recommended that 'the company install
CCTV cameras'. This is an inappropriate auditor response and ·so would have gained no marks
as it addresses the Issue from the perspective of the company and not the audit. 'Peony Co'_
from the 'Sample March/Juno 2019Quostions' is a-good scenario-based question on audit risks
and responses to practise.

@aPP Answers 163

 Marks

.· (a) 1 mark per well explained point

Materiality and performance materiality
Materiality definition
Material due to size or nature
Materiality benchmarks
Depends on judgement and risk
Performance materiality qefinition
Used for testing individual balances
Set at lower level than materiality
Maximum 4
(b) Audit risks and responses (oni!:J 8 required)
Reliance on internal audit - increased detection risk 2
Unusual movement in margins 2
lnventor!:J valuation policy 2
Perpetual inventory system 2
Obsolete PPE 2
Advertising expenditure 2
Use of payroll service organisation 2
Transfer of data to service organisation 2
Bank loan 2
Redundancy plan 2
Maximum 16
Total 20
-

(a) Materiality and performance materiality

Materiality and performance materialit!:J are dealt with under !SA 320 Materialit!:J in Planning
and Perforrning on Audit. Auditors need to establish the materiality level for the financial
statements as a whole~ as well as assess performance materialit!:J levels, which are lower than
the overalf materialit!:J for the financial statements as a whole.
Materiality .
Materialit!:J is defined in !SA 320 as follows: 'Misstatements, includiog omissions, are
considered to be material if they, individually or in the aggregate, could reasonabi!:J be
expected to influence the economic decisions of users taken on the basis ofthe financial
statements.'
If the financial statements include a material misstatement. then they will not present fairly
(give a true and fair view) the position·, performance and cash flows of the entity.
A misstatement ma!:J be considered material due to its· size (quantitative) and/or due to its
nature (qualitative) or a combination of both. The quantitative nature of a misstatement
refers to its relative size. A misstatement which is material due to its nature refers to an
amount which might be low in value but due to its prominence and relevance could influence
the _user's decision; for example, directors' transactions.
As per_ISA 320, materialit!d is often calculated using benchmarks such as 5% ofprofit before
tax or 1% of total revenue or total assets. These values are useful as a starting point for
assessing materialit!:J; however, the assessment of what is material is ultimately a matter of
the auditor's professional judgement. It is affected by the auditor's perception of the financial

161t Audit and Assurance @BPP

 of
informatiqn, the needs of the users the financial statements and the perceived level~f risk;
-- :the higher the risk, the lower the leVelof overall materiality:· ·
In assessing materiality.,' the auditor must consider that a number of er~ors each with a low
.volqe may, when aggregated, amount -tci'·a material misstatement.
Performance material"ity . . .
Performance materiaJity is defined in ISA 320 as follows: 'Thframount set by the auditor at·
lessthan materiolityfor the financial statements as a whole to reduce to an appropriately
low level the probability that the aggregate of uncorre.cted and undetected misstatements
exceeds materiolit!:J for the_ financial statements as a whole.' ·
Hence performance mgteriality is set at a level lower than overall materiality for the financial
statements as a whole. It is used for testing individual transactions, account balances and
disclosures. The aim of performance materiality is to reduce the risk that the total of all of. the
errors in balances, transactions and disclosures exceeds overall materiality.
(b) Audit risks and auditor's response

The external audit team may place reliance The external audit team should meet with lA
on the controls testing work undertaken by staff, read their reports and review their files
the lA department. relating to store visits to ascertain the
If reliance is placed on irrelevant or poorly nature of the work undertaken.
performed testing, then the external audit Before using the work of lA, the audit team
team may form an incorrect conclusion on will need to evaluate and perform audit
the strength of the internal controls at procedures on the entirety of the work
Peony Co. This could result in them which they plan to uset in order to
performing insufficient levels of substantive determine its adequacy for the purposes of
testing, thereby increasing detection risk. the audit. In addition, the team will need to
re-perform some ofthe testing carried out
by lA to assess its adequacy .
................................ ,..............

Forecast ratios from the finance director The classification of costs between cost of
show that the gross margin is expected to sales ancl operating expenses shouid be
increase from 56% to 60% and the .. reviewed in comporison to the prior year
operating margin is expected to decrease and an\:) inconsistencies investigated.
from-21% to 18%.
This movement in gross margin is significant
and inconsistent with the fall in operating
margin. There is· a risk that costs may have
been omitted or included in operating
expenses rather than cost of sales.
Misclassification of expenses would result .in
understatement of cost of sales and

Peony Co's inventory valuation policy is Testing should be undertaken confir·m

selling price less aver:age profit margi"n~ as cost and NRV of inventory and that on o
this is industry practice. Inventory should be line-by--line basis the goods are valued
valued at the lower of cost and net correctly.
realisable value (NRV).- , In addition, valuation testing should focus
a
lAS 2 Inventories allows this as cost ' on .comparing the cost of inventory to the
calculation method as long as it ts a close- selling price Je~s morglnfor a sample of
approximation to cost. If this is not the case, items to confirm whether this method is
• then inventory-could be under or actually a close approximation to cost.
overvalued. ·

@aPP Answers 165

 The company utilises a perpe~ual inventory The timetable of the perpetual inventory
system at its warehouse rather than a full counts should be reviewed and the controls
year-end count._ Under such a system, all_ over the counts and adjustments to records
inventory must be counted at least once a_ should be tested. ..
year with ;adjustmehts made to the In addition, the level of adjustments made
inventory records on a timely basis. ·to inventory-should be considered to assess
Inventory could be under'-'· or overstated if their significance. This should be discussed
the perpetual inventory counts are not all with management as soon· as possible. as it
completed, such that some inventory lines may not be possible to place reliance on the
are not counted in the year. inventory records at the year end, which
During the interim audit, it was ·noted that could result in the requirement for a full
there were. significant exceptions with the - year-end inventory count.
inventory records being higher than the
inventory in the warehouse. As the year-end
quantities will be based on the records, this
is likely to result in overstated inventory.

A number of assets which had not been Discuss the depreciation policy for non-
fully depreciated were identified as being current cissets with the finance director and
obsolete. assess its reasonableness.
This is an indication that the company's Enquire of the finance director if the
depreciation policy of non-current assets obsolete assets have been written off. If so,
may not be appropriate, as depreciation in review the adjustment for completeness.
the past appears to have been understated.
If an asset is obsolete, it should be written
off to the statement of profit or loss.
Therefore depreciation may be understated
and profit and assets overstated.

Peony Co is planning to include a current Discuss with management the ration.ale for
asset of $0.7 million, which relates to including the advertising as a current asset.
advertising costs incurred and <;~dverts Request evidence to support the
shown on TV before the year end. assessment of probable future. cash flows,
The costs were incurred and adverts shown and review for reasonableness.
in the year ending 20X5 and there is no Review supporting documentation for the
basis for including them as a current asset advertisements to confirm that all were
at the year end. The costs should be shown before the 20X5 year end. Request
recognised in operating expenses in the that management remove the current asset
current year financial statements. If these and record the amount as an expense in the
costs are not expensed, current assets and statement of profit or loss.
profits will be overstated.

During the year. Peony Co outsourced its Discuss with management the extentof
payroll function to an external service records maintained at Peony Co for the
organisation. A deteCtion risk arises as to period since January 20X5 and any
whether sufficient and appropriate monitoring of controls which has been
evidence is ·availabre at Peony Co to undertaken by- management over payroll.
confirm the completeness and accuracy of Consideration should be given to
controls over the payroll cycle and liabilities contacting the service organisation's
at the year end. auditor to confirm the level of controls in
place; a type 1 or type 2 report could be
requested.

166 Audit and Assurance \iJBPP

 T~e payroll functio.n was .transferred to H-le . ·Discuss with managemenLthe transfer .
··organisation from 1 January 20X5,- ·process u"ndertaken and.anyccmtrolswhich
is 'five months prior to the !::Jear~er:~d._lf were put in place. to·.ensurethe
any errors occurred during the transfer completeness and atcurqcy of th~ data.
: proc~ss, these could result in wages and Where possible, undertake tests of controls.
: salaries being under/overstated. ·to confirm the effectiveness ofthe transfer
!
controls. In addition, perform substantive
testing on the transfer of information from
the old to the· new system;
i
I A $3 million lodn was obtained in March Re-perform the company's calculations to
f 20X5. This finance needs to be accounted confirm that the split of the loan note is
i for correcti~J, with adequate disclosure correct between non-current and current
: made. The loan needs to be allocated liabilities and that total financing proceeds
between non-current and current liabilities. of$3 million were received.
Failure· to classify the loan correctly could In addition, the disclosures for this loan note
result in misclassified liabilities. should be reviewed In detail to ensure
compliatice with relevant accounting
standards.

Peony Co is planning to make v,.;:....-~....._..., with management the status of the

approximately 60 employees redundant redundancy announcement; if before the
after the year end. year end, review supporting documentation
The timing of this announcement has not to confirm the timing. In addition, review the
been confirmed; if it is announced to the basis of and recalculate the redundancy
staff before the year end, then under lAS 37 provision.
Provisions, Contingent Liabilities and
Contingent Assets, a redundancy provision
• will be required at the year end as a
' constructive obligation will have been
created.
Failure to provide or to provide an
appropriate amount will result in an
understatement of provisions and expenses.

67 Harlem

Course Book references

Chapters 1 and 6.

Top tips
In part (c)t make sure that you exploir1 both the audit risk and the auditor's respon~e, to th~
risk. Make sure thqt you discuss audit risks··· the risks which havean impact on the financial
statements- orily. Talking about business risks in general will not get you marks!

Easy marks
Parts (a). and (c) both offer easy marks. If you know the material well, you shoL,IId score good
marks there.

Marks

(a} Auditor's responsibility fot fraud

Obtain reasonable assurance that financial statements are free from material
n1isstaternent
:~

@BPP Answers 167

 · Identify and assess risk of misstatement due
-
to fraud --
Obtain sufficient and appropriate evidence
Respond appropriat~ly to frau~ or suspected fraud
Maintain professional scepticism_
Discuss risk of fraud ~ith engagementteam
·Maximum 4
(b) .Rqtios
Gross profit. margin
Inventory holding period
Gearing
Interest cover
Maximum 4
(c) Audit risks and responses (only 8 required)
Sale or return assumption 2
Intangible asset amortisation 2
Significant losses on disposal 2
Financial controller dismissal 2
Unfair dismissal claim 2
Inventory valuation 2
Recoverabilit~ of receivables 2
Purchases cycle control deficiencies 2
Intention to restructure finance 2
Bonus issue of shares 2
Maximum 16
(d) Substantive procedures-- Valuation of trade receivables
Discuss with management adequacy of allowance for trade receivables .1
Outcome of prior year allowance 1
Review aged trade receivables listing to identif~ old balances .
Cash aftor,..date testing
Review customer correspondence for evidence of disputes
Recalculate potential irrecoverable balances and assess adequacy of provision
Maximum 3
(e) Substantive procedures- Disposal of plant and machinery
Obtain breakdown of disposals, cast and agree removal to non-current asset
register
Select sample of disposals and agree sales proceeds to invoice
Recalculate the profit/loss on disposal and agree to trial balance
Recalculate depreciation to C()nfirm applied on a pro rata. basis
Review disclosures and confirm in line with accounting standards
'Maximum 3
Total 30

168 Audit and Assurance @aPP

 - ~- {ci) Fraud responsibility
Auditors conduct an audit in accordance with ISA 240 TheAuditor~s RE!~ponsibilities Relating -
to Fraud i~ an Audit or Financial Statements and.-arere$ponsible for obtainlng reasonable -
assurance that the financial statements taken as a whole_are free ftom material
misstatement, Whether caused by fraud or error.
In order to fulfil this responsibility, the.auditor is requir~d tg ide-nttfy and assess the risks of
material misstotem\3nt of the financial statements:dueto fraud. ·
The auditor needs to obtain sufficient appropriate auditevldence regarding the-.assessed
risks of material misstatement due to fraud through designing and implementing appropriate
responses. In addition; the auditor must respond ·appropriate!!;:! to fraud or suspected fraud
identified dlJrln·g the audit.
When obtaining reasonable assurance, the auditor is responsible for maintaining professional
scepticism throughout the audit. considering the potential for management override of
controls and recognising the fact that audit procedures which ore effective in detecting error
may not be effective in detecting fraud.
To ensure that the whole engagement team is aware of the risks and responsibilities for fraud
and error, ISA 240 requires that a discussion is held within the team. For members not present
at the meeting, the audit engagement partner should determine which matters should be
communicated to them.
(b) Ratios

Ratio 20X5 20X4

Workings

Ratio 20X5 20X4

Note that you were, not required to give the formulae.

(c) Audit risks and auditor's response

Audit risk Auditor's response

The finance director is planning on reducing Discuss the basis of the revised assumption
the estimated return rate for goods sold on . of a 5% return rate with the finance director.
a sale or return basis to wholesale Revic~w a period of 60 days to quantify the
customers from 10% to 5%. tevels of return in the specified period and
IFRS@ 15 Revenue from Contracts with compare this to the assumed rate of 5%.
Customers provides that revenue and cost Discuss any significant variations with the
of sales should only be accounted for to the finance director.
extent that the company foresees that tho

@sPP Answers 169

~)

Jj)
 Audit risk Auditor's response

goods will not be returned. For the g9ods

which ma!J be returned. the company
should recognise a refund liability. If, after
60 days, the goods are notreturned, then
this liability is reversed and revenue ·is
recognised.
By reducing the return rate, there is a risk
that revenue and cost of sales may be
overstated 'and Habilities understated.

The company purchased a potent for Agree the useful life of the patent is four
$800,000 at the end of the prior year which years to supporting documentation. The
has a useful life of four years. The carrying amortisation charge shoul~ be calculated
amount in the forecast financial statements and the appropriate journal adjustment
is $800,000 which is the same as prior year. discussed with management, in order to·
In accordance with lAS® 38 Intangible ensure the accuracy of the charge and that
Assets, this intangible asset should be the intangible is correctly valued at the year
amortised over its four-year life. It does not end.
appear that management has correctlbJ
accounted for the amortisation and as a
result, intangible assets and profits are
overstated.

Surplus plant and machinery was sold Recalculate the loss on disposal
during the year, resulting in a loss on calculations and agree all items to
disposal of $160,000. supporting documentation.

Significant profits or losses on disposal are Discuss the depreciation policy for plant
an indication that the depreciation policy of and machiner~::~ with the finance director to
plant and machinery may not be assess its reasonableness. ·
appropriate. Therefore depreciation may be Review for other significant gains or losses
understated and profit and assets on disposal of property, plant and
-overstated. equipment to assess the reasonableness of
the company's depreciation policies.

Harlem Co's financial controller has Discuss with the finance director the details
alleged!~ carried out a number of of the fraud perpetrated bu the financial
fraudulent trcmsactions at the company. controller and what procedures have been
The investigation Into the extent of the fraud adopted to date to identify any
has only recently commenced. adjustments which .are needed in the
financial statements.

There is a risk that she may have Additional substantive testing should be
undertaken a f1igher level of fraudulent conducted over the affected areas of the
transactions leading to an increased control accounting records.
riskwhich has not yet been identified. These In addition, the te~m should maintain their
would need to be written off to the professional scepticism and be alert to the
statement of profit or loss. If these have not risk of further fraud and errors.
been uncovered by the year end; the
financial statements could include errors
resulting in the misstatement of profits~

In May 20X5, the financial controller was The audit .team should discuss with
dismjssed and is threatening to sue the management and request-confirmation
company foe unfair dismissal. from the compan~:fs lawyers of the ·
existence and likelihood of success of any
claim from the former financial controller.

170 Audit and Assurance @BPP

 Audit risk Auditor's response

If it is probableJhqt Harlem Co Will make

i,l payment to the financial controller, a >
provision for unfair dismissalis required to
com-ply with lAS ·37 Provisions, Contingent
Liabilities a[ld Contingent A?sets.lf the.
paymentis possible rather than probable, a
contingent liability disclosure would be
I
~ -~
neces·f)ary. If. Harlem Co has not done this,
thereis a risk over the completeness of any
provisions or contingent lictbilities -
• 1
i'
disclosures .
1..'

Harlem Co has had production problems Discuss with the finance director whether
which have affected the quality of a any write downs will be made to the
significant batch of tyres. In addition, the affected tyres, and what, if any,
inventory holding period has increased from modificatiqns may be required with regard
34 to 41 days. to the quality.
!~
Inventory may be overvalued as its net Testing should be undertaken to confirm
realisable value (NRV) may be below its cost and NRV of the affected products in
cost. If the tyres can be rectified, the inventory andthat all inventory on a line-
rectification costs may mean that cost by-line basis is valued correctly.
exceeds net realisable value. If the tyres
cannot be rectified, the inventory may need
to be written off completely.

A significant customer has been· granted a Review and test the controls surroljnding
six-month payment break and the how the finance director identifies old or
receivables collection period has increased potentially irrecoverable receivables
from 38 to 51 days. An allowance for balances and credit control to ensure that
receivables has historically been they are operating effectively.
maintained, and it is dnticipate_d that it will Discuss with the director· the rationale for
remain at the prior year level. ; maintaining the allowance for receivables at
There is a risk that receivables will be . ·; the same level as the prior year:, despite the
overvalued; some balances may not be ; increase in receivables collection period and
recoverable and so will be overstated if not the payment breakgranted to a Iorge
adequately provided for. customer.
Extended post year-end cash receipts
testing and a review of the aged receivables
ledger to be performed to assess valuation
and the need for ·an increased level of
allowance for receivables ..

The report to management issued after the Discuss with management whether the
prior year .audit highlighted significant purchases C!:Jcle recommendations
deficiencies relating to the purchases cycle. suggested by Brooklyn & Co were
implemented s.uccessfully this uear. If so,
undertake tests of these controls to assess
whether they are operating efficiently~
If these deficiencies hove not been rectified 1 If the controls are not in a place or ·
the cor1trols overpurchases and payables . operating efficietltl!:-h adopt a fully
may cor1tinue to be weak leading to substantive approach for confirming the
increased control risk and risk completeness ond accuracy of cost of sales
misstatements arising. Cost of sales, and other expenses and trade. poyables. ·
expenses a·nd trade payables rnay not be
complete or accurate.

@BPP Answers 171

 -I

Audit risk Auditor's response

Bro_oklgn& Co should ensuFe that there is a

finance after"the year end. However, the suitably exp§lrienced audit team. Also,
interest cover has declined from 4.4 to 2.6 adequate time should be allocated for team·
and the level of gearing has increased from members to obtain an understanding of the
53.7% to 56.5%. company and the significant risks of
In order to maximise the chances of overstatement ofproffts and assets and
securing the debt finance restructure, understatement of debt, including
Harle_m Co will need to present financial attendance at an audit team briefing.
statements which show the best possible The team needs to maintain professional
position and performance. The worsening scepticism and be alert to the increased risk
interest cover and gearing ratio increases of manipulation.
the risk that the directors may manipulate Significant estimates and judgements
the financial statements, by overstating should be carefully reviewed in light of the
profits and assets and understating debt misstatement risk.
liabilities.

Harlem Co has issued shares during the Review the treatment of the bonus issue and
year via a bonus issue. Share capital within agree the increase in shares to the share
equity should increase by the value of the register and share certificates, and agree
shares and a reserve should 'decrease that the corresponding reduction in reserves
accordingly. is correct.

If the company has not accounted for a Review board minutes for authorisation and
bonus issue before, there is a risk that it terms of the bonusissue and review if the
could hove been incorrectly treated with transaction has been conducted in line with
equity being under- or overstated. In this approval. Review the statutory
addition, legal issues may arise if the shares constitution documents to confirm the
have not been issued in accordance with legality of the share issue.
the company's statutory constitution.

Additionally, bonus issues require disclosure Review the adequacy of the bonus issue
in the financial statements and there is a disclosures in the financial statements.
risk that these may be incomplete or
inaccurate.
\------------------------------------~·- ---------·---------------·-•<"'"·-·------------------------·------------'--·-··------------------ --------··------------'----~--~----------·--·---·-------------

(d) Substantive procedures for valuation of trade receivables

Discuss with the fincmce director the rationale for not increasing the allowance for trade
receivables and review its overall odequoc!:J.
Obtain a breakdown of the opening allowance and consider if the receivables provided for
in the prior year have been recovered to assess the reasonableness of the prior levels of
allowances.
Review the aged trade receivables ledger to identify any slow""-movlng or old receivable
balances and discuss the status of these balances with the credit controllers to assess
whether they are likely to be received.
Review whether there are any after-date cash receipts forslow.,-mo\ling/old receivable
balances.
Review customer correspondence with the significant customer and others to identify any
balances which are in dispute or are unlikely to be paid.·
Review board minutes to identify whether there are any significant concerns in relation to
payments by _ customers.
Calculate the potential lever of trade receivables which are not repoverable and assess
whethi9r this is material or not and discuss with management.
(e) Substantive procedures for disposals of plant and machinery

172 Audit and Assurance @aPP

 • Obtain a breakdown· of disposals, cast the list and review the non~current a~sets register
, . to confirrn that all osset_s have been removed .. · -
• Sele.ct a sample of disposals arJd agree sol.e proceeds to supportrng documentation such-
as sundry sales invoices. - · · ·-
Recalculate the depreciation charge for a ·sample of disposals to confirm the coloulations
of
are correctly applied qs pert he company policy a pro rata bo$is or a full year in the.
yedr of acquisition-and .none in the gear of dispo~_?l •. ·. · ·
Review the disclosure of the disposals In the draft financial statements and ensure it is in
line with lAS i6 Property, Plant and Equipment. -

68 Scarlet

Course Book references.

Chapters 5, 6 and 7.

Top tips
Maintaining focus is essential on a long 30-mark question such as this one. A common theme
throughout this question is the risk of answering the question you hoped would come up,
rather than the question actually being asked,
In part (a) you were given a straight knowledge question about the engagement letter, which
was not difficult and should have helped you to get off to a good start on the question.
Part (b) continued the theme, although the question was slightly deceptive in that you needed
to make sure that hJOUr explanations really warranted a full mark each. It mahJ be helpful here
to think about trying to get two half marks here in order to extend your answer enough to get
the full mark.
Part (c) was the standard risk and response requirement, for which you need to work through
the scenario carefully, drawing out the consequences of tho hints contained therein.
Part (d) rounded off the question hhl asking for-substantive procedures. It fs crucial here that
you do not. for example, strahJ into writing down tests of controls or audit evidence points. Eocll
procedure should be something that the audit team con do.

Easy ma·rks
Port (a) was a. relativelhJ painless start to the question (and to the exam, if this had been you·r
real exam). ·

Marks

(a) Purpose and contents of engagement letter .

Purpose :2"
FOUf examples of items to be included (0.5 mark each) 2
Maximum 4·
· (b) Factors to consider prior to acceptance
Outgoing, auditor's response
Management integrity
Pre-conditions
Independence and objectivity
Resources
Maximum 5
(c) Audit risks ahd responses (only required)

@aPP Answers 173

 Marks

New client 2
Temporary accountant 2
FS preparation deadline for bank lo~n application 2
Training costs capitalised 2
Goods in transit 2
Increase in receivables days 2
Redundancy provision 2
Directors'.bonus disclosure 2
Credit note for faulty goods 2
Late supplier payment run 2
Maximum 16
(d) Substantive pr~cedures for redundancy costs
1 mark per well-described procedure
Maximum 5
Total 30

(a) Engagement letters

Purpose of an engagement letter
The letter of engagement outlines the responsibilities of both the audit firm and the audit
client. Its purpose is to: ·
minimfse the risk of any misunderstanding between the auditor and the client;
confirm acceptance of the engagement; and
• form the basis of the contract by outlin~ng the terms and conditions of the engagement
Items to be included in an engagement Jetter
the objective and scope of the audit;
• the responsibilities of the auditor;
responsibilities of management;
identification of the financial reporting framework-used in the preparation of the financial
statements;
expected form and content of any reports to be issued;
elaboration of the scope of the audit with reference to legislation;
the form of any other communication of the results of the audit;
the fact that some material misstatements may not be discovered;
arrangements concerning the planning and performance ofthe audit. including the
composition of the audit team;
• the expectation that management will provide written representations;
the basis on which the audit firm will calculate its fees;
a request for management tp agree to the terms of the audit-engagement and
acknowleqge _(eceipt of the letter of engagement;
arrangements concerning the involvement of internal audit and other staff employed at
the company;
any obligations to provide audit working papers to third parties;

171t Audit and Assurance @aPP

 . any restrictions on the auditor's.liability; and ..
• arrangements to make available draft fi-nancial statements and any other information~
(b) Facto.rs to consider prior to accepting Scarlet Co as a new oudlt client.·

Pre-acceptance factors Explanation

Prior to accepting an quditengagement,

the auditor is required to contactthe
_ ':
previous auditors, after obtaining
permission f~omScarlet Co, to ask forall
information relevant to the decision as to
whether or not the firm should accept
appointment. The auditor should consider
the outgoing auditor·s response to assess·
whether there are any ethical or
professional reasons why the firm should
not accept appointment.

Management integrity If Orange 8Cds auditengagement partner

has reason to believe that Scarlet Co's
management lack integrity, there is a
greater risk of fraud and intimidation.
Orange & Co need to consider
management integrity because if there are
serious concerns regarding this, Orange &
Co must not accept the. audit engagement.

Pre-conditions for an audit Orange & Co can only accept an audit

engagement if the preconditions are
present. The preconditions confirm that
management will use ·an acceptable
financial reporting framework under which
they.will prepare the financial statements
and confirms that management
acknowledges and understands its
responsibilities for:
Preparing the financial statements in
accordance with the applicable financial
reporting framework;
Internal control necessary for the
preparation of the financial statements
to be free from material misstatement;
and
Providing the auditor with access to
information relevant for the audit and
occess to s~aff within the entity to
audit evidence. .
) If the preconditions are not present, Orange
B Co cannot accept the audifengagement.

The auditor must consider whether there are

any threats to independence and .
objectivity which cannot be reduced to an
acceptably low level·by the use of .
appropriate safeguards, such as if any of
Orange G Co's staff have shares in Scarlet
Co or are related to staffemployed at

Answers 175
 Pre-acceptance factors Explanation

Sc()rlet Co. If such threats are present and

cannot be sufficiently mitigated, Orange-S
Co must not accept the audit engagement.

Resources available at the time of the audit Orange 8 Co must have adequate
resources with the relevant experience
available at the time the audit of Scarlet Co
is likely to be carried out. All audit staff
deployed to the audit of Scarlet Co must be.
capable of carrying out the audit in
accordance with International Standards on
Auditing (ISAs). If adequate resources will
not be available, OrangeS Co must not
accept the audit engagement.

(c) Audit risks and auditor's responses

Audit risk Auditor's response

Scarlet Co is a new audit client of the firm. Orange &Co should ensure that it has a
The audit engagement team will be suitably experienced team deployed on the
unfamiliar with the accounting policies; audit. In addition, sufficient time must be
transactions and balances of the client, set aside so that the team members can
hence there will be increased detection risk familiarise themselves with the new client,
on the audit. document its systems and controls and
In addition, there is less assurance over understand the risks of material
opening balances as Orange & Co did not misstatement.
perform last year's audit. Increased audit procedures should be
performed on the opening balances to
confirm their reasonableness.

The compcmy's financial accountant was Discuss with management the technical
taken ill suddenly in May 20X5 and a competency and experience of the
temporary accountant has been drafted in temporary financial aocountant. In
to help preparethe financial statements. addition, the audit engagement team
There is an increased risk of errors in the should ensure that increased substantive
financial statements as the temporary procedures are undertoken on the material
financial accountant may not be familiar areas of the financial statements to reduce
with the company's activities and so audit risk, particularly those requiring
errors/omissions may go unnoticed. judgement.

The ~:Jear-end financial statements have to The audit engagement team should
be prepared by the end of September 20X5 maintain professional scepticism
in order to secure bank finance and throughout the course of the audit. Detailed
management wish to report strong results. cut-off testing on areas such as revenue,
This increases the risk that the directors inventory and payables should be .
may manipulate the· financial statements, performed to ensure that cut-off has been
by overstating profits and assets and correctly applied and substantive
understating liabilities. procedures performed on estimates and
judgements to ensure accuracy.

A specialised machine was acquired and Di~cuss the accounting treatment with the
staff members-had to be trained in the directors and request that an adjustment is
machine's use at a cost of $15,000 which made to ensure appropriate treatment of ·
has been capitalised as part of the cost of the training costs. Obtain a breakdown of
the machine. the remaining capitalised costs and agree
lAS® 16 Property, Plant and Equipment to supporting documentation to ensure that

176 Audit and Assurance

 Audit risk Auditor's response

prohibits ,training costs from being they meet the recognition criteria in lAS 16.
ca.pittllised and therefore profits and
property, plant and equipment will be
overstated~ and expenses understated if the.
training co-~ts are not written off to the
statement of profit or loss.

The delivery time of three weeks from the· · Discuss with management the point at
.company's international supplier is likely to which inventory is recorded and review the
result tn gpods in transit at the year end. contract with the supplier to verify thtr
The company !'las advised that the contract requirements in place.
with the supplier means that Scarlet Co will · Review the controls the company has in
be responsible for goods from dispatch and place to ensure that inventory is recorded
therefore inventory should be recorded from the point of dispatch.
when the products are sent by the supplier. Extend cut-off testing by reviewing pre and
There is a risk that inventory is not recorded post year-end GRNs and supplier dispatch
on dispatch andtherefore inv~ntory and notes to verify that inventory is recorded at
liabilities are understated at the year end. the correct point.
·············~'·"···"·'•'·"'''~·"

Preliminary analytical procedures indicate Extend post year-end cash receipts testing
that the receivables collection period. has and perform a review of the aged
increased from 38days to 52 days due to receivables listing to assess the valuation of
customers taking longer to pay. receivables. Discuss with management the
There is a risk that some receivables may· adequacy of any allowance for receivables.
llot be recoverable and an allowance for
receivables is required$ hence receivables
may be overstated and the allowance for
receivables understated.

On 29 May 20X5, the directors announced Obtain the calculation of the redundancy
that a brand was being discontinued payments and agree that a provision has
resulting in four members of staff being been included as a liability in the year-end
made redundant. The costs of redundancy financial statements.
eire being included in the July 20X5 payroll Agree the redundancy payments have been
run. paid post year end.
As there is a present obligation for which
·the costs can be reliably measured! and _
which will result ·in an outflow of funds, lAS
37 Provisions, Contingent Assets and
Contingent Liabilities would require this
provision to be recognised in the financial
statements. If a provision is not recognised
profit would be overstated and liabilities
ond payables would be understafed.

The directors have each been paid d Discuss this matter with management a:nd
, significant bonus at the year end and review the disclosure in the financial
· separate disclosure of this· is requirr~d in the statements to ensure it complies with loco~=
financial statements by local legislation. legislation. · ·
The directors•: remuneration disclosure will
be incomplele cmd inaccurate if the bonus
paid is included In the payroll charge for the
·year and not ·separately disclosed in
accordance with the local legislation.

@ilPP Answers 177

 . '

Audit risk Auditor's response

A customer has returned $120,000 of faulty Inspect acopy ofth.e credit note and
goods to the company prior to the year-end confirm an adjustment to revenue and
but a credit note is yet to be issued. receivables has been recorded pre-year
As this sale occurred pre year end there is a end.
risk that revenue and receivables are ·
overstated if the credit note is not correctly
recorded prior to the year end.

The company's suppliers have been paid on Request that the bank reconciliation is
1 June 20X5 and the payment has been amended to remove the supplier payments
included as an unpresented item in the at the year end as these should be
year-end bank reconciliation. accounted for in the 31 May 20X6 financial
This is possible evidence of window dressing statements.
which results in understated payables and Review the journal entry correcting the
bank ba Ia nces. payables and bank balances at the year
end.

(d) Substantive procedures for the redundancy costs

Review the board minutes for evidence of the decision to discontinue the brand of
chemicals prior to the year-end.
Review supporting documentation to confirm that the decision to discontinue the brand
was notified to the four members of staff prior to the year end.
• Obtain details of the redundancbJ calculated by employee) cast the schedule and agree to
the trial balance/financial statements.
• Recalculate the redundancy provision to confirm completeness and agree components of
the cost to supporting documentation such as employee contracts.
• Agree the redundancy payments made in July 20X5 to the bank ledger account/payroll
records and compare these to the provision in the financial statements.
• Obtain a written representation from management confirming the completeness of the
costs.
• Review the disclosures included in the financial statements to verify they are fn
compliance with requirements of lAS 37 Provisions, Contingent Assets and Contingent
Liabilities.

178 Audit and Assurance @aPP

\-

69 .Corley Appliances qo

• ·Course Book references.

Chapters 5 and 6~ .

Top tips
,:. Part (a) of this qu~stlon is largely·knowl~dge. which could m~an either that you have a !lice
easy start to the question (if you know it) or that you struggled. The key. here is whether you
have done enough preparation for your exam. ·
For part (b) of the question it is important that you describe the audit risks clearly. A common
mistake in this type of question is to simply identify a risk factor from the question eg the
company has reduced the amount of its warranty provision. This is a risk factor, ie something
about the way in which the business operates that increases audit risk. The risk itself is the
potential issue that this causes. For example, in this case the risk would be that the reduction is
not reasonable leading to an understatement of provisions in the statement of financial
position and an overstatement of profit for the period. Notice that to score well you must both
identify the risk factor and then explain the associated risk.
Part (c) then asks you about professional scepticism. This has been a topical area in th~
profession for some time. and continues to be so. The three marks that are available for this
part divide themselves neatl!:j into one for your definition (knowledge), and then two for your
examples (application). If you read through the model answer, you will find that you do not
need to say anything intimidatingly profound to get the marks. You do. however, need to select
some appropriate areas where the auditor could be sceptical, and try to use the right audit
• terminology when describing the potential problems. For example, terms such as ~management
bias' and 'manipulation'. Finally, it is instructive that the model answer is specific about the risk
that professional scepticism would want to address, stating wherepossible what the effect
might be on the financial statements were a problem to go unaddressed.
Take care with timing. Part (c) is for onl!:! three marks but it is important that you atternptall
parts ·of the question.

··Easy marks
Part (a) should represent easy marks as you should be familiar with the concept of the
preconditions for an audit.

Marks

(a) Preconditions for the audit

1 mark per well-explained point 3
Maximum 3
(b) Audit risks and auditor's responses (only 7 required).
Refund liability 2
Reduced warranty provision 2
Goods in transit· 2
Inventory count attendance 2
Allowance for. receivables 2
Fraud 2
Payables ledger backlog 2
Training costs capitalised . 2.
Renewal of overdraft facilit!:j 2
-
Maximum 14

Answers 179
 Marks··

(c) Profe~sional sc~pticism and &xamples where professional spepticism should be

applied
Professional scepticism definition .1
Examples 2
Maximum 3
Total . 20

(a) Preconditions required for an audit

Auditors should only accept a new audit engagement or continue an existing audit
engagement if the preconditions for an audit are present.
ISA 210 Agreeing the Terms of Audit Engagements requires the auditor to:
Determine whether the financial reporting framework to be applied in the·preparation of
the financial statements is acceptable (for example IFRS® Standards). In considering this,
the auditor should have assessed the nature of the entitbJ, the nature and purpose of the
financial statements and whether law or regulation prescribes the applicable reporting
framework.
• Obtain the agreement of management that it acknowledges and understands its
responsibilities for the following:
- preparing the financial statements in accordance with the applicable financial
reporting framework;
- internal control necessary for the preparation of the financial statements to be free
from material misstatement whether due to fraud or error; and
- providing the auditor with access to information relevant for the audit and access to
staff within the entity to obtain audit evidence.
(b) Audit risks and auditor's responses

Audit risk Auditor's response

The compan!::j has a returns policy allowing Enquire with the finance director how the
a customer to return goods within 28 days returns policy has been applied at the year
of purchase-If they are dissatisfied with the end and whether the provisions in !FRS '15
product. have been reflected.
!FRS® 15 Revenue from Contracts with Review the assumptions underpinning the
Customers requires that revenue should refund liability for reasonableness and
onl!::j be recognised to the extent that goods whether they meet the historic 5% value of
Will not be returned. The company should returns.
recognise a refund liability for goods which Compare the level of post year-end returns
are expected to be returned. to the refund liability and discuss any
If the company has not correctly accounted significant differences with management.
for the refund liability, revenue will be
overstated and the refund.liabilitbJ
understated.

The compan!::j provides a s'x-month Review the calculation of the warrantbj

warranty on its products which require provision and assess its reasonableness in ·
defects to be repaired at Corley Appliances light of the value of claims received in the
Co's own cost.- The directors have reduced period.
this provision during the year on the Review the assumptions underpinning the
g.rounds they feel the products they sell are warranty provision for reasonableness.
built to a high standard. Review the level of claims made under

180 Audit and Assurance @aPP

 Audit risk Auditor's response

The-company _does nc;>t mant.tfacture the - warranty post year end. to assess the
goods(the!Jon}y sell them) and therefore reasonableness of the' reduced-prc>Yi$ion.
this is nQta . reasonable reason for
reduction, hence· if the company has ·
reduc?d the warranty provision excessively
atthe yearend, liabilities and expenses
may be understated.

The company purchases their goods from Discuss with managemeDt the point at
its main supplier in Asia and has which inventory .is recqrded and review the
responsibility for goods at the point of contract with the supplier to verify the
dispatch, the goods are in transit for up to requirements in place.·
one month. Review the controls the company has in
At the year end, there is a risk that the cut- place to ensure that Inventory is recorded
off of purchases may not be accurate as from the point of dispatch.
they may not correctly re·cognise the goods The audit team should undertake detailed
from the point of dispatch. There is also a cut-off testing of purchases of goods at the
risk that inventory and trade payables are year end and the sample of shipping
understated at the year end. documentation immediately before and
after the year end relating to good~ from its
main supplier in Asia should be increased to
ensure that cut-off is complete and
accurate.

The company's central warehouse andall The audit team should assess which of the
20 branches will be carrying out an inventory counts they will attend. This
inventory count at the year-end date of 31 should include the count for the central
August. wa~ehouse and a sample of branches which
It is unlikely that the auditor will be able to contain the most material balances of
attend all.sites which increases detection inventory and those which have historically
risk. It may not be possible to gain sufficient had exceptions reported during the
appropriate "audit evidence over the inventory count.
inventory counting controls and For those not visited, the auditor will need to
' completeness and existence of inventory for review the level of exceptions noted during
' those sites which are not visited. thecount and discuss any issues which
arose during _the count with management.

Over the last six months, the receivables Review and test the controls surrounding
collection period has increased from 42 the way in which the finance director
· days to 55 days and the allowance for assesses the recoverability of receivables
receivables will be at the same level as the balances and other credit control processes
· prior year. to ensure that they are operating
Some receivables may not be recoverable · effectively. :'
and if an additional allowance for Perform extended post year-end cash
receivables is not included in the financial receipts testing and a review of the aged
statements, receivables will be overstated receivables ledger in order to assess
an.dthe allowance for receivables valuation and the need for an increased
· tmderstated. allowance for irrecoverable receivables.
Discuss with the finance director whether
an additional allowance for receivables will
be required against balances older than the .
cornpa!~y·s credit terms.

@BPP Answers 181

 Audit risk Auditor's response

The payabl~s ledger supervisor was Discuss with the finance director the details
dismis·$ed in June 20X5 due· to a fraud. of the fraud perpetrated by the payables
The value of this fraud has been recognised ledger supervisor and what procedures
as an expense in the draft statement of have been adopted to date to identify any
profit or loss. . further adjustments.which are needed in the
If additional frauds committed by the financial statements. In addition,discuss
payables ledger supervisor are not with the finance director what additional
mscuver·ea this could result in expenses controls have been put in place to prevent
being understated and payables being any similarfrauds.
overstated. Control risk is also increased if The audit team shou~d undertake additional
the fraud has gone undetected for a period substantive procedures over the payables
of time. . balance, particularly the fictitious supplier
set up on the payables ledger to ensure this
has been removed.
In addition, the team should maintain
professional scepticism and be alert to the
risk of further fraud.

Since the dismissal of the payables ledger Review the unprocessed invoices file at the
supervisor, purchase invoices have ~:Jet to be year end to identify any invoices which
logged onto.the payables ledger. relate to the suppl\:J of pre year~end goods
There is a risk that the purchases and trade and ensure they have been properly
payables balance at the year end will be accrued for in the year-end financial
understated if these invoices are not logged statements and recognised as a liability.
onto the payables ledger before it is closed Discuss with the finance director the
down for the \:jear or accrued for. approach to be adopted to resolve the issue
of unprocessed purchase invoices.

The company .Purchased and installed a Discuss the accounting treatment with the
new dispatch system. The costs which have finance director and request that the
been capitalised include staff training costs training costs are written off to profit or loss
($0.1m). to ensure treatment is in accordance with
As per lAS® 16 Property, Plant and lAS 16~ If adjusted, review the journol entry
Equipment, the cost of an asset includes its for accuracy.
purchase price and directly attributable
costs on-ly. lAS 16 does not allow staff
training costs to be capitalised as part of
the cost of a non-current asset, as·these
costs are not directly related to the cost of
bringing the asset to its working condition.
The training costs should be charged to
profit or loss. Therefore property, plant and
equipment (PPE) and profits are overstated.

182 · Audit and Assurance @sPP

' 'I

The compan!J breached the terms of its - . Discuss _with the fi nonce director the
overdraft facility in June 20X5 and the bank availability of alternative financing if the_
will only -confirm the decision whether, or bank is unwilling to continue to support the
not;to cqntinue to supporfthe~businessfn compcmy ond review the adequacy of any
November 20X5, which is after the. auditor's going concern disclosures in the financial _
report-will be signed. The company is statements. _ _
dependent on the overdraft facility. The audit tear~ should ondertake detailed _--
-If the bonk·tefuses to continue to support going concern testing, in -.particular,
the company, there may be doubts as to reviewing the impact of a non-renewal of
the company's abilitk! to continue as a the overdraft facility. -
going concern. The' uncertainties may not
be adequately disclosed in the financial
statements.

(c) _Professional scepticism and examples where professional scepticism should be applied
Professional scepticism is defined in ISA 200 Overall Objectives of the Independent Auditor
and the Conduct of an Audit in Accordance with International Standards on Auditing as an
attitude whi.ch includes a questioning mind, being alert to conditions which may indicate
possible misstatement due to fraud or error, and a critical assessment of audit evidence.
Examples where the auditor should apply professional scepticism for Corley Appliances Co
are as follows:
Revenue recognitio~
ISA 240 The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements
contains a rebuttable presumption that fraud in relation to revenue is high risk and hence the
auditor must apply professional scepticism to Corley Appliances Co's revenue recognition
policies, especially in relation to the company's returns polic!:J which due to the judgement
involved may be used as a way to manipulate revenue.
Warranty provision
Accounting for warranty provisions will include an elemeilt of estimation based on previous
experiences of the costs incurred by the company to repair defective goods. The auditor ·
should maintain professional scepticism keeping in mind that warranty provisions may
include management bias to either deliberatel~rover or understate the provision.
Management has reduced the warrant!:! provision in the year on the grounds the!:J feel the
goods they sell are built to a high standard. As the company is not involved in the
manufacturing of the goods they sell, it rnay be unreasonable to reduce the warranty
provision on this basis. ·
Fraud
As a fraud has been committed during the year, the auditor must maintain professional
scepticism recognising the fact that internal controls may be weak, hence allowing for .
_ employee manipulation of such internalcontrol deficiencies. The ouditor must also consider
the possibility that other frauds may have taken place during the blear through manag~ment
override of the entity's internal controls.
Bank overdraft
I
The company is reliant on its bank overdraft due to the significant levels of expenditure which
it has incurred during the year on the new dispatch system. Management ma!::J want to
deliberately overstate pro.fit and· understate liabilities so that tl'm l:mnk renews the overdraft
facility.
Receivables valuation-
). The receivables collection period has· been-increasing over the past six months, but the
finance director does not envisage that an increase in the allowance for receiVables is
requimd. The·tiuditor rnustappi!:J professional·scepticisin in considering whether-
management's assessment of recoverability is reasonable, as anu increase in the allowar1ce
will reduce profits.

Answers 183
70 HartCo

Course Book references

Chapters 5, 6 and 7.

Top tips.
This is a 30-mar~ question on audit planning. Part (o) was mainly a test of knowledge, which to
some extent you either have or do not have. The key here is finding a way to make the most of
what you know3 which means sticking to your time allocation and explaining your points in
enough detail to score marks. ·
Part (b) asked for both audit risks and the auditor's response to each risk. You must provide
eight points in the solution, our advice is to choose the eight risks that you are most confident
writing about. Do not overlook the auditor's response column- you should be aiming to score
eight marks each for your risks and for your responses.
In part (c), your substantive procedures should be as specific as possible in order to get the
marks. You can use the scenario as a starting point- anything in the scenario that relates to
directors' bonuses might help bJOU think of something that could be tested by the auditor.
Finally, part (d), on ethics, asked for safeguards in relation to a conflict of interest. Some of
these will be common sense, but some ore general safeguards that you should know about
and be able to apply.

Easy marks
You should be able to score well on part (b) on audit risks and responses.

Marks

(a) Benefits of audit planrying

Appropriate attention to important areas
ldentifbj/resolve potential problems/risks 1
Effective/efficient performa nee 1
Assists in selection of audit team/assignment of work
Facilitates direction/supervision/review
Assists in coordination of work performed by experts
Maximum 4
(b) Audit risks and responses (only 8 required)
New client 2
Directors' bonus 2
Payment of deposit 2
Audit team not attending all WIP counts 2
·Warranty provision decrease 2
Treotme nt of R&D costs 2
Payment for PPEin advance 2
Rights issue 2
Outsourced pai::Jrolt function 2
Directors'· reinu neration disclosure 2
Maxi mom 16
(c) Substantive procedures for directors' bonuses
1 mark per well-described procedure 5

181+ Audit and Assurance @BPP

 Marks_

Maximum 5
(d) Safeguards
1_ mark per well-explained point 5
_ Maximum 5
Total 30

(a) Audit plonnirYg is addressed by ISA 300 Planning an Audit of Financial Statements.
It states that adequate planning benefits the audit of financial statements in several ways:
Helping the auditor to devote appropriate attention to important areas of the audit.
Helping the auditor to" identify and resolve potential problems on a timely basis.
Helping the auditor to properii:J organise and manage the audit engagement so that it is
performed in an effective and efficient manner.
Assisting in the selection of engagement team members with appropriate levels of
capabilities and competence to respond to anticipated risks and the proper assignment of
\fl,'ork to them.
Facilitating the direction and supervision of engagement team members and the review of
their work.
Assisting, where applicable, in coordination of work done by experts.
(b) Risks and responses

Audit risk Auditor's response

Hart Co is a new client for Morph S Co .. Morph & Co should ensure it has a suitably
As the audit team is not familiar with the experienced team assigned to the audit and
accounting policies, transactions and that adequate time is allowed for team ·
balances of Hart Co, there will be an members to obtain an understanding of the
increased detection risk on the audit. company and the risks of. material
There is also less assurance over opening misstatement, including a detailed team
balances as Morph & Go did not'perfonn briefing to cover tho key areas of risk.
the audit last year. -Increased audit procedures should be
performed over opening balances.

The directors are paid a bonus based on a The audit team should be aware of the
· percentage of profit before tax for the year. increased risks of manipulation and should
There is a risk that the directors will try t() assign more e><peri-enced audit members to
·overstate the profit, and therefore their significant estimates an·d judgemental
bonuses by· increasing the revenue and areas.
i.noome recorded and decreasing expenses. Also, adequate time should be allocated for
This is a partic~larrisk r:elating to team members to obtain an understanding
judgemental areas such as provisions and of the company and the significant risks of
estimates. overstatement of·profit, including
attendance at an audit team briefing.
The team needs to maintain professional
scepticism and b~ alert to the increased risk
of manipulation. Increased testing should
be perforrn13d relating to adjusting journal
entries.

Answers 185
 Custo.mers pay a 25% deposit on signing The audit team should ob~qin a copy of the
the contract to purchase the playgrounds. cor:ttracts with customers and review them
The deposits should 11ot be recognised as to understand the performance obligations.
revenue immediately and instead should be They should discuss with management the
recogr11sed as deferred income (contract criteria for determining whether
liabilities) within qurrent liabilities until the performance obligations have been
performance obligations, as per the satisfied and the treatment of deposits
contracts, have been satisfied. This is likely received-to ensure itis appropriate and.
to be at a point in time, when control of the consistent with relevant standards.
playground is passed to the customer. During the final audit, the audit team
There is a risk that revenue is overstated should undertake increased testing over the
and current liabilities understated if the cut-off of revenue and the completeness of
deposits have been recorded within deferred income (contract liabilities).
revenue.

The audit team will only attend the WlP The auditor should assess which inventory
counts at five of the 16 sites. counts the team will attend, most likei!:J to
WIP is a material balance and the valuation be those with the most material WIP
of WIP is a judgemental area. As the audit balances or which are assessed as having
team is not attending all sites, detection risk the greatest risk of misstatement.
is increased as the team will be unable to For those inventor!:! counts not attended,
directly obtain evidence relating to WIP. the audit team will need to obtain and
review documentation relating to the
controls surrounding the counts and will
need to review reports from any experts
used to value the WIP. and any exceptions
noted during the count and discuss with .
management any issues which arise during
the count.

Hart Co offers its customers a warrant!:! at The audit team should discuss with ·
no extra cost. which guarantees the manogem(3nt the basis of the provision
playgrounds will function as expected for calculation and compare this to industr!:J
three years. The provision is calculated as averages and the level of post year-end
2% of revenue in the current year against claims~ if an!:J, made by cu_stomers. In
6% in the prior year, despite there being no particular, they should discuss the rationale
changes in the construction techniques or behind reducing the level of provision this
the level of cloims. y~ar.

Under lAS 37 Provisions, Contingent The audit team should also compare the
Liabilities and Contingent Assets this should prior b)ear provision with the actual level of
·be recognised as a. warranty provision. claims in the year) to assess the
Calculating warrant!:! provisions requires reasonableness of the judgements made by
judgement as it is an uncertain amount. management.
There is a risk that the warranty provision
could be understated, leading to
understated expenses and liabilities.

Hart Co has recognised $0.6 million of The· audit team should obtain a breakdown
research expenditure in profit or loss with of the research expenditure recognised in
the remaining $1.2 million having been profit or loss and of the development costs
capitalised as development expenditure. capitalised and review supporting ·
lAS 38 Intangible Assets has strict criteria as documentation to determine whether thebJ
to which costs can be capitalised as have been correctly classified. AnbJ
development expenditure. There is a risk ·development expenditure should then be
that the requirements of the standard have agreed as meeting the relevant criteria for
not been qpplled correctly. capitalisation as set out in lAS 38.
If research costs have been incorrectly The team should a lao discuss the

·186 Audit and Assurance @aPP

 f . . . . . . . . ,.. ""·r.. ".-,-o-..·~............ ~........ ,............. .. ....... ·... ----~-•...-{·----"-.'''""'' •• ='."''""""!:·-:r·· . . ~·-:""~~-.-.r. ·------·~- . . . ~-~-. . ··---.~--;-"--.- ·_ _. ....... .._... . . w ....~_... ._ ..•." ....,:·~ .. 4 ... : ...... :· ..... .,.. .. , ,..... : ..: : : . , _ _ . :.... , ...._...,

t classified. as development expenditure,. · j accounting treatrnerilwith thefinanqe :: J

l there .is a risk.that intangible assets could , 1 director ond~msure. itis in accordance with 1
; be overstcted and research expenses 1 lAS 38. i ··
I understated.
_
.........................,_,, ......... ._.._... ~............._ ____ ,.,..... ...... ______ ........ ~..-.~- ..........._ .. -------~~---- ........... ----- ........................:---------- .......... -... : ..,..,; ___ ....... ______
!
., .................................. _.... ................_.. ....,_,_..._ , ...............__........ ........ ""'...._....... ,~
....

I Hart Co placed an order for $2.4 million. of I Review the ncm-current asset r~gister to· i
1machinery, paying $1 million in advance. j·deterniin"e ifthe $1 million pdid ln odvone.e
. l The machinery was due to be received in ! has been cqpitalised. Discuss .the correct
! Jul~20X5 but will now be delivered post . i accountlllgtreatmentwith mdnqgement to
' year end. ! confirm that the amount paid ill advanc~ is ..
! Only assets which physically exist at the ! recognised dsa· prepaymer:t and if ~
! !:Jear end should be capitalised as property. ! Incorrectly r(3cogrijs(3d review the correcting t ·
J plant and equipment (PPE). The $1 million· !journal entry.:
!·deposit paid in advance should be '
l recognised as a prepayment. If the deposit
l of $1 million paid in advance has been
I capitalised within PPE then prepayments .
\ are understated and PPE will be overstated. l

Hart Co made a rights issue in the year. l The audit team should obtain legal
This is a non-standard transaction and documentation in support of the rights issue
there is increased risk that the issue has not to agree the humber of shares issued and
been recorded correctly. the rights price. They should recalculate the '
The rights issue has been made at a split of share capital and share premium ·\
premium and therefore requires to be split and agree this to the journal entry to record
into its share capital and share premium the rights issue.
elements. The audit team should also agree that
There is a risk that the split between share disclosures are adequate and consistent
capital and share premium has not been wtth standards and legislation.
accounted for correctly and that these
balances are misstated. There is also a risk
that the rights issue.has not been disclosed
in accordance with accounting standards
and local ~ompc;my legislation.

Hart Cds payroll function is outsourced to Discuss with management any changes to
an external service organisation. .. the extent of records maintained at Hart Co I·
A detection risk arises as to whether since the prior !:Jear audit and any !
sufficient and appropriate evidence is. monitoring of controls which has been
available at Hart Co to confirm the undertaken-by management over payroll.
completeness and accuracy of controls over Consideration should be given to
the payroll cycle and liabilities at the yeor contacting the auditor of the service
end. ·organisation, Chez Co, to confirm the level
Consideration should be given to the level of of controls in place. A type 1 or tbJPe 2
controls in place at the service organisation report coUld be requested. Consider the
and whether the data is reliable. If any extent to which sufficientappropriate audit
errors occUrred these could result in the evidence cari beobta·ined from' records held
wages and salaries expense and an!d at Hort Co. in respect of the wages and
accruals being misstated. ; salaries expense and liabilities._

@app Answers 187

 Directors, remuneration disclosures have Discuss this matter with managem~nt and
been made in-line with IFRS® Standards but review the requirements of local legislation
not local legislqtion. to determine if the disclosure in the financial
Where the local legislation is more statements is included appropriately.
comprehensive than IFRS Standards it is
likely that the company must comply with
locai legislation. ·-
The directors, remuneration disclosure- will
not be complete if the additional
information is not disclosed._

(c) Substantive procedures for directors' bonuses

• Obtain a schedule of the directors' bonus and cast the schedule to ensure its accuracy.
Agree the amount to that disclosed in the financial statements~
• Review the schedule of current liabilities and confirm the bonus accrual is included as a
!::lear-end liabilit!::l.
• Agree the individual bonus payments to the post year-end payroll records.
• Recalculate the bonus pa!::lments and agree the criteria to supporting documentation and
the percentage rates to be paid to the directors' service contracts.
• Confirm the amount of each bonus paid by agreeing to the post !::lear-end cash book and
bank statements.
• Compare the profit before tax used in the bonus calculation to the final profit before tax
figure to confirm whether any adjustment is required to the bonus paid and discuss an!::l
differences with management.
• Agree the amounts paid to each director to board minutes and contracts to ensure the
amounts included in the current year finanCial statements are fully accrued and disclosed.
" Review the board minutes to identif!::l whether an!::l additional payments relating to this
year have been agreed for any directors.
• .Obtain a written representation from management confirming the completeness of
directors' remuneration including the bonus. - - -
• Review the disclosures made regarding the bonus paid to directors and assess whether
these are in compliance with local legislation.
(d) Safeguards
• Both Hart Co and its competitor should be notified that Morph & Co would be acting as
auditors for each company and consent should be obtained from management of each.
company.
• Morph & Co should consider advising one or both clients to seek additional independent
advice.
• Morph & Co must ensure it appoints separate engagement teams, with different
engagement partners and team members to each client; once an emplo!::lee has worked on
one audit. such-as Hart Co 1 then they should be prevented from being on the audit of the
competitor for a period of time. · -
• Adequate procedures should be in ptace within the firm to prevent access to information,
for example, strict physical separation of both teams, confidential and secure data tm·ng.
• Morph & Co must set out clear guidelines for members of each engagement team on
issues of security and confidentiality. These guidelines could be included within the audit
engagement letters sent to each client.
• Morph & Co should consider the use of confidentiality agreements signed by all members
of the engagement -teams of Hart Co and the competitor.
• Work performed should be reviewed by an appropriate reviewer who is not involved in the
audit to assess whether key judgements and conclusions are appropriate.

188 Audit and Assurance @aPP

 -· Regular monitoring pf the application of the above safeguards should be undertaken by a
.senior individual in Morph & Co not involved in either audit.

71 Prancer Construction Co ·

Course Book references

Chapters 4 and 6.

Top tips
This question is a typical scenario based question· testing the area of audit risk. Part (a), on the
preconditions of an audit, is an area thot can easily be tested for a few marks and so you need
to be familiar with them.
Both parts (a) and (b) were for 3 marks each, so you need to be looking for at least 2 marks on
each question port to pass this part of the question.
Part (c) accounted for the majority of marks in this question, and required you to read the
scenario closely in order to identify audit risks. The requirement asks you to 'describe' the audit
risks, so it is important that you do not just state what the risk is, but also say why it is a risk,
thinking in particular about how it might affect the financial statements and specifically which
balances might be over or understated.

Easy marks
You should have found parts (a) and (b) reasonably straightforward.

Examining team's comments

This area of the syllabus requires an understanding of how the auditor obtains and accepts
audit engagements, obtains an understanding of the entity and its environment~ assesses the
risk of motorial misstatement and plans an audit of the financial statements.
Questions on assessing audit risks tend to be scenario based with candidates having to
identify and explain the risks from a scenario and give an auditor's response to address the
risks. Other questions in this area of _the syllabus tend to be more factual knowledge based
questions and hence depend on the abiHty of students to recall their knowledge in the exam.
In this session it was disappointing to see. a significant number of candidates were unable to
answer the knowledge marks in this syllabus area. Some answers scored zero marks as points
made were completely unrelated to the question asked. It is important in factual questions that·
candidates answer the question set rather than the one they wouk;llike to see. This
unsatisfactory performance also indicates a lack of preparation and awarenesl;l' of the
knowledge areas relating to planning and risk.
As noted in previous Examining team~sReports a fundamental factor in-planning and assessing
the- risks of an audit of an entity is an assessment of audit risk, and this remains a highly
examinable area. Audit risk questions require a number of audit risks to be identified (W marks_
each), -explained (Y2 marks each) and an auditor's response to each risk (1 mark ect.ch). _
Typically candidates can be required to identify and explain in the region of six to eight risks
ar1d responses.
The scenarios usuaiii:J contain more issues than are required to be discussed. It is pleasing that
candidates planned their time carefuii!::J ·and generallbJ.only attempted to list the-required
number of issues. However, in- common with other sessions, a significant number of candidates
often did not explain how each issue could irnpact on the audit risk and therefore were not-
owardedthe second Y2 mark. To explain audit risk candidates need to state the area of the
accounts impacted with an assertion (eg cut off; valuation, etc), or, a reference to
under/over/misstated-, or, a reference to inherent, control or detection risk. Misstated was only
awarded if it was clear that the balance could be either over or understated.

(f}BPP Answers 189

 Auditor's respons.es still continue t6 be weak and while an auditor's response does not have to·
be a detailed audit procedure, rather an approach the audit team._will take to address the
identified risk. The responses given were sometimes too vague, eg "disc_uss with the finance
director" or they were impractical such as "recruit more audit staff" for the risk of the auditor
not attending all the company's inventory cour~ts. Additionally; candidates continue to
concentrate their responses on what management should do rather than the auditor..

Marks-

(a) Preconditions for the audit '

Determination of acceptable framework
Agreement of management responsibilities
Preparation of financial statements
Internal control
Access to information
Maximum 3
(b) Audit strateg1:4 document
Main characteristics of the audit
Reporting objectives
Significant factors affecting the audit
Preliminar!:J engagement activities
Nature, timing and extent of resources
Maximum 3
(c) Audit risks and responses (only 7 required)
New client 2
Work in progress 2
Increased inventor!:J 2
Warranty provision 2
Attendance at inventory counts 2
Deferred income not corrGctly recognised 2
Receivables allowance and valuation 2
Overdraft covenants· 2
Trade payables · 2
Maximum 14
Total 20
-

(a) Preconditions for the audit

ISA 210 Agreeing the Terms of Audit Engagements states that auditors should only accept a
new audit engagement when it has been confirmed that the preconditions for an audit are
present .
. To assess whether the preconditions for an a~dit are present, Cupid S Co sho~.,Jid have
determined whether the financial reporting framework to be applied in the prep·aration of
Prancer Construction Co's financial statements is acceptable. In considering this, the auditor
should have ass.essed the nature of the entity. the nature and purpose of the financial
statements and whether law or regulation prescribes the applicable reporting framework.

190 Audit and Assurance @aPP

I:

._. In addition, the firm should have obtained the Glgreement of Prancer Construction C.o(s -
._ manae~ment that it acknowledges and undefstands itsresponsibility for the fol_lowing:
.Prep_gration-of the finan~ial statements jfi.accordonce with the applicable tin.,ancial
·reporti'ng framew<?rk. including where relevant their fair presentation; -
For suc_h internal control ds management determines is necessary to:·enable the
preparation of Hnancial stat~mentswhich are free from material misstSJteme·nt_,whether
du~ to froud or error; and ,
To provide CupidS Co with access· to all relevant information for the p(eparotion ofthe ·
financial stat~ments, any addjtional information :Which the auditor may request from
management and unrestricted access to personnel within Prancer Construction Co from
whom the auditor determines it necessary to obtai!l audit evidence.
(b) Areas to be included in the audit strategy document
The auditstrategy sets out the scope, timing and direction of the audit and helps the
development of the audit plan. The revised ISA 220 Quafit!:J Management for an Audit of
Financial Statements understands proper planning to be a key part of providing a high _
quality audit. ISA 300 Planning an Audit of Financicii.Statements sets out areas which should
be considered and documented as part of the auditstrC1tegy document and are as follows:
Main characteristics of the engagement
The audit strategy should consider the main characteristics of the engagement, which define
its scope. For Prancer Construction Co, the following dre examples of things which should be
included:·
• Whether the financial information to be audited hgs been prepared in accordance with
the relevant financial reporting framework. ·
• Whether computer-assisted audit techniques will be used and the effect of IT on audit·
procedures.
• The availability of key personnel at Prancer Construction Co.
Reporting objectives, timing and nature of communication
It should dscertoin the reporting objectives of the engagement to plan the timing of the audit
and the riature of the communications required, suchds:
• The -audit timetable for reporting including the tirning of interim and final stages.
Organisatiotl of meetings with Prancer Construction Co'!:) management to discuss any
audit issues arising.
Any discussions with management regarding the reports to be issued.
• The timings of the audit team meetings and review ofwork performed.
Significant factors affecting the oudit
. The strategy should consider the factors which, in the auditor:s professional judgement, are
_ significant in directing Prancer Construction Co's audit team's efforts, such as:
• The determination of materiality for the audit.
• · The need to maintain a questioning mind and to exerpise professional scepticism in
gothering and evaluating audit evidence.
Preliminary engagement activities and knowledge from previous engagements
It should.oonsider the results ofp·reliminary audit planning activities and. where applicable, ..
whether knowledge gained on other engagementsfdr Prancer Construction Go" is relevant,
such as:
Results of any tests over the effectiveness of internal'controls·.
Evidence of management's commitment to the design, implementation and· rr1aintenance
of sound internal controls. ·
• Volume of transactions, which may determine whether it fs more efficient for the audit
tea in to rely on internal controls.

@BPP Answers 191

 • Significant business developments affecting Pra!lcer Construction Co, ·such as the
improvement in building r?~actices and construction quality,-·
_Nature, timing and extent of resources _
The audit strategy should ascertain the nature, timing and extent of resources necessar~ to .
perform the audit, such as:
• The selection' of the audit team with experience 6t this type of industry. - .
• Assignment of audit work to the team members.
• - Setting the audit bl!dget.
(c)

Audit risk Auditor's response

Prancer Construction Co is a new client for Cupid S Co should ensL1re they have a
Cupid G Co. As the team is not familiar with suitably experienced team. In addition,
the accounting policies. transactions and adequate time should be allocated for team
balances of the company, there will be an members to obtain an understanding of the
increased detection risk on the audit. company and the risks of material
misstatement including a detailed team
briefing to cover the key areas of risk.

Prancer Construction Co is likely to have a The auditor should discuss with

material level of work in progress at the management the process they will
year end, being construction work in undertake to assess the percentage
progress as well as ongoing maintenance completion for work in progress at the year
services, as Prancer Construction Co has end. This process should be reviewed bbl the
annual contracts for many of the buildings auditor while attending the year-end
constructed. inventory counts.
The level of work in progress will need to be In addition, consideration should be given
assessed at the year end. Assessing the as to whether an Independent expert is
percentage completion for partially_ required to value the work in progress or if a
constructed buildings is likely to be quite management expert has been used. If the
subjective~ and the team should consider if work of an expert is to be used, then the
they have the required expertise to audit team will need to assess the
undertake this. If the percentage competence, capabilities and objectivity of
completion is not correctly calculated, the the expert.
inventory valuation may be under or
overstated.

The August 20X5 management accounts Detailed cost and net realisable value (NRV)
contain $2.1 million of completed properties; testing to be performed at the year end and·
this balance was $tlt million in September the aged inventory report to be reviewed to
20X6. assess whether inventory requires to be
The increase in ·inventory may be due to an. written down.
increased level of pre year-end Grders.
Alternatively, it may be that Prancer
Construction Co is struggling t6 sell·
completed properties, which may indi.cate
that they are overvalued. lAS 2 Inventories
requires that inventory should be-stated at
the lower of cost and NRV. ·

At the year end there will be inventory The auditor should assess. for which of the
counts undertaken at all11 of the building ·building sites they will attend the counts.
sites in progress. · This will be those with the most material·
It is unlikelbJ that the auditor will be able to inventory or which according to
attend all of these inventory counts. management have the mostsignificant risk
increasing detection risk. and therefore th~y of misstatement.

192 Audit and Assurance @aPP

 Audit risk Auditor's response

. need to. ensure that they obtdin sufficient For. those not:visited;·the Quditor will need to
evidence oyer the inventory counting · review ·the lever of exceptions--noted during
controls, and completeness and existence of the count anci c:Jiscuss with management
for any sites not visited._ any issues." w~ich arose during :the count ..

Prancer Construction Co offers its , Discuss with mat:Jagement the basis of the
customers a building warranty of five ·years, provision calculation, and compare this to
which covers any construction defects. A the level of p9st year-end claims~ if any~
warranty provision will be required under made by customers:, In particular, discuss
lAS 37 Provisions. Contingent Liabilities and the rationale behind reducing the level of
Contingent Assets. Calculating warranty provision this _year.
provisions requires judgement as it is on Compare the prior year provision with the
uncertain amount. actual level of claims in the year, to assess
The finance director anticipates this the reasonableness of the judgements
provision will be lower than last year as the made by management.
company has improved its building
practices and the quality of its finished
properties. However; there is a risk that this
provision could be understated, especially
in light of the overdraft covenant relating to
a minimum level of net assets and is being
used as a mechanism to manipulate profit
and asset levels.

Customers who wish to purchase a Discuss with management the treatment of

property are required to place an order and deposits received in advance, to ensure it is
a 5% non-refundable deposit prior to the appropriate.
completion of the building. During the final audit, undertake increased
These deposits should not be recognised as testing over the cut-off of revenue and
revenue in the Btatement ofprofit or loss completeness of deferred income.
until the performance obligations as per the
contracts have been satisfied, which is likely
to be when the building is finished and the
sale-process is complete. Instead. they
should be recognised as deferred income
within current liabilities.
Managementmay have incorrectly treated
the deferred income as revenue) resulting in
overstated revenue and understated
liabilities.

An allowance for receivables has historically Review and test the controls surrounding
been maintained, but it is anticipated thdt how the finance director identifies old or
· this will be reduced. potentially irrecoverable receivables
· There is a risk that receivables will be bafances and credit control to ensure that
overvalued; some balances may not be they are operating effectivel!-J· ·
recoverable and so will be overstated if not· Discuss with the director the rationale for
· provided for . reducing the allowance-for receivables.
. In addition, reducing the allowance for Extended post year-end cash receipts
i receivables will increase. asset values and testing_ and a review of the aged receivables.
would improve the covenant compliance, led~:jer to be p~rforrned to assess valuation
which increases the manipulation risk· and the need for an allowance for -
·. further. receivables.

@BPP Answers 193

 Audit risk Auditor's response

Prancer Construction Co has a materiaL Review the-' covenant calcwatlons prepared

overdraft which has minimum profit and net by the company at the year end and
assets covenants attached to it. If these identify lfv'hether any defaults have
covenants were to be breached, the occurred; ifso~ de.terminethe effect on the
overdraft balance would become instantly company.
repayable. The team. should maintain their professional
If the company does not have sufficient scepticism and be alert to the risk that
cash to meet this repayment. then there profit and/or net assets have been
could be going concern implications. overstated to ensure cbmpfiance with the
In addition, there is a risk of manipulation of covenants.
profit and net assets to ensure that
covenants are met.

Preliminary analytical review of the August The audit team should increase their testing
management accounts shows a payables on trade payables at the year end. with a
payment period of 56 days for August particular focus on completeness of
20X5, compared to 87 days for September payables. A payables circularisation or
20Xlt. It is anticipated that the year-end review of supplier statement reconciliations
payables payment period will be even lower. should be undertaken.
The forecast profit ·is higher than last year!
indicating an increase in trade_, also the
company's cash position has continued to
deteriorate and therefore, it is unusual for
the payables payment period to have
decreased.
There is an increased risk of errors within
trade payables and the year--end payables
may be understated.
'············~·········•······· .. ············ ·······-········- ... -... · ··-····-······-····· ···- ....

72 Blackberry Co
. \

Course Book references

Chapter 6.

Top tips
Part (a) dealt with responsibilities for fraud. This is a simple area that you should be familiar
with.
Part (b) was an application-based requirement. It is essential that you only ihcluc:le eight audit
risks in your solution, the 16 marks available divide themselves into one each for describing the
audjt risk and then for the auditor's response to it. Your description of the audit risk should say
what is happening and then, crucially, why this poses an audit risk in termsof problems that
could be encountered during the audit.(perhaps due to lack of available information) or which
balances could be over or understated.The auditor's response is then focused on reducing the
audit risks. .

Easy marks
You: should have found part (a) reasonably straightforward. There are marks in (b) for giving a
· simple description of each audit risk from the scenario (the marks for identification), and these.
are easy to get.

191t Audit and Assurance @aPP

)

- Examining team•s comments

: .This area df the syllabus requires an understqnding of how the auditor oq;tains and_ accepts
audjtengagem~pts. obtains an understanding of the entity and its envrron_rnent.-asses~es the .
risk ofmoterial misstatement and plans an aUdit or the financial statements~
As rtoted in previous Examining team's reports a fundamental factor in planning and assessing
em
the risks of~ audit ofan entity is an assessment of audit risk. and.this·remains a highly
examinable _area. Audit risk questions typically require a number of audit risks to_be identified .
) (Y2 inorks each). ~xplained 012 marks. E3ach)and an auditor's responseto_eaclirlsk (1 mark
each). -Typically candidates oan be required to identify and explain in the r(3gion of. six to eight
risks and responses.
I The spenodos usually contain more issues than are required to be d1SCL1Ssed. It is pleasing that
candidates planned their time carefully and generally only attempted to list the required
)
number of issues. However, In common with other sessions, a significant number of candidates
)
often did not explain how each issue could impact on the audit risk and therefore were not
awarded the second Vz mark. To explain audit risk candidates need to state the area of the
financial statements impacted with an assertion (eg cut off, valuation etc.), a reference to
under/over/misstated, or, a reference to inherent, control or detection risk. Misstated was only
I
awarded if it was clear that the balance could be either over or understated.
Candidates should note that an auditor's response does not have to be a detalled audit
procedure, rather an approach the audit team will take to address the identified risk. However,.
the responses given were sometimes too weak eg 11 discuss with management". Responses also
sometimes focussed on what management should do rather than the auditor~ and/or~ were
inappropriate to the scenario.

\
Marks

(a) Fraud and error

ISA 240 responsibilities 2
Respond <?ppropriately 2
Maximum 4
(b) Audit risks and responses (only required)
Inventory valuation 2
_Inventory c.ount after \:jear-end date 2
Accounting treatment of patent 2
Share issue 2
Receivables ledger fraud 2
Use of service organisation 2
Transfer of data to service organisation 2
Claim for unfair dismissal 2
_ Direct controls not performed 2
Contingent asset 2
Maximum 16 -·
Total 20
-

(a) Fraud responsibility

· Loganberr\:j 8 Co must conduct on audit-in accordcmce with ISA 21tQThe A.LJditor1s
·Responsibilities Relating to Fraud in an Audit of f:ii1ancia/ Stgtements and is responsible for
obtaining reasonable assurance that the financial statements taken as a whole are free from
material misstatement, whether caused b\:J fraud or error.

@BPP Answers 195

 In order to ·fulfil this responsibility, Loganberry 8 Co is required to_ identify and ass~s~ the risks ·
of material misstatement of the financial statements due to fraud.
· They need to obtain sufficient appro-priate audit evidence regarding the ass~ssed risks of
·material misstatement due to fraud through designing·and implem-emti!lg appropriate
responses. In addition, LoganberrbJ & Co must respond appropriatelbJ to fraud or suspected
fraud identified during the audit.
When obtaining reasonable assurance, Loganberry & Co is responsible for maintaining
professional scepticism throughout the audit, considering the potential for management
. override of controls and recognising the fact that audit procedure~ Which are effective in
detecting error may not be effective in detecting frau~.
To ensure that the whole engagement team is aware of the risks and responsibilities for fraud
and error, ISA 240 requires that a discUSqion is held within the team. For members ilot present
at the meeting, Blackberry Co's audit engagement partner should determine which matters
should be communicated to them.
(b) Audit risks and auditor's response

Audit risk Auditor's response

,, ·'. '. ' · ............ .

BlackberrbJ Co values its inventory at the Discuss with management the nature of the
lower of cost and net realisable value. Cost overheads included in inventory valuation. If
includes both production and general general overheads are included, request
overheads. management remove them from the
lAS 2 Inventories requires that costs valuation to be included in the draft
included in valuing goods and services financial statements.
should only be those incurred in bringing Review supporting documentation to verify
inventor!:J to its present location and those overheads deem-ed to be of a
condition. Although production overheads production nature are valid.
meet these criteria, general overheads do The auditor should attend the inventory
not. If these are included in inventory cost, count held after the year end and note
then this will result in over-valued inventory. details of goods received and despatched
The compan!:J is planning to undertake the post l:Jear end, in order to agree to the
full year-end inventory counts after the reconciliation.
l:Jear end and then adjust for movements During-the final audit, the ~ear-end
from the year end. inventory adjustments schedule should be·
If the adjustments are not completed reviewed in detail and agreed to supporting.
accurately, then the year-end inventory documentation obtained during the
could be under or overstated. inventor!:J count for oil 0djusting items.
The audit team should increase the extent
of inventory cut-off testing at the year end
and at the date of the count.

A patent has been purchased for $1.1 million The audU team will need to agree the
·and this grants BlackberrbJ Co the exclusive purchase price to supporting ·
right for three years to customise their documentation and confirm the useful life is
portable music players to gain a three years as per the contract.
competitive advantage in their industry. Discuss with management the reason for
Management has expensed tf1e full amount fully expensing the $1.1 million paid, and
paid to the current year statement of profit . request they correct the-treatment.
or loss. The correcting journal should be reviewed
In accordance with lAS 38 lntarygible Assets, and the amortisation charge should be
this should have been included as an recalculated in order to ensure the
intangible a!;ls~tand amortised over its accuracy of the ch~rge and that the
three-year life. As the sum has been fully intangible is correctly valued at the· year
expensed and not treated in accordance end.
with lAS 38, intangible assets and profits
are understated.

196 Audit and Assurance @aPP

 Audit risk Auditor's response

Durfng the ge.ar Blackberry Co has raised The audit team should confirm that
new finance through issuing$1.2 million of proceedsof $1.2 mliHon·were rece_ived and
shares at a premium. This need~ to be that the split of shore capital and share
accounted for co.rrectly, with adequate premium is correct and appropriately
disclosure mode and the equity finance recorded. . '
needs to be allocated correctly between In addition, the discl~sures forth is finance
share capital and share premium. in
should be· revi.ewed detail 'to ensure
If this is not done, then the accounts may compliance with relevant accounting
be misstated due to a lack of disclosure or standards and local legislation.
share capital and share premium may be
misstated.

In Novernber 20X7, it was discovered that a Discuss with the fino hoe director what
significant teeming and lading fraud had procedures they have adopted to fully
been carried out by four members of the identify and quantify the impact of the
receivables ledger department. teeming and lading fraud. In addition,
There is a risk that the full impact of the discuss with the finance director, what
fraud has not beenquantified and any controls have been put in place to identify
additional fraudulent transactions would any similar frauds.
need to be written off in the statement of Review the receivables listing to identify any
profit or loss. If these have not been unusual postings to individual receivable
uncovered, the financial statements could balances as this could be further evidence
be misstated. of fraudulent transactions.
In addition, individual receivable balances In addition, the team should maintain their

•
may be under/overstated as customer professional scepticism and be alert to the
receipts have been misallocated to other risk of further fraud and errors.
receivable balances.

During tt~e year.Biackberry Co outsourced Discuss wtth management the extent of

its receivables ledger processing to an records maintained at Biackberry Co for the
external service organisation. A detection period since February 20X8 and any
risk arises as to whether sufficient and · monitoring of controls undertaken by
e appropriate evidence is available at · management over sales and receivables~
Blackberry Co to confirm the compleh;mess Considoration should be given to
and accuracy of controls over the sales and. contacting the service organisation's
receivables CI:Jcle and balances at the year auditor to confirm the level of controls in
end. · place.

The receivables ledger processing Discuss with management the transfer

transferred to the service organisation from process undertaken and an\) controls put in
1 February 20X8. If any errors occurred place to ensure the cornpleter1ess and - ·
during the transfer process, these could accuracy of the data.
result in soles and receivables being Where possible, undertake tests of contrb\is
under/overstated. to confirm the effectiveness of the transfer
controls. In addition, perform substantive
testing on the transfer of information from
the old to the new SbJStern. · ·

In December 20X7, the fincmciol. accountant . The audit team should reql.rest confirmation
of Blackberry Co was disrn.issed and is from the ·company's lawyers of the
threatening to sue the company for unfair existence and likelihood of success of any
dismissal. · claim from the formt7r finoncial accountant.

@BPP Answers 197

 Audit risk Auditor's response

If it is probable that Blackberry Co will

make a..payment to the financial
accountant, a provision for unfair dismissal
is required. If the payment is possible rather
than probable, a contingent liability
disclosure would be necessary. If
Blackberry Co has not done this, there is a
risk over the completeness of any provisions
or contingent liabilities.

No supplier ,statement reconciliations have The audit team should increase their testing
been performed in the period from on trade payables at the year end,
December 20X7 to the year end. including performing supplier statement
This a direct control which is being reconciliations, with a particular focus on
overridden and as such there is an completeness of trade payables.
increased risk of errors within trade
payables and the year-end payables
balance may be under or overstated.

A current asset of $360,000 has been Discuss with management whether any
included within the statement of profit or notification of payment has beeh received
loss and assets. It represents an anticipated from the liquidators and review the related
pay out from liquidators handling the correspondence. If virtually certain, the
bankruptcy of a customer who owed treatment adopted is correct. If payment
Blackberry Co $0.9 million. The sum of $0.9 has been received, agree to post,..year end
million was written off in the prior year bank ledger account.
accounts. If receipt is not virtually certain,
However, the company has not received a management should be requested to
formal notification from the liquidators . remove it from profit and receivables. If the
confirming the payment and this Would receipt is probable, the auditor should
therefore represent a possible contingent request management include a contingent
·asset. To comply with lAS 37 Provisions; asset disclosure note.
Contingent Liabilities and Contingent
Assets. this should not be recognised until
the receipt is virtuaii\~J certain. With no firm
response to date, the inclusion of this sum
overstates profit and current assets.·

:' (~ I'i Videos- can be viewed by accessing your ebook version on VitaiSource.

73 Darjeeling Co

Course Book references

Chapter 6, 13 and 14.

Top tips
Part (a) was a simple knowledge requirement on which you should have a chance of scoring at
least two marks. If you were not sure of your knowledge here, then you could think about what
the stages of an audit would be, and then consider why analytical procedures might be used
at each stage.

198 Audit and Assurance @BPP

)

Port (b) simply asked for three ratios for both years- so:slx calculations irttotal. The.se_did not _·
need to be complex. but it is importantthqt you worked carefully and picked up the right-.
·_figures from the question.~~e carefLiLnottq WQqte t!me·by calculating-more .ratios than ar~ .
m:eded, or writing out the formula foreC:Jch ratio. ·
·Part (c) was an application-based requirement. It is essential that you only include eight audit
risks in your solution; the 16 marks ovailable divide themselves into one each for d~scribing.the
audit dsk and then for the auditor's response to it. Your description 'of the audit risk should say
what is happening .and then, crucially, why this poses an audit risk. This statement~of why
could address a problem that could be encountered during the audit (eg due to ldck of
available information). or simply which balances could beover or understated. Jhe auditor's
response is then focused on reducing the audit risks. '- - - -
Part (d) asked for substantive procedures on the faulty paint inventory~ When writing your
procedures you need to be as specific as possible, and should say why the procedure should
be performed. Do not overlook procedures that begin with 'Discuss with management',_ you
could have scored two out of three marks here merely for 'discuss' procedures.
Part (e) was similar to (d) but focused on revenue. Many ofth.ese are generic points that would
apply to tTmny different situations, but there are easy marks available for thinking of
procedures that are specific to Darjeeling Co and its sales price promise.

Easy marks
There are marks in (c) for giving a simple description of each audit risk from the scenario (the
marks for identification), and these are eaShJ to get.

Examining team's comments

As noted in previous examiner's reports a fundamental factor in planning and assessing the
risks of an audit of an entity is an assessment of audit risk, and this remains a highly
examinable area. Audit risk questions typically require a number of audit risks to be identified
(% marks each), explained (% marks each) and an auditor's response to each risk (1 mark
each). Typically candidates can be required to identify and explain in the region of six to eight
risks and responses. ·
The scenarios usually contain more issues than are required to be discussed. ·It is pleasing that
candidates planned their time carefully and generally only attempted to list the required·
number of issues. However, in common with other ses$ions, a significant number of candidates
often did not explain how each issue could irnpact on the audit risk and therefore were not
awarded the second% mark. To explain audit risk candidates need to state the area of the
financial statements impacted with an assertion (eg out off, valuation etc), a reference to
under/over/misstated or, a reference to inherent, control or detection risk. Misstated was only
awarded if it was clear thqt the balance could be either over or understated.
Candidates should note that an auditor's response does not have to be a detailed audit
procedure, rather an approach the audit team will take to address the identified risk. However,
the responses given were sometimes too weak eg idiscuss with management'. Responses also
sometimes focussed on what management sl_1ou~d do rather than the auditor, and/or, were
inappropriate to the scenario.
' .. .

As in previous sessions, in this session a number of a·udit risk questions were combined with a
requirement to calculate ratios, these ratios then link into the risk anc;l responses requirement.
'Darjeeling Co' from the 'Sample September/December 2018 Questions' is a good question to
practice the skill of calculating ratios and applying these to a risk and response question ..
Candidates tcmd to score well in calculating ratios, however a few points. to note are as follows:
Do not calculate more than the required number of ratios a~ this wastes tirne
Do not provide the formula for ratios, as no credit is available

@BPP Answers 199

 Marks -

(a) Analytical procedures

. Must be use~ at planning a~ risk assessment tool
Can be used to ·gather evidence during fieldwork ·1
Must be used at completion to confirm overall conclusion
Maximum 3
{b) Rati<;>s (3 ratipsr·P calculations, 0.5 for each calc)
. Inventory holding per-iod
Receivables collection period
Quick ra-tio
Maximum 3-
. (c) Audit risks and responses (only 8 required)
Treatment of research and development costs 2
Incorrect capitalisation of PPE costs 2
New significant loan finance 2
Finance costs 2
Risk of manipulation due to potential listing 2
Recoverability of receivables 2
Accounting for 'price promise, 2
·Product recall 2
Inventory valuation 2
Significant increase in revenue and gross margin 2
Cash flow difficulties 2
Maximum 16
(d) Substantive procedures - faulty inventory
One mark per well explained procedure 3
Maximum 3
(e) Substantive procedures - revenue
One mark per well explained procedure 5
Maximum
,-
;)

Total 30
-

(a) Analytical procedures

AnalyticaJ procedures can be used at all stages of an audit, however, ISA 315 (Revised)
fdentifying and Assessing the Risks of Material Misstatement and ISA 520 Analytical
Procedures identify three particular stages.
During the planning stage, analytical procedures must be used as risk assessment
procedures in order to help the auditor to obtain an understanding of tbe entity and ossess
thf? risk of material misstatement.
During the ffnal audit, analytical.procedures can be used to obtain suffident appropriate
evi<;lence. Substantive procedures can" either be tests ofdetail orsubstantive analyticol .
procedures.
At the final review stage~ the auditor must
design and perform analytical procedures which
assist them when forming an overall conclusion as to whether the financial statements are.
consistent with the auditor's understanding of the entity.
(b) Ratios
Ratios to assist the audit supervisor in planning the audit:

200 Audit and Assurance @aPP

 20X5 20X4
(1,33Q/1Q~8QQ) X 365 = 45
days

Receivables collection
period

Quick ratio -

(c) Audit risks and responses

Audit risk Auditor's response

During the year, Darjeeling Co has spent Obtain a breakdown the expenditure and
$0.9m on developing new product lines, verify that it relates to the development of
some of which are in the earl!d stages of the new products. Review expenditure
their development cycle. This expenditure is documentation to determine whether the
classed as research and development under costs relate to the research or development
lAS 38 Intangible Assets. The standard stage. Discuss the accounting treatment
requires research costs to be expensed to with the finance director and ensure it is in
profit or loss and only development costs to accordance with lAS 38.
be capitalised ds an intangible asset.
The compan!d has included all of this
expenditure as an intangible asset. If
research costs have been incorrectly
classified as development expenditure,
there is a risk that intangible assets could
be overstated and expenses understated.

Darjeeling Co purchased and installed a Review the purchase documentation for the
newmonufacturing line. The costs include new manufacturing line to confirm the exact
purchase price ($2.2m), installation costs cost of the servicing and that it does relate
($Q.L~m) and a five-!dear servicing and to.a five:-!dear period.
maintenance plan ($0.5m). Discuss the accounting treatment with the
As per lAS '16 Property, Plant and finance director and the level of ang
Equipment, the cost of an asset includes its necessary adjustment to ensure treatment
purchase price and directly attributable is in accordance with lAS 16.
costs only. lAS 16 does not allow servicing<
and maintenance costs to be capitalised as
part of the cost of a non-current asset, as
they are not directly related to the cost of
bringing the asset to its working condition.
The servicing costs relate to a five-year
1 period and so should be charged to profit or
' loss over this time. The upfront payment
represents a prepayment for five years; as
the services qre received, the relevant
proportion of the. costshould be charged to
profit or loss. lfthe service for 20X5 has
been carried out, then $0.1m .($0.5m/5)
shol.Jid be charged to profit or loss.
Therefore property, plant and equipment
(PPE) and profits are overstated and
prepa!dments are understated.

@aPP Answers 201

 The company has borrowed $4 mill.ion Ourtng the audit, the-team would need to
the bank via an eight..,year loan. This loan confirm that the $4 .million loan finan~e wa$
needs to be correctly split between current received. In .additi<;>n, the split between
and non-current liabilities in order to ensure current and non-current liabilities and the
correct disclosure. disclosures for this loan shoulo be reviewed
In detail to ensure compliance with relevant
accounting standards and local legislation.
Details of security should be agreed to the
bank confirmation letter.
~-----·- .. ···-·"
As the ievel of debt has increa~ed, there The finance costs should be recalculated
should be additional finance costs as the and any increase agreed to the loan
loan has an interest rate of 5%. There is a documentation for confirmation of the 5%
risk that this has been omitted from the interest rate. Interest pa!:Jments should be
statement of profit or loss leading to agreed to the bank ledger account and
understated finance costs and overstated bank statements to confirm the amount was
profit. paid and is not therefore a year-end
payable. ·

Darjeeling Co intends to undertake a stock Earl 8 Co should ensure that there is a

exchange listing in the next 12 months. suitably experienced audit team. Also,
In order to maximise the success of the adequate time should be allocated for team
potential listing~ Darjeeling Co will need to members to obtain an understanding of the
present financial statements which show company and the significant risks of
the best possible position and performance. overstatement of revenue, profits and
The directors therefore have an incentive to assets, including attendance at an audit
manipulate the financial statements, by team briefing. The team needs to maintain
overstating revenue. profits and assets. , professional scepticism and be alert to the
increased risk of manipulation.
Significant estimates and judgements
should be carefully revi~wed in light of the
misstatement risk.

The receivables collection period has Review and test the controts surrounding
increased from 38 to 51 days and how Darjeeling Co identifies receivables
management has extended the credit terms ·balances which may not be recoverable
given to customers on the condition that and procedures around credit control to
sales order quantities were increased. The ensure that they are operating effectively.
increase in receivabk~ days could be solely Extended post year-end cash. receipts
·due to these increased credit terms. testing and a review of the aged receivables
However, it could also be due to an ledger to be performed to assess valuation.
increased risk over recoverabilit!:J of, Also consider the adequac!d of any
receivables as they maQ be overvalued and allowance for receivables.
expenses understated.

This !:Jear the company made a 'price Discuss with management the basis of the,
promise' to match the price of its · refund liability of $0.25 million and obtain
competitors for similar products. Customers supporting documentation to confirm the
are able to claim the difference from the · reasonableness of the assumptions and
company for one month after the date of calculations.
purchase of goods.
The cornpan!:J shoLlld account for the price
promise in accordance with !FRS 15 Revenue
from Contracts with Customers. As the
compan!J may be required to provide a
refund, the anticipated refund amount
should not be initially recognised as revenue
but instead as a refund liabilit!:J until the

202 Audit and Assurance @BPP

one-month price promise period has ended.
This is·a.highly subjective area, with many
ju,dgements required withregards to the
level of likely refund due. As .this is a new
liability, the director$ may not have ··
conectly acco.unted for this sum resulting in
overstdted revenue, under/overstated profits
and liabilities ..

lrirliOO::::.Ii.nri Co has stopped further sales. of Review the list of sales of the paint produCt
one its paint products and a product made between June and the date ofthe
recafl hds been initiated for any goods sold recdll, agree that the sales have been
since Ju_ne. removed from revenue and the inventory
This product recall will result in Darjeeling included. If the refunds have not been paid
Co paying refunds to customers.The sales before the year end, review the draft
will need to be removed from the 20X5 financial statements to confirm that it is
financial statements and a refund liabilitb:) included within current liabilities.
recognised. Also inventory will need tobe
reinstated, albeit at a possiblb:J written down
value. Failing to account for this correctlb:J
could result in overstated revenue,
understated liabilities and misstated
inventorb:J.

The company is holding a number of Discuss with the finance director whether
damaged paint products in inventorb:J and anb:Jwrite downs will be made to this
overall the inventory holding period has product, and what~ if any, modifications will
increased from 45 days to 54 days. be required to rectify the quality of the
Due to the issue with the paint consistency, product.
the quality of these products is Testing should be undertaken to confirm
questionable and management is cost. and NRV of the affected paint products
investigating whether these products can held in inventory and that on a line-by-line
be rectified. There is a risk that this basis the goods are valued correctly.
inventory may be overvalued as its net
realisable value 1i1ay be below cost.

Revenue has increased by 16.8% in the year;· During Uie audit a detailed breakdown of
and the gross margin has increased slightly sales will be obtained, discussed with
from 36.4% ·to 37.3%. This is a significant~ management and tested in order to
increase in revenue and, along with the· understand the sales increase. Afso
increase in gross margin, may berelatedto increased cut-off testing should be
the increased credit period and price undertaken to verify that revenue is
promise promotion or could be due to an recorded in the right period and is .not
overstatement of revenue. overstated.

payables payrnent period has Detailed going concern testing to be ..

increased from 40 to 58 days. The current performed during the audit, including the
ratio has decreased from 3.08 to 1.65. The review of cash flow forecasts and the
quick ratio has also decreased frorn 1.97 to ·underlying assumptions. These should be
0.99; discussed with management to en~ure that·
the going concern basis is reasonable.

In addition. the bank balance has rnoved

from $0.56 million to an overdraft of $0.81
million.

Answers 203
 These are all indicators that the-company ·
could be experiencing a reduction in its
cash flow which could result in going
concern difficulties or uncertainties. These
uncertainties may not be adequately
disclosed in the financial statements.
..
.

(d) · Faulty inventory

Obtain a breakdown of the damaged goods held in inventory and returned from
customers and cast to confirm its accuracy .. :
From the breakdown, agree the damaged goods quantities manufactured since June to
production records; and agree to sales records thequantlties sold.
Agree on a sample basis the returns from customers as per the breakdown back to sales
returns documentation to confirm the existence of the returns quantities.
· Discuss with management the current status of their plans for this product line and
whether they are able to rectify the damage and then sell the goods on. If so, agree the
costs of rectification to supporting documentation.
If the damaged inventory has been rectified and sold post year end, agree to the sales
invoice to assess NRV in line with the new cost of the product.
Agree the cost of damaged goods to supporting documentation to confirm the raw
material cost, labour cost and any overheads attributed to the cost.
Discuss with management if the goods have been written down; if so, follow through the
write down to the inventory valuation to confirm.
Inspect monthly board meeting minutes from June 20X5 onwards to obtain further
information regarding the faulty paint and its possible resale value.
(e) Revenue
Compare the overall level of revenue against prior years and budget for the year and
investigate any significant fluctuations.
Perform a proof in total calculation for revenue, creating an expectation ofthe average.
price for the main paint products multiplied by the increased sales volumes for this year.
This expectation should be compared to actual revenue and any significant fluctuations
should be investigated. ·
Obtain a schedule of sales for the year broken down into the main product categories and
compare tl1is to the prior year breakdown cmd for any unusual movements, discuss with
management.
Calculate the final gross profit marg.in for Darjeeling Co and compare this to the prior
year and investigate any significant fluctuations.
Select a sample of sales invoices for customers and agree the sales prices back to the
price list or customer master data information to ensure the accurac!:J of invoices.
For a sample of invoices, recalculate invoice totals including discounts and sales tax;
Select a sample of credit notes raised, trace through to the original·if!\/Oice and ensure the
invoice has been correcti~;J removed from sales.
Select a sample of customer orders and agree these to the despatch notes and sales
invoices through to inclusion in the receivables ledger and revenue general ledger·
accounts to ensure completeness of revenue.
Select a sample of despatch notes both pre and post year end·and follow these through to
sales invoices in the correct accounting peri9d to ensure that cut-off has been correctly
applied.
For sales made under the price promise, compare the level of claims made to date with the
refund liability recognised and assess whether it is reasonable.

201t Audit and Assurance @BPP

 For.qsample of sales invoices issued between June and the product recall} trac~ to
subsequent cr~dit notes to confirm that the sqle has been remove.d from revenue.

71+ Hurling Co

·Course Book references ...

Chapters 4 and 6.

Top tips
This question is a typical scenario-based question testing the area of audit r:isk. To score well in
part (b) it is essential that your audit risk is properly explained (in terms_ of what could be
over/under stated in the financial statements) and also that you come up with practical
actions that the auditor would take to gain evidence. Part (c) on ethical threats and
safeguards is another area where it is very important to fully explain both the threat and the
safeguqrd.

Easy marks
You should have found parts (a) and (c) reasonably straightforward.

Examining team's comments

Questions on assessing audit risks tend to be scenario based; the candidates having to
identify and explain the risks from a scenario and give an auditor's response to address the
risks. Other questions in this area of the syllabus tend to be more factual, knowledge based
questions and hence depends on the ability of students to recall their knowledge in the exam.
As noted in previous Examining team's reports a fundamental factor in planning and assessing
the risks of an audit of an en tit~ is an assessment of audit risk, and this remains a highly
examinable area. Audit risk questions typically require a number of audit risks to be identified·
(Y2 marks each), explained (Yl marks each) and an auditor's response to each risk(1 mark
each).
The scenarios usually contain more issues than are required to be discussed. It ls pleasing that
candidates planned their time carefully and generally only attempted to list the required
number of issues. However, a large number of candidates often did not expfain how each issue
could impact ori the audit risk and therefore were not awarded the second !-1! mark. To explain
audit risk candidates need to state the area of the accounts impacted with an assertion (eg
cut off, valuation etc), or, a reference to under/over/misstated, ort a reference to inher~nt,
control or detection risk. Misstated was only awarded ·if it was clear that the balance could be
either over or understated.
Auditor's responses. continue to be weak and while an auditor's response does not have to be a
detailed audit procedure, rather an approach the audit team will take to address the identified
risk, the responses given were sometimes too weak eg 'discuss with management',;,:
A minority of candidates discussed business risks and therefore concentrated theif responses
on what management should do rather than the auditor.
Regarding part (b): QLiestions in this area may presentcandidateswith a scenario-based
ethics question and performance in this area remains satisfactory~ Candidotes are generally
asked to identif~ and explain a set number o·f issues frorn a given scenario and give relevant.
recommendations to counter the risks identified.
It is pleasing to note evidence of candidates planning their time carefully-and ge.nerqlly only
listing the required number of issues. · · ·
One mark was available for each wen ex~'>lained issue. As in previous sittings, while it was ·
pleasing that candidates were ablE) to ic,:h:mtify relevant issues from the scenario, candidates
oftendid not explain the issues correctly, or In sufficient detail, therefore rnany candidates
scored Y2 marks rather than one mark for each issue.

Answers 205
 Therefore, a candidate wh-o iqentified an issue and stated the type of threat scored~ marks,
to be awarded the second'~ mark the candidate had to-explain why this._caused an ethica·l
probiBni.The explanation-was often weak~ for example explaining the threat of'self-interest
resulting from contingent audit fees, as 'the auditor will not be independent' is not sufficient.
The candidates needed to comment on the possibHit!:J of the auditor 'ignoring audit
· adjustments tho.~ reduce profits' to obtain the second Y2 mark.

Marks

(a) Audit risks and auditor's responses (only 8 required)

Capitalisation of website costs 2
Warehouse acquisition 2
Classification of preference shares 2.
Appropriateness of asset useful lives 2
Irrecoverable receivable 2
Sales staff bonus scheme 2
Product recall 2
Legal action 2
Audit timetable, increased detection risk 2
Accounting for proposed dividend
Maximum
-2 16
(b) Ethical threats and appropriate safeguards
Intimidation threat- audit timetable 2
Self-interest threat - recruitment 2
Familiarity threat- EQR review 2
Self-interest/intimidation threat- fees 2
Self-interest threat - contingent fee 2
Self-interest threat- outstanding fees 2
Maximum 10
(c) Significance of the breach
How the breach occurred and wos identified
· Actiori proposed or taken and wh!:J that will address the breach·
Conclusion that objectivity has not been compromised and Wh!:J
Steps to reduce or avoid the risk of further breaches
Polides and procedures· to provide reasonable assurance independence is
maintained
. Maximi.1rn 4
Total 30

(a) Audit risks and audito~'s response

Audit risk Auditor's response

Hurling Co upgraded their website during Review a breakdown of the costs and agree
the !:Jear at a cost of $1.1 million. The costs to invoices to assess the nature of the
incurred should be correctly allocated expenditure and if capital, agree to

206 Audit and Assurance @BPP

 Audit risk Auditor's response

between revenue ar~d capital expenditure. inclusiqn.withiri the asset register or agree
As the website has be(m·upgraded, there is to the statem~nt of profit or loss.
a _possibility that the. new processes a.nd The audit. team shpuld document the-
systems·may notrecord data reliabl_y and revised _system and undertake tests over the
accurately. This may lead to tJ risk over completeness -and accuracy of data
completeness and accuracy of data in the recorded from the website to the
underlying accounting records. . accounting records •.

Hurling Co has entered into a transaction to Discuss with manage men~ as to whether the
purchase a new warehow~e for $3;2 million warehouse purct10se was completed by the
and it is anticipated that the legal process year end. lfso, inspect legal documents of
will be completed by the year end. ownership, such as title deeds ensuring
Only assets which physically exist at the these are dated prior to 1 October 20X5 and
year end should be .included in property, are in the company name.
plant and equipment. If the transaction has
not been completed by the year end, there
is a risk that assets are overstated if the
company incorrectly includes the
warehouse at the year end.

Significant finance has been obtained in the Review share issue documentation to
year, as the company has issued $5 million confirm that the preference shares are
of irredeemable preference sbares. This irredeemable. Confirm that they have been
finance needs to be accounted for correctly classified as equity within the
correct!~:~, with adequate disdosure made. accounting records and that total financing
As the preference shares are irredeemable. proceeds of $5 million were received.
they should be classified as equity rather In addition, the disclosures for this share
than non-current liabilities. Failing to · issue should be reviewed in detail to ensure
correctly classify the shares could result in compliance with relevant accounting
understated equity and overstated non- standards.
current liabilities.

The finance director has extended the Discuss with the direCtors the rationale for·
useful lives of fixtures and fittings from any extensions of asset lives and reduction
three. to four years, resulting in the. of depreciation rates. Also, the four-year life
depreciation charge reducing: Under lAS 16 should be compared to how often-these
Property, Plant and Equipment, useful lives assets are replaced, to assess the useful life
are to be reviewed annually; and if asset of assets.
lives hove genuinely increased, then this
change is reasonable. ·
However, there is a risk that this reduction
has occurred in order to boost profits. If this
is the case, then fixtures and fittings are
overvdlued and profit overstated.

A customer of Hurling Co has been Review the revised credit terms and identifbJ
encountering difficulties paying their if any Ofter date cash receipts ·for this
outstanding balance of $1.2 million and customer have·been made.
Hurling Co has agreed to a revised credit· Discu~s with the finance director whether he
period. intends to .make an allowance for this
If the customer is experiencing difficulties,- receivable. lf'not, review whether any
there is an incireased risk that the receivab1e existing allowance for uncollectable
is not recoverable and hence is overvalue¢!. accounts is sufficient to cover the amount ·
of this receivable.

@BPP Answers 207

I
 A sales-rela~ed bonus scheme hm~ been _ Increased sales cut-off testing will be
introduced in the year fot sales s~aff, with a . performed along with a review of a"n!J post
signifi_q_qht nurnber of new customer · !Jear-end returns as they may indicate cut-
acco.unts on favourable credit terms being off errors. In addition~ increased after date
opened pre !Jear end. This has resulted in a cash receipts testing to be.undertoken for
5% increase !n revenue, new. customer account. rece iva bl es.
Sales staff seeking to maximise their current
year bonus ma!J result in new accounts
being opened from poor credit risks leading
to irrecoverable receivables. In addition,
there is a risk of sales cut-off errors as new
customers could .place orders within the
two-month introductory period and
subsequently return these goods post year
end.

Hurling Co has halted further sales of its Discuss with the finance director whether
new product Luge and a product recall has any write downs will be made to this
been initiated for an!:J goods sold in the last productt and what, if any, modifications
four months. may be required with regards the quality.
If there are issues with the qualit!d of the- Testing should be undertaken to confirm
Luge product, inventory may be overvalued cost and NRV of the Luge products in
as its NRV ma!::J be below its cost. inventory and that on a line-by-line basis
Additionali!::J, products of Luge sold within the goods are valued correcti!::J.
the last four months are being recalled, this Review the list of sales made of product
will result in Hurling Co paying customer Luge prior to the recall, agree that the sale
refunds. The sale will need to be removed; a has been removed from revenue and the
refund liability should ~e recognised along inventor!J included. If the refund has not
with the reinstatement of inventor!::!~ been paid pre year end, agree it is included
although the NRV of this inventor!::! could be within current liabilities.
of a minimal value. Failing to account for
this ·correctly could result in overstated
revenue and understated liabilities and
inventory ...
·.--M.·

Petanque Co, a customer of Hurling Co, Caving S Co should write to the company's
has announced that the!J intend to law!:Jers to enquire of the existence and
commence legal action for a loss of likelihood of success of any claim .from
information and profits as a result of the Petanque Co. The results of this should be
Luge product sold to them. used to assess the level of provision or
If it is probable that the company will make disclosure included in the financial
payment to the customer, a legal provision statements.
is required. If the payment is possible mther
than probable, a contingent liability
disclosure would be necessary. If Hurling Co
has not done this, there is a risk over the
completeness of an!J provisions or the
necessar!J disclosure of contingent
liabilities.

The finance director has requested that the The timetable should be confirmed w(th the
audit completes one week earlier than 'finance director. If it is to be reduced, then .
normal as he wishes to report results earlier. consideration should be given to performing
A reduction in the audit timetable will an interim audit in late September or early
increase detection risk and place additional October; this would then reduce the ·
pressure on the team in obtaining sufficient pressure on the final audit.
and appropriate evidence. The team needs to maintain professional
In addition, the finance team of Hurling Co scepticism and be alert to the increased risk

208 Audit and Assurance @aPP

 will have less time to prepare the financiql . oferrors occurring.
inform9tion leading to an increas~d risk of
errors arising in the financial statements.

The company is intending to propose a final Discu9.s the issue with management and
dividend once the financial statements are confirm that the dividend will not be
finalised.This amount shqyld not_be inclu_qed within liabilities in the 20X5
provided for in the 20X5 finc:mciar ·financial statements.
statements, as the obligation only arises The financial statements need to. be
once the dividend is announced, which is reviewed to e·nsure that adequate disclosure
post year end. of the proposed dividend is included.
In line with lAS 10 Events after the Reporting
Period the dividend -should only be
disclosed. If the dividend is includ~d, this
result in an overstatement of liabilities
and understatement of equity.

Note. Only eight risks and eight related responses were required.
(b) Ethical threats and appropriate safeguards

Ethical threat Appropriate safeguard

The finance director is keen to report The engagement partner should discuss the
Hurling Cds financial results earlier than timing of the audit with the finance director
normal and has asked if the audit can be to understand if the audit can commence
completed in a shorter time frame. earlier, so as to ensure adequate time for
the team to gather evidence.
This ma!:J create an intimidation threat on
the team as they may feel under pressure to If this is not possible, the partner should
cut corners and not raise issues in order to politely inform the- finance director that the
: satisfy the deadlines and this could team will undertake the audit in accordance
' compromise the objectivity of the audit with all relevant ISAs and quality
team and quality of audit performed. management procedures. Therefore the·
audit is Lin likely to ~e com·pleted earlier..

If any residual concerns remain or the

intimidation threat continues, then Caving
S Co may need to consider resigning from
the engagement.
........................... ; ..

A non-executive director (NED) of Hurling Caving S Co is able to assist Hurling Co in

Co has just resigned and the directors have that they can undertake roles such as
asked whether the partners of Caving S Co reviewing ·a shortlist of candidates and
can assist them in recruiting to fill this reviewing qualifications and suita_bility.
vocancy. , However, the .firm must ensure that they are
not seen to undertake management
This represents a self-interest threat as the , decisions and so must not seek out - _
audit firm cannot undertake the recruitment ! candldates for th1~ position or make the-final
of members of the-board of Hurling Co, - - decision on who is appointed.
especial!~ a NED who will have a ke!:J rote· in
overseeing the audit process and audiLfirm.

The engagement quality reviewer (EQR) i As-Hurling Co is a listed cornpcmy. theh the
assigned to Hurling Co was until last year l previous- audit engagement partner sl1ould
the auditengagement par-tner. : not be involved in the audit for at least a
This represents a familiarit!d threat as the . period of five years. Ari alternative EQR ·
partner will have been associated with ; should be appointed instead.

@BPP Answers 209

 Ethical threat Appropriate safeguard

Hurling Co ford long periodof time and so

may not retain professional scepticism and
objectivity. ·

Caving & Co provides tdxation services, the Caving S Co should assess whether audit,
audit engagement and possibly services recruitment and taxation fees would
related to the recruitment of the NED. represent more than 15% of gross practice
There is a potential self-interest or income for two consecutive years.
intimidation threat as the total fees could If the recurring fees are likely to exceed 15%
represent a significant proportion of Caving of annual practice income this year,
&Co's income and the firm could become additional consideration should be given as
overly reliant on Hurling Co, resulting in the to whether the recruitment and taxation
firm being less challenging or objective due services should be undertaken by the firm.
to fear of losing su.ch a significant client. In addition, if the fees do exceed 15%, then
this should be disclosed to those charged
with governance at Hurling Co.
If the firm retains all work, it should arrange
for a pre-issuance (before the audit opinion
is issued) or post-issuance (after the opinion
has been issued) review to be undertaken
by an external accountant or by a
regulatory body.

The finance director has suggested that the Caving & Co will not be abJe to accept
audit fee is based on the profit before tax of contingent fees and should communicate to
Hurling Co which constitutes a contingent those charged with governance at Hurling
fee. Co that the external audit fee needs to be
Contingent fees give rise to a self-interest based on the time spent and levels of skill
threat and are prohibited under ACCA's and experience ofthe required audit team
Code of Ethics and Conduct. If the audit members.
fee is based on profit. the team may be
inclined to ignore auqit adjustments which
could lead to a reduction in profit.

At toda~:/s date, 20% of lastyear~s audit fee Caving & Co should discuss with those
is still outstanding and was due for charged with governance the reasons why
payment three months ago. the final 20% of last year's fee hcJS not been
A self-interest threat can ·arise if the fees paid. They should agree a revised payment
remain outstanding, as Caving S Co may schedule which will result in the fees being
feel pressure to agree to certain accounting settled before much more work is performed
adjustments in order to have the previous for the current year audit.
year and this year,s audit fee paid.
In addition, outstanding fees could be
perceived as a loan to a client which is
strictly prohibited ..

·(c) Breach of independence provision set out in the ACCA Code

If an independence provision is breached the firm is required to communicate in writing to
those charged with governance the· following matters:
• The significance of the breach, including its nature and duration
·How the breach occurred and how itwos identified
• The action proposed or taken and why that will satisfactorily address the breach
• The conclusion that objectivity has not been compromised and why

210 Audit and Assurance @aPP

 • Steps proposed or taken by tlie firm to red.uce O( axoJdthe risK.~ of further breochs;lS
• A description of the firm~s policies and procedures r~l~von_t to the breach designed to
provide it with reasonable assurance that independence is maintained ·
(ACCA Code: s. R400.82~84)

75 Peach Co

Course Sook references

Chapters 5, 6 and 12.

Top tips
This is a 3Q..;mark question set at the planning stage of Ctn audit.
Port (a) requires you to focus on the scenario, pulling out risks and then thinking about how
the auditor would respond to them. This is an expected requirement and one that tests a skill
that will be important not just for. your exams but in your professional life. There are plenty of
risks in the scenario so you should not be short of things to write. Pick out those you are most
confident about, and try to get2 marks for each (risk and response).
Part (b) was knowledge-based, and tests an interesting area. Who is responsible if there is
fraud? Try to make at least 4 solid points here for 4 marks, ensuring that eadtpoint is
developed properly. Markers sometimes mark by awarding half a mark for each valid point,
and this suggests that you might write your answer this way too: each point you make in
relation to fraud needs to be stated (1/2 mark), and then developed (1/2 mark). Writing in this
way can help you to get more mileage from the knowledge you possess.
Part (c) focused on ethics and safeguards in relation to another part of the scenario. The
marking scheme limits you to '2 issues. 2 marks each'~ which is how you should be structuring
your answer- each issue has the issue itself and then safeguards. Do not write more than 2
issues because you will not be given marks for these.
Part (d) asked for substantive procedures on development expenditure. There was quite a lot in
the scenario about this, and generating procedures is a core skill for AA. It's important to make
sure you score for every procedure you write. down, which means·thinkingof procedures that
are relevant to the scenario and are practical for the auditor. State what the procedure is, and
why it should be done.

Easy marks
There were many easy marks available for simply 'describing' risks from the scenario, which in
reality requires a simple explanation of the risk. Almost every part of the scenario gave rise to a-
risk, so this part of the question was simple. Part (b) should have been easy. ·

Marks

(a) Audit risks ond auditor's responses (only ·a required)

New accounting system 2
Development costs 2
. Inventory valuation. 2
Staff costs 2
PPE useful lives 2.
Fraudulenfpurchases 2
New supplier costs 2
Legal claim 2
New bank loan 2

@BPP Answers 211

 Marks

Loan covenants 2
Maximum l6
(b) Auditor's. responsibilities in relation to the prevention and detection of fraud .
and error -
1 mark per well-explained point 4
Maximum 4
(c) Ethical threats and appropriate safeguards
Lux:urbl weekend provided bbJ client 2
Audit fee based on profit 2
Corporate finance service 2
Maximum 4
(d) Substantive procedures for development expenditure
1 mark per well-described procedure 6
Maximum 6
-
Total 30 ,~

212 Audit and Assurance @aPP

(a) Audit risks and auditor's response·

Audit risk Auditor's response

A new accounting. system was Introduced in The audifteam should undertake detailed·,
March 20X5 and post lmplem~ntati~n testing to confirm that al~ bakmces have
testif!g has not beeri conducted. · been completely and accurately transferred
There is a risk.ot opening baJances oo the. to the new accounting system.
new system being misstated and loss of They should perform walkthroughs to
ongoing data if they hove not been d~cumentthe new system and test the
transferred from the old system correctly. If controls in place.
the new system is not operating effectively Thebl should discuss with management any
there is a risk of misstatement of the issues which have occurred since the new
accounting records. system was implemented.
···-· .. ·········{'············· ··························································-·····"····-·--:

Peach Co has been developing a new The audit team should discuss with
production process and $0.8 million was management the accounting·policy
capitalised in the yearas development applied, particularly in respect of
expenditure. · identifbjing the research and development
stages.

lAS® 38 Intangible Assets requires research A detailed review of. the costs capitalised
expenditure to be recognised as an expense and supporting documentation should be
as incurred and development expenditure carried out to determine the nature of the
capitalised only if strict criteria are expenditure. Any development expenditure
satisfied. should then be agreed as meeting the
There is a risk that research expenditure has relevant criteria for capitalisation as set out
been incorrectlbl classified as development in lAS 38.
expenditure resulting in overstated The auditor should discuss the assessment
intang_ible assets and understated research of the useful life of the product with
expenses. management and assess its
The capitalised expenditure should be , reasonableness. They should also reperform
amortised over the life of the process, : amortisation calculations to confirm the
commencing when the new process is first · amounts are accurate.
brought into use in May _?OX5. There is a risk
thaf amortisation has not been correctly
calculated.·

Peach Co holds inventory of $227,000 that The audit team should discuss with the
it can no .longer sell in its home market. It directors their belief that the inventory can
believes ·it can be sold to an international be sold and should review any agreement
customer, but there are significant with the international customer to
additional costs that Peach Co will incur. determine the likelihood of the sale and the
There is d risk that the (let realisable value , selling price for the inventory. Thebl should
(NRV) of the inventory is less than cost and ' also obtain supporting documentation in
therefore that the .inventory is overstated respect of the delivery and shipping costs in
and cost of soles understated • order to establish NRV and discuss with

. . Peach Co has included in wages and The audit team should discuss with
salaries. significant staff costs involved in management the accounting treatment
the preparation of the site for the new applied and request that the relevant staff
. machinery and in testing the new costs are included in the cost of PPE.
mochiner~J·

Answers 213
 Audit risk Auditor's response
lAS 16 Property, Plant and Equipment states Theauditteam should undertake a review
that costs, directly attributable to bringing of the staff costs expensed and the process
the asset to the condition necessary for its f;r allocating staff costs to work undertaken
intended use, are capitalised as part of the to confirm the amounts that should be
cost of the asset. These directly attributable capitalised as part of the cost of
costs include costs of site preparation and machinery. If an adjusting journal is made
costs of testing.- by ma~agement this should b~ reviewed for
lt appears that an incorrect accounting accuracy.
treatment has been applied in respect of
the staff costs resulting in understated
property, plant and equipment (PPE) and
overstated wages and salaries expense.

The directors extended the useful lives of The audit team should discuss with the
plant and machinery by an average of five. directors the rationale for any extensions of
years despite the fact that inachinerbJ had asset lives and reduction of depreciation
been disposed of at a significant loss. rates.
Under lAS 16 asset lives should be reviewed The revised useful life of a sample of assets
annually, and if the asset lives have should be compared to how often these
genuinelbJ increasedt then the resulting assets are replaced and any gain or loss on
decrease in depreciation mabJ be disposal, as this provides evidence of the
reasonable. However, the fact that old items useful life of assets.
of machinery were sold at a substantial loss
in the period does not support the decision
to increase useful life.
As such, it appears that plant and
machinery is overstated and depreciation
expense understated.

A member of Peach Cds finance team The audit team should discuss the fraud
fraudulentlbJ purchased assets for personal with management to understand how the
use.. fraud was detected and corrected. They
The reconciliation of phbJsical assets to the must understand ·the. internal controls in
non-current assets register will be ongoing place to prevent other frauds occurring.
at the bJeOr end, hence there is a risk that Additional procedures should be per-formed,
non-:-current assets are overstated as the~J particularly in respect of non-current assets
mabJ include the personal assets purchased. additions. When testing non-current assets,
Control risk Js also increased if the fraud they sho.uld obtain a list of all non-current
has gone undetected for a period of time. assets capitalised in the year and agree the
new assets to an authorised purchase order.·
They should select an increased sample of
assets from the non-current assets register
to confirm the existence of the assets and
that they are used in the business.

The directors have not accounted for anbJ The audit team should review the terms of
costs under the new contract for bottles as the contract to understand the omounts
no amounts are due to be paid until after payable and terms of pabjmeht. They
the year end. should review the goods received not
There is o risk that the costs incurred to invoiced accrual listing to ensure. tho~
date have not been recognised and amounts pabJable to the supplier for bottles
therefore costs and liabilities are received have been accrued despite not
understated and profit is overstated. being invoiced.

211+ Audit and Assurance @BPP

 A previous supplier has launched a legal The audit team should review· .
claim-agoin.st P~ach Co.Thecloim has not :correspondence with Peo.ch Co's l()wyerto ..
been settled but Peach Co's lawyers believe understand the likelih06d of the supplier ··
that they are likely to have to pay an winning-the case and the amount of ~he
estimated $0.3 million. ·payments to be made to them.
As it appearsprobable.that Peach Co wilt
have to pay the st,Jpplier, a provision is
required to comply with lAS 37 Provisions,
Contingent Liabilities ond Contingent
Assets. There is a risk that provisions and ·
expenses are under"s"tated if .the company
has not recognised a _liability in respect of
this legal claim.

Peach Co obtained a new interest-bearing The audit team should undertake a review
bank loan in the year repayable over three of the loan agreement to confirm the details
uears. and reperform the company's calculations
There is a risk that the loan has not been to confirm that the loan has been correctly
correctly allocated between current and classified between current and non-current
non-current liabilities which would give rise liabilities.
to a classification error and liabilitles being The finance costs should be recalculated
misstated. and agreed to the accruals schedule.
In addition, the finance costs are paid in
arrears and may not have been correctly
accrued at the year end resulting in
understated accruals and finance costs.

Peach Co has strict covenants in place The audit team should review the loan

e regarding the loan .

A breach of covenants could result in fines
covenants in detail to understand what
Peach Co is required to comply with. The!:J
and penalties or mean the loan would be should calculate the covenants to
instantly repauable. There is an increased understand whether any breaches have
risk that the existence of covenants gives an occurred and discuss the impact of any
incentive to manipulate key balances by breaches with management.
overstating revenue and profit to ensure The team should maintain their professional
covenants are met. . sceptfcisrn to remain alert to the risk over
revenue recognitio_n and judgements which
affect profit. ·

(b) Auditor's responsibilities in relation to the prevention and detection of fraud .and error
Apricot 8 Co must conduct an audit in accordance with ISA 240 The Auditor's
Responsibilities Relating to Fraud in an Audit of Financial Statements and are resp-onsible
for obtaining reasonable assurance that the financial statements taken as a whole are
free from material misstatement, whether caused by fraud or error. .
Apricot 8- Co is required to identify and assess the risks of material misstatement of the
.financial statements due to fraud. ·
• The al.1ditor needs to obtain sufficientappropriate audit evidence regarding the assessed
risks of material misstatement due to fraud, through designing and implementing
appropriate responses.
Apricot 8- Co must respond appropriately to fraud or suspected fraud identified during the
audit, for example, the fraud regarding the purchase of assets for personal use identified
bu Peach Co.
·- • When obtaining reasonable assurance, Apricot 8- Co is-responsible for maintaining
professional scepticism throughout the audit~ considering the potential for management
override of controls and recognising the fact that audit pi"ocedures which are effective in
detecting error may not be effective in detecting fraud.

@BPP Answers 215

 To ensure that the who.le engagement tearri Is aware of the risks and responsibilities for
fraud and err~r, _1$As require that· a discussion is held within the team.
Apricot 8 Co musfreportany actual or suspected fraud to appropri·ate parties.
(c) Ethical threats and appropriate safeguards .

Ethical threat Appropriate safeguard

The managing director of Peach Co has As it is unlikely that the weekend away h9s
year suggested that .instead of a meal, all an insignificant value, this offer should be
the audit staff and client staff go awalJ for politelbl declined. The normal meal at the
the week_end to a ·luxury hotel at Peach Co's start .of the audit is likely to be acceptable,
expense. particularly if the audit team pay for
This represents a self-interest and themselves.
familiarity threat. The acceptance of goods
and services~ unless trivial and
inconsequential in value, is not permitted as
it may make the audit staff less likely to
challenge Peach Co's assumptions and
explanations.

Peach Co has suggested that the audit fee Ap~icot 8 Co should not agree to the
is renegotiated to be based on a proposed basis for the fees and should
percentage of Peach Co's net profit. This is · communfcate with those charged with
a contingent fee ahd leads to a self-interest governance to explain that the audit fee
threat. needs to reflect the level of work and the
If the audit fee is based on. profit the audit experience of the team required to obtain
team may feel incentivised to allow reasonable assurance.
incorrect accounting treatments in order to
maximise profits.

Apricot & Co has been approached by Apricot 8 Co malJ_be able to accept this
Peach Co to assist with the identification of type of work de!Jending on the precise
acquisition targets. nature and provided that adequate
The provision of this type of corporate safeguards can be put in place. Care must
finance work creates a potential advocacy also be taken not to make _management
threat as Apricot & Co may be seen to be decisions. Safeguards would include using
promoting Peach.Co as an investor. In professionals who are not involved in the
addition, there may be a self~review threat audit to perform the service (eg corporate
if the potential acquisition is subsequently finance) and having an appropriate
reflected in the financial statements and the reviewer who was not involved in providing
audit team may be less likely to challenge the service review the au-dit work or service
the figures included. performed.

(d) Development expenditure

Obtain a schedule of capitalised costs within intangible assets, cast it and agree the
closing balance to the general ledger, trial balance and financial statements.
Select a sample of capitalised costs and agree to invoices, payroll records or.other source
documentation iri order to confirm that the amount is correct and that the cost relates to
the project.
Discuss with the directo'rs t11e decision to capitalise the costs from 1 November 20Xlt
onward? and assess whether this is based on the project meeting all of the conditions for
capitalisation -in lAS 3R
Review a breakdown of the nature of the costs capitalised to identify. if any research costs
have been incorrectly included. lfso, request that management remove these and include
within proflt or loss.

216 Audit and Assurance @aPP

 • Select a sample of costs.re.corded as research expenses and develepment cost$ and agree
to supporting documentation confirming the date of the w<penditure to ensure that costs
.were allocated correctly~ ·
Review market research reports to confir~ that there is~ market for the new process and
that the selling price is high enough to generate a profit.
·• Rev_iew feasibility reports as at 1 November 20X4 and discuss with dir?dors their view that
the process was technically feasible at that date.
• · Review the budgets in :relation to the development project and the cash flow forecast in
order to assess wheth.er Peach Co had access to adequate cash· resources to complete
the-project-as at the date of capitalisation. Agree the budgets to supporting
documentation.
• . Discuss with the finance director the rationale for the useful life being applied, consider its
reasonableness and agree .to supporting documentation.
• Recalculate the amortisation charge and confirm that it covers the period for May to
August 20X5.
• Review the disclosures for intangible assets in the draft financial statements in order to
/
confirm that they are in accordance with lAS 38.
T I

')
76 EskCo·

Course Book references

Chapters 5, 6 and 14.

Top tips
For (a) make sure you include the sufficient detail on each precondition to gain a full mark for
each rather than half a mark.
You needed your calculator for part (b) and take care in the computer-based assessment to
enter your calculated answers in the correct box for the correct year.
Part (c) is a common requirement in the Audit and Assurance exam. Risks need to be linked to a
financial statement qrea. In your answer state the financial statement area affected and
whether It .is over or understated, or there is a risk of omission. Responses need to be as
specific as possible and ideally explain what that procedure will achieve. General statements
I such as 'discuss with the directors' are· not sufficient. State exactly what needs to be discussed
or reviewed to gain the full mark. The requirement specifically says to use the ratios calculated
as well as the other information provided so you should refer to them and use them to generate
risks.
Part (d) your procedures need to be sufficiently detoil~d and note that the requirernentasks
·for substantive procedures so including tests of control will not score any marks,

. Easy marks
You should hove found the knowledge-based requirement in (a) straightforward. You should
! · also -have had no pr'oblerns using the figures .given in the scenario to calculate- ratios required·
in (b).
)
Examining team's comments
This question tests candidates' knowledge of preconditions for accepting an audit
engager"nent, ratio calculations, audit risks and responses and substantive procedures .for
trade receivables~
.)
I·
Part (a) is a relatively straightforward knowledge requirement which hos been tested in
)
previous exam sessions. It is especially important that candidates understand exactly what the
question is asking, especially for knowledge questions, where candidates should be oiming to
score full marks ..

@BPP Answers 217

 Question .requirements such a~ this demon~trate the import~ nee of having a detailed
understanding of the ISAs. For a Jour-mark knowledge requirement such as this. candidates,
should aim ,to provide four well~descrrbed points. For example, 'management should conffrm
their preparation of financial statements' would be awarded% marks. In order to gain the
additional1h m.ark this should be expanded to include 'in accordance with the applicable
framework•. Core should be taken when reading the requirement to ensure that answer poin~s
focus on the right issues. For example, in this session some candidates incorrectly focused their
answers on pre:-acceptance procedures such as ensuring adequate staff were available,
obtaining professional c.learance from the previous auditors, independence issues and
preparing engagement letters, all- of which were not relevant. Candidates must take the time to_
carefully read the requirement, in order to ensure their answer is relevant.
In (b) the marks are only awarded for the correct answer and the requirement clearly states
that formulas are not required to be shown. Credit is not awarded for the calculations. It is
clear from reviewing candidates• answers that some fail to bring a calculator into the exam, as
they only list the calculations. Candidates are reminded that a calculator could be required for
ratio calculations as well as to assess materiality in audit report requirements. Candidates
must ensure that they ore able to calculate all ratios within the syllabus, and not just the main
liquidity and profitability ratios.
In part (c) The first step is to identify the factors which will give rise to an audit risk. Having
looked at the whole scenario and highlighted relevant points, candidates should pick their
eight strongest points, re-reading them from the scenario, drafting their answer as they go
along. Candidates often use the copy and paste function wheri drafting their answers for the
identification of the risk. However, care should be taken to ensure that the risk is actually
identified. For example, this session some candidates stated 'Esk Co purchased a patent for
$2.6 million' this in itself is not the audit risk, as it is the fact that 'administrative costs have
been included within the intangible asset'. Financial accounting knowledge is also important
as audit risks will often focus on the accounting treatment used in the financial statements.
When tackling audit risk questions which include ratios, the results of the calculations should
be considered when identifying the risks.
Having identified the risk factor, the next step is to explain the risk. To do this, candidates need
to state the specific area ofthe financial statements impacted with an assertion (for example
cut off, valuation etc) or a reference to over/under/misstoted or a reference to
inherent/control/detection risk. 'Misstated' will only be awarded if it is clear the balance could
be either ove·r or understated.
Having identified and-explained the risk, the next step is to provide the auditor's response.
Responses must be practicot within the context of the scenario and care should be takeh to ·
ensure the response is one an auditor would make and not a management response.·
Auditor respo"nses do not have. to be a detailed procedure, rather it is an approach the audit
team will take. Care must be taken however, to ensure that the approach suggested actually
addresses the risk identified and contains sufficient detail. A response of 'discuss with
management' will not gain any credit as candidates need to be very clear exactly 'what' they
are 'asking management' about. Where further documentary evidence is available to the
auditor, candidates need to referto this to gain the available 1 mark per response.
Future candidates are advised that audit risk is and will continue to be an important element in
the syllabus and must be understood. Candidates must ensure that they include adequate
question practice as part of their revision on this key topic.
In (d) one mark is available for each well described procedure, therefore candidates should aim
to produce six tests for this requirement. Candidates should plan their time accordin·gly. Also,
candidates should note that it is not necessary to write out the question requirement ot the
beginning of their answer, it does not gain any cre.dit and therefore wastes time.
When generating substantive procedures for trade receivables or trade poyables, it is
imperative that the focus of the tests is on the statement of financial position balance rather
than on revenue or purchases. In this session some candidates incorrectly provided .revenue
procedures such as 'recalculate the total on the sales invoices' and 'agree goods dispatched
notes to the sales invoice and sales day book/ and these dld not gain credit. Take the time to

218 Audit one' • · @aPP

)

. read ~he quesfionrequirements carefully and spend time thinl<ing. about what is needed prior
to producing an Clns~er. · · ·· - · --

Marks

· (a) Preconditions for an audit

1 mark per well-explained point 4
Maximum 4
(b) Gross profit margin, inventory holding period, receivables collection period and
payables payment period· ratios ·
Ratios 4
Maximum 4
(c) Audit risks and auditor's responses (only 8 required)
New client 2
Patent cost 2
New bank loan 2
Miscoded invoices 2
Inventory damaged following fire 2
Insurance claim 2
Staff bonuses 2
Discounts 2
Credit control 2
Tax investigation 2
Other 2
Maximum 16
(d) Substantive procedures- trade receivables
1 mark per well-described procedure 6
Maximum '6
Total· 30
-

(ar Preconditions for an audit

In order to establish whether the preconditions for an audit are present) Bannock& Co must:
determine whether the finanCial reporting framework (for example IFRS®) to be applied by
Esk Co in the preparation of its financial statements is occeptable. In considering this, the
auditor should have ass~ssed the nature of the entity, the nature and purpose of the
financial statements and whether law or regulation prescribes the applicable reporting
framework; ond .
obtain the.aqreement of the f110nagement of Esk Co that they acknowledge and
understand ·their responsibility:
for the preparation of the financial statements in accordance with the applicable
financial reporting framewor~. including where relevant their fair ·presentation; ·
·- for the design and implementation of internal controls which rnanagernent considers
necossar\:) to enable Esk Co to prepare financial statements which are free from
material misstatement, whether due to fraud or error; ar1d

@BPP Answers 219

 - to provide Bannock 8 Co with access to all information which is relevant to the·
preparation of the financialstatements such as records, documentation and other
matters. Access to information includes a[iy additional information which Bannock S
Co may request from management for the purpose of the audit and an agreement to-
provide unrestricted access to Esk Co's staff in order that Bannock & Co can obtain
relevant evidence. ·
(b)

Ratio 20X5 20X4

8.4m/30.9m x 100 =27.2%

Inventory holding period 8.3m/22.5m x 365 = 135 days

Receivables collection 7.2m/30.9m >< 365 =85 days 4.9m/27.5m x 365 = 65

period days

Payables payment 2.4m/22.5m x 365 = 39 days 3.5/19.9m x 365 = 64 days

period

(c) Audit risks and auditor's response

Audit risk Auditor's response

Esk Co is a new client for Bannock & Co. As BannockS Co should ensure it has a
the audit team are not familiar with the suitably experienced team assigned to the
accounting policies, transactions and audit. In addition, adequate time should be
balances of Esk Co, there will be an allocated for team members to obtain an
increased detection risk on the audit. understanding of Esk Co and the risks of
There is also less assurance over opening material misstatement including a detailed
balances as Bannock & Co did not perform team briefing to cover the key areas of risk.
the audit last year. Increased audit procedures should be
performed over opening balances.

Esk Co purchased a potent in the year and The audit team should obtain a breakdown
has capitalised all costs associated with the of the total amount capitalised and review
purchase. There is a risk that the costs. such the costs to ensure they are all allowable
as the administrative cost incurred in under lAS 38. They should agree, the
negotiating the controct, hove been purchase price of the patent to the contract
capitalised which is not in accordance with and other costs to invoice and bank
lAS® 38 Intangible Assets. There is also a statements to confirm that the correct
risk that amortisation has not been amount has been capitalised as an
calculated and accounted for correctly. intangible asset.
There is a risk that intangible assets and The!J should review the terms of the patent
profit for the year are both overstated. to agree its useful life of four years,
recalculate the amortisation expense for the
period and agree the carrying amount at
the end of the period is correct.

Esk Co has borrowed $2.5 million from the The audit team should recalculate the split
bank under a five-year loan. between current and non-current liabilities
If the loan is not allocated correctly to ensure the classification is correct in
between non-current and current liabilities, , accordance with relevant accounting
this would lead to a Classification error with standards and local legislation. Details of
liabilities being.misstated. any security offered against the loon
There is a risk that the· finance cost should be agreed to the loan agreement.
associated with the loan has been omitted The finance costs should be recalculated
from the statement of profit or loss leading based on the loan amount and interest

220 Audit and Assurance @aPP

 Audit risk Auditor's response

rates cippfieddnd agreed to th~:occ_ruals

schedule. -

batch of invoices was mtscoded and was The oudit team sl1oulcfdiscuss the matter
not recorded_as trade payables. relating to.the !llistod~d invoice~_s with =
lnvestigati.ons ore stilr ongo~ng to ide.ntify management to understand how the issue -
whether there arc any other batches of arose, where the miscoded invoices had
miscoded invoices. The payables _payrrient been origJnally posted to and whether a II
period has decreased from 64 days to 39 invoices have now been correctly posted.
days. Detailed testing of the trade payables
There is a risk that there are other. batches balance, including a review of supplier
of miscoded invoices. If these are not statement reconciliations, should be carried
identified and corrected by the year end, out to ensure that all liabilities ore recorded.
purchases and trade payables will_ be
understated.

Inventory of $1.1 million was damaged as a The audit team should discuss with
result of the fire and has not been replaced. management the process for ldentifying
The inventory balance has increased by $1.9 damaged inventory items following the fire
millfon In the year and the inventory holding and review the outcome of the inventory
period has increased from 117 days to 135 count to agree that the items identified
days. The increase in inventory and the hove beenwritten off correctly.
holding period is inconsistent with the loss They should also attend the year~end
of inventory as a result of the fire. inventory count to identify whether any of
There is a risk that the damaged inventory the damaged items are still held within
has not been fully written off and remains inventory at year end and confirm how
within closing inventory or that there is management intends to value this damaged
other slow-moving inventory which has not inventory in the year-end financial
been identified. Inventory may be statements. _
overstated and cost of sales understated as

Esk Co has included a current asset of $1.1 Discuss with management whether any
milllon in respect of an insurance claim notification of payment has been received.
relating to the fire. from the insurance company and review the
To comply with lAS 3TProvisions, related correspondence.
Contingent Liabilities and Contingent · If virtually certain, the treatn1ent adopted is
Assets, the amount claimed should not be correct. If payment has been received,
recognised until the receipt of the claim is agree to post year-end bank ledger
virtually certain. account.
As the insurance company has not If receipt is not virtually certain,. the auditor
responded to the claim, recognising the should request that mcmagem~nt remove it
amount claimed overstates profit and other from profit and receivables. ·
receive bles. If the receipt is probable, the auditor should
request monagememt include a contingent
asset disclosure -note ..

An additional bonus is payable to sales The audit tedm should remain alert to the_
staff in the quarter to 31 August 20X5 which risk of fictitious soles and solos being
gives an incentive to achieve sales forgets in recorded in the wrong period. They should
that period. extend cut:..off testing around the year end
This increase.s the incentive -for staff to . and revlewthe level of returns or orders
create fictitious sales or to record sales in ... , cancelled post yearend.
the incorrect period in order to achieve the
additional bonus.

@BPP Answers 221

 Audit risk Auditor's response

Trade discounts offered to regular The audit team should discuss with
customers have been separately accounted management the rationale for including
foras an expense. di.scounts in cost of sales. how discounts are
Trade discounts should be offset against calculated and accounted for.
revenue. There has been an increase in For a sample of sales, they should
revenue but the gross profit margin has recalculate the discount and review a
fallen slightly from 28% to 27%, consistent breakdown of revenue and cost of sales to
with the fact that there are additional agree that discounts have been accounted
expenses. recorded. for correctly.
There is a risk that revenue and cost of sales The audit team should request that
are overstated as a result of the accounting discounts are reclassified to revenue in
treatment adopted. accordance with IFRS® 15 Revenue From
Contracts with Customers.
Esk Co's credit control manager has been Bannock & Co should discuss with the
off work since December 20X4 and has directors the credit control procedures in
been replaced by an inexperienced place and the process for identifying and
manager. The receivables collection period following up on aged and irrecoverable
has increased from 65 days in 20X4 to 85 debts.
days in 20X5, indicating that they are not Extend post year-end cash receipts testing
collecting debts as efficiently in the current and a review of the aged receivables ledger
year. to be performed to. assess valuation. Also
There is a risk that a mounts will not be consider the adequacy of any allowance for
collected from credit customers and that receivables.
receivables are overstated as a result.

Esk Co is under a tax investigation relating The audit team should obtain a copy of the
to sales tax and it is likely that the company letter from the tax authorities and discuss
will be required to pay a penalty and fine of the matter with the directors.
$0.6 million. · They should obtain and reyiew
Therefore a provision should be recognised documentation from the tax consultant to
as there is a probable qutflow of resources assess the likelihood and amount of any
os o result of n past event. E~>k Co hos not penalties and fines to be paid.
recognised a provision nor has any
disclosure been made.
There is a risk that provisions are
understated and that disclosures are
inadequate.

(d) Substantive pro~edures- trade receivables

Obtain a breakdown of the receivables listing, cast and agree the total to the trial
balance/receivables ledger control account.
• Obtain the prior year aged receivables listing and for significant customers compare to
the current year and prior year balances. Discuss with management any missing
receivables or significantly lower balances.
• Select a sample of trade receivables from the listing and prepare a receivables
circularisation. ·
Review the after date cash receipts and follow through to pre year-end receivable
balances.
Inspect the aged receivables report to identify any slow moving balances, discuss these
with the credit control manager to assess whether an allowance or write down is
necessary.

222 Audit and Assurance @BPP

 . - . ~. ·-

For any-slo~-moving/oged balanqes review customer corresponde~ce to assess whether

there are any invoices in dispute. -
Review board minutes/discuss with managemehCto" assess whe"thar there .ore any
significant concer11s regarding recoverability of receivables. -- -
• Select a sample of goods dispatched notes from_ before the year end, agree to sales
invoices and to inclusion in the yea_r:end re?elvables ledger.
Review the receivables ledger for any credit balances and discuss with management
· whether these should be reclassified aspayables.
--• Review customer correspondence to identify any balances which .ore in dispute or unlikely
to be paid and discuss with management.
Recalculate the allowance for trade receivables and compare any potential irrecoverable
balances to assess if the allowance is adequate. _

77 MagpieCo

Course Book references

Chapters .5 and 6

Top tips
The majority of the marks on this question were for identifying the risks and responses from the
scenario in part (c). Where you are calculating ratios or are given them along with financial
statement extracts you should try and make connections between the increases or decreases
from one year to the next and the information given in the scenario. That will help you identify
and develop a risk with the right level of explanation. For example, the increase in receivables
collection period links to the scenario information given on overdue contract customer
balances. Responses must then be specific and clearly relatable to the risk identified.

Easy marks
Part (a) was purely a case of recalling your knowledge of engagement letters and in part (b)
you should have been comfortable calculating ratios.

Marks

(a) Engagement letter purpose and matters to be included

1 mark perwell-explained point
Maximum 4
(b) Ratios
Operating profit margin 1
· Payables payment period
Maximum 2
(c) Audit risks and auditor's response (Max 7 issues, 2 marks each)
New-client - 2
PPE exp 2
New sales system 2
Cash shortages 2
Receivables valuation 2
?upplier statement reconciliations 2
Inventory valuation 2
Prior year manegement report 2

@BPP Answers 223

 Marks

Operating profit and gross profit mdrgins 2

Maximum 14
Total 20

(a).
. _ r~ Word ~~~~ess~-;8~-""·--~----.-. :-:-:-.
---,~·-"·"--"-·-·~--"---~---:--·--·~::·~"·-~--~·:--··-··-··"··-··-········· . "-··-····"···---·-··i:En
II! .. . • , , . . ~

i
i[) ~'OlD !

Ir · . ·· .
I'· Pamw•~h v 1m ' _ _
1 MagpieCo .
I Engagement letter purpose and matters to be included
I
1 The audit engagement letter outlines the nature of the contract between the audit firm
1 and the audit client. Its purpose is to minimise the risk of any misunderstanding of the
1 terms of the engagement between the auditor and the-client and it confirms acceptance

l of the engagement. The purpose of the engagement letter is to also set out the terms and
I conditions of the engagement and the responsibilities of the auditor and management.
!
! Matters which should be included in the engpgement letter include:
1
!
I •
i
)
t
. The objective and scope of the audit;
The auditor's responsibilities;
f • Managemenfs responsibilities;
Il • Identification of the applicable financial reporting framework for the preparation of
~ the financial statements;
i

Ii • Expected form and contenfof any reports to be issued by the a-uditor and a statement
l
I
that there may be circumstances in which a report may differ from its expected form
and content;
i
I• Elaboration of the scope of the audit with reference to legislation;
The form of anu other communication of results of the audit engagement;
!

i • The requirement for the auditor to communicate key audit matters in accordance with
i
ISA 701 Communicating Key Audit Matters in the Independent Auditor's Report;
i
I
l • The fact that some material misstatements may not be detected;
I
• Arrangements regarding the planning and performance of the audit. including the
composition of the audit team;
• The expectation that manag~ment will provide written representations;
• The expectation that management will provide access to all information relevant to or
i affecting the financial statements;

I·
i
t •
The basis on which fees are computed and any billing arrangements;
A request for management to acknowledge receipt of the auditengagement letter and
f to agree to the terms of the engagement;
t
t • Arrangements concerning the involvement of internal auditors and other staff of the
I entity;
I
!
!• Any obligations to provide audit working papers to other parties;
i
1 • Any restriction on the auditor's liability; and
!
i • Arrangements to make available draft financial statements and any other information.
1.................__............ . - . - R . . - o O o o_ _ _

. 221t Audit and Assurance @aPP

 (b) Ratios

Ratio 20X5 20X4

Payables payment period

. (c) Audit risks and responses

Audit risk Auditor's response

Magpie Co is a new client for CrowS Co. As CrowS Co should ensure it has a suitably
the audit team are not familiar with the experienced team assigned to the audit. In
accounting policies~ transactions and addition, adequate time should be
balances of Magpie Co, there will be an allocated for team members to obtain an
increased detection risk on the audit. understanding of Magpie Co and the risks
There is also less assurance over opening of material misstatement incfuding a
balances as Crow & Co did not perform the detailed team briefing to cover the key
audit last year. areas of risk.
Increased audit procedures should be
performed over opening balances.

During the year, the company has spent Obtain a schedule of costs which have been
$0.75 million on refurbishing its stores. This capitalised as part of the refurbishment
expenditure has been recognised as programme. Review supporting
property, plant and equipment in the documentation such as invoices to establish
statement of fini:mcial position. that they are capitol in nature.
There is a risk that some items of revenue
expenditure may have been capitalised in
contravention of lAS® 16 Property, Plant and
Equipment (PPE) which would mean that
PPE is overstated and expenses are
understated.

During the year, a sales system was The auditor should fully document and test ·
installed but it was not felt necessary to run the new accounting system. In addition,
the old and the new system in parallel. they should also perform substantive tests
Opening balances from the old system may over the openrng balances to ensure they
not hove been transferred correctly. In have been correctly transferred from the old
addition; further errors could have arisen if system.
there are issues with the operation of the : Discuss with the finance director whether
new system. As a result, sales and any issues have arisen since the new sales
receivables may be misstated. system has been fn operation which ma.y
give rise to a misstatement in the financial
statements.

Daily cash takings reports sent to head Discuss with the directors whether these
office si;JOW an increasing nUmber of COSh cash shortages may be indicative of.fraud.
shortages at each store when comparing The audittea"m must-also apply
·the contents ofthe cash registers to the professional scepticism throughout the .
reports. These differences have not been audit recognising that fraud may have
: investigated or reconciled as they are only arisen as a result of the cash· shortages.
: small amounts. Extended substantive procedures~ over the
• This is ·a risk thotthese discrepancies are_ cash sales cycle.should~also·be carried out.
· the-result-of fraud and several small cosh
· shortaHes could become material when
aggregated. ·1h addition, an increase in
control risk arises when internal controls
detect a problem but it is being ignored.

-@BPP Answers 225

 Audit risk Auditor's response

There has beEm an increase ii1 corporqte Discuss with th~ credit controller the
customer accounts which are overdue for fikelihood of recovering the overdue
payment, but no increase has been made balances and carry out extended post year-
to the allowance fbr receivables in the end cash receipts testing to identily if the
financial statements. In addition, the overdue balances have been properly
receivables collection period has increased cleared after. the reporting date.
from 101 days to 149 days. Discuss with the finahce director the need
There is a risk that some of the customers to increase the allowance for receivables in
may not pay and that the receivables respect of other customers who may be
balances are not recoverable. This would unlikely to settle their debts.
result in receivables being overstated and
the allowance for receivables being
understated.

The payables ledger clerk has carried out Review the supplier statement
supplier statement reconciliations and a reconciliations and discuss with the
number of supplier statements indicate a payables ledger clerk why they have been
higher balance is owing by the company included as reconciling items on the supplier
than is shown ·an the payables ledger. The statement reconciliation rather than
differences have been included as investigated.
reconciling items on the supplier statement Perform a review of after-date purchase
reconciliations rather than being invoices to determine if any relate to the
investigated. In addition. the payables current year. If any do relate to the current
payment period has decreased from 81 year, agree them to the accruals listing.
days to 64 days.
There is a risk that cut-off is incorrect,
resulting in trade payobles, cost of sales
and expenses being understated.

Inventory of $0.1 million has been noted as Discuss with the finance director whether
being damaged due to containing the damaged inventory will- be written down
contaminated soil. In addition, the inventory to its net realisable value an·d agree this
holding period has increased from 28 days write down to the final inventory valuation.
to 54 days meaning the company is Discuss with the directors why the inventory
retaining inventory longer than the prior holding period has increased and whether
year. further inventory may need to be written
lAS 2 Inventories requires inventory to be down to net realisable value.
valued at the lower of cost and net Perform review of post year-end sales
realisable value. If the contaminated soil invoices to determine the price at which
cannot be remedied and the damaged these items have been sold and compare to
inventory of $0.1 million is not written down inventory valuation,
to its net realisable value (NVR), inventory
will be overstated and cost of sales will be
understated. In addition, if the inventory
holding period suggests further .inventory
may need writing down to NRV, inventory
will be overstated and cost of sales will be
understated.·
l--··· .. ···············~···~·-········--·----·---··--···-·······-·----- ..--·············--···-········· ............. \·····································································-························· .............. -• ..............- ...-. ...........'

Last year's management report highlighted Discuss with the directors whether the
a number of significant deficiencies in the recommendations made by the audit firm in
company's payroll cycle. respect of the payroll cycle have been
implemented and carry out tests of controls
to assess whether they are operating

226 Audit and Assurance @BPP

 Audit risk Auditor's response
1 If thes~-d~f~~~-~~i~~,.h~~e not been ,,,,T"~ffectively_. : ... ...
1
! addressed by managemeh~ the controls I If the recommendations have not been 1

l overthe payroll may still contain ·j implemented or there are n() controls in i
-+deficiencies leading to an increased risk_of' 1·p1ace, adopt a tully substa·n.trve approach I
j inisstotement. Wag~s and. salaries ~xpense l- to address the completeness and accuracy 1!

I and.the year-end employment tax·accrual ! of the wages and salaries expense and 11

t may be misstate~. i completeness of the year-end employment

i f ta_x dccrual. I
~The_~;~~~~<~~~ operating profi; ~~-r~iri·h~~· ..·:·:··R~~~~~ih~·nature ~f-~ ~~~-~j~ ;f·-;·~~;6~~~~ .·1
l reduced from 4.6% to 1.8% and gross profit ! expenses during the year to identify if any
margin has increased from 44% to 50%. I direct costs have been incorrectly classified 1

There is a classification risk that costs may i as overhead expenditure.

·have been omitted from costs of sales or I Compare the classification of costs
some direct costs have been included in l between cost of sales and operating
overhead expenses incorrectly) meaning I expenses and compare with the prior year
costof sales is understated and operating I to ensure consistency and investigate an~
costs overstated. l significant differences.
! Increase cut-off testing of purchases and
j accruals to verify that costs are included in
! the correct period .
. ························· ............... L ....

78 LapisCo

Course Book references

Chapters 5 and 6

Top tips
For the knowledge-based part (a) relating to ISA 220 you needed four well described points.
Readingthe requirement carefully here was important so that you remained focused on
supervision and review, and didn't start describing responsibilities not asked for (such as in
relation to fraud).
In part(b), remember you can use the highlighter toolin.the CBE as a visual aid for quickly
spotting audit risks. Having read the whole scenario and highlighted relevant points you should
then pick ~Jour eight strongest points.

Easy marks
There were plenty of 'red flags' in the scenario to help you genc;!rqte the marks you needed for
part (b)~ .

Examining team's comments

For port·{b) candidates often use the copy and paste function when drafting their answers for
the identification of the risk. However~ care should be taken to ensure that the risk is actually
identified. Simply stating .a fact from the sce-nario is not the same as identifying an audit risk.
For exqmple, stating that 'a significant customer is experienCing financial difficulties' ls not in
itself an audit risk. If adequate allowance is made for this receivable, then the audit risk is
mitigat~d. However, in this case the scena.rio went on to state that no allowance for receivables
was required. Therefore, ,both facts together are required for the identify Y2 mark, and stating
one without the other. will. not gain credit--
Having. ic:lentified the ri~k factor the next step is to expla-in the risk. To do this, candidates need
to state the specific area of the financial statements impacted with an assertion (for example
cut off, Valuation etc), .or a reference to over/under/misstated. 'Misstated' will. only be awardr0d
if it is ciear the balance could be either over or understated.

@BPP Answers 227

 Marks

(a) QlJafit~ management

1mark per well-explained point
Restricted to
-4
Marks Available 4
4
(b) Audit risks and auditor's response 2
Goods in transit 2-
Reliance on lA 2
No allowance for receivables 2
Warranty provision 2
Fraud 2
Directors' remuneration 2
Rebate receivable 2
Development expenditure 2
New loan 2
Dividend 2
Other 2
Maximum 8 issues, 2 marks each
Marks Available 24
16
Total 20
-

(a) Quality management

Overall, the audit engagement partner is required to take responsibility for overall supervision
of the audit and reviews performed; however~ this work is often performed by other senior
members of the audit team.
Supervision
During the audit of Lapis Co, the auditor should keep track of the progress of the audit
engagement, which includes monitoring progress against the audit planj assessing whether
the objective of work performed has been achieved and considering the ongoing adequacy_of
assigned resources.
The competence and capabilities of individual members of the engagement team should be
considered, with on-the-job training and coaching provided to develop skills and
competencies where necessary.
Supervision also includes creating an environment where engagement team members can
raise any concerns without fear of repercussion.
In addition~ part of the supervision process involves taking appropriate action to address any
significant matters arising during the audit of Lapis Co and modifying the planned approach
appropriately.
The supervising a·uditor is also responsible for identifying matters for consultation or
consideration by more experienced engagement team members such as the audit manager
or audit engagement partner.

228 Audit cmd Assurance

 Review
The auditor would be. required to review the work completed b_y the team and consider
whether this wo.rk has been performed in accordance with the audit firm's policies,
International Standards on Auditing and other re·gulcitorg requirements. r·

The auditor should also consider whether all significant matt~rs have been raised for audit
engagement partner attention or for further consideration and, where appropriate
con?ultations have taken place, whether appropriate con9lusions have been documented.
. .

The auditor should consider if-there is a need to revise the nature, timing and extent of work
performed. The auditor should also consider ifthe objectives of the engagement procedures
have been achieved and if the work performed supports the conclusions reached and has
been properly documented.
Overall, consideration should be given as to whether sufficient and appropriate evidence has
been obtained to provide a basis for the auditor's opinion. .

Audit risk Auditor's response

Lapis Co purchases its raw materials from The audit team should undertake detailed
overseas suppliers and has responsibility for cut-off testing of purchases of raw
goods at the point of dispatch, with materials at the year end. The sample of
materials in transit for up to six weeks. shipping documentation inirnediately before
At the year end, there is a risk that cut-off and after the year end relating to goods
may not be accurate and inventory, from overseas suppliers should be increased
purchases and payables may be to ensure that cut-off is complete and
understated as the company may not accurate.
correctly recognise the raw materials from
the point of d,ispatch.

Indigo & Co may place reliance on the The external audit team should meet with lA
controls testing Work undertaken by the staff, read their reports and review their files
internal audit (lA) department. relating to controls testing performed a1 the
If reliance is placed on work which is factories to ascertain the nature· of the work
inadequate for the purposes of the audit, undertaken.
then the external audit team may form on Before using the work of lA, the audit team
incorrect conclusion on the strength of the will need to evaluate and perform audit
internal controls at Lapis Co. This could procedures on the entirety of the work
result in Indigo & Co performing insufficient which they plan to use, in order to
levels of substantive testing, thereby determine its adequacy for the pi.Jrposes of
increasing detection risk. the audit. In addition, the team will need to
, re-perform some of the testing carried out
. by lA to assess its adequacy .
............................. ·

A significant wholesale customer has Review and test the controls surrounding
informed Lapis Co that it is experiencing the way in which the finance director
financial difficulties. Lapis Co's finance identifies old or potentially irrecoverable
director does not believe an allow<;mce for receivables balances and other credit
receivables is required in the draft fi_nancial contro.l processes-to ensure that they are .
statements for the year ending 30 · operating effectively.
·September 20X5. Review correspondence with this customer
There is a·risk that trade receivables will be and-di$cuss with the finance director the
overvalued. rhis customer balance may not . rationale for not maintaining an allowance
be recoverable and so trade receivables will for receivables, despite the financial
be overstated and the ollowance for difficulties experienced by this customer.
receivable$ understated if an allowance is Extend post Hear-end cash receipts testing,
not recognised. ~ In particular for this significant customer, in
order to assess valuation and the need fo-r
an allowance for receivables.

@BPP Answers - 229

 The company changed one of its television Discuss with management their procedures
su-ppliers in December 20X4 to a for estimating the-wa rrbnty provision -and
cheaper alternative and this has led to an specifically if they have identified the
increase in wa..rranty cloims for television -reason for the increase in claims and the
speaker deficiencies. effect of this on the estimate.
If the overall number of customers claiming_ Review the level of claims received during
on the warranty has increased, then the _ the year and post year end and compare
warranty provision should possibly be this to the provision made at the year enc;i
higher. As the finance director is to assess the adequacy of the provision.
anticipating that the overall level of the
provision will be similar to the prior year,
there is a risk the provision and expenses
are understated.

In May 20X5. a payroll clerk was dismissed Discuss with the finance director the details
as they had carried out fraudulent of th~ fraud perpetrated by the payroll clerk
transactions at Lapis Co. Controls have and what procedures have been adopted to
since been implemented to prevent this date to identify any adjustments which are
reoccurring. needed in the financial statements. In
There is a risk that the clerk may have addition)· discuss with the finance drrector
undertaken a significant number of what additional controls have been put in
fraudulent transactions which have not yet place to identify any similar -Frauds.
been identified. Additional substantive testing should be
The loss as a result of the fraudulent conducted over the affected areas of the
transactions would need to be written off to accounting records. particularly payroll, to
the statement of profit or loss. If these have establish if there have been any further
not been discovered, profit may be fraudulent transactions.
misstated. Control risk is also increased as In addition, the team should maintain their
the controls previously in place did not professional scepticism and be alert to the
preve_nt the fraud. ~isk of further fraud and errors.

The directors only disclosed the amount of Piscuss this matter with managementand
remuneration pa!:Jable to each director, review the requirements of the local
which does not comply with local legislation legislation to determine if the disclosure in
which also requires the names of the the financial statements is included
directors to be disclosed. appropriately. If disclosure is inadequate,
The directors' remuneration disclosure will then request management to am~nd the
not be complete and accurate if the names directors' remuneration disclosures and
and individual total payments are not review for compliance with local legislation.
disclosed and hence the financial
statements will be misstated as a result of
the non-complfance.

Lapis Co is planning to include a $0.8 Discuss with management the basis of the
million receivable relating to a supplier rebate calculation and agree the
rebate based on purchases for the year. calculations back to supporting
The receivable should only be recognised if documentation, including the contract with
the company has purchased the required the supplier.
volume levels and the amount claimed is Review post year-end correspondence with
virtually certain to be rece.ived. If the annual the supplier for evidence of the rebate being
volumes are overstated, then the value of applied or post year-end bank statements
the receivable recognised may be for evidence of receipt. . -.
overstated and cost of sales may be
understated.·

230 Audit and Assurance

 Lapis.Co intends to capitalise within Obtain a breakdown. of the expenditwe
intangible assets all costs rncurred of $f6 capitalised and ogre~ to supporting
million in respect of the development of a documentation as to whether the costs
new smort television model. relate to the research or development,stage.
lAS® 38/ntangib/e Assets requires r:esedrch Discuss the accounting treatment with the
costs to be expensed to profit or lbss and finance director to assess whetherlhe
only development costs which meet specific criteria. for capitalisation under lA$ 38 are
criteria to be capitalised .as an intangible being met. - ·
asset.
All of this expenditure has been included as·
an intangible asset. If research costs have
been incorrectly classified as development ·
expenditure, there isa risk that intangible
·assets are overstated and expenses
understated.

A $2.5 million interest bearing loan was Review the loan agreement to confirm the
obtained in April 20X5 and will be repaid in details andre-perform the company's .
quarter!~ instalments over four years. calculations to confirm that the loan has
If the loan is not allocated correct!~ been correctly split between non-current
between non-current and current liabilities, and current liabilities.
this would lead to a classification error with Recalculate the interest accrual and agree
current and non-'CUrrentliabilities being the amount to finance costs and the
misstated. In addition, the company may accruals schedule.
fail to accrue for the interest, resulting in
finance costs and accruals being
understated.

The directors are intending to propose a Discuss the issue with management and
final dividend once the financial statements confirm that the dividend will not be
are finalised. recognised within liabilities in the 2QX5
In line with lAS 10 Events after the Reporting financial statements.
Period, the dividend is a non-adjusting The financial statements need to be
event and should not be recognised as a reviewed to ensure that adequate disclosure
liability in the 20X5 financial statements. of the proposed dividendJs included in
The obligation only arises once the dividend compliance with lAS 10.
is declared, and this occurs post year end.
The dividends should~ however, be disclosed
in the notes to the financial statements
assuming they are declared before the
financial statements are authorised for
issue.
If the dividend is recognised, it will result in
an overstatement ofliabilities. Failing to
disclose the proposed dividend will result in
a lack of completeness of disclosure.

@BPP Answers 231

 PART C: INTERNAL CONTROL

Section A Questions
Flowers Anytime
79 · The correct answers are:

Steps Order

Complete flowcharts and internal (1)

control evaluation questionnaires

Perform walkthrough tests

- I I (2) I
Perform tests of control
I I (3) J
Revise the audit strategy and plan
I (4) I
The first step should be to document the system of internal control -this is done using the
flowchart and internal control evaluation questionnaire. The second step should be to
confirm the auditor's understanding of the system- this is done with a walkthrough test.
Tests of control are then performed to obtain audit evidence about the effectiveness of the
design and operation of internal controls. Finally, if controls testing reveals any deficiencies
in internal controls that have not been previously identified, the audit strategy and the
· audit plan should be revised as required.
80 The correct answer is: ICEQs are generally easier to apply to a variety of different systems
thaniCQs.
In the first option, the descriptions ofiCQs and ICEQs are reversed. Neither ICQs nor
ICEQs are likely to capture how internal controls deal with unusual transactions: narrative
notes arc needed to do this. 8oti1ICQs and ICEQs give the impression that all controls are ·
of equal fmportance. The significance of each control would only be highlighted in -
narrative notes.

232 Audit and Assurance @BPP

 81 · The co·rrect answers are: . .

·• All orders·are g.enerated in the sol.esm9dule within the a9cou~ting system by inputting
the details into an electronic sales orderform. Once saved by the soles. clerk, one copy
is auto.maticolly forwarded by email to th~ warehouse for the dispatch of inventc;>ry, and·
·one copy is emailed to the ·customer as evidence. of the order. -No
• The sales ~lerk regularly performs reviews or the standing data onthe system,-matching
.the ·price of flowers against ari up to date price Ust:-" ~o .
• To ensure completeness of orders~ a sequence check is performed on·the sales invoices
by the sales clerk using a report generated from the sales module. Any missing
documents are investigated. - Yes
Sales invoic_es are posted on a weekly basis to the detailed sales listing and accounts
receivable ledger~ - No
A.sequence check of the invoices is an effective. control, be it carried out manually or
electronically.
When the order is generated no copy of the order is emailed to the accounts receivables
clerk- as a result, the recording of receivables may be incomplete or delayed, and
outstanding balances may remain uncollected.
The sales· clerk should not be reviewing the standing data themselves- this review should
be performed by an independent, senior member of staff.
Sales invoices should be posted automatically to the detailed sales listing and the accounts
receivables ledger immediately after the order is taken.
Note. The 'detailed sales listing' is the electronic equivalent of the 'sales day book' used in a
manual system. The ACCA have said these terms may be used interchangeably in the Audit
and Assurance exam.
82 The correct answer is: 1 onl~
This simply reduces the risk that cash will be misappropriated. It does not provide any
assurance that subsequent recording will be complete or accurate.
83 The correct answer is: The deficiencies identified in the sales system on~y
ISA 265 Communicating Deficiencies in Internal Control to those Charged with Governance
and Management requires the auditor to communicate significant deficiencies in internal
control (ISA 265). The fact that the amounts exposed to the deficiencies in the sales system
were high and that it is likei~;J that the deficlenoies woUld result in rnaterial i·nisstatements in
the financial statements.are indicators that the deficiertcies are significant (ISA 265).

KLECo
84 The correct answer is: Purchases moy be made· unnecessarily at unauthorised prices.
The fact that the ordering clerk transfers information from the order requisition to the order
~- form without any subsequent approval increases the risk that errors on the order form go
unnoticed. The fact that the order requisition is thrown away means that any subsequent
queries cannot be traced back to the original order. The facts that the ordering department
does not retain copies of the order forms means thot orders mdy be duplicated, either in
error or deliberatei~J. The chief buyer authorises the order requisitions and determines the
appropriate supplier, so the risk of purchases -being mode at unauthorised prices is-
reduced,
85 Tl1e correct answer is: 1, 3and 4
It is important that the ordering department receives o copy of the GRN, so that they can
monitor which orders.are closed and which remainouts~anding. To ensure efficiency and to
avoid delays, a· three~ part GRN could be used- one for the ordering department, one- for
the goods inwards department and one for the accounts department.

@BPP Answers 233

 86 The correct answer is: For .a sample of GRNs check that there is an authorised purchase
order
The·direction of the test is important here. The sample is taken from goods received notes
ds thes~ represent deliveries. The auditor can then check that eacb delivery is supported b!:J
a valid order. If the sample is chosen from purchase orders (as in the first option) the test
would confirm whether orders have been fulfilled. The remaining options are tests of
cof1trolsregarding completeness of accounting information.
· 87 The correct answer is: Undertake 'myster!:J shopper' reviews, where they enter the store as a
customer, purchase. goods and rate the overall shopping experience
Bank confirmations should alwd!:JS be carried out b!:J the auditor. Providing advice on the
implementation of a new pa!:jroll S!:JStem would impair the internal auditors' independence.
Reviewing the financial statements on behalf of the board is the responsibility of the audit
committee, not internal audit.
88 The correct answer is: The relationship between goods and services produced and the
resources used to produce them
A value for mone!:J audit focuses on three Es: Econom!:J, Efficienc!:J and Effectiveness. The
first option describes econom!:J. The third option describes effectiveness. The second option
oni!:J describes one aspect of efficiency.

South lea
89 The correct answers are:
• Cut-off of starters' and leavers' wages
Potential fraud risk factors
The facts that the foreman is authorised to issue new employee numbers, and that the two
wages clerks are responsible for setting up emplo!:Jee records, make it more likei!:J for bogus
employees to be set up on the S!:Jstem than for bona fide employees to be omitted. This is
likei!:J to give rise to questions around the occurrence of wages, not their completeness. The
fact that a wages clerk reviews the calculations for the deductions from gross pa!:J should
reduce the risk of computerised errors.

90 The correct answer is: Review the log of amendments to standing data for evidence of
review
Reviewing overtime lists for evidence of authorisation is a test of control over the
outhorisation of woges. The other two procedures can identif!J unauthorised amendments
to standing data, but they are substantive procedures.
91 The correct answer is: The internal auditor must alwa~JS consider the potential of
management overriding controls and modify their audit procedures accordingi!:J when .
performing internal audit engagements. ·
to
The need to consider the potential of management override applies mainly the external
auditors. The external auditor's objective is to conclude whether the financial statements
. are free from material misstdtement, whether from error or fraud. Audit procedures that are
effective in detecting error may not be appropriate in detecting fraud due to the nature of
fraud.
92 The correct·answer is: (1) and (2) only
In the absence of the audit committee the work of the internal audit department should be
directed by the board. The scope being set b!:J the finance director reduces independence.

93 The correct answers are:

Full testing procedures using test data when developing computer applications
Disaster recovery procedures
One for one checking and hash totals are application controls.

231+ Audit and Assurance @BPP

Cherry·
94 -lhe correct answer .isi Th~ selection ond application of accounting policies
The selection and application 6f accounting policies is one of.the. areas in Which the. auditor· ..
is required to gain an understanding, qs part pf the auditor's risk assessment procedLiLes. It ·
·is not a componer~t of internal control. The other components ofinternal.control are the
entity's risk assessment process and the entity's process·to mon~to.r the system of internal
control. · -

95 · The correct ans\/Ver is: 2 and 3

The fact that raw materials are being ordered without reviewing inventory levels mean$ that
both stock-outs and excess obsolescent inventory are likely. The lack of authorisation
means thatfraudulent purchases could be made 1 but there is on approved supplier list and
money-laundering risks seem far-fetched. Likewise, poorer quality goods may be ordered
but the approved supplier list does act as a control here- and going concern risksare
irrelevant.
96 The correct answer is: Completeness of payobles
The fact that goods received notes (GRNs) are not sequentially numbered means that
GRNs may be omitted from accounting records and it would be difficult to trace the
unrecorded GRNs. As a resultt the risk is that payables (and inventory) is understated.
97 The correct answers are:
• Only authorised staff haye read and write access to the finance system. Other users
have read only access to specific reports that they require for their roles. - General IT
control
• The finance system won't allow a negative invoice amount to be entered nor a positive
credit note amount. It presents an error message and the input screen needs to be
corrected before proceeding. - Information processing control
• Automatic back-ups of the finance SbJstem occur each night to a separate virtual
(online) server. - General IT control
• Only IT administrators can install software on the same server that hosts' the finance
system and anti.;..virus software checks the install file forthenew software before
installation commences. -General IT control
General controls over the entity's IT processes that support the continued proper operation
·of the IT environment, including the continued effective functioning of information .
processing controls and the integrity of information. This includes limiting the ability to edit
the ShJStern to authorised users (1), back-ups (3) and virus protection (4).
Information processing controls relate to the processing of information in IT applications or
manual information processes in·the entity's information system that directly address risks
to the integrity of information. This is the case in (3) where-invoice or credit nq~e amounts
are validated during.input. · ,
98 The correct answer Is: 1 and 3
·The direction of the test is irnportont here. If the sample of serial hurnbers were .taken from
the non-current assets register, the physical assets· which were not assigned serial nLnilbers
and/or were not recorded would not be identified. Reviewing the non-:-current register to
identify duplicate·serial numbers will identify instances when the serial numbers assigned
were not unique, making it difficult to trace the re1ated assets. Observation is a valid audit
procedure, but it provides a weak fonT"1 of audit evidence, since it does not assure the
auditor that tho con.tral would: be operated when the auditor is not there to observe it.·

@BPP Answers .235

Swan
99 The correct answer I$: Thecompahy is able to fulfilthe orders
ltis a 'deficiency in·the system that the o~her:three objectives do not appear to be met.
100 The correct answers are:
Goods are sent out but not invoiced
• Wrong goods ar~ sent to customers
This is because there is a risk that the printed orders will not be invoiced properly as they
may be lost or overlooked (being outside tho electronic system), hence the second risk. In
addition, if-the reason the GRN details do not match is that they have been fulfilled
incorrectly (rather than due to simple typographical errors). the staff member may assume
it is a typing issue and simply print the order, but not double check the goods. properly
against it, hence the fourth risk. In this situation, a customer might be sent 50 goods rather
than the ordered 5, but only be invoiced for 5, as the invoice is generated from the order.
This issue should not cause goods to be invoiced without being sent out, as invoices are
generated from goods out notes or orders being used as goods out notes.
It should also not cause orders not to be fulfilled. as the issue arises when the order has
been processed, so the order has not been overlooked.
101 The correct answers are:
Review a sample of invoices to ensure their numerical sequence.
Review a sample af goods out notes to ensure they have been matched to sales invoices.
The other two procedures relate to accuracy.
102 The correct answers are:
•· The likelihood of material misstatement resulting
• The number of deficiencies identified
The likelihood of material misstatement occurring is a key factor. in-determining whether the
.deficiency is significant. The number of deficiencies is a factor, as c;:leficiencjes may become
significant if there is a significant combination of deficiencies.
A control deficiency does not increase in significance simply due to the area. of business it
relates. to, but may become significant if there is a risk of fraud. There is no more significant
risk of fraud in the sqles system than in other systems, for example, the purchase·s system
or payroll system; so the business area is not a critical factor.
Sin1ilarlt~, a deficiency is a deficiency regardless of whether the related control is hew or
not. In fact, an old deficiency might be more significant than a new one if, say, it had been ·
previously reported and not acted on.
103 The correct answer is: A computerised ICEQ
This is the only option that has the element of evaluation that the partner requires. The fact
that it is computerised should also influence how easy it is to update, therefore addressing
her second issue.

236 Audit and Assurance @BPP

 Sect.ion 13 Q~estions -

101t Freesia

Course Book references

Chopters·3~ 10 and.16.

Top tips
Part (a) was the knowledge-based part. and as such you should be aiming for full marks here.
It is important that you stick to the requirement precisely, eg you should only .give an
advantage of each method- one advantage. with no marks available for disadvantages. The
marks for describing each method were among the easiest in the exam.
Part (b) was the core of this question, and asked for six deficiencies for which you needed to
develop controls and then tests of control. Your response should therefore be connected across
all three columns. As ever, the requirement is to 'identify and explain' each deficiency, which
suggests that your answer could be structured as two sentences/ paragraphs within the left
column, the first of which says what is happening (identifying the problem), and the second of
which says why this is a problem (or why it is wrong). Your control and test of control must then
be explained in enough detail to get a full mark each. It is a good idea to think of these two
columns together- try to suggest a control for which you can easily suggest a test.
Part (c) asked for substantive procedures in relation to the employment tax accrual; quite a lot
of the points here should not be difficult to think of, so this requirement is a good opportunity
to score marks.
Part (d) covered corporate governance. This requirement is not actually asking a great deal
here~ particularly given the length of the related scenario 1 so again this should not have been
overly taxing.

Easy marks
Part (a) was knowledge-based and should have been within !:JOUr reach._

Examination team comments

Internal control questions remain a highly examinable area and performance in June 2019 was
mixed. The scenarios included in exam questions contain mo(e issues than are required to be
discussed. It was pleasing in this session that candidates were genemlly able to identify (for Yz
mark each) the required number of issues from the scenarios. However some candidates were
unable to- correctly identify the deficiency from the scenario. They were. able to pick the
relevant fact from the scenario but foiled to spot what the actual deficiency was. Additionatly.
this session there was an increase in the number ofanswcrs with irrelevant defidencles being
. given. This seems to stem from a lack of understanding ofthe scenario and possibly due to a
lack of question practice.
. -
In common with previous sittings many candidates did not cl~arly explain the impl(~ation of
the deficiencies. It is important that the explanatton fully details the impact to the company.
As an example, for a deficiency of 'purchase invoices are not sequentially numbered' a
suitable, well-explained implication would be 'this could result in the recording of purchases
and payables_being incomplete and suppliers being paid late'. Many candidates did not go on
to explain the illlf?OCt on the compcmy in sufficient detail, for exampl(!l just· stating, 'this COtJid
msult in invoices being missed'.
Most candidates were able to provide good recommendations to address the deficiencies they
identified. However, some of the recommendations were either poorly._described. did not clearly
address the specific control deficiemC!:J identified or were impractical sugge~tions. Many
candidotesjust repeated the converse ofthe deficienct~ and to obtain the ono mark for the
recommendation more detail is needed~ For example, for the deficiency 'a loqk of segregotion
of duties arour1d inventory management' some candidates stated a recommendation of
'segrogation should be introduced'. However, to obtain the full mark this recommendation
needed to cover what .elements of the role should be separated.

@BPP. Answers 237

 Additionally, as with ethics and corporate governance questions, recommendations must b.e
actions rather than just-objectives. ·

Marks

(aY Methods of documenting systems of internal control

Narrative hates 2
Questionnaires 2
Maximum 4
(b) Control deficiencies, recommendations and tests of contro_l (only 6 required) ·
Credit limits 3
No sequential numbering of orders 3
Segregation of duties- cash receipts 3
Insufficient copies of GRN 3
Controls over inputting of invoices 3
Out-of-date standard costs 3
Overtime not authorised 3
Authorisation of bank transfer 3
Maximum 18
(c)· Substantive procedures - accrual for employment tax
Compare to prior year and investigate differences
Agree accrual to year-end payroll records
Recalculate accrual and consider reasonableness
Perform proof in total and investigate variances
Confirm post year.:.end payment
Review correspondence with tax authorities for ani:J additional liabilities
Review disclosure and confirm in line with accounting standards
Maximum 4
(d) Corporate governance deficiencies and recommendations (2 issues required)
Composition of audit .committee 2
Finance director·sets remuneration 2
Executive directors' remuneration 2
OnlbJ chair liaises with shareholders 2
Maximum 4
Total. 30

(a)

Description Advantage

Narrative notes Narrative notes consist of a ThebJ are simple to record;

written description of the after discussion with staff
system. They detail what members; these discussions
occurs in the system at each are easily written up as
stage· and include any .notes.
controls which operate at
each stage.

238 Audit and Assurance @BPP

 They can facilitate
ui1d~rst6nding by all
members of the audit team,
especially more junior
members who might find
alternative methods too
complex.

Questionnaires Internal control Questionnaires ore quick to

questionnaires (ICQs) or prepare, which means they
internal control evaluation are a timely method for
questionnaires (ICEQs) recording the system.
contain a list of questions They ensure that all controls
for each major transaction present within the system
c'ycle; ICQs are used to are considered and
assess whether controls recorded, hence· missing
exist whereas ICEQs assess controls or deficiencies are
the effectiveness of the clearly highlighted to the
controls in· place. audit team.

(b) Deficiencies, controls and testof controls

Control deficiency Control recommendation Test of control

Customer credit limits are Credit limits should beset by For a sample of new
; set by receivables ledger a senior member of the sales customers accepted in the
' clerks. receivables ledger department and not by year, review the
clerks are not sufficiently receivables ledger clerks. authorisation of the credit
senior and so may set limits These limits should be limit, and ensure that this
too high, leading to regularly reviewed by a was performed by a
irrecoverable debts. or too responsible officiaL responsible official.
low, leading to a loss of Enquire of receivables
sales. ledger clerks as to who can
set credit limits.

Customer order numbers Sales orders should be Re-perform the control by

generated are based on the sequentially numbered~ On a undertoking a sequence
salesperson's own regular basis, a sequence check of sales orders.
identification number. These check of orders should be Discuss any gaps in the
numbers are not sequential. undertaken to identify atiy sequence with sales
Without sequential missing orders. orderlng staff.
numbers, it is difficult for
Freesia Co to identify
, missing orders and to
• monitor lf'allorders are
being dispatched in a timely
· rnor~nE~r. If they are not:, this
could lead to a loss of
customer goodwil~. ·

@BPP Answers 239

)
 Lily Shah, d. finance clerk, is The keY- roles of posting bank Review the. file of completed
responsible for several receipts,. updating· the bank reconciliations to
elements of the cash receivables1edger and identify who pre pared \-
reoeipts·s.ystem as she po$tS performing bank them.
the bank transfer receipts reconciliations should be Review the log of IDs of
from the bank.statements to split·between different individuals who.have posted
the· bonk ledger account, ' individua Is. bank receipts and updated
updates the receivabLes If this is not practical~ then the receivables ledger to
ledger and performs the as a minimum. the bank ossess whether these are·
bank reconciliations. reconciliations should be different individuals.
There is a lack of undertaken by another Discuss with the financial
segregation ofduties and member of the finance team. controller which members of
errors will not be identified staff undertake the roles of
on a timely basis. There is processing of bank receipts
also an increased risk of and updating of the bank
fraud. ledger account and
receivables ledger.

GRNs are only emailed to A GRN copy should also be Review copy GRNs held by
the finance department. auto-emailed to the ordering the purchase ordering
Failing to send a copy to department. A copy should department and review for
tbe purchase ordering be held at the warehouse as evidence that these are
department means that it is well as being emailed to the matched to orders and
not possible to monitor the finance department. flagged as complete.
level of unfulfilled orders. A purchase ordering clerk Review the report of
This could result in a should agree their copy of unfulfilled purchase orders
significant level of unfulfilled the GRN to the purchase for any overdue items and
orders leading to stock-outs order and change the order discuss their status with an
and a consequent loss of status to complete in the ordering clerk.
sales. purchasing module. On a
In addition, if the GRN regular basis, a report of
record is lost, then it will not unfulfilled orders should be
be possible for the finance generated and reviewed and
department to match the each order should be
invoice to proof of goods followed up with the relevant
being received. This could supplier.
result in a delay to the
invoice being paid and a
loss ofsupplier goodwill.

Camilla Brown$ the The payables ledger clerk The audit team should
payables ledger clerk, onlbJ should instead input the utilise test data procedures
utili~es document count invoices in batches and to assess whether data can
controls when inputting apply application controls, be entered without the use
invoices into the payables such as control totals, rather of batch control toto Is and
ledger. than just completeness also whether sequence
Document count controls checks to ensure both checks are· built into the
can confirm the completeness and accuracy system.
completeness of input. overthe input of purchase Observe the inputting of
However, they do not verify invoices. In addition, purchase invoices and
the accuracy or validity of sequence checks should be identify what application
input. built into the system to controls are utilised by-the
If the invoices are not input ensure completeness of clerk.
input.
correctly, suppliers may not
be paid on time, or paid
incorrect amounts leading
to an overpayment or loss

21t0 Audit and Assurance @aPP

j

of supplier goodwill who

rr1ay withdraw credit
ts:wll itles.

The company values its A review ofall standard costs Obtain a copy of the
inventory using standard currently iru.ise should be standard costs used for:
·costs, which are not being undertaken by a senior inventory v-Oiuation, assess
kept up-,to-date. manager in-the production when the review Was last
·If the standard costs were,. department. Actual costs for undertaken and Inspect for
reviewed 18 months ago, materials, labour and evidence of review by the
there is the risk that the overheads should be production director.
costs are misstated as ascertainedand compared
changes in row materials to the proposed standard
and wages inflation may costs to ensure they are a
nothave been adjusted for. close approximation.
This could result in inventory The revised standard costs
being under or overvalued should be reviewed by the
and profits being misstated. production director who
In addition for year-end should evidence this review.
reporting, lAS 2 Inventories At least annually. a review of
only allows standard costs the standard costs should be
to be used for valuation undertaken to ensure they
purposes if they are a close are up-to-date.
approximation to aCtual
costs, which is unlikely if the
standard costs remain
unchanged fora long
period of time. Therefor-e the
valuation may not be in line
with lAS 2.

Overtime worked is not :All overtim¢ should be Review the overtime report
authorised prior to being . authorised by a responsible for evidence of
paid. The information per official prior to the payment authorisation and note the
employee is collated and being processed by the date this occurred to ensure
submitted to payroll by a payroll department. This that this was undertaken
production clerk, but not authorisation should be prior to the payment of the
authorised. The production evidenced in writing. overtime.
director is only informed
about overtime levels via
quarterly reports.
These reports are reviewed
sometime after the
payments have been made
which could result in
unauthorised overtime or
amounts being paid
incorrectly cmd Freesia Co~s
payroll cost increosing.

The finance director The finance director~ when · Obtain a sample of ·

compares the toto I of the authorising the payments, payments lists and review
list of bonk transfers with should on crsomple basis for signature by the finance
the total to be paid per the perforrn checks from the diredor as evidence that
payroll records. • human resource , tbe control is operdti11g
: department's staffrecords to · correctly.
payment list and vice versa
to confirmthot payments

@BPP Answers 2Lt1

 :·are _complete and only made
to bona fide employees.-

There could be employees The finance director should

omitted ortictitious sign the payments list·as· --
emp_loyees add~d t_o the evidence that these checks
payment listing so that, have been undertaken
although the total --

payments list. agrees to -

payroll totals, there could
be fraudulent or erroneous
payments being made.
---·------·---------
-J
(c) Accrual for employment tax payable
Substantive procedures the auditor should adopt in respect of auditing this accrual include:
Compare the accrual for employment tax payable to the prior year, investigate any
significant differences.
• Agree the year-end employment tax payable accrual to the payroll records to confirm
accuracy.
Re-perform the calculation of the accrual for a sample of employees to confirm the
accuracy.
Undertake a proof in total test for the employment tax accrual by multiplying the payroll
cost for January 20X5 with the appropriate tax rate. Compare this expectation to the
actual accrual and investigate any significant differences.
• Agree the subsequent payment to the post year.,.-end bank ledger accountand bank
statements to confirm cornpleteness. -
Review any correspondence with tax authorities to assess whether there are any
additional outstanding payments due. If so. confirm they are Included in the year-end
accrual.
- Review any disclosures made of the employment tax accrual and assess whether these
. are in compliance with accounting standards and legislation.
(d) Corporate governance deficiencies and recommendations

Deficiency Recommendation

The finance director is a rnernber of the The audit committee must be comprised of
audit committee. independent NEDs only; therefore the .
The audit committee should be made up finance director should resign from the
entirely of independent NEDs. The role of committee.
the committee is to maintain objectivity with
regards to financial reporting; this is
difficult if the finance director- is a member
of the committee as the finance director will
be responsible for the preparation of the
financial statements.

The remuneration for directors is set bg the There should be a fair and transparent
finance director. policy iii pldce for setting remuneration
However, no director should be involved in levels. The NEDs should form a
setting their own remuneration as this ma!:J remuneration committee to decide on the
result in excessive levels of pay be1~_g set. remuneration of the executives. The board
as a whole should decide on the pay of the
NEDs. - - ..

, 21t2 Audit and Assurance @BPP

 Executive remuneration includes a The remuri~ration of executive~ should be
signific~nt onn~al profit related
bo,nus. restructured to include a significant
Remuneration should motivate th~ directors proportion based on long-term.company
to focus onthe long-term growth of the performance.· For examp"le, executives.,could
business, however, annual targets can be granted share option$, as this would .
encourage short-:term strategies rather than encourage focus on the longer term
maximising shareholder wealth. · position.

The chairman has sole responsibility for All· members of the board should be. involved
liaising with the shareholders and in ensuring that satisfactory dialogue takes
answering any of their questions. place with shareholders, for example, all
However, this is a role_ which the board as a should attend meetings with shareholders
whole should undertake. such as the annual general meeting:
The board should state in the annual report
the steps they have taken to ensure that the
members of the board, and in particular the
non-executive directors, develop an
understanding of the views of major
shareholders about the company.

105 Castle Courier Co

Course Book references

Chapters 9, 10 and 16.

Top tips
The requirements for this question are typical of the Audit and Assurance exam, with the
scenario being about controls and tests of control within a particular system. There is a lot to
do in this question, so there is a. risk of overrunning on the time. Make sure you stick to time for
each part of the question and move·on to the next requireh1ent once the time is up.
Part (a) is a knowledge-based requirement. The CBE would have given you a table in which to
·complete your answer, which would help you to get one mark for each
rnethod/explanation/advantage.
Part (b) requires you to make good use of the tabular format for the controls and tests of
control -go through the scenario line by line and make notes on the controls that appear tp be
particularly in1portant in the system, and then consider how you might go-about testing
whether the control works as it should do. Your tests of.control need to be sufficiently detailed
to gain the morks. Note that you should not be mentioning financial state~ent assertions here
because we are dealing with test of control rather than substantive procedures.
Part (c) is on controls deficiencies and recommendations. This is the biggest part of the
question so it is important that you stick to your time here. Your· recommendations should be
as specific as possible, including details of the actions that will need to be taken and whg they
should be taken.
Part (d) asks for substantive procedures on the payroll" expense. This is a standard area forAA,
and should be within tJOUrreach; if you struggled here then it is irnportantthat you prepare
yourself for questions of this type in your exam. ·· -

Easy marks
Part (a) on methods of documenting internal controls is knowledge based for four marks and
relatively straightforward. Part (d). asks for substantive procedures for payroll. This is worth six ·
· ri1arks and, provided your procedures are adequately dotoiled, you should be ctblo to score
well here. · ·

Answers 21t3
 . Marks

(a) Methods for documenting internaf control systems

Narrative notes 2
Internal c6ntrol questionnaires 2
Maximum 4
(b) Direct·controls and tests ·of control (only 4 required)
Sequence checks on key cards/data 2
HR review ofclocking in process 2
Payroll calculations reperformed 2
Password updated monthly 2
Control account reconciliations performed 2
Tax liability calculation reviewed 2
Maximum 8
(c) Control deficiencies and recommendations (only 6 required)
Holiday requests not authorised 2
FC prepares and authorises bank transfer 2
Edit report not checked 2
Temporary staff not processed by HR 2
Only overtime above five hours authorised 2
Cash wages collected without identification 2
No approved bonus parameters 2
Drivers breaks not monitored 2-
Maximum 12
(d) Substantive procedures for payroll expense
1 mark per well-described procedure 6
Maximurn 6
Total 30
-

Method Explanation Disadvantages

Narrative notes consist of They may prove to be time-

a written description of consuming and
the internal control cumbersoml3 if the int~rnal
system. They detail what control system is complex.
occurs in the system at It may make it more difficult
each stage including to identify if any internal
related controls which controls are missing in
operate at each stage. narrative notes.

Internal control questionnaires Internal control Internal controls may be

questionnaires contain a overstated if the client is
list of questions for each aware that the auditor is
major transaction cycle. looking for a particular .
They use questions answer.
designed to assess Unusual controls may not
whether internal controls be included on a standard
exist. questionnaire and hence

21tlt Audit and Assurance @aPP

 (b) ·Direct controls and tests of control

Direct control Test of control

All staff members a~eissued with a For a sample of key· cards and data
sequentially numbered key card. Sequence recorded in the !:locking~in system. corry
checks and checks on the data recorded out a sequence check to identify if there are
are carried out by the human resources any gaps in.the sequence.
(HR) supervisor. Review details of checks carried out by the
This ensures that payroll records are HR supervisor to identify any gaps in the
complete~ that employees ore paid for sequence and check they hove evidenced
hours worked and that all hours are their review by way of signature.
recorded.

The clocking-in process is monitored by d For a sample of weeks, review the log of the
camera on entry to the distribution centre recordings to identify who reviewed that ·
and video footage is reviewed by HRevery week's footage to ensure it has been
week. reviewed by a member of the HR
This will prevent staff members fraudulentlg department.
clocking-in for other employees and hence Review the log for any gaps in the review
employees will only be paid for actual hours process and discuss these findings with HR.
worked. ·

The payroll clerk confirms the transfer of For a sample of months, review the
hours and calculations has been done calculations of gross to net pay for evidence
accurately by recalculating, for a sample of . that the calculations have been performed.
employees, their gross to net pay. This : Confirm the signature of the payroll
check is also reviewed by the payroll supervisor as evidence that the!J have
supervisor who evidences their review; reviewed the report. For any anomalies,
This reduces the risk that errors occur ih the enquire of the reasons and what action· was
automated transfer and colculations during taken to resolve the issue.
the payroll processing. Any error&;would.be For a sample of months. reperform the
, identified on a timely basis to prevent gross to net pay calculations and compare
salaries being over or under paid. to the pa!:Jroll system and the calculations
prepared b!:J the payroll clerk. Discuss any
discrepancies with the payroll supervisor.

• The payroll system is password-protected Attempt to login to the payroll system using
' and the payroll manager changes the a password which should be out of date:
password on a rnonthfy basis using a Confirm :that the system has rejected
random password Qenerator.
This reduces the risk of fraud by r)reventing
unauthorised changes being made to the
standing data and unauthorised accessto
sensitive payroll information.

Each month, the finance director carries out Foro sample of months, review the control
a payroll control account-reconciliation and account reconciliations and make enquiries
investigates any differences. of the finance director of any errors on the
This will ensure the payroll expense and control account, how they arose and what
employment tqx liability is accurate and is action was taken to ensure they ·do not Orise
not misstated in the year-end financial in the future.
statements. Reperform a sample of control occount
reconciliations and compare results with

@BPP Answers 21+5

~
'""-''
 those prepared by the finance director.·
Discuss any discrepancies with the finance
director. ·

The amount due to the tax authority is Revfew a sample of calculations of the
calculated by the .payroll supervisor who monthly employment tax liability for
then passes it to the financial controller for evidence of review by the financial
review. controller confirming the calculation is
This ensures that the amount paid to the correct and that pa.yment can be made.
tax authority is correct. It also creates
segregation of duties between th~ payroll
supervisor calcwlating the liability and the
financial controller reviewing the calculation
which reduces the risk of error.

(c) Deficiencies and recommendations

Control deficiency Control recommendation

Department managers are required to Employees should receive written
approve all employees' holiday forms, confirmation when their holiday has been
however, this does not always occur. approved and should be informed that they
This could result in employees taking will not be able to take holiday without this
unauthorised leave which could lead to notification.
operational difficulties if there are An!:J payments for unused holidabJ should be
shortages of staff at critical periods. In authorised by department managers pr:ior
addition, payments for untaken holiday to pa!:Jment.
may be made in error as holiday records
may be incorrect.

The financial controller prepares the bank Once the bank transfer has been prepared
transfers for the payroll and also authorises by the financial controller, it should be
these to be paid. passed to the finance director to be
This lack of segregation of duties increases reviewed and authorised for payment. The··
the risk of fraud/error as the financial review and authorisation should be
controller could pa!:J themselves or certain evidenced b!:J the finance director.
ernployees more than they are due without
this being detected.

The pa!:Jroll clerk amends the pa!:Jroll and an The pa!:Jroll supervisor or a member of the
edit report .of changes is produced but this finance team should review all edit reports
report is not reviewed-. and agree changes made to the details on
As the edit report is not·checked, errors the joiner/leavers forms. An!:J discrepancies
made by the pawoll clerk when updating should be investigated prompti!:J and the
the system will not be identified prompti!:J. payroll system updated for any errors or
This may result iri new emplo!:Jees not being omissions.
paid at all. errors being made in payments The payroll supervisor should evidence their
to new employees or leavers being paid review on the edit report with their
after they have left the company. This signature.
would lead to loss of employee goodwill and
errors in accounting records for wages and
salaries.
It could also result in an increased risk of
fraud as fictitious emplo!:Jees could be
added by the payroll clerk.

21+6 Audit and Assurance @BPP

 The HR deportme_nt is responsibl~ fqr -All stoffoppoiAtments, including temporar!J
prooessing joiners andJeayer:s~ but _due to staff, sh.ould only be processed by. the" HR ·
staff illness, the operations manager hos department to ensure that correct
processed temporary new drivers and ·procedures are followed. ·
notified· payroll. If it is not possible for the HR department_ to
The operations manager may not carry out out all of the detailed processing due
all the required procedu_res·for processing to staff shortages, a member of the HR
temporary new drivers as the rnanage.r may should review the leaver/joiner form
not be using appropriate documentati_on. and authorise it before it is sent to t~e
This could result in temporary employees payroll department. ..
not being set up in the payroll records The payroll cJepartment should be notified
correctly, resulting in the late payment of not to accept any new joitier information
wages, incorrect statutory deductions being unless approved by a member of HR.
calculated and incomplete payroll records.

Only overtime in excess of five hours per All overtime, including that below five hours,
week needs authorisation by the operations should be authorised by a responsible
manager. official before being ·processed in the
This means that employees could claim to payroll. This authorisation should be
have worked up to five hours overtime evidenced by way of signature.
without authorisation resulting in payments
being made to employees for hours not
worked and additional payroll costs.

Where cash wages are paid, the driver is All drivers collecting cash pay packets
only required to provide their name to should provide a form of identification to
collect their pay packet. the finance staff member before the pay
I~ Payment of wages without proof of identity packet is handed to them. The driver should
or signature increases the risk that wages also be-required to sign for their pay
could be paid to incorrect employees either packet.
in error or due to fraud resulting in a loss of
cash.

The operations manager decides on the Approved bonus parameters should be

bonus to be paid to delivery drivers each established by the board. All bonuses
quarter and ther-e are no approved should be determined by a senior official,
parameters fo~ the bonus levels. such as the soles director, in line with these
Without approved pararneters.the parameters, who should communicate the
operations manager may award excessive bonus in writing to the payroll department.
bonuses or pay additional sums to friends
andfamily members resulting·in additional
.payroll costs.

Defivery drivers must take breaks : The company should monitor the activity of
throughout the day which are not the delivery drivers through electronic
monitored. . tneafls, for example, b\:J U$ing tracking
Drivers could take longer breaks than those devices-attoched to their vehicles to ensure
authorised. resulting in payments being that the prescribed breaks are taken by the
made to employees for time not worked. : employees.
Conversel\:h if drivers do not take the Data should be downloaded. and reviewed
required breaks, they may be in breach of ' by a responsible official ()n a regularbasis.
law and regulations which require drivers to
take regularbreaks, hence the company is
at risk of fines.

@aPP Answers 2Lt7

 · (d). Substantive procedures on payroll expense
Cast a sample of payroll records to confirrn completeness and accuracy and agree the
total wages and salaries expense per the payroll system tcrthe trial balance.
-· Recalculate the gross and net pay figure.s for a sample of employees and agree to the
payroll records. · . ·
For a sample of .wage payments, agree the total net pay per the payroll records to the
bank transfer listing and to the cash book.
Perform d proof in total of wages and salaries, incorporating-joiners and leavers and the
pay increase/bonuses. Compare this to the actual wages and salaries expense in the
financial statements and investigate any significant differences.
• Compare the total payroll figure this !:Jear to the prior year, identify any significant
differences and discuss with management.
Review monthly payroll charges, compare this to the prior year and budgets and discuss
any significant differences with management.
Calculate overtime costs as a percentage of total wages. Compare this to the prior year
and discuss any significant differences with management.
• Agree a sample of individual wages and salaries per the payroll to personnel records and
records of hours worked per the clocking-in system.
• Reperform the calculation of statutorhJ deductions and agree to supporting
documentation to confirm whether correct deductions for this year have been made in. the
payroll.
• Select a sample ofjoiners and leavers, agree their start/leaving date to supporting
documentation~ recalculate their first/last salary to ensure it is accurate.

Recalculate holiday pay for a sample of emplo~:~ees and agree to holiday records and
daily rote applied.
Select a sample of employees from HR records and agree salaries per HR records to the
payroll records to confirm the accuroclJ of the payrolL. expense.
• Agree the payroll control account reconciliation to accounting records and investigate any
differences~.

106 Bluesberry

Course Book references

Chapters 5 and 12.

Top tips
You should have been familiar with the purpose of a value for money audit in part (a)- just
remember to focus on the purpose and not just provide a definition of a value far money audit.
The most-important thing for (b)(i) is to understand the requirement. Don't be fazed bbJ the~ fact
you are asked for strengths instead of weaknesses or deficiencies. The scenario actually gives
examples of problems that have been solved by certain procedures, so you should have
recognised that these were strengths (for example the overtime scheme has seen reliance on
expensive temporary staff reduced). As you were pulling out the strengths !n the operating
environment you could also have been consideri_ng the areas for tmprovement to help in
answering part (b)(ii). In fact a good approach would have been to lay out your answer so that
you could answer (b)(i) and (b)(ii) together. .
Part (c) depends on you knowing your assertions so you can stay focused on the relevant
substantive procedures. For each assertion ask yourself~ what am I trying to prove with this
procedure? For example, with -completeness you are trying to prove no material Jtems are
missing from non-current assets. You therefore need to suggest procedures that might
highlight missing assets.

21t8 Audit and Assurance @aPP

 Eosy marks
Part,s (a) and (c) were more ~traightforward tha.n (b).

Examining team's comments

Candidates performed satisfactorily . on part (a) of the question..

Part (b) required identification and explanation of four strengths within.the hospital's operating
environment and a description ofan improvement to provide best value forrnoney for the · ·
ho9pital. Candidates performed well fn the explanations ofth~ strengths within Blues berry,
with many scoring full marks. Where candidates failed to score well this was due to a failure to
explain their strengths. The requirement was to 'identify and explain'; where a strength was
identified then% mark was available, and another 1 mark was available for a clear explanation
of each strength. In addition, a significant minority misread the question requirement and
identified weaknesses rather than strengths. ·
The second part of this question required improvements to the strengths identified.
Performance on this question was adequate. The_mdjority of candidates attempted this part of
,', the question, and were able to identify a few relevant points. However, answers were often too
vague or unrealistic.
Candidates' performance was mixed for part (c), with many confusing their assertions. It was
common to hove existence tests provided for completeness. In addition, too many answers
were vague; candidates are still giving substantive procedures such as 'check the invoices'.

Marks

(a) Up to 1 mark per valid point.

Explanation of value for money audit
Economy -· description
E:fficiency - description
-Effectiveness - description
Maximum· 4
(b) Strengths and improvements include:
Internal audit department
Centralised buying department buys from lowest cost supplier
Authorisation of all purchase orders by purchasing director
Reduction in use of temporary staff
Employee clocking in cards to monitor hours worked
New surgical equipment leading to better recovery rates
Capital expenditure committee
Maximum
(i) 0.5 marks for identification of strength and up to 1 mark for explanation of.
each well-explained strength.
If not well-expla_ined 0.5 marks for each, but overall maximum of 4 strengths.
Maxirnurn .6
(ii} Up to 1 mark per improvement
Maximum 4·
(c) Up to i mark per well··explained procedure

(i) Valuation:
Review depreciation policies for reasonableness
Recalculate the depreciation charge

·.@BPP Answers 2Lt9

 Marks

· Proofln total-calculation of depreciation

For revalued assets, consider reasonableness of valuer
For rev_alued assets) agree the revalued amounts to valuation report
Surgicol equipment ~~ditio_~s -.vouch the cost t<? invoice
Maximum

.,
(ii) Completeness:
Reconcile PPE schedule to general ledger
Physical inspection of assets
Reconciliation of non-current assets register to the general ledger
Review the repairs and maintenance expense account
Maximum 2

(iii) Rights and obligations:

Verify ownership of property via inspection of title deeds
Additions agree to purchase invoices to verify invoice relates to entity
Review any new lease agreements
Inspect vehicle registration documents
Maximum 2
6
Total 20

(a) Purpose of a value for money (VFM) audit

VFM focuses on the best combination of services for the lowest level of resources. The purpose
of a VFM qudit is to examine the economy, efficiency and effectiveness of the activity or
process in question.
Economy: attaining the appropriate quantity and quality of physical, human·and
financial resources (inputs) at lowest cost ·
• Efficiency: the relationship between goods or services produced (outputs) cmd the
resources used to produce them
• Effectiveness: concerned with how well an activity is achieving its policy objectivesor
other intended effects

250 Audit and Assurance @sPP

(b) (i)
.,..........·.:.:-:-...........~:;:.~-··

Strength
;-: ::.' (i) Improvement (ii)
-·
~

..... ·.:...:·;·········"·.' i
j The byying department researchf)s the· j.tnorderto qlso ensure the goodsda re off. !'
i lowesfprice from suppliers before raising I the required quality, an approve 1ist o l
l a purchase order. This helps with I suppliers could be built up, with
l econorny of the process, attaining ! purchases only being permitt_ed from .!
· I resources at the lowest cost. I those suppliers on the list. . ;
i· '• < o• o '···'·-~-~-·-- • ••••: d No ~ j. •
•• oO • • • •• 0 • ''"'''"•' • ••-'- """'- "•OoO " · ' " """ '"" ' '"'"'" l
I Overtime rates have been increased and I The increased hours will affect overall j . . ..

.j tbis-hasJncentivised staff to fill staffing 1 efficiency given that the same staff are
!-
! gaps~ ,A~ a result H1e hospital has saved t now carrying out extended shifts, as
i money by decreas1ng the level of · l overtime rates are higher than basic
; expensive temporar~ staff. Additionally, l rates, even though overtim,e cost appears
; the permanent staff may be more t to be l?wer thantemporar~ staff.
i effective:as they are familiar with the
! hospital's systems and the level of patient
· care expected at Bluesberr~.

1
There is also an increased risk of mistakes
due to tiredness which could have
adverse effects on the reputation of the
hospital. Ideally the hospital should
recruit enough permanent staff of the
required level to fill shifts without then
working overtime.

i The hospital has implemented time card The system appears to allow pal-Jable
, clocking in to ensure employees are on I~ overtime to accumulate simpi!J because
. paid for those hours worked. It also an employee clocks out late, even if there
1 provides a means tor recording hours is no staff gap to fill. The system should
l workedVvhich is valuable management be set to automatically clock out after the
: infortnqt!on. Before this there would have normal number of shift hours. Staff will
1 been ho definitive record of actual.hours then need toclock back in for their
! worked. overtime if they have an authorised shift.
Overtime hours each month should be
reviewed by the department head for
consistency with agreed extra shifts.

A capital expenditure committee of senior ln a hospital there will be very expensive·

managers has been s~tup to authorise· equipment purchases, such as the .
significant capital expenditure items. This recently acquired new surgical _.
will help prevent cash outflows for · equipment. It is better that these are
unnecessary assets, or assets not authorised at board level rather than by
budgeted for. senior managers. An authorisation policy
should be drawn up setting out the
different levels of authorisation n_e~ded
(the highest being at board level)
depending--on the amount of expendityre.
for capital items. .

· rutorial note. You were only asked for four strengths and related improvements.
Other$ you may have come up with in place of those given in the answer above are as
follows.

@BPP Answers 251

 (ii)

Strength (i) Improvement (ii)

The remit of internal audit could be

extended to advising on implementation.

Orders are authorised by a purchasing The volume of forms (200 per day) will no
director to help ensure expenditure doubt take valuable time away from the ..
incurred is necessary expenditure. director which could be used on more
pressing matters. Orders below a certain
monetary level should be authorised by
the next level (down) of management.
Orders over the specified monetary value
should still be reserved for purchase
director authorisation.

New surgical equipment purchased has The equipment is not used as efficiently
improved the rate of operations and as it could be due to lack of trained
patient recovery rates. This is an medical staff. The hospital should look at
improvement in the effectiveness of the providing targeted training for existing
hospital. medical staff and look to recruit staff that
have the appropriate skills.

(c) Substantive procedures- property, plant and equipment (non-current assets)

(i) Valuation
Review depreciation rates applied in relation to asset lives. past experience of profits
and losses on disposals, and consistency with prior years and disclosed accounting ·
policies.
If assets have been revalued, consider:
- Experience and independence of valuer
- Scope of the valuer's work
- Methods and assumptions used
- Whether valuation bases are in line with lFRSs
(ii) Completeness
Compare non-current assets in the general ledger with the non-current assets
register and obtai'! explanations for differences.
For a sample of assets which physically exist agree that they are recorded in the non-
current asset register.
(iii) Rights and obligations
• Verify title to land and buildings by inspection of:
- Title deeds
- Land registry certificates
- Leases
Examine documents of title for other assets (including purchase invoices, contracts,
hire purchase or lease agreements). ·

252 Audit and Assurance @app

 · Tutorial nqte. Only two substahtivt;J procedures were needed for each ossertior1. You
may have come up with alternative procedures intl~:~ding: · '
Valuation.
Recalculate the clepreciation charge for a sample of assets and agree the charges
to the asset register ·· ·
•. Perform a depreciation proof in total taking_ into acco.t.mttfming_ of
additicns/dlsposafs and investigate any differences-·
• Agreethe~cost of a sample of additions of surgical equipment to purchase invoices
Completeness
Re.concile the schedule of non-current assets with the general ledger
Review the repairs and maintenance expense account in the SOCI for capital items
Rights and obligations
Review new lease agreements to ensure properly classified as a finance lease or an
operating lease in accordance with IFRSs
Inspect vehicle registration documents (eg ambulances) to confirm ownership of
motor vehicles

@BPP Answers ·253

107 Snowdon

Course Book referenc_e -

Chapters 9, 10, 12 dnd 15.

Top tips
This was a reasonable question on internal controls and began, in pdrt (a), with· a theoretical
requirement on significant deficiencies. This part of the question was not entirely
straightforward and many of the points listed in the answer may seem strange. particularly if
you were not familiar with the requirements of ISAs in this area. If you struggled then you will
need to ensure that you are able to cope with this kind of requirement in your exam.
Part (b), on direct controls and tests of controls, was scenario-focused and to score well here
you needed to make sure that you developed your points sufficiently to get the marks on offer.
Part (c) was again based on the scenario and is typical of the way this area is likely to be
examined.

Easy marks
Part (a) was considered by the examining team to be easy but may not have been- so you
would have to have scored well in parts (b) and (c) to make up for this.

Marks

(a) Significant deficiencies

Likelihood of leading to material misstatement
Susceptibility to loss or fraud
. Subjectivity and complexity of amounts
Amount exposed to deficiency
Volume of octivity 1
Importance to financial reporting process 1
Cause and frequency of exceptions-
Interaction with other deficiencies
Maximum 4
(b) Direct controls and tests of control (only 3 required)
Capital expenditure class~fication 2
HR department/payroll department 2
Processing new joiners 2
Bank reconciliations. 2
Meximum 6
(c) Control deficiencies and recommendations (only 5 required)
lA staff shortages 2
Capital expenditure over budget 2
Physical verification of assets 2
Amendment ofstanding data 2
Changes made i~ payroll records 2
Credit limits not reviewed 2
Invoices only chased after 90 days 2
Max 5 issues, 2 marks each

251t Audit and Assurance @aPP

 Marks

Maximum. 10
Total 20

(a) Significant deficiencies -

Examples of matters the external-auditor may consider in qetermining whethero deficiency in
internal controls is significant'include:
• The likelihood of the deficiencies leading to material misstatements in the- financial
statements in the future. ·
• The susceptibility to loss or fraud of the related asset or liability.
• The subjectivitbj and complexity of determining estimated amounts.
• -The financial statement amounts exposed to the deficiencies.
• The volume of activity that has occurred or could occur in the account balance or class of
transactions exposed to the deficiency or deficiencies.
• The importance of the controls to the financial reporting process.
• The cause and frequency of the exceptions detected as a result of the deficiencies in the
controls.
• The interaction of the deficiency with other deficiencies in internal control.
(b) Direct controls and tests of control

Direct control Test of control

Capital expenditure purchase orders are Select a sample of capita·! expenditure

classified by the finance department purchase orders and review evidence of the
between capital and revenue using classification being noted. -
guidelines established by the -finance For a sample of orders compare the
director, this is noted on the purchase order. l classification- noted with the fina·nce
The finance director also sample checks the director's guidelines to assess whether the
classification is correctly applied. ciassification wqs correctly undertaken.
The use of finance department guidelines Review purchase orders for evidence of the
and sample checks by the -finance director finance director's sample checks for
should reduce the risk of an incorrect example~ by signature.
assessment and of understated/overstated
profits, assets and incorrect depreciation
. charges.

Snowdon Co has o separate human Review the job descriptions of payroll and
-reso_urces (HR) deportment, which is HR to confirm the sp-lit of responsibilities.-
·responsible for setting up all new with regards to setting up new joiners.
employees. DiscUss with members of the payroll
Havir1g a segregation ofroles between HR department the process for setting up new
and payroll departments reduces the risk of joiners and agree new joiners to·
fictitious employees being set up and also documentation initiated by HR.
being paid.

@B.PP Answers 255

 Pre~printed forms are completed by HR for Select a sample of new employees ()dded to
new employees, ahd includes assignment of the payroll during the year, review the joiner
a_ unique employee number, and once forms for evidence of completion and the
verified a copy is sent to the pawo"ll allocation of a unique employee number
department. The payroll system is unable to which was received by payroll prior to being
process new joiners without the. inclusion of addedtothesy~em ..
the employee's unique number. Select a sample of edit reports for changes
As payroll is unable to set up new joiners to payroll during the yeor; agree a sample
without the forms and employee number it of new employees added to payroll to the
reduces the risk of fictitious employees joiner's forms.
..
being set up by payroll. Attempt to odd a new joiner to the payroll
system without a unique employee number,
the S!:Jstem should reject this addition.

The cashier reconciles the bank statements Review the file of bank reconciliations to
to the cash book monthi!:J and this confirm that there is one for each month.
reconciliation is reviewed and investigated Inspect a sample of monthly bank
by the financial controller, who evidences reconciliations for evidence of investigation
his· review by way of signature on the bank and review by the financial controller.
reconciliation. For a sample of months reperform the bank
The bank reconciliation is a direct control reconciliation and where differences have
which reduces the risk of fraud. Monthly occurred discuss and investigate these with
review and investigation ensure that fraud the financial controller.
and errors are identified on a timely basis.
.. -"··-·-"""''""'

(c) Control deficiencies and recommendations

Control deficiency Control recommendation

Snowdon Go has experienced significant Senior management should consider

staff shortages within its internal audit (lA) recruiting additional employees to Join the
department, and the department is lA department or outsourcing the lA
currently under-resourced. This has resulted function .
.in. a reduction in their programme of work In the interim, employees from other
for the !:Jear. departments, such as finance, could be
Maintaining an lA department is an seconded to lA to assist them with audits. It
important control as it enables senior must be ensured that these. reviews do not
management to test whether controls are cover controls operating in the department
operating effectively within the compan!:J. Jf in which the emplo!:Jees normally work.
the team has staff shortages, this reduces
the effectiveness of this monitoring control.

Some departments have already The company's monthly management

significanti!:J exceeded their annual capital accounts should include an analysis of
expenditure budgets. capital expenditure against budget and
It appears that purchase orders for capital prior year per department. Each
expenditure are being placed-without being department head should include narrative
agreed back to annual capital budgets, which explains the significant variances to
resulting in overspends. date.
The increaseq expendi.ture may be due to Capital purchas€ orders should be
increased levels o.f services being provided, compared to the annual department
or it could be due to a lack of control over budgets as part of the authorisation
the capital expenditure process, resulting in process. Any spend in excess of the budget
increased costs and reduced profits. should be referred for authorisation to the
finance director.

256 Audit and Assurance @BPP

I_

The lA department ~.mdertakesphysical . lA should review its programme of visits to

verification o£ assets each yearf9r the fbur assess ifaddftional rt;sources could be
largest centres as well as five of the other devotedto.ensuring that ·a·ll sitesare visited
centres, randomly selected. The company · overti shorter period, for example, five
has 45 centres as well as a head office and years. This would ensure that physical
warehouse, hence_ if.ecich year the four verificatfon.of all assets could be completed
largest sites are visited this can result in the more regular.ly. For sites visited any assets .
other sites only being visited every eight which cannot be loqated shoiJid be .
years. investigated fully.lt'it cannot be located,
If the non-current assets register is not then it should be written pff.
physically verified on a regular basis, there Each centre should submit a list of assets
is an increased risk of assets being with seridl numbers to lA, who should
misappropriated as there is no check that compare these to the PPE register. Those
the assets still exist in their correct location. sites with significant variations should be
In addition, obsolete assets will not be prioritised for a site visit by lA.
identified on a timely basis.

All members of the payroll department can The password to amend standing data
amend employees' standing data In the should be changed and only communicated
payroll system as they have access to the to senior members of the pa~roll
password. department.
As all members of payroll can amend If all members of payroll need the ability to
standing data this may result in errors or amend standing data, the system should be
unauthorised changes being made. leading changed to require authorisation of all
: to incorrect payment of wages and changes by a senior member of payroll.
increased risk of fraud. Edit reports should be generated for all .
standing data changes with clear reference
to who made the change and who
authorised it. These edit reports should be
regularly reviewed by a r~sponsible official
and they should evidence this review with a
signature.

The senior payroll manager reviews the The senior payroll manager should not be
bank transfer listing prior to authorising the able to process changes to the payroll ·
payments and if any dis-crepancies are system CIS well as authorise payments.
noted, always makes the adjustment in the Discrepancies should be thoroughly
payroll records for any changes required. investigated, and adjustments made in the
Discrepancies may arise due to the payroll relevant record as required. .
records or the bonk transfer listing being The authorisation of the bank transfer
incorrect. Assuming the discrepancies are · listing should be undertaken by an
always in the payroll records may result in individual outside the payroll department,
incorrect records may result in incorrect such as the finance director.
amendments being made to payroll or
ir1correct amounts paid-to employees.
In addition, there is a lack of segregation of
duties as it is.the payroll team which
processes the amounts and the senior
pawoll manager who authorises payments.
The senior manager could fraudulently
increase or incorreetlw amend the ·arnoLmts
to be paid to certain employees, process
this payment as well as amend the records.

After passing a cr13dit check o credit lirnit is Credit limits should continue tope set by
set for dll new customers by the sales ·· . the sales director; howeve-r. these limits ·
director; but these credit limits are not : should be reviewed and amended as
reviewed after this unless a review is appropriate on a regular basis by a

@BPP Answers 257

 i---·-······-,.........,.•.----·-·····-·····-··'·-------........................................................................- ...~ ....... ---r··········-·-···---~·-····-·------·.-·. -·-'---·--·-·-···-..--·-····---·--·--····-····
I requested by the customer. ! responsible official.
l1t credit limits are not reviewed reg.Uiariy, - I .
I they could be out o{date, resulting in. limits i
l being·too high and sales being made to j
I poor credit risks or too low and Snowdon Co j
/ kJsing potential revenue. · 1 I
~--·ci·i~-~~--~-~-~~~6~~-·-~-~-~-~~~-~s .are g_iven. .
_. . . .:········-----·J···-~--~-;~d'i~--~~-~-~-~~-~~~·;·~-h~-~ ld···b~···~·~·~·6i·~·~;d, .and j·
1 responsibility to chase customers directly 1 1t shoulc:f be the1r role~ rather than the client 1

! for payment once an invoice is outstanding j services managers, to chase any

! for 90 days. This is considerably in excess of I outstanding sales invoices which are more
I the company's credit terms of 30 days ! than 30 days old.
I which will lead to poor cash flow. I
! Further, client services managers are more I
I likely to focus on customer relationships i
l and generating further revenues rather ·
! than chasing payments. This could result in
j an inciease in irrecoverable balances and li

p-~~:~.~---~-~~. . :.~. :-~-~~-~-~~:..........................

i
1 reduced .............................................- .................____. . _...._.........._.......................................i

108 SwiftCo

Course Book references

Chapters 9 and 10.

Top tips
This is a 20-mark question on controls and tests of <;:ontrols in relation to payroll and the
purchases system.
Part (a) tested your knowledge of the methods for documenting systems of internal control.
These were among the easiest marks on the exam, so you should have been aiming to score
well here.
Part (b) was the core of this question, consisting-of 14 marks for direct controls and tests of
controls; The marks divide themselves in to seven points in each column; there are more than
seven points in the scenario so you should not have been short of ideas for your answer here ..
As ever, you should highlight relevant parts of the sceriario as you r-ead thr-ough it, trying to
look behind the information given in order to generate tests of control.

Easy marks
You should be able to get easy marks in part (a) on methods of documenting systems of
internal control.

Marks

(a) Methods of documenting internal controls

Narrative notes 2
Flowcharts· 2
· Questionnaires 2
Maximum. 6
(b) Pirect controls and test of controls (only 7 required)
Segregation of duties- HR and payroll 2
Unique employee number to processjoiners 2

258 Audit and Assurance @aPP

 . Marks

Review of exception report · 2

Recalculation of gross to net pay 2
. Authorisation of purchase orders 2·
Gobds ag~eed to purchase ordedquality/quaritity 2
Control totals used for invoic~ input 2
Supplier statemen~ reconciliations 2
Authorisation of bank transfer list 2
Maxim urn 14
Total 20

Description Advantage "

. ......;.,_~,..;..:.,,,;._.,,.:..,_.,,;.. ' " ' ' '

Narrative notes consist of a They are simple to record; after

written description of the system. discussion with staff members,
They detail what occurs in the these discussions are easily written
system at each stage and include up as notes.·
details of any controls which They can facilitate vnderstanding
operate at each stage. by all members of the audit team,
especially more junipr members
who rnight find alternative
~I
methods too complex.

Flowcharts are a diagrammatic With flowcharts iUs easy to view

illustration of the internal control the system in its entirety as itis all
system. Lines usually presented together in one
demonstrate the sequence of diagram.
events and standard symbols are Due to the use of standard
used to signify controls or symbols for controls, It can be
documents. effective in identifying mis$ing
controls.
-...J
!
Internal control questionnaires Questionnaires are quick to
(ICQs) or internal control prepare. which means they are a
evaluation questionnaires timely method for recording the
(ICEQs) contain a list of questions system.
for each major transaction cycle; lfdrafted thoroughly they ensure
ICQs are used to assess whether that all controls present within the·
controls exist whereas ICEQs system are considered and
assess the effectiveness of the recorded, hence missing controls
controls in place. or deficiencies are clearly
highlighted by the audit teCJm.

@BPP . Answers 259

 The cashing up of tills along with the The cashing up prbcess should-be
recorc:ling of any cgsh disC:repo.ncies is undertaken by two individuals ..togethe-r,
undertaken by just cine individual. the ideally an assistant manager and the
restaurant maoqger. There is a fraud risk as restaurant manager. One should count the
the mpnager cou·ld remov~ some of the c(Jsb and the other record it.
cash and then simply record that there was
an exception on the daily soles list. Any exceptions to the till reading should be
In addition~ as there is ·no segregation of double checked to confirm that they are not
duties, ~he restaurant manager could,' simplyarithrnetical errors. If still present, the
fraudulently or by error, record the total releyant employees who had access to the
sales· as per each till incorrectly leading to till can be identified and further
incorrect identification of discrepancies. investigations can be undertaken.

Daily sales sheets are scanned and emailed for each venue should be
to head office on a weekly basis. numbered and remitted to
There is a possibility that some sales sheets head office on a daily basis. At head office,
could be misplaced by the restaurant a sequence check should be undertaken on
manager resulting in incomplete sales and a regular basis to identify any missing
cash receipts data being recorded into the sheets and any .gaps should be investigated
accounting system. further,
Once received, the cashier should post the
sales and cash data for all six venues on a
daily basis. Once proces~ed, they should
then be signed as posted by the cashier and
filed awaysecurely .
...................... .. . ,....... , .. ,,~·!·" ''"'~'·''''"'''"~''~''"'"''"

Cash is stored in a safe at each venue and The current key lock safe should be replaced
tho restaurant manager stores the safe key with a safe with a digital code. Only
in a drawer of their desk when not in use. authorised personnel should have the code
Although cash is banked on a daily basis, which should be updated on a regular basis.
there could still be a significant sum of cash
f ollsite each day. There is a risk of

' significant cash losses due to theft if access

to the safe key is not carefully controlled .
........................,. '··
The cashier is responsible for several _ These key roles should be split between
elements of the cash receipts· system. She different members ofthe finance team, with
receives the daily sales sheets from. ideally the bank reconciliations being
restaurants~ agrees that cash has cleared undertaken by another member of the
into the bank statements, updates the cash team.
book and uhdertakes the bank
reconciliations.
There !s a lack -ofsegregotion of duties and
errors will not be identified on a timely
basis.

The cashier is_not checking that payments The c.ashier should reconcile the credit card
made by credit car_d have resulted In cash vouchers per restaurant to the· monthly
being received bg Car:nomile·Co. The credit staternentrecefved from the card company.
card statements are not reviewed or The doily amounts per the statement should
reconciled, they are just filed away. be agreed to the bank statement to ensure
There is a risk that receipts of cosh by that all funds have been received.-
credit card .may hove been omttted and this This r:econciliation should be reviewed by a
would not be identified on a timely oasis as responsible official, such as the financial
the bank is only reconciled every two controller, who should evidence by
rnonths and rnay result in difficulties in signature that the review has been

Answers 275
 If they are aware that these accounts are
_notr~gularl.y review~d, then they could use
these cash sums fraudulently.

Fox ·Industries Co has a policy ofdelaying Fox Industries Co should undertake cash
payrnents_to th-eir suppliers for as long as" "flow forecasting/budgeting to maximise
possible..: bank balances. The policy of delaying
While this maximises· Fox Industries Co's payment should be reviewed,. and suppliers
bank balance,there is the risk that the should be paid in a systematic way, such
comp9ny is missing out on early settlement that supplier goodwill ~s not lost. ·
discounts. Also, this can lead to a loss of
supplier goodwill as well as the risk that
suppliers may refuse to supply goods to Fox
Industries Co.

The finance director authorises the bank The finance director should review the whole
transfer payment list for suppliers; however, pakjments list prior to authorising.
he only views the total amount of payments As -part of this, he should agree the amounts
to be made. · to be paid to supporting documentation, as
Without looking at the detail of the well as reviewing the supplier names to
payments list, as well as supporting identify any duplicates or any unfamiliar
documentation. there is a risk that suppliers names. He should evidence his review by
could be being paid an incorrect amount, or signing the bank transfer list.
that sums ore being paid to fictitious
suppliers.

Note. Only five deficiencies were required.

(c) Information processing controls
Document counts- the number of invoices to be input are counted, the invoices are then
entered one by one, at the end the number of invoices input is checked against the document
count. This helps to ensure completeness of input.
Control totals - here the total of all the invoices, such as the. gross value, is manually
calculated. The invoices are input, the system aggregates the total ofthe input invoices1 gross
value and this is compared to the control total. This helps to ensure completeness and
accuracy of input. ·
One for one checking -the invoices entered into the system are manually agreed back one
by one to the original purchase invoices. This helps to ensure completeness and accurqcy of
input. -
Review of output to expected value - an independent assessment Is made of the value of
purchase invoices to be input. this is the expected value. The invoices are input and the total
value of invoices is compared to the expected value. This helps to ensurecorTlpleteness of
input. -
Check digits:- this control helps to reduce the risk of transposition errors. Mathemotic:ol
calculations are performed by the system on a particurar data field, such as supplier number,
a mathematical formula is run by the system, this checks that the data entered into the
system is accurate. This helps to ensure accurac~:~ of input.
Range ~hecks- a pre-determined maximum is inputintothe system for gross invoice value,
for example, $10~000; when ·invoices are inplJt If the amount keyed in is incorrectly entered as
being above $10,000, the s~:~stem will reject the invoice. This helps to ensure accuracy of·
input. ··
Existen~e checks·- the system is set up so thot cmtoin key data must be· entered, such as
supplier name, otherwise the irwoice is rejected. This helps to ensure- accurac!:J of input.
Tutorial note: Marks will be awarded for any other relevant application controls.

@BPP Answers 279

· (d) .Substantive procedures on bank and cash balances ·
- .
Send out a standard bonk confirmation letter to each bank where the company holds bank
accounts-to confirm the year-end balance.
Review the year-end reconciliation of the bonk balance per the gen.erafledger against the
bank balance per the bank letter. .
Reperform the arithmetic of the bank reconciliation for each b_ank account held.
Trace cheques shown as outstanding from the bank reconcjliation to the cash bo.ok prior to
the yearend and to the after.;.date bank statements and obtain explanations for any large or
· unusual items not cleared at the time of the audit.
Compare cash book(s) and bank statements in detail for the last month of the year, and
match items outstanding at the reconciliation date to bank statements. ·
Review the bank reconciliation previous to the year-end bank reconciliation and test whether
all items are cleared in the last period or taken forward to the year-end bank reconciliation.
Obtain satisfactory explanations for all items in the cash book for which there are no
corresponding entries in the bank statement and vice versa by discussion with finance staff.
Verify contra items appearing in the cash books or bank statements with original entry.
Verify by inspecting paying-in slips that uncleared bankings are paid in prior to the year end.
Examine all lodgements in respect of which payment has been refused by the bank; ensure
that they are cleared on representation or that other appropriate steps have been taken to
effect recovery of the amount due.
Verify balances per the cash book according to the bonk reconciliation by inspecting cash
book, bank statements and general ledger.
Verify the bank balances with the reply to standard bank letter and with the bank
statements.
Inspect the cash book and bank statements before and after the year end for exceptional
entries or transfers which have a material effect on the balance shown to be in hand.
Identify whether an\:! accounts are secured on the assets of the company by discussion with
management.
Consider whether there is a legal right of set-off of overdrafts against positive bank balances.
Determine whether the bank accounts are subject to any restrictions by inquiries with
management.
Review draft financial statements to confirm that all amounts and relevant disclosures
relating to bank have been correctly stated.
-~ote. Only five procedures Were required.
(e) (i) Big data and data analytics
Big data is a broad term for the larger, more complex datasets that can be held by
modern computers. The term refers to a qualitative shift in the amount of data that js
available in comparison with the past.
Data analytics is the examination of data to try.to identify patterns, trends or ..
·cOrrelations. As the quantity of. data has increased, it has become more and more
necessary to evolve ways of processing and making sense of it.
(H) ··ISAs.require a risk management based approach to audit, where the auditor does not
test all of an entity's transactions, but instead focuses audit procedures on the. riskiest
areas. Data analbjtics can offer the chance of examining all of an entity's data. This in
turn should improve both audit efficiency and audit quality. ·
Large quantities of data can be interrogated relatively quickly, allowing auditors to focus
immediately on the riskiest areas, and obtain evidence to reduce audit risk:
Examples of how auditors might use data analytics include:
• Analyse patterns relating to revenue or costs per product or per customer

280 Audit and Assurance @aPP

 Trace the matching of orders to good~ despatched/goods received· documentation
and to
the_ invoice, in order to determine whetheuevenue ondccwt~,:~hould be
recognised
• To calculate-i~ve_ntory ~ageing and how many days inventbr'y is held bg product/item
'Detailed recalculations of depreciation on non.,.current assets by item
Note. Only,two examples '!"ere required.

-113 Pomeranian Co

Course Book r~ferences

Chapters 9 and 10.

Top tips
This is a 20-mark question focusing on internal controL
Part (a) requires you to describe the limitations of internal control, and was a standalone
question part that did not reaiiH refer to the main question scenario. It could be said that
people are the denominator that is common to all _of these points (people making mistakes; ·
people circumventing controls; people overriding controls; people using their judgement to
·design controls. People!). Understanding this might be a point of.departure for understanding
the inherent limitations of internal controls.
Part (b) was a normal AA question on deficiencies and recommendations. As ever, your
deficiencies grow from your reading of the scenario. with your recommendations coming from
these in turn. Exam technique is important here- you may find it helpful to highlight important
points of the scenario, or to make notes within the software. Whatever !JOI.J choose, pick your
eight strongest points and write about those.

Easy marks
Many of the recommendations are not difficult ;_ once you've spotted a problem in the.-
scenario, there are likely to be marks on offer for followi_ng througt~ on this and recommending
a way of fixing it.

Marks

(a) Limitations of internal control

1 mark per well-explafned point 4
Maximum 4-
(b) Control deficiencies and recommendations (only 8 required)
Credit limits not r~viewed 2
GDNs provided weekly to finance department 2
No credit controller 2
Reconc;lliations only reviewed if differences 2
_Capex authorisation limits too high 2
PPE verification work not as scheduled 2
Warehouse manager supervising inventory counts 2
Standard costs out of dote · 2
Exception report not checked 2
Purchaseinvoices_not agreed to GRN~ .... 2
Maxirnurr1 16
Total 20
--

@BPP Answers 281

(a) Limitations of internal control
. . .

There are limitations in any system of internal control which affects the extent to which the
()Uditor can place reliance on it. The limitations are as follows: ·
Hunian error in the design of or application of an internal control
An entity may hove an adequate internal control process over a particular area of the
financial statements. However, human error in applying that control gives rise to an inherent
limitation, for example a staff member may review a bank reconciliation but not identify an
error.
There may also be a flaw in the design of internal control whereby there is an error in the
design of. or change to, an internal control which means it does not operate as intended.
Circumvention of internal control
No system of internal control will be completely effective at preventing and detecting fraud
and error. Employees may manipulate deficiencies in an entitbj•s internal control for personal
gain or to conceal fraudulent activity. This is more likely to be possible where there is collusion
between emplo!:jees.
Management override of internal control
Management is in a position of power to override an entity's internal control regardless of the
strength of the system of internal control. Such management override could be to conceal
information or for personal financial gain.
Use of judgement on the nature and extent of controls
Management is responsible tor implementing controls which are designed to prevent, detect
and correct material misstatements and safeguard the company's assets. Professional
judgement will be needed to determine the t!:jpe and extent of internal controls needed within
the company and certain controls may be absent or ineffective. In particular, systems may
be designed to deal with routine transactions and may therefore be inadequate in respect of
non-routine transactions.
(b) Control deficiencies and recommendations

Control deficiency Control recommendation

Creditlirnits s¢fby the sales director are Credit limits should continue to be set by
only changed when a customer requests an the sales director, however these limits
increase. should be reviewed and amended as
If credit limits ore not reviewed regularly appropriate on a regular basis b~J a
they could be out of date, resulting in limits responsible official for example the finance
being too high and therefore sales being director or sales director.
made to poor cr·edit risks or, alternativelbj,
too low and therefore Pomeranian Co losing
potential revenue.

Goods dispatched notes (GDNs) are onlbj The links to the GDNs should be sent to the
made available to the finance department finance department on a more frequent
on a weekly· basis. basis, such as daily.
If the finance department does not The finance department should undertake a
promptly receive links to the. GDNs, this sequence check of the GDNs to ensure none
could resultin goods being dispotched but are missing for processing.
being invoiced late. This could result in
revenue cut-off issues and understated
receivables.

282 Audit and Assurance @a.PP

 The co-mpany's credit controller is currenti~J .During th~· period maternity leave an
on maternity leave for six montbs and_ no · alternatiVe: member of the finance .
one has taken over her duties. . - department-sho.uld be trained in the credit
Therefore, during this period no one has, control role (or a tempon;:try credit controller
been responsible for monitoring and recruited). and assigned responsibility for
chasing ageing receivables. This could . reviewing the aged reCeivables listing and
result in an increased .risk of krecoverable following up on an!J overd~e customers.
receivables and Jead to customers not
paying their outstanding balances ontimet
or at ali, leading to reduced cash flows.

The monthly receivables ledger control The RLCA reconciliations should be reviewed
account (RLCA) reconciliation Is only· by the financial controller on a monthly
reviewed by the financial controller if there basis. even if there are no exceptions, and
are any unreconciled differences. the review should be evidenced by way of
The RLCA reconciliation could reconcile but signature on thereconciliation.
still contain significant errors as there could
be compensating errors which cancel each
other out or it may have been incorrectly
prepared or manipulated and this would not
be identified. If the reconciliation is not
reviewed, then this significantly reduces its
effectiveness.

Capital expenditure items below $0.5m are The authorisation level for department
authorised by the relevant head of heads should be significantly reduced to a
department. appropriate level, such as $25,000.
$0.5m is a significantsum and although Any sums in excess of this should be
department heads undertake the · approved by the board. If this proves too
authorisation process, there is still onerous, a capital expenditure committee of
considerable scope for non-business use or senior employees should be established for
surplus assets being purchased leading to authorisation of capital items. This
reduced profits ond cosh flow for committee should report to the board.
Pomeranian Co. .

The internal audit department (lA). lA should review its programme of visits to
undertakes physical verification of assets assess if additional resources could be
each year. It is supposed to verif!::J all assets devoted to ensure that all11sites are visited
over a three-year cycle, however in the iri line with the policy of three years, This
current year lA will only complete the would ensure that physical verification of all
relevant procedures atone factory ando"ne assets could be completed more regularly.
warehouse. ·During visits ariy assets which cannot be
The corn pony has five factories and located should be investigated fully to
warehouses and a head office. Therefore. identify where they could be. If they cannot
on this basis it will take over five years to be located. then they should be written):Jff.
physically verity all11 sites. If the non~
currentossets register is not physically
. vetrfied on a regular basis, there is an
incr;eased risk of assets being
misappropriated or obsolete _assets still
being included in the register,. as there -is no
check that the assets still exist in good
working order.

The warehouse-rnanag·er at edch of the The inventory counts should be supervised

company's five sites is responsible tor by an ·independent person., such as a
supervising the monthly perpetual inventory • member of Pomeranian Co's.IA de-partment.
counts and ensuring that the counting

@BPP Answers 283

 ...

teams are following their instructions.

The wareho\,Jse managers may wish to hide
inefficiencies and inventory disqrepancies
so that their departments are not criticised.
This could resultin inventory count records
being inaccurate as well as an increase·· in
inventory frauds.
·-·-··

The company costs its inventory using A review of all standard costs currently in
standard costs, which are not being kept up Lise should be undertaken by a senior
to date. manager in the production department.
If the. standard costs were last reviewed two Actual costs for materials, labour and
years ago there ·is the risk that the costs are overheads should be ascertained and
misstated as changes in raw materials and compared to the proposed standard costs
wages costs may not have been adjusted to ensure they are a close approximation.
for. This could result in inventory and profits The revised standard costs should be
being misstated. reviewed b!:J the production director who
In addition, for year-end reporting, lAS 2 should evidence this review. At least
Inventories only allows standard costs to be annuaiii:J, a review of the standard costs
used for valuation purposes, if they are a should be undertaken by the production
close approximation to actual costs, which director to ensure the!:J are up to date.
is unlikei!:J if the standard costs remain
unchanged for a long period of time.
Therefore, the inventori:J cost ma!:J not be in
line with lAS 2.

Access to the master file data for suppliers The monthly exception report of.changes to
is available to all those in the purchasing master file data should be reviewed b!:J a
department and the monthly exception responsible official, who should evidence
report of changes to master file data is not this review. Anb! unauthorised or unexpected
reviewed. changes should be investigated and
All members of the purchasing department appropriate action taken.
could amend data and, potentiall!:J, add The ability to make amendments to master
new suppliers to the pabjables ledger file data should be restricted to those
system, and as the exception report is not required and authorised to make changes
reviewed it is unlikely that this would be to this data.
identified. This leads to an increased risk of
fraud as clerks could add fictitious suppliers
and then place fraudulent orders without
detection.
,_, ..,.. ,........"·"·"'"'"'"""'"

Purchase invoices are not agreed to the All purchase invoices ·should be matched to
relevant goods received notes (GRNs) prior both the purchase order and the related
to authorisation and input. GRN. The details should be agreed prior to
This could result in invoices being paid for th~ invoice being authorised ~nd logged in
goods which were not received, resulting in the pa!:Jables ledger.
increased costs.

28Lt Audit and Assurance @BPP

1·11+ Whittaker Co

·Course Book-references
Chapters 9 and 10~..

Top tips
This is a 20::-mark question "focush1g on internal control.
Part (a) only asked for four matters so do noty./aste time by providing more. Because the·
requirement asks you to describe the matters, you need to ensure you include enough detail
on each matter to be considered.
For part (b} in thecomputer-based assessment there is a table to enter in your direct controls
in one column and testsof controls in the.oth.er: Notice the first part of the requirement states
bJOU need to identify and explain the direct controls. Dontt forget the explanation or you will
only score Y2 mark instead of 1 mark for each of your controls. Your tests of control are worth a
mark each and should be procedures carried out by the auditor.
Part (c) is a typical audit and assurance requirement. It can be broken down into three parts
and the word ·explain' in the requirement in the context of deficiencies means you need to say
what the implication of each deficiency identified is. Each recommendation should address the
related deficiency you have identified and explained.

Easy marks
Part (a) was purely knowledge based and you should have found it straightforward.

Examining team•s comments

In (a), as the requirement verb was <describe' candidates need to ensure that th~y include
sufficient detail in their answers. Simply providing a few words such as 'materiality of
deficiency' is not enough for a description. There was a note under the requirement which
stressed that the scenario did not need to be referred to in answering this requirement.
Unfortunately, during this session some candidates ignored this note and provided control
deficiencies from the scenario which were required for part (c).
In part (b) marks are awarded for identification of direct controls (¥2 mark each), explanation of
the implication of the direct control to the compan!:J (¥2 mark each) and an appropriate test of
control for each control (1 mark each).
Candidates should be prepared to answer questions which cover direct controls and tests of
controls, control deficiencies and recommendations or a combination of both. Whittaker Co
examines both directcontrols and deficiencies and focuses on different parts of the internal
control system. Questions ma!:J also be set where direct controls and deficiencies are tested but
in relation to tt single part of a company's system. It is important that the control described is
complete. For example, the fact that the monthly control accounts are reconciled is not in itself
a direct control. Additional checks would need to be undertaken to ensure that the process has
been undertaken fully.
Having identified direct controls, candidates then need to explain each control. In considering
this it is irnporta11t to think about what the aim of the control is, what potential rnisstatemeot is
·being prevented or detect~d. The explanation needs-to be specific to each cqntrol: · .·
The last part of the requirement is for candidates to describe tests of controls for,each direct .
control identified. In considering how to test the control, a usefulstarting point is to consider if . ·
there are any docurnents.which can be Inspected as this is likely to provide strong evidence
that tho control is operating. However, when describing the test it is importqnt to clearly state
what document is being inspected and also for what purpose. Direct controls and tests of
controls are a key requirement in internal control questions and future candidates must ensure
the~ practice these types of questions ..

In identifying defidenciesin part (c), it is important to record what the actual deficiency from·
the scenario is. Candidates can pick the fact from ·the scendrio but fail to spot what the actual
deficiency is. For example; candidates identified from the scenario 'the oVertime reports are
reviewed on a quarterlbJ basis'. However, the actual issue was that the reports are being
reviewed after the overtime has been paid.

@aPP Answers 285

 Hqving identified deficiencies, carididotes are required to explain the implication to the
business to be awarded credit. For example, avolid"ex_planation for the deficiency ..staffadded
·to the payroll without joining forms beirig completed' (identification J1 marl awarded), would
hove been 'this could result in fict!ous emplo~ees. being added- to the payroll'.
The last part of the requirement is for candidates to describe control recommendations. To
gqin the 1 mark available it's imperative that the descriptions of the controls are detailed
enough. Additionally1 recommendations must be actions rather than just objectives,
recommend9tions which are phrased as 'ensure that ...' are unlikely to gain much credit ..
Catl_didates must be E;Ure to describe.'how) something is to be ensured. .

Marks

(a) Determining deficiencies in internal control

1 mark per well-explained point 4
Maximum 4
(b) Direct controls and test of controls
New system tested 2
Credit check 2
Aged receivables review 2
Control account reconciliations 2
Other 2
Maximum 6
(c) Control deficiencies and recommendations (Maximum 5 issues, 2 marks each)
No joiner forms 2
Overtime reviewed quarterly 2
Calculations not checked 2
Bonus 2
Input errors 2
Internet banking 2
Reconciling items 2
Other 2
Maxirnum 10
-
Total 20
-
(a) Determining deficiencies in internaJ control
ISA 265 Communicating Deficiencies in Internal Control to Those Charged with Governance .
and Management details matters the external auditor should consider when determining
whether a deficiency in internal control is significant, including:
• The likelihood of the de-Ficiency (or deficiencies) resulting in material misstatements in the
financial statements in the future.
• The susceptibility to loss or fraud of the related asset or ·liability.
• The subjectivity and complexity of determining estimated amounts.
• The amounts exposed to the deficiencies.
• The volume of activity which has occurred or could occur in the account balance or class
of transaction exposed to the deficiency or deficiencies.
• The importance of the identified deficient controls to the financial reporting process.

286 Audit and Assurance @BPP

 • The cau~e and frequency ofthe exceptions identifiedas a result of the deficiencies in the .
controls. · --
• The interaction o~ the defLci~ncy with other deficiencies in internal controL
(b)

Direct control Test control

The new soles system wa-s The audit team should review the -.
to its implementation and the new and old -- procedures and documentation relating to
systems are being run in parallel until the the testing which has been undertaken and
year end with internal ·audit (lA) performing agreethat the tests undertaken are
checks on the output and following up on· appropriate and.thatony errors were fully
any discrepancies. - investigated and re.solved.
This reduces the risk that data is lost or The audit team should review lA's testing
data is not processed correctly ifthere are schedule to understand what checks are
issues associated with the operation of the being undertaken and when they are
new system. This reduces the risk of expected to be complete. For lA checks
processing errors and misstatements in the which have been completed, the audit team
accounting records. should obtain and review documentation
which details the test performed and any
follow up actions to confirm the tests are
appropriate and to understand how errors
or inconsistencies have been communicated
and resolved.
For a new transaction being entered into
the system, the audit team should observe
the transaction being recorded in the old
and new S!:JStetn and agree that the
information is processed and output is
generated conslstentl.y between _the two
systems.

New customers undergo a full credit check The audit team should select a sample of
; and a credit limit is set using an automated new customer accounts opened in the
system. The credit limit is approved by the period and confirm, by reference to
sales director who evidences her review. information on the system. that a credit
Requiring a credit check reduces the risk of check has been· performed.
lost revenue and uncollectable trade They should also agree there is evidence of
receivables as only credit worthy customers a
approval, such as signature or electronic
are able to place orders. sign-off, by the sales director before the . ·
The automated process should ensure that credit limit is set.
no bias is included in accepting credit For a sample of new customers, the audit
worthy customers or setting the credit limit team should obtain a copy of the first order
which helps ensure the credit limit set is placed by the customer and ags.ee that the
appropriate and that receivables a"re date of the first order was after ·the credit
recoverable.· check was completed.
The sales director review helps to ensure
that any' anomaties or inoonslsteneiss in the
automated credit limit are identified and
addressed prior to orders being placed.

The receivables ledger clerk performs a The auditteam.should obtain a copy of the
monthly review of the aged receivables aged receivables report downloaded and
- listing and identifies those aged more than confirm there is evidence of review, such as
30 days which are followed up with the a signature or electronic sign-off. b!:J the
relevant customers by the credit control receivables ledger clerk.
department. The audit team should enquire as to which

@aPP Answers 287

 The regular review of th~ aged receivables rec'eivables balances are passed to credit
listing and subsequent action by credit coritrol and st)ould confirm this is
control should ensure that debts are appropriate based on Whittaker Co's credit
cojlected on a timely basis which reduces control policies.The audit team should
the risk of irrecoverable debts. It should also review a sample of follow-up documenta_tion
ensure that balances_ are appropriately from credit control to confirm action taken.
identified a~ irrecoverable and accounted
for acc·ordingly;

The accounts clerk performs a monthly The audit team sbould review the file of
receivables ledger control· account receivables ledger control account"
reconciliation and resolves errors on a reconciliations and confirm that these are
timely basis. The reconciliation is reviewed being performed on a monthly basis.
and approved by the financial controller. For a sample of reconciliations ~ith
Regular reconciliation of the receivables reconciling items trace to supporting
ledger and the receivables ledger control documentation to confirm that errors have
account helps to ensure that the receivables been corrected.
balance presented in the financial The team should also review the
statements is accurate. Timelbl identification reconciliations for a signature or electronic
and correction of errors ensures that sign-off as evidence of approval and review
recording issues are resolved and the by the financial controller.
accounting records are accurate.
Review by the financial controller helps to
ensure the accuracy of the reconciliation.

(c) Control deficiencies and recommendations

Control deficiency Control recommendation

When additional staff are required at short A joiner form should be completed for a !I
notice, joiners forms are not completed. new employees, whether temporary or
lnsteadj they are added to payroll following permanent. The authorised joiner form
email notification from the production should then be sent to payroll on the dobJ
supervisor. the employee commences employment.
The production supervisor may not include Pa!Jroll should then sign the form as being
all the relevant details on the email to actioned.
payroll. This could result in the temporarw Po~:~ roll should riot set up new employees
employees not rece-iving the correct pay or without on authorised joiner form.
not being paid on tinie, resulting in a loss of
employee goodwill. The addition of
emplo~:~ees to the payroll without
authorisation from HR also increases the
risk of fictitious individuals being added.

Staff are paid overtime on a monthlbJ basis The production supervisor should review
but the overtime worked reports are only and authorise overtime worked reports
reviewed every quarter after the overtime before they are passed to the payroll
has been paid. department for processing. This will ensure
Reviewing overtime worked reports the correct levels of overtime are paid to the
quarterly after employees have been paid is correct employees.
too infrequent. This could result in The payroll department should be
employees being paid for hours not worked. instructed not to process any overtime
hence increasing.costs or not being paid worked reports which have not been
enough overtime which could result in loss reviewed and authorised.
of employee goodwill.

288 Audit and Assurance @BPP

 The wages and: deductions calcuJations are For a sample of employees, a senior
autoritotically p-erformed by the payroll member of the payroll team should __
system but no checks are carried out to recalculate the gross to net pay workings
confirm the calculations are accurate. and compare their results to the output ·
from the payroll system. Any discrepancies
-
There is a risk that any system errors which should be investigated.
occur during the payroll processing would These calculations should be signed as ·
not be identified-. This could result in wages approved before payments are made.
being over or under calculated. leading to ·
·an additional payroll cost or loss of -
employee goodwill. In addition, statutory
deductions may be over- or underpaid,
giving rise to compliance issues.

The HR manager decides on bonuses based The bonus payments should be determined
on employee performance and has in line with specified and documented
confirmed the bonuses to the payroll criteria and approved by the board. The HR
department. director or other responsible official should
There are no approved parameters for the provide payroll with a list detailing
bonus level so it is purely based on the approved bonuses per employee. Payroll
discretion of one individual who could pay should be informed onlkJ to action payment
bonuses inappropriately. leading to extra of a bonus or ankJ other change on receipt
costs or loss of employee goodwill. of written authorisation approved by the
The bonuses were input into the system and board.
a number of employees subsequently The bonuses should be reviewed to agree
notified the payroll department of errors in they are in line with documentation
their pay. provided by HR. The bonuses should be
It appears that bonuses were input without input by one clerk and checked by a second
any additional review. This increases the risk payroll clerk for any errors.
of errors arising within payroll. Any ch<~mges to the payroll should trigger
In addition, it appears that the bonus issues an exception repoi·t which a senior member
have onlkJ been investigated for the of the payroll department should authorise.
employees who have complained that their -
bonus is inacc-urate. It is more likely that
complaints will arise from an employee who
is underpaid and therefore there is a risk
thot other employees have been overpoid
whic.h incre?ses tne pauroll cost

The internet banking log in details are saved The internet banking log in details should
in a·centrallocation which is accessible to not be-documented and should be known to
all payables ledger staff. - only select staff with appropriate authori~y.
, There is a risk that staffare fraudulently Any changes to pa!:Jees should be
setting up payees or making withdrawals documented on a change report.which is
from the bank, resulting in an increased risk extracted from the internet banking system
of loss due to misappropriation of funds. and reviewed by the finance director on a
regu.lar basis to confirm changes are
-expected. ·

The reconciling items on the bank The reconciling items should be reviewed by
reconciliation are oni!:J investigated by the- ' the finaJlcial controller on a weekly basis,
finonciol controller if the sum of reconciling even if they ore not significant, and they .
items is significont. · should evidence their review by way of
The bank reconciliations could contain signature oh the bank reconciliation.
significant errors, but a low overall amount

@·BPP Answers 289

 ·of reconciling items) as there could be
compensating errors which cancel each
other out. If reconciling items are not
reviewed, then this reduces the
effectiveness of the bank reconciliations
and also results in a lack of assurance {hat
bank reconciliations are being carried out
properly.

115 Daley Co

Course Book references

Chapters 3, 9, 10 and 15.

Top tips
This is a 30-mark question covering internal control components in (a) and deficiencies,
·· recommendations and tests of control in (b). Procedures relating to bank balances were
covered in (c) and corporate governance deficiencies and recommendations were tested in (d).
In (b), worth half of the marks for this question, you should have picked up on where the
scenario so'id items were not checked or reviewed and turned that into your deficiency.
However. for it to be a well explained deficiency y9u needed to say why it is a problem and
what could go wrong because that review doesn't happen currently.
a
Once you have deficiency the recommendation flows from that, and you can say that review
should take place, being specific about who should carry it out and how it is evidenced. If you
sa!::J how-o control is evidenced !:JOU then have the basis for the test of control because you can
review that evidence, such as a report with a.signature, as part of your test of control.

Easy Marks
Part (a) was a purely knowledge-based requirement with no need to refer to the scenario. You
should have scored well here.

Marks.

(a) Five components of a system of internal control (1 mark per well-explained point)
Maximum 5
(b) Internal control deficiencies:. controls and test of controls (Maximum 5 issues, 3
marks each) . -
No checks of data 3
Edit report not reviewed 3
PPE physical verification 3
Chcmge to capex p.olicy 3
Finance director only reviews pa!::Jment total 3
No receipts for petty cash 3
Quarterly bank reconciliations 3
Maximum 15
(c) Substantive procedures over the. bank balances
i mark per well-explained point
Maximum 4

290 Auditqhd Assurance @BPP

 ·.Marks

(d} qorporate governance deficiencies and recommendations

CEO is also Choir 2
·Shareholder engagement 2
Remuneration of non-executive directors 2
No audit committee 2
Maximum 3 issues, 2 marks each
Maximum 6
Total 30

(a) Five components of a system of internal control

Component of internal control Description

Control environment The control environment includes the
governance and management functions
and the attitudes, awareness and actions of
those charged with governance and
management concerning the entit~·s
system of interna I control and its
importance in the entity. The control
environment sets the tone of on
organisation. influencing the control
consciousness of its people and provides
the overall foundation for the operation of
other components.
The control environment encompasses
manbJ elements~ such as how management's
responsibilities are carried out (such as
creating and maintaining the entitt~•s
culture and demonstrating management's
commitment to integrity and ethical values);
how those charged with governance
demonstrate independence from
management and exercise oversight of the
entity's system of inter:nal contml; how the
entit~ assigns authority and responsibilit~
in pursuit of its objectives; bow the entity
attracts, develops and retains competent
individuals In alignment with Its objectives;
~ and how the entity holds ihdividuals
accountable for their responsibilities in
pursuit of the entity's system of internal
controL
............................................. : ....·..................................................., ................................................................................ ,, ...... .

Entity's risk assessment The entity's risk assessment process is on

iterative process for idt;mtifSjing and .
analysing risks to achieve the entity's
. objectives and forms the basis for
. determining the risks to be managed. For
: ·financial reporting purposes,. the entity's
; risk assessment process includes how
management identifies business risks

@aPP Answers 291

 relevant to the preparation of financial
statements- in accordance with the entity's-.
applicable financial reporting framework. It
estimates their significance, assesses the
likelihood of their occurrence~ and decides
upon actions to respond to and manage
them and the results thereof.

Entity's process to monitor the system of Monitoring of controls is a continual process

internal control to assess-the effectiveness of internal
control performance over time. It involves
assessing the effectiveness of controls and
taking necessary remedial actions on a
timely basis. Management accomplishes
the monitoring of controls through ongoing
activities. separate evaluations. or a
combination of the two. Ongoing
monitoring activities are often built into the
normal recurring activities of an entity and
include regular management and
supervisorbJ activities.

Information system and communication The information system relevant to the

preparation of the financial statements
consists of the activities, policies and
records designed and established to initiate.
record, process, and report entity
transactions (as well as events and
conditions) and to maintain accountability
for the related assets, liabilities, and equity.
Communication which involves providing an
understanding of individual roles and
responsibilities may be through policy and
accounting and financial reporting
manuals. It may be made electronically,
orally or through· management actions.

Control activities Control activities include controls which are

designed to ensure proper application of
policies in all the components of the entity's
system of internal control and include both
direct and indirect controls. Control
activities include information processing
controls and general IT controls and may be
manual or automated in nature. They have
various objectives and are applied at
various organisational and functional levels.
They may include authorisation and
approvals) reconciliations, verifications,
·physical or logical controls and/or
segregation of duties.

292 Audit and Assurance @BPP

 (b) Internal control deficiencies, controls and test of controls

Control deficiency Control recommendation Test of control

At the end of each week~ the The transfer of hours worked Review a sample of weeks
key card system transfers from the key card systemto transferred from the-key-
the hours worked to the the payroll should be- card system to the pay-roll··
payroll ~gstem. As the checked by a senior officio) system -forevidence that
system is automated, no . in the pa-yroll department . they have been checked by -
checks are performed. and this check should be a senior official prior to the
As there are no checks evidenced by way of payroll being finalised.
performed on the transfer of signature.
hours worked from the key
card system to the payroll
system, errors and
overpayments could be
made resulting in a loss of
employee goo~will.
~
The payroll clerk reperforms The edit report should be For a sample of weekly edit
payroll calculations and reviewed on a weekly basis reports, confirm that these
amends the payroll data if by a senior official from the have been signed as
there are any errors. The payroll department before reviewed by a senior official
edit report of the the payroll is finalised and from the payroll
amendments is not any payments made. Any department. For a sample of
reviewed. unusual amendments amendments, agree to
The payroll clerk could make should be inves_tigated. This record of investigation and
errors when making the review should be evidenced confirm appropriate action
amendments or could (likely by way of signature) taken.
fraudulently revise payroll and the results of any
data to inflate the pay of investigations should be
friends or family. This could recorded.
result in incorrect payments
being made to employees
and incorrect deductions
being made resulting in loss
of employee goodwill and
misstated pawoll expenses.

The internal audit (lA) The board-should set a Review the board minutes
department undertakes policy to ensure -for evidence of new policy
physical verification of comparisons must be set by the board regarding
assets each year. As in the carried out more frequently frequency of lA visits. Review
prior !jears, lA will only (forexample. every two lA programme to assess
complete the comparison at years). lA should review its whether visits ore fn line with
one factory and one programme of visits to new policy.
warehouse in the year to 30 assess if additional Review records from
· September 20X5. Daley Co resources could be devoted physical verification visits b.Q
has ten factories, ten to ensure that all21 sitesare lA to ensure comparisons
_ ·warehouses and a head visited in a shorter period. have been performed and
-office. Therefore, on this This would ensure that any unidentified and
basis, it will take over ten physical verific.ation of all .obsolete assets hove been
years to physically verify all assets could be completed written off following
21 sites. rnore regularly. approval by theboord or a
If the non-current assets During visits, any assets_ .. responsible official.
register is not physically which canr:iot be loccrted
verified on a regulor basis, should be iiwestigated fully

@BPP Answers 293

 there is an increased risk of to identify where they could ·
assets being be .. If they cannot be
misappropriated as th~re is located, then they should be
no check that the assets still written off.
exist in their correct
location. In addition,
obsotete assets may not be
identified on a timelbJ basis.

During the year, the Significant changes to an Review board minutes for
company's accounting accounting policy should be evidence that changes to
policy was changed b!d the discussed and approved at accounting policies have
financial controller so that board level. A record of any been discussed and
items of a capital nature are decisions should be included approved.
only capitalised if they in the board minutes. Discuss with the finance
exceed $20,000. The capitalisation limit director the capitalisation
While it can be normal should be reduced to a more limit and for a sample of
practice for a threshold to appropriate limit such as capital items over $t,OOO,
be set for capitalisation, this $1 ,000 so that assets and agree that they have been
represents a significant profitability are more correctly capitalised in the
change to an accounting accurately reported. statement of financial
polic!d which does not position ..
appear to have been
discussed or approved at
board level. This threshold is
too high, as over time this
will result in a significant
amount of costs which
should be capitalised being
written off to the statement
of profit or loss and .
understated property, plant
and equipment.

The finance director The finance director should A.sample of payment listings
authorises the monthl!d review the whole po!:Jments should be reviewed to verifu
supplier payments listing, list prior to authorising. that the finance director has
but only views the total As part of this, the finance agreed the amounts
: omount of pa~:Jments to be director should agree the payable to supporting
made. amounts to be paid to documentation prior to the
Without looking at the detail supporting documentation~ bank transfer being made.
of the payments list, as well as well as reviewing the
. as supporting supplier names to identify
; documentation, there is a any duplicates or any
dskthat suppliers could be unfamiliar names. This
being paid an incorrect should be evidenced by
amount, or that sums are signing the supplier
being paid to fictitious payments listing.
suppliers .
..... ....... ...__ ....._.........,.............................................................................................................. ..
_. .. .. ' ....................................................... - .. .. .. ..... .... - ......... __ "
~

291+ .· Audit and Assurance @aPP

 There is no r~quirement for ·A pett~ cash book should be A sample of petty cash
'for sundry maintained so that the transactions from the record
purchases paid for out of· amount borrowed, date. and book should be reviewed to
petty cash to be returned to employee nam·e is recorded . ensure all cash issued has
the finance deportment. .together with details of the been accounted for and
This could result in sundry sLtndr~ purchase mode.. receipts provided for.··
purchases being mdde In addition to r~turning expe11ses.
which are for non-business expess cash back to the A sample of reconciliati~ns
related items or the cash· finance depdrtment, · should also be reviewed to
could be being employees should ·also be ensure thes~ are approved.
misappropriated. required to promptly return·
receipt for sundry
purchases. The petty cash
book should then be
updated to record the
excess cash and the receipt.
member of the finance
department should reconcile
the petty cash on a weekly
basis and if any receipts are
missing; they should be
investigated further with the
employees who made the
petty cash purchases during
that week. The
reconciliations should be
reviewed by a responsible
official who should evidence
their review.

The company maintains All bank accounts should be Review a sample of bank
four· bank accounts but only reconciled each month and reconciliation statements for
the main current account is any reconcilir)g items on the . all bank accounts to ·ensure
-: reconciled on a monthly bank reconciliation they are being completed
basis, with the other three statements should be and reviewed on monthly
bank accounts being investigated anq corrected, basis.. -
reconciled quarterly. where necessary. Tbo
If all bank accounts are not reconciliations should be
: reconciled on a monthly reviewed by a responsible
basis, errors or fraud rnay official who should evidence
not be spotted on a tirnely their review.
basis.

(c)

ro B I- 1l s x2 Xa L
g v
=-: - - - ·- ,_·- >::§

Substantive procedures over the bonk·balonces

Obtain a bank confirmation letter from Daley Co's bank for all:of its bank accounts.
• Agree a !I accounts listed on the bank confirmation letter to Daley Co's bank
reconciliations and trial balance to ensure completeness of bank bolances.
• Obtain tho year-end bank reconclliations and cast to ensure mathematical accuracy.

@BPP Answers 295

 - -
Agree the balance per cash book on the year-end bank reconciliation statements to
the cash book/trial balance/financiql statements.
Agre._e the balance per the bank reconciHations tothe year-end bank confirmation
letter and bank statements.
Trace all outstanding lodgements/deposits to the pre year-end cash book, post year-
end bank statement and also to the paying-in book pre year end.
Trace all unpresented cheques through to the pre yea_r-end cash book and post year-
end bank statements. For any unusuaL amounts or delays, obtain explanations from
management.
Examine any old unpresented cheques to assess if they need to be written back to the
I payables ledger as they are no longer valid.
I• Examine the bank confirmation letter for details of any security provided by the
I company or any legal right of set-off as this may require disclosure.
l• Review the cash book and bank statements for any unusual items or large transfers

j_ a rou~-~--~-~~~~~~--=~-~·-~~--~~~:---~~~-~~-~~-i~~-~ce o~-~~-~oV: d~essi~~----------------------------·---------

(d) Corporate governance deficiencies and recommendations

Deficiency Recommendation

During the year, the Chair resigned and Fred Johnson should resign as the Chair
Fred Johnson, who is currently the chief and only carry out the role of chief
executive, took over the role. executive. An independent non-executive
If Fred Johnson is both the Chair and chief should be appointed to fill the Chair's role.
executive, he will have unfettered power of
decision making and will effectively be
responsible for running the company and
the board.

The Chair recently wrote to all shareholders The Chair of Daley Co should take steps-to
to inform them that any questioos or encourage regular effective engagement
comments they may have could only be with major shareholders in addition to the
raised at the company's annual general AGM. This could be in the form of regular
meeting (AGM). . meetings and would aim to seek
Restricting shareholders to only raising shareholders' views on the company's
cohcerns at the AGM will not ensure regular governance and performance agdinst
effective engagement with the owners of strateg!:J.
the company. This could result in the board
making decisions whicl-1 are not in line with
the wishes of major shareholders.

Non-executive directors· remuneration is Daley Co should pay the non-executive

based on pre-tax profit targets agreed by directors an annual fee for their services to
the board at the start of the year. the company_ and this fee should be
Non-executive directors' remuneration unrelated to the company"s financial
should not be based 6n pre-determined performancet but rather based on time
profit targetS as their pay should not be committed and responsibilities of the role.
based on how the company performs as
this would· reduce their independence.

296 Audit and Assurance @aPP

 r· ..................·.......................................

: The company currentl!J does not have an ~-The company shoutd consider appointing .
-; audit committee as the board views the j an audit committee as quickly_ a$ possible.
internal control environment as very - i The audit committee should be cOmprised
effective. - i of at least three. non-executive di(:edtors a·nd
i one of these non-executive directors should
i have recent and relevant financialexpertise. I
.................... ! :~~~:;,:~!t;;~~.;t:nhc~~~$~~~\~~~-Y.· . ~ .
The lack of an- audit co~--~-i~~~~- ~~~ans there , I_

is no oversight rn the company toenablethe i

directors to discharge their responsibilities -
for accountability appropriately and there-
will not be a means of the company
maintaining its independent relationship
with the external auditors.
............,.... ~------··· ........., ........................ j

116 Petra Co

Course Book references

Chapters 3, 10 and 16

Top tips
Time management is critical for this 30 mark question to ensure you make it all the wdy to part
(e) on Corporate Governance deficiencies. Reading the requirements carefully first would have
helped here. Then you can read the scenario with a mindset that you are looking for'good
things' in (b) so you can rely on the controls and suggest how to test them, and 'bad things' in
(c) so ~ou can pick out deficiencies and suggest recommendations.
Don't be phased by part (e) which is just compartng the scenario to good corporate
governance and seeing where Petra is falling short of achieving that.

Easy marks
You should have been able to generate procedures in part (d) fairly easily and explain them
using the verb-document-reason approach outlined in ~our Course Bo.ok.

Examining team's comments

For (a) it was common to see answers which provided controls rather than objectives or listed
tests of controls. Many candidates ignored the note advising thatthe scenario did nofneed to
be referred to. These candidates provided controls from within the scenario, such as 'PeHra Co
carried out credit checks for all new customers.' Unfortunate!~, this is not a controVobjective
and so to gain credit the objective should be 'to ensure that goods are not suppliedto poor
credit risks'. ·
.In relation to (b) and (c) candidates should be prepared t:o answer questions which cover direct
controts and tests of controls_. control deficiencies and recon1mendations or a combind.tion of
both. Petra Co examines both direct controls and deficiencies and :focuses on diffHrent parts of
the internal control system. Questions may olso be set where direct controls and deficiencies
are tested but in relation to a single part of.a company's internal controLs1Jstern .. lt isJrnportont ·
that having read the question requiren1ent, candidates toke the time to ensure they f(JHy
understand what the requirement involves. This session there were a number of candidqtes--
who listed deficiencies rath~r than controls or provided.controls relating to the sales and ·
purchases -systems. These would not gain cmy credit as they are not answering the question
asked.
In (d), when describing substantive procedures, one of the key things to consider is the> level of
detail provided. Many candidates fail to score well in this type of requirement because their

@BPP Answers 297

 . - ' .
procedures are vague or too brief. Tests must be sufficlentltJ detailed noting clearly which
source document should be used anp what for..
For (e) candidates were required to identify the deficiency fromthe scenario and it was
pjeasing to $ee that most candidotes were able to coAfidently· undertake this. Hqwever, there
were a number of incorrect points identified as deficiencies such as the non~executive directors .
· · (NEDs) are all member of the audit committee and so lack independence. These incorrect
points demonstrate a lack of technical knowledge around corporate governance deficiencies.

Marks

(a) Control objectives of a sales system

1 mark per well-explained point
Restricted to 4
4
(b) Direct controls and tests of control
Supervision clock card 2
Gross to net checks 2
Revised rates 2
Segregation of duties 2
Other 2
Maximum 3 issues, 2 marks each
6
(c) Control deficiencies and recommendations
Credit limits 2
No copbJ of sales order 2
Discounts not reviewed 2
Access master data 2
No GRN to finance 2
Document count controls 2
No PLCA rec 2
Other 2
Maximum 5 issues, 2 marks each
10
(d) Substantive procedures fqr purchases and other expenses
1 mark per well-described procedure
Restricted to 4
·4
(e) Corporate governance deficiencies and recommendations
Marketing director Chair · 2
Frequenci:J of director: re-election 2
NEDs no financial experience 2
Annual bonus NEDs 2
Other 2
Maximum 3 issues, 2 marks each .·
6
-
Total 30
-

298 Audit and Assurance @aPP

(a) Control objectives of a sales system
·• To (f)nsure, that orders :are o·nly accepted ifgoods are available to be processed, for
customers~

To ensure that all orders are recorded completely andaccuratelg~

To ensure that gC?ods are n_ot supplied to' customers who are poor credit risks.
~ . . -

• To ensure that.goods are dispatched for 911 prders on a timely,basis.

To ensure that o·nly genuine sales supported by a valid order are recognised in revenue. ·
• To ensure that the cor-r~ct quantity of goods are dispatched and they are of on adequate.
quality.
• To ensure that all gooqs dispatched are correctly invoiced at authorised prices.
• To ensure that all invoices raised are recorded as revenue in the correct accounting period.
• To ensure that soles discounts are only provided up to an agreed limit.
• To ensure that all salesand related receivables are recorded at an appropriate amount in
the correct accounts~
• To ensurethat cash received is allocated against the correct customer and invoices to
prevent disputes.
• To ensure that overdl.le receivables are followed up on a timely basis.
• To ensure that irrecoverable receivables are identifiedar1dwritten off appropriately.

Direct controls o"nd tests of control

Direct control Test of control

Factor~ staff are issued with clock cards Observe the use of clock cards by
which they are required to swipe to enter employees when entering and exiting the
and exit the factory andthis process is factory and confirm that security staff are
supervised by security staff.: supervising the process.
This ensures that gen'-'ine employees are
only paid for the workpctually done and
reduces the dsk of employees being paid
but not completing the;lir required hours. In
addition) due to the supervision it is unlikely
that one employee coqld fraudulently
clock-in on behalf of other employees.

The payroll supervisor' selectsa sample of Review the weekly payslrps sampled by the
payslips, recalculat~sthe gross to net pay payroll supervisor for his signature for
calculations and compares their results to evidence the review of calculations has
the output from the payroll system and been undertaken.
investigates any discrepancies. ·For a sample of we.ekly payrolls, reperform
This reduces the risk thatthc automated · tho gross to net pay calculation and
system generates errors.during the payroll. compare to the ppyroll S\;jstem~ Discuss any-
processing. Any error~ Would be identified discrepancies with the.payroll supervisor.
on a timely basis to"preVont wages being Enquire of. the payroll supervisor whether
over or underpaid.· any discrepancies have been noted during
the year between the gross to net pay
calculations and the figures generated by
the payroll system an_<;! howthese were
.resolved.

@aPP Answers 299

 errors prior to processing and their review. senior clerk who checks for input errors.
evidenced ·via s1gnature of the listtng.
This reduces the risk ofinput errors resulting
in over/underpayment of wages arid
salaries to employees.

The pay packets are prepared by two staff Observe the preparation of the pay
members using system generated payslips packets, ensuring that one member
·with one staff member preparing and one prepares the wages using the system
checking the pay packets. This is evidenced generated payslfps_and that the second
by each staff member signing the weekly _member checks pay _packet::> for accuracy.
listing. For a sample of weeks throughout the year,
This ensures there is segregation of ~uties inspect the weekly payroll listing for
and reduces the likelihood of errors or staff evidence of signature by two members of
members fraudulently increasing the pay staff involved in the preparation of the pay
packets for friends and family member packets.
without being identified.

Control deficiencies and recommendations

Control deficiency Control recommendation

A credit check is performed on all new Credit limits should continue to be set by
customers, after which a credit limit is set the finance director, however, these limits
by the finance director, and these limits should be reviewed on a regular basis and
remain unchanged unless the customer amended as appropriate by a responsible
requests an increase. official.
If credit limits are not reviewed regularly~
they could be out of date, resulting in limits
being too high and therefore sales being
made to poor credit risks or, alternatively·,
too lowand therefore Petra Co losing
potential revenue.

No copy of the order form is emaiJed to the The sales order coptd should be_ emailed to
sales department of Petra Co and hence the sales department.:
they would notbe able to monitor if orders Upon dispatch, the goods dispatch note
are being fulfilled on a timely basis. If orders ·should be matched to the orde·r. A regular
are not fulfilled on a timely basis, this would review of unmatched orders should be
reduce customer goodwill. undertaken by the sales department to
identif!d any unfulfilled orders.

Sales staff have discretion to grant sales. All discounts to be granted to customers
discounts to customers of up to 8% but should be authorised in advance b!:J a
discounts granted are not revieyved. responsible official, such as the sales
This could result in unauthorised discounts .director. If this is not practical, then the
in excess of 8% being allowed and a loss at supervisor of the sales staff should
revenue as they may award unrealistic undertake this role. A copy of the
discounts simply to meet sales targets. authorisation should be sent to the sales
department and-the customer's master file
data amended for discounts allowed by a
responsible officiaL
The master file data system should be
amended to prohibit discountS- in excess of
8% being entered. ·

300 Audit and Assurance @BPP

 .... ·..... .;. .. ,_.,

! On a regular basis, the sal~s,director should

~.undertake ·a revieW of discoUnt levels ·.
l granted on sales orders an~ ensure they are
; in line with authori$ed levels; '
••••••••••••• •••••••• • • • • • • • • • • ··•· •••. •••• ... ••• •• .................... •••• ••• ......... •• •••••••••· ~--····" ..... ····~;. ........ ..u.;..• ·~··'' ...

Access to the master file data for suppiiers Amen'dments to .master file data .should be l
is available to all those in the purchasing 1 restricted so that only authorised members
department who are able to make changes. of the department are able to make i
As all members of the purchasing · i changes.
department can make changes to data and : In addition, a log. of changes~to masterfile
therefore add new suppliers to. the payables l data, including details of whrch staff
ledger Sl:Jstem. this increases the risk of 1 member made the change, should be

fraud. ; produced and reviewed by a responsible

official on a regular basis andsigned as I
! evidence of their review.
.. ......... ........ '""""\"""""""" ............................................................................

GRNs and orders are matched and filed in i A copy of the GRN should, be provided on a
the warehouse and the finance department l timely basis to the finance department. On
does not receive a copy. Therefore, on receipt, all purchase invoices should be !
receipt of purchase invoices~ they are not 1
matched to the related GRNOhd purchase
being agreed to the relevant GRNs.and ; order and this should be und€Jrtaken prior to
orders prior.to input into the pauables i the invoice being logged in the payables
ledger. · ledger.
This could result in invoices being paid for·
goods which were not received or ordered.

A payables ledger clerk only utilises : The payables ledger clerk should instead
document count controls when inputting ; input the invoices in batches and apply
invoices into the payables ledger. _ i informatiQn processing controls, such as

Document count controls can confirm the ' control totals) rather than just completeness
completeness of input. However, they do not , checks to ensure both completeness and
verify the accuracy or validity of input. i accurocu over the input of.purchase
If t_he invoices are not input correctly, ' invoices. In addition, sequence checks
suppliers ma~J not be paid on time or may should be built into the system to ensure
be paid incorrect amounts. This could lead completeness of input.
to a loss of supplier goodwill or suppliers
withdrawing credit facilities.

The total on the payables ledger is not On a monthly basis. payables ledger
compared to the general ledger on a control account reconciliations should be
monthly basis, hence patJables ledger undertaken with all reconciling items fully
. control account reconciliations are not : investigated. The account reconc.iliation
being undertaken. should be reviewed by a responS,!ble offici a I
Failing to undertake these reconciliations who should evidence this revtew by way of
means that errol's in the payables ledger signature.
may not be identified promptly, resulting in
suppliers being under or overpaid. In
, addition, errors may be present in the
· general ledger resulti.ng in the payables
balance In the financial statements being
under or overstated.

(d) Substantive procedures for purchases and other expenses

• Calculate the operating profit and gross profit-rncrgin and compare t6theprior year and
to budget and investigate any significant differences. ·

@BPP Answers 301

 Review monthiy purchases and other expenses to identif!J any significant fluctuations and
discuss yvith
.
management.
. . . .

Review the annual purchases and othe~ expe~ses on a line-by-line basis) compare to the
prior !:Jear and investigate an!:J-significant differences. -
Recalculate the accuracy of a sample of purchase invoice totals and related taxes and
confirm that the expense has been correctly included in the general ledger.
Recalculate the year-end prepayments and accruals to ensure the accuracy of the
expense charge included in the profit or loss.
• Select a sample of post year-end expense invo!ces and ensure that ani:J expenses relating
to the current year have been accrued.
• Select a sample of expense payments from the bank ledger account and trace to the
relevant expense account in the general ledger to ensure the expense has been included
and classified correctly.
• Select a sample of goods received notes (GRNs) from throughout the year. Agree them to
purchase invoices and the detailed purchases listing to ensure the completeness of,
purchases. ·
• Select a sample of GRNs immediately before and after the year end. Agree to the
purchase detailed purchases listing to ensure the expense is recorded in the correct
accounting period.

Corporate governance deficiencies and recommendations

Deficiency Recommendation
It is proposed that the current marketing The Chair of Petra Co should be
director be appointed as the Chair of the independent on appointment and hence the
company when the current Chair retires. marketing director .should not be appointed
As a former executive director) this director as Chair, as they have been an employee
has been previously recently employed by within the last five years and therefore not
the company and so will not be considered independent.
independent on appointment as advised by An individual who is fuiii:J independent of
·corporate governance principles. A lack of Petra Co should be appointed to the role of
independence ma!d result in the Chair not Chair when the current Chair retires.
bringing the necessarl:Jievel of
independence and objective judgement to
the role.

Annuaii!J at the company,sgeneral meeting, All directors should be subject to annual re-
two directors are subject to re-election .. election by the shareholders.
The shareholders should review on a regular At the current year's general meeting, it
basis that the composition of the board of shoUld be proposed that all directors should
directors is appropriate, and they do this by be subject to re-election.
regular re-election of all directors.
-···'···············--·-······-···········-·········--········-······························+························'"·································-···········-··-······-············-·-···---·····-·····-·-·········-·····---!

All members of the audit committee were The company should consider recruiting a
previously involved in sales or purchasing new independent NED who has the required
related roles. At least one member of the recent and relevant financial experience.
audit committee should have recent and. This process may be undertaken as part of
relevant financial experience. the re-election process for directors.
None of the non-executive directors (NEDs)
appears to have held a financial role and so
it is unlikely they possess the required
financial experience to be able to
understand the financial statements.

302 Audit and Assurance @aPP

 The NEDst reinuneration·.is in" the form of an The remuneration ofthe.NEDs should be
annual b~nus: However; remuneration paid revised so they are paid an onnual fee for
to NE[)s should reflect the time and , their ser-vices, which is unrelated to how
respohsibrlities at1;oched to the role, asthe ·Petra· Co~perior:rns,- and should reflect the
inclusion of performance related elements, _time commitment and responsibilities
especially those tied to short-term ottach_ed.to the role. .
performance targets, can affect the .. The board as a. whole should determine an
independence of NEDs. appropriate level of remuneration for the
NEDs. .

••

@BPP Answers 303

 PART 0: AUDiT EVIDENCE ·

Section- A Questions
Expert
117 The correct answers are:
• The revaluation constitutes a change in accounting policy, so. we will need to consider
the adequacy of the disclosures made in respect of this. .
• The flagship store should be depreciated on its revalued amount.
lAS 16 Property, Plant and Equipment permits non-current assets to be revalued (lAS 16:
para. 31). However, if an item of property, plant and equipment is revalued, the entire class
of property, plant and equipment to which that asset belongs must be revalued (lAS 16:
para. 36). Truse Co is therefore entitled to revalue the shop, but it will also need to revalue
all of the other shops if it is to comply with lAS 16.
The revaluation does constitute a change of accounting policy, so disclosures do need to
be reviewed.
Under lAS 16, all non-current assets used by the entity should be depreciated, even if the
fair value is in excess of the carrying amount. Repair and maintenance does not negate the
need to depreciate the shop over its useful life (lAS 16).
Repairs and maintenance costs should be expensed as incurred, not capitalised.
118 The correct answers are:
• Existence - Yes
• Occurrence - No
• Classification - Yes
• Presentation - Yes
Existence, classification and presentation are all assertions related to tangible non-current
assets. Completeness and accuracy, valuation and allocation are also relevant assertions
(ISA 315 (Revised)). Occurrence and classification relate to classes of transactions and
events recorded in profit or loss (ISA 315 (Revised)).

1"19 The correct answer is: 'For a smnple of assets selected bg physical inspection, agree that
they are listed on the non-current assets register
Physically inspecting assets listed in the non-current assets register tests for existence.
Recalculating the carrying amount tests for accuracy, valuation and allocation. Inspecting
relevant purchase invoices or deeds tests for rights and obligations.
120 The correct answer is: The existence of any interests in or relationships with Truse Co that
might pose a threat to the expert's objectivity
The existence of threats to the expert's objectivitbJ should be considered as part of
determining the competence, capability and objectivity of the auditor's expert (ISA 620).
HoweVer, it is not a matter to be considered when the auditor determines the overall nature,
timing-and extent of the audit procedures required to evaluate the auditor's expert and the
auditor's expert's work.
-Besides the other three matters listed, the auditor should also consider the nature of the
matter to which the auditor's expe~t's work relates (ie the nature of Truse Co's properties)
and the significance.of the auditor's expert's work in the context of the audit (this depends,
in part, on the materiality of the property ~ccount).

301t Audit and Assurance @BPP

· 121 The correct answers are:

Audit evidence Order

Cosh count carried out ~.ythe audit

junior himself

Bank confirmation report frorn_Truse

Co's bank
(2)
I
Bank reconciliation carried out by the (3)
cashier

Verbal confirmation from the directors (4)

that the overdraft limit is to be
increased

Auditor generated evidence is more reliable than evidence from other parties. Third-party
evidence is more reliable than client generated evidence. Documentary evidence is more
reliable than verbal.

Newthorpe
122 The correct answers.are:
• The auditor observes client staff to determine whether inventory count procedures are
being followed.
• The auditor reviews procedures for identif!::Jing damaged, obsolete and slow-moving.
inventory. .
Management is responsible for organising the inventory count, not the auditor. If the results
of the auditor's test counts are not satisfactory. the auditor can request that inventory is
recounted, but the auditor cannot insist on a recount. However, if management refuses the
auditor's request then the ouditor will need to consider the implications of this on the
auditor's report .

..123 The correct answer is: Fora sample of inventory sold just before and just after the year
end, match dates of sales invoices/date posted to ledgers with date on related:goods
dispatched notes.
All of the suggested audit procedu.res test the valuation assumption, except fo~~.,matching ·
the dates of soles invoices with the dates on the related goods dispatched notes~ which is
an audit procedure around cut-off.

@aPP Answers · 305

124 The legal claim should l. . ~.~:...?e r~?,.?.~?..C:.? ;-~. ~. ·~~;i~~b~t. .d·i~d~~~d·. ~·~ a contingent.
liability because ..

.
[O?f~~·~·~t ~.b~~~t·~:. .but th;;~~·tf~~;~~mic resources is not probable
Manag.ement believe that there is a 35% chance of the claim succ~eding. For an event to
be 'probable\ it should be more likely than not to occur (ie a 50% probabtlity) (lAS 37). In
this case~ the oLi.tflow of economic resources is therefore not probable, so a provision
should n~t be recogf)ised. A present obligation (not a possible obligation) exists. since the
former managing director has sued Newthorpe for unfair dismissal. It is because the
likelihood of him succeeding in his claim is not probable that the claim should be treated as
a contingent liability instead of a provision.
125 The correct answer is: Send an enquiry letter to Newthorpe's lawyers to obtain their view as
to the probability of the claim being successful
Independent third-party audit evidence is generally considered to be more reliable than
client generated or auditor-generated audit evidence. Although all the procedures are
valid, only the written confirmatior; from Newthorpe's lawyers provides an expert, third-
party confirmation on the likelihood of the claim being successful. It is also sent directly to
the auditor rather than to the client.
126 The correct answer is: To perform specific audit procedures to identify possible non-
compliance
ISA 250 (Revised) distinguishes between those laws <;md regulations which have a direct
effect on the financial statements) and those which have an indirect effect (I SA 250). For
those which have a direct effect on the financial statements the auditor must undertake
specified audit procedures to help identify non-compliance with laws and regulations that
may have a material effect on the financial statements (ISA 250). ·

Tirrol
127 The correct answers are~
• We should budget for the extra time required to document an understanding of the
entity, its environment and its systems, and to verify material opening balances.
• We must agree a clear timetable with the client for the testing of the computerised
inv~~ntQJl:J systems, setting out availability of access to the system, files and personnel
required to complete testing.
As this is Cal S Co's first year of auditingTirrol Co, additional time should be budgeted for
documenting an understanding of the entity and for verif[;Jing the opening balances.
Because Cal 8 Co's audit software has to be rewritten and the testing is taking place on a
live basis, it is particular!!:) important to plan our CAATs procedures carefully.
The ACCA's Code of Ethics and Conduct does not prohibit lowballing as such stating that
'a professional accountant in public practice may quote whatever fee is deemed
appropriate' (ACCA Code of Ethics and Conduct: para. 330.3 A2), so withdrawing from the
audit engagement on this basis is disproportionate. However, the firm should.be able to
demonstrate that appropriate time and qualified staff are assigned to the audit. and that
all applicable standards are being adhered to (ACCA Code of Ethics and Conduct: para.
330.3 A3-7). It may not be appropriate to adopt a combined approach if the control risk is
deemed to be high. The appropriate audit approach shol!ld be determined by the risk
assessment, not by time or fee constraints.

306 Audit and Assurance

 .. . ~

128 The correct answers are:

• The ability to test all 25 ot"firrol Co's locations using the same. audit software, ·resulting
in time and cost savings - · ·
• The ability to selectand extract a sample of irwentory data- fOr testing,"thus reducing
sampling risk
· Audit $Oftware is used to p$rform substantive proceduresratherthon tests,;ofcontrols and
therefare.tryiswould not inClude testing internal controls relating to theinputof Ciota·.
.Similari!:J, the error rate in· a sample refers to the number oftimes a contr9l qefibiency is
projected to occur in a population and therefore is not relevant to audit software. -
129 The correct answer is: A sampling method which involves having a constant sampling·
interval; the starting point for testing is determined randomly
The ftrst option describes monetary unit sampling. The third option is an example of block
selection. The fourth option describes haphazard sampling.
130 The correct answer is: Whether there are any significant threats to the objectivity of the
internal auditor
The objectivity of the internal auditor should be considered in determining whether or not
the work of the internal auditors can be used in the first place. It is not part of evaluating
the work itself.

131 The correct Ol"\swer is: Inventory should be $43,500, Inventory is overstated
Inventory should be measured at the lower of cost and net realisable value (lAS 2). Net
realisable vdl.ue is defined b~ lAS 2 as estimated selling price less estimated costs necessary
to make the sale (lAS 2). In this case, inventory should be written down by $6,000 and
shown at a value of $43,500 in the financial statements.

Wright
i32 The 6orrect answer is: 1 and 3
Material items. will require more evidence to support them than· immaterial items~ which
might be tested by. comparative analytical review only. If the evidence is of high quality,
then less may be required than if it were of poorer quolity. Time and budget constraints
should never influence the auditor's judgement regarding the sufficiency of audit evidence.
The size of the account is considered in determining materiality (ie materiality may be
determined ds 5% of profit before tax), but the· auditor's judgementregarding the
sufficiency of audit evidence depends on the level of audit risks associated with edch
account. The operating ,effectiveness of the compan~fs internal control sy_stems will also
influence thisjudgement. ·

133 The correct answer is: 2 only

The goods were received before the year end and have been recognised in inv§ntory. A
liability should therefore be recognised in the current accounting period. Although the
chBqUe cleared the bank account after the year end it was issued before the ~Or end and
there is nothing to suggest that it hos been deliberately held bock. The cosh in transit is
. therefore a legitimate reconciHfig itern. · ·

134- The correct oriswer is: No further evidence is required

As the- su.ppller statement balance agrees with that on the payables ledger, no further work
is required in respect of this account. ·
Purchase orders made after the year end would not have any effect on current ~Jeor
liabilities.
As a supplier statement is ovai.lable there would be no need to .ask for a direc.tcontirrnation
of the balance from !.)Upplier. XX3.
·Credit notes issued by Wilbur Co would potentially affect receivables, not payobles,
balances.

@BPP Answers 307

135 . The correct answer is: Written on the audit firm's headed paper; ~nformation requ_ested to
be sent directly to the auditor
The bank contrrmation Jetter must be sent identifiably by the auditor, :and responses should
·be provided directry to the auditor~ This is. to prevent the information beingdlstorted by any.
lack of objeCtivity, ortampering by client management. ·
136 Tbe correct answer: is: The bank's date stamp on the paying-"in slip
. -
The bank's stamp on the paying-in slip is the most reliable as it is third~party evidence and
shows the date the lodgements were actually paid into the bank.
The bank statement would be a useful source of evldence but there may be a delay
between the paying-in date and the date that the balance is cleared by the banki~g
system. Therefore the bank statement date is not necessarily an accurate reflection of .
when the lodgement was made. There may also be a delay between the date on the
cheques/remittance advice and the d~te it is actually received by Wilbur Co.

Lodestar
137 The correct answer is: The sample selection does not address the risk of understatement as
it has focused on the ten largest balances.
The first option is incorrect as the sample is not appropriate. In order to test completeness,
the sample selection for a receivables circularisation should consider incorporating nil
balances and balances written off in the year to ensure that the balance is not
understated. (Hence the third option is correct.)
The second option is incorrect as the nature of sampling means that a percentage of the
. balance will not be sampled, but conclusions can still be drawn.
The fourth option is incorrect as stratification is not required (although it may be helpful)
and would not necessarily give a 'representative' sample, due to the risks discussed above
in relation to the first option. ·

138 The correct answer is: 1~ 2 and 4

Appropriateness refers to relevance and reliability. All the procedures are relevant to the
assertion, but onlbJ some of them are reliable. Simply asking the credit controller. if the client
exists is not reliable, as it gives oral evidence generated by management and does not add
value to the receivables ledger.
Sending out a follow-up request gives the auditor a chance of obtaining evidence direct
. from a third party, which would be considered very reliable.
Reviewing cash receipts after date gives indirect evidence from a third party os. if someone
is pa!:Jing the debt, it implies it existed in the first place.
Reviewing the sales invoices is auditor-generated evidence that the sale was generated in
the first place. lt is based on relatively weak internaii!:J generated evidence (the invoices) but
as it involves auditor analysis (for example, whether the relevant invoices appear in
numerical sequence with other genuine invoices and have associated goods outwm;ds
notes) it adds a degree of reliability. This evidence would not be sufficient on its own but it
might corroborate other evidence.

308 Audit and Assurance .@BPP

139 The correct answer _is: Trade receivables should be $6~000 lowe.r, current assets are
ave rstated. > •

The difference caused bQ the. payment by the.cus:tomer d;es not require adjustment. The- .
auditor has verified that the-payment wasreceivec! by .Lodestaron2 October, which is
.consistent wit11 the third-part\:! evidence that it was sent out on 30 September. As far as
Lodestar is concerned~ the debt was genuine at 30 September dr)g there is good evidence
about its existence
.
and valuation provided by the subsequent pqyh1erit. ·
. . . -

The customer is disput!ng an invoice and declaring _its i.ntentioh llBfto accept the debt~
Regardless of rnanogemcnt's intention to dispute t{lis credit request, that suggests that the
valuation of the debt is inappropriate (as the customer is only prepqred to pay $0 in effect
for that invoice), even·. if the existence of the debt can be proved. The Invoice should be
written off, hence receivables and current assets are overstated by $6,000.
140 The correct answer is: Auditors should use their own estimate inthe financial statements, as
au.ditor-generated evidence is more conclusive than management-generated evidence.
Auditors do not prepare the financial statements, management do; It is inappropriate to
suggest that the auditors should prepare a figure for the financiah3tatements (and this
might cause an ethical threat of self-review). Auditor-generated evidence is considered
reliable, so if the auditors did make an estimate which was significantly different from
management's, this would be evidence that the allowance was misstated. The auditor will
have to bear in mind the risk of management bias in making an estimate, and it is true that
it can be difficult to obtain evidence relating to management judgement (particularly in
this case if no events occur to 'prove' the debt is doubtful, such qsthe customer going into
liquidation, or management writing the debt off- which they are likely to want to defer in
case the debt is eventually paid). ·
141 The correct answer is: i, 2, 3, 4
The assertion being tested is valuation.
(1) Gives indirect third-party evidence that the valuation of the debt is appropriate (ie in
proving that some debts have not been paid)
(2) Gives auditor-generated evidence of the age of sorne debt and therefore the fact that
its valuation is likell:l to be indoubt (otherwise itwoufd have been paid before)·
(3) Gives management evidence relating to the valuation of the debt, which might give the
auditor insight into issues they might otherwise be unaware of. such as conversations
with customers about when debts are to be paid
(4) Gives very little ·evidence about current valuation, as it only shows what the value was
at the time the invoice was sent, and is of low reliability anywa!J, as it is internalll:l
generated

Porthos
1'+2 The correct answeris: 2, 4, 1, 3
The steps should be undertaken in this order. The objective of theCAAT procedures should
be determined first and foremost. The accessibility of the data files must be constdered_
before· the scnpe dnc;:l nature of the procedures are determined.
i 43 The correct answer is: 0)~ (ii)> (Iii) and (iv)
Testin"g orders for unusually large quantities identifies whether c.tnw reject controls requiring
special authorisation for large orders are effective. Testing order$ with-fields left blank
determines whether controls are in- place to prevent orders being placed that can't be
fulfilled due to rnissingJnformation.(ie incomplete delivery address). Testing orders with
invalid inventory codes identifies whether controls ate in place to ensure that t_he correct
goods ore dispatched. Finally. orders with correct and complete d~tails should be
aocepted by the system. This will allow the auditor' to inspect the order confirmation to
determine whether the order details are transferred accurately into the dispatch system.

@BPP Answers 309

144 The correct answer is: For sales invoices issued bef9re 31 December 20X7 use audit .
software. to determine whether there is a matching GDN dated .before 31 December 20XT
- . - - -

Sales cut-off will have been correctly applied where goods eire dispatched. and recognised
as sales in the same accounting period. Therefore aH GDN&relating to goods dispatched
·before 31 December 20X7 should be matched ·by a sales invoice also dated before 31
December 20X7.
The fact th~t g~ods are picked and dispatched in the same accounting period- does not
provide evidence that sales have been recognised in the qqrrect accounting period.
Therefore the third and fourth options are not relevant.
145 The correct answer is: To provide audit evidence over the completeness of the recording of
sales -·
Sequence checks on sales invoices provide evidence on the completeness of sales.
146 The correct answer is: (21,600 x 2/12) + (24,000 x 10/12)
The rent recognised in the year should reflect that earned in the period. For January and
February this will be based on an annual rental income of $21~600. For the remaining 10
months this would be based on the increased rental. The proof in total should be calculated
on the same basis.

Lancaster Co
147 The correct answers ore:
Physically inspect a sample of assets selected from the non-current asset register
Inspect the condition of assets held to determine the need for any impairm.ent
ThTs question tests candidates' understanding of the purpose of specific audit procedures
relating to non-current assets with the focus being overstatement. When testing for
overstatement it is essential to work from the financial statements to source documents or
asset,s. (Workingfrom source documents or assets to the financial statements would test
for understatemenq Candidates should also note the number of responses required. In this
case two correct answers from four options are required. Selecting assets from the non~­
current asset register and inspecting them tests the existence assertion which provid~s
evidence regarding potential overstatement - the balance will be overstated if assets
included do not exist.
-Assessing the need for impairment is a valuation test. If an asset is impaired but the -
impairment has not been recognised the balance will be overstated. Optiol} 1 provides
. evidence that disposals which are recorded have actually taken place. This tests for
understatement and is therefore not an appropriate response. Option 3 _also tests for
understatement by confirming that assets physically inspected are recorded in the non-
current asset register.
148 The correct answer is: 1. 3 and 4 onl!:j
In respect of test (1), tracing additions per the non-current asset register to the bank ledger
account and invoice, checking that the date is correctls an existence check providing
evidence that the asset was held by Lancaster Co from that date. Confirming the amount
at which the asset is recorded to the bank ledger account and invoice is a valuation test. ·
Test (2) is an analytical procedure. It therefore provides evidence in respect of all the
assertions listed with the exception of classification. As the comparison is being performed
based on totals, this test would not provide evidence relating to classification.

310 Audit and Assurance @BPP

f
J )

149 .. The correct answers are:

. • Perform a proof in total for the depreciation charge. of $_2m includedJn the financial
.. · statements and investigate any significant differences" .- . . .
·Discuss with managemehtthe reasons for the $300,000 difference in the current year . ·
depreciation compared to the prior year
0pti()f1$ 2 ctnd 4, a proof in total and d.c"amparison witn the pdor year.are both analytical
. ) procec:fures and are therefore substantive pro~edures; RevieWing t.he non-current asset".
regist~rto ensure that assets have .been assigned a u~efullife .and reviewing board minutes
for-~vlden~::e of approval of useful lives are both examples of tests of controls. This question
test~ candidates• understanding of the different types of procedures which the auditor r:J:lay
perform during the audit. and in particular the dlstinction between tests of controls and
· substc.mU'Ie procedures. Substantive procedures are designed to detect material
misst(Jtement at the assertion level whereas tests of controls are designed to evaluate the
operoting 13ffectiveness of controls. It is essential that candidates understand the purpose
of these two types of procedure and can distinguish between them. both for Section A and
Secttori B qu~stions. Candidates also need to be aware that substdntive procedures include
bothanal~:~tical procedures and tests of detail.

150 Si15fm
At th13disposal date accumulated depreCiation would be: $6m x 0.05 x 7 = $2.1m
The carrying amount of the asset at the date of disposal would be: $6m - $2.1m = $3.9m
Disposdl proceeds are: $6m x 40% = $2.4m
The loss on disposal is therefore: $3.9m- $2.4m = $1.5m
This question highlights the importance of candidates having the required Financial
Accounting knowledge which underpins the ability to perform an effective audit. The
auditor must understand the basis on which the financial statements being audited should
hove been prepared if misstatements are to be identified. In this instance, if the auditor is to
audit th~ profit or loss on disposal they must be familiar with the components which make
up this balance. This particular calculation could be· relevant, for example, as part of the
analytical procedures performed. The auditor would form their own expectation of the
profit ocloss on disposal of an asset and.then compare this with the profit or loss
recognised in the financial statements. Candidates should also take note of the specific
instrqction provided with this question i.e that the answer should be provided to one decimal
place. Where specific instructions like this are given in a question it is essential that
candidates follow these to avoid losing marks unnecessdri!y.

@BPP Answers 311

i51- The correct answers are:
Referen9e to the work· of the external expert should not be ·included in the quditor's
report
" The objectivity ·of the valuer must be assessed before placing reliance on the valuation
rn~rt · ··
This question tests candidates' understanding of the issues-for the auditor when placing ·
reliance on the work of an expert. There are two types of exp~rt which the auditor may rely
on during the course of the audit, a management's expert or an auditor's expert. In this
instance the exp.ert has been u_sed by Lancaster Co to assist it with the valuation of the
. buildings which will appear in the financial statements. The expert is therefore a
management's expert in accordance with ISA 500 Audit Evidence. If information-is to be
·used as audit evidence that has .been prepared using the w.ork of a management's expert
the auditor must evaluate the objectivity of that expert. The competence and capabilities
should also be evaluated. The auditor takes sole responsibility for the audit opinion. If the
auditor is to rely on .the work of the expert the evidence would have been evaluated with
the conclusion that it provides appropriate evidence to support the valuation. No reference
therefore to the expert should be made in the auditor·s report.
Option 1 is incorrect as in accordance with ISA 500 there may be circumstances where it is
appropriate for the auditor to place reliance on a management's expert. Simply obtaining
the valuation r~port would not constitute sufficient and appropriate evidence over the
carrying amount of the buildings~ In accordance with ISA 500 the auditor would be
required to evaluate whether the information is sufficiently reliable for the purposes of the
audit. This would include obtaining evidence about the accuracy and completeness of the
information and evaluating whether it is sufficiently precise and detailed. Option 2 is
therefore incorrect.

Wilfow&Co
152 The correct answers are:

Obtain Ash Co's bank

reconciliation and cast to RECALCULA
ensure mathematical TION
accuracy

Obtain o bank EXTERNAL

confirmation letter from CONFIRMATI
Ash Co's bankers ON
...... ·- '····'-•-•,; ... ~

Perform a cash count for

comparison with the REPERFORM
results of the cash count ANCE
conducted by Ash Co
.,__ , __
•"""" .....................
~ ...

This question exam.ines candidates' understanding of the different types of audit

procedures which the auditor may use to obtain audit evidence and also the ability to
apply this understanding to specific examples of procedures perfo_rmed.
Casting the bank reconciliation to ensure it is mathematically accurate is an example of a
recalculation procedure. ·
Obtaining the bank confirrnatfon letter is an example of an external confirmation as the
bank is a third-party source.
Performing the cash count and comparing the results with the cashcount already carried
out by the company is an example of a reperformance procedure.

312 Audit and Assurance @aPP

:153 The correct answer is: 4, 2, 3,1
ISA. 50b Audit Evidence states that the reliability of informa-tion used as audit evidence is
influenced by its source and its nature and the circumstances under which it is obtained. It
. also states tha~while exceptions may exist, .tlie folloWing generalisations can be made:
• The reliability of audit evidence is increased w_hen it is obtained from independent
sources outside the _ entity. . . · . . . _
The reliability of-evidence generated internally is increased when related controls are
effective. ·
• Audit evidenc~ obtained directly by the auditor is more reliable than audit evidence
obtained indirectly or by inference.
• Audit evidence in documentary form is more reliable than evidence obtained orally.
In the case of the evidence collected in respect of Ash Co, the bank confirmation letter
received from Ash Cds bank described in (4) is the most reliable. It is evidence from an .
independent party outside the entity and as it is the bank it would be a knowledgeable
source.
Auditor generated evidence is normally seen as a reliable source. however in this case as
described in (2) its reliability is affected by the fact that the reconciliation is prepared using
client documents.
Audit evidence (1) and (3) are both sources ofevidence generated by the client. However
due to the nature of their role internal audit would be viewed as being more independent
than an accounts clerk. therefore (3) would be more reliable than (1).
154 The correct answers are:
• The risk of material misstatement including fraud risk needs to be re-evaluated
• The audit plan must be revised and alternative procedures considered
This question emphasises the importance of candidates being able to thirik practically. in
this case Ash Co has restricted WillowS co·s ability to collect audit evidence. As a result it
would be appropriate to re-evaluate risk. It would also be appr-opriate to revise the audit
plan accordingly in U1e light of this and to determine whether sufficient appropriate
evidence can be obtained by alternative means.
The third option is incorrect as although a modified opinion may ultimately be the end
result further procedures may be possible therefore it would not be appropriate to
conclude that a modified opinion must be issued at this stage. The fourth option is
· incorrect as the bank would not respond to the request without permi?sion from Ash Co,
155 The correct answer is: Bank and cash is overstated by ·$400,000
. In order to carry out an effective audit the auditor must hove a good understanding of
financial accounting. This question examines the impact on the bank and cash balance of
issues identified as part of the audit of the bank reconciliation. A key point to remember is
that it is the bank ledger account figure (adjusted ifrequired) which will appear in the
financial statements. ·
In this case two issues have been identified in the preparation of the bank ledger account.
The total has been incorrectly reduced by $30,0,000 in respect of cheques which were not
posted until after the ~Jeor end and has been incorrectly increased by $700,000 in respect
of lodgements not submitted until after the yeor end. The net effect of this is an ·
overstatement of $4-00,00.0. As the bank charges were not charg·ed by the bank until June
these would hove been recognised as an accrual at the year end and therefore would have
no effect on the year-end bank and cash balance. ·

@aPP Answers 313

156- The correct answer is: Inspect Ash Co's C<?nstitution documents for evidence t_hat the--share.
is_sue is permitted
The AA syllabus includes learning outcomes whkh cover a wide range of bakmces in both
the statement of profit or loss and the statement of financial po-sition. This question_
examines procedures relating to a share issue. Candidates should be prepared for
· questions on any of the balances listed in the syllabus.
Thtsquestion also highlights the importance of careful reading of the requiremenL Here
candidates are required to ·consider which procedure. will address the partner's concern ie,
over whether the transaction has been carried out in compliance with appropriate laws- and
regulations. The second option would be the appropriate response as it is the only
procedure which would address this concern.
With this question candidates may find it useful to derive-the correct answer through a
process of elimination. This first option would show approval by the board but would not
confirm whether the issue was lawful. The third option would not be appropriate as other
evidence should be available. The fourth option would provide evidence regarding the-
recording of the share issue but does not provide evidence that the transaction complies
with laws and regulations. The second option is therefore the correct answer as explained
above.

Pickering S Co
157 The correct answer is: 3 only
This question tests an understanding of the forms of evidence available to the auditor.
Discussing a matter with knowledgeable persons is an example of enquiry. In this instance,
only the discussions with management are an enquiry. Watching a process is observation,
obtaining a bank letter is confirmation and comparing annual balances is an analytical
procedure.
158 The correct answer is: I, 2 and 4 only
The auditor is required to obtain sufficient and appropriate audit evidence in order to be
able to draw reasonable conclUsions on which to b_ase the audit opinion. Therefore, the
·source and reliability of this evidence is crucial-
In this. instance, the bank con-firmation letter being received via the client means that the_
auditor is not receiving directly from a third party, therefore reducing the reliability of the
audit evidence. The loss of the original year end bank statement and its replacement with a
photocopy also reduces the relicibilit[d of this piece of evidence, ·as the risk of tampering
increases. The unreconciled difference means that this key control is riot operating as
effectively as it should and therE?fore reduces the reliability. ·
The fact that the bank account is new does not reduce the reliability of the audit evidence;
the year end balance is what is being tested and therefore the fact that it has not been
_subjected to audit in the prior year is irrelevant.
159 The correct answer is: Recalculate the accrued interest based on the outstanding loan
value, interest rate and accrual period ·
Recalculating the accrued interest will be the best-procedure to verify the accuracy of
- accrued interest at the accounting period end.
Testing an internal control. such as the. bank reconciliation, is not relevant to the issue.
lhter~est charges are not yet showing on pre year-end bonk statements.
The analytical comparison of the loan interest rate is not specific to the calculation of year-
end accrued interest.

311t Audit and Assurance @aPP

160 The correct answer is: Attend the cpsh count at the yec:sr end and-reperform the count
Gathering evidence.of the exfslerice of bank and cosh-is a crucial pr~cedur~ underta.ken
during the audit to ensure th~. assets (or liabilities) truly exist and there has been no
overstatement. Attending the cash count at the year end and reperforming the-count would
•· be-6 test for existence and therefore
-
the correct answer. · .

Reviewing all relevant bank statements to verify that the accounts ore held under Walker
.Co is atest for rights a·nd C?bligations. .., .
- Agreeing a sample ofaccounts detgiled on the bank confirma.tion letter_tothe trial balance
· is o completeness test.
Reviewing the disclosures included in the financial statements to verify only bank accounts
per the bank letter are disclosed is a test of presentation.
161 The correct answer is: 3 and 4
When testing for accuracy, valuation and allocation; the auditor is ensuring that assets,
liabilities and equity are included in the financial statements at appropriate amounts,
ensuring that any resulting adjustments have been appropriately recorded and related
disclosures have been appropriatei!:J measured and described.
The key to answering this question is to focus on the stated assertions. Tracing the
balances from the closing tria~ balance to statutory records and draft financial statements
and also confirming cash receipts from the share issue will both go towards confirming
valuation. ·
Reviewing board minutes and agreeing to constitution documents will not give assurance
over the accuracy, valuation and allocation.

@BPP Answers 315

 Section B Questions
162 Lily

Course Book referenc;:es

Chapters 10, 11 and 13.

Top tips
This case study style question is based on procedures at an inventory count. In (a) you need to
fully explain each deficiency before you move on to providing relevant recommendations. A$
you read through the scenario ask yourself what could go wrong and to what extent the
inventory count procedures do, or do not, address these issues. This will help you explain your
deficiencies as your explanation will include the possible consequences of the missing or
ineffective control.
In (b) your procedures must be those that can realistically be carried out during the inventory
count~ not before or after. These will therefore include observing the teams to make sure they
are following instructions, test counting and making notes of GRNs and GDNs. Your
procedures should not include standard inventory tests that would be carried out later during
the detailed audit fieldwork, such as reconciling quantities from the final listing back to the
inventory count sheets.
Part (c) for 12 marks on automated tools and techniques may look daunting at first, but taking
each sub-requirement in turn and breaking it down into manageable parts should help when
working through such a question. In (i) your automated tools and techniques must be relevant
to the inventory cycle and year-end inventory balance. You can generate these automated
tools and techniques by asking yourself initially what procedures need to be carried out" before
then determining whether automated tools and techniques would help. For example, an!::Jthing
involving a cdlculation (inventory holding period, ageing, recalculating costs) could potentially
be performed using automated tools and techniques. In (ii) and (iii) you should be able to.
suggest advantages and disadvantages of automated tools and techniques, with the
advantages being centred around time and cost savings in the long term.

~ .Easy marks
You should have been able to identify and explain deficiencies in (a} and suggest procedures in
(b).

Marks

(a) Up to 1 mark per well-explain~d deficiency and up to 1 mark per

recommendation. If not well explained then just give~ mark for each.
Warehouse manager supervising the count
No division of respon~ibilities within each counting team
Internal audit teams should be checking controls and performing sample counts
No flagging of aisles once counting complete
Additional inventory listed on sheets which are not sequentially numbered .
Inventory sheets not signed by counters
Damaged goods not moved to central location
Movements of inventory during the count
Warehouse manager not qualified to assess the level of work in progress
Warehouse manager not experiemced enough to assess the quantities of raw
materials
Maximum 12

316 Audit and Assurance @aPP

(b) Up to 1 mark perwell-described.pro_c~c;fure.
Observe the count~r~ to confirm if inventory countinstructions are being
followed···:~·:

Performtest ~ounts inventory to sheets qrid sheets to inventory 1·

Confirm procedures fordamaged goo~s are operating correctly . 1·
Inspect damaged goods to confirm whether the level of damage is correctly
noted
Observe. procedures f~r movements of inventory during the count
Obtain a photocopy of the completed inventory sheets .1
Identify and make a note of the lost goods received notes and goods dippatched
notes 1
Observe the procedures carried out by warehouse manager in assessing the level
of work in progress ·
Discuss with the warehouse manager how he has estimated the raw materials
quantities
Identify inventory held for third parties and ensure excluded from count
Maximum 6
(c) ·(i) Up to 1 mark per well-described procedure. max of 4 procedures.
Calculate inventory holding period
Produce an aged inventory analysis to identify any slow-moving goods
Cost the inventory listing
. Select a sample of items for testing to confirm net realisable value (NRV)
and/or cost
Recalculate cost and NRV for sample of inventory
Computer-assisted audit techniques (CAATs) can be used to confirm cut-off
CAATs can be used .to confirm whether inventory adjustments noted during
the count have been updated to inventory records 1
~

Maximum 4
(ii) Up to 1 mark per well-explained advantage.
Test a largevol'ume of inventory data accurately and quickl8
Cost effective after set-up
Automated tools and techniques can test program controls as well as
general IT controls·
Test the actual inventory system and records rather than printouts from the
system
Automated tools and techniques reduce the level of human error in te$ting :.
Automated tools and techniques results can be compared with traditional ~s
audit testing
Free up audit team members to focuson judgemental and .high risk areas
Maxirnum 4 ..
(iii) Up to 1 mark per well..:explained disadvantage.
Co.sts of using automated tools and techniques in this first year will be high
Team may require training on the specific automated tools and techniques
·to be utilised 1
Chang·es in the inventory system may require costlu revisions to the ·
automated tools and techniques _·
The inventory system may not be compatible with the audit firm's
automated tools and techniques

@BPP Answers 317

 If testing the live system, there is a risk the data could be corrupted or lost
If using copy files rather than live data, there is the risk that these files are .
not genuine copies ·~ -
Adequate systems documentation must be availabl.e
Maximwm 4
Total 30

(a)' Deficiencies and recommendations

Deficiency (i) Recommendation (ii)

The warehouse manager will supervise the An independent supervisor should be

inventory count and is not independentas assigned, such as a manager from the
he has overall responsibility for the internal audit department.
inventory. He therefore has an incentive to
conceal or fail to report ani:J issues that
COLJid reflect badly upon him.

Aisles or areas counted will not be flagged. Once areas have been counted they should
This could result in items being double be flagged. At the end of the count the
counted or not counted at all. supervisor should check all areas have been
flagged and therefore counted.

There is no one independent reviewing Instead of the internal auditors being

controls over the count or test counting to involved in the count itself, they should
assess the accurac!::l of the counts. perform secondari:J test counts and review
controls over the count.

Damaged goods are being left in their Damaged goods should be clearly marked
location rather than being stored as such during the count and at the end of
separately. This makes it more difficult for the count they should be moved to a central
finance to assess the level of dama.ge to the location. A manager from the finance team
goods and establish the level of write down should then inspect these damaged goods
·needed~ Also, if not moved, damaged goods to assess the level of allowance or write
could be sold by mistake. down needed.

Due to the continuous production process, Although it is not practicable to disrupt the
there will be movement of goods in and out continuous production process, raw
of the warehouse during the count~. materials (RM) required for 31 July should
increasing the risk of double counting or be estimated and separated from the
failing to count inventory. This could mean remainder of inventory. These materials
inventory in the financial statements is l should be inctuded as part of work in
under- or overstated. progress (WIP).
Goods manufactured on 31 Juii:J should be
stored separately, and at the end of the
count should be counted once and included
as finished goods.
Goods received from suppliers should also
be stored separately, counted once at the
end and included in RM. Goods dispatched
to customers should be kept to a minimum
.during the count.

318 Audit and Assurance @aPP

I ]:

The warehouse manager is going to A specialist should-he w:ied to ~ssess the

estir1late WIP levels. The warehouse work in progress.-- -- •· ·
is unli.~eJy to have the- necessar\J
experience to estimate. the WIP levels which
is something th13 factory manager would be
more familiar with. Alternatively a specialist
may be needed to make the estimate; This
·could ultimately result in an inaccurate WIP
balance in the financial statements.

The warehouse mdnager is going to As in previous years, a specialiSt should

) approximate RM quantities. Although he is assess the quanUties.of raw materials, or at
familiar with the RM, and on the basis that- least cheok the warehouse manager's
a specialist has been required in the past, estimdte to give comfort that the manager's
the warehouse manager may not have the estimates will be reasonable going forward.
necessary skill and experience to carry out
these measurements. This could result in an
inaccurate RM balance in the financial
~
statements.
[······-··················--·-··-·---'·····················-········--·'···. ·····-·--·····-····'···-

There is no indication· that inventory sheets Inventory sheets should be signed by both
ore signed or initialled by the counting team members once _an aisle is completed.
team, nor a record kept of which team The supervisor should check the sheets are
counted which area. This means it will be signed when handed in.
difficult to follow up on any anomalies
noted, as the identity of the counters may
not be known.

Inventory not listed on. thl3 sheets is to be Every team should· be given a blank sheet
entered onto separate sheets. These sheets on which they can enter any inventory
are not sequentially numbered and the counted which is not on their sheets. The
supervisor will be unable-to ensure the blank sheets should. be sequentially
completeness qf all inventory she:_ets. numbered, with any unused sheets returned
at the end of the count. The supervisor
shoulq then check the sequence qf all
sheets. ·

The responsibilities of each of the two staff For each area one team member should be
members within a counting team is unclear. asked to count ·and the second member
It does not appear that one has been told to. asked to check that the inventory has been
count and the other to check. Therefore counted correctly. The roles of each can
then be reversed for the next area.

Note. Only six deficiencies and six relate_d recommendations were needed to gain 12 marks.
(b) Procedures undertaken during the inventory count
For a sample of inventory items, carry out test counts from aisle to inventory· sheet to test
completeness and from inventory sheets to aisle to test existence.
Obtain and record detoils of the last rJoods received notes (GRNs) and goods dispatched
notes (GDNs)- for 31 July to form the basis for cut~off procedures. at the audit.
• . Observe whether tearns carrying out the count are adequately f~-llowing the inventOriJ -
count instructions. · -
of
For a sample items marked as ddrnoged on the inventoru sheets, inspect the windows to
verify that the level of damage has been correcti!J recorded.
• Observe the procedures for movements of inventory during the count andossess_the r1sk
that raw materials or finished goods-have been missed or double counted.-
Photocopy the inventory sheets for follow-up and use when performing procedures at the
final oudit. ·

@'BPP Answers 319

 Ascertain how the wa_rehouse manager is assessing the level of work in progress by
observing the assess.ment and by reviewing his assumptions •. and consider how consistent
his estimate is with observed levels. · ·
Ask the warehouse rnan9ger how he has estimated. the raw materials quantities cind
review his calculations and any assumptions for reasonableness. Reperform a sample of
the measurements of height and width forming the basis of any cqlculation to see if they
are accurate. ·.
Confirm an!:J third-part!:) inventory observed has been excluded from the count.
Confirm that the procedures for identifying and separately storing damaged goods are
operating effectively.
Note. Only six procedures were needed to gain full marks.
(c) Automated tools and techniques
(i) Audit procedures
Software can be used to cast the inventory listing to confirm the total is complete and
accurate.
a
Audit software could be used to extract statistical sample of inventory items in order to
verify their cost or net realisable value (NRV).
Calculations of the inventory holding period or inventory turnover could be carried out
by audit software, before being used to compare against the same ratios for the prior ftJ

year or of competitors. This will help to assess the risk of inventor!:J being overstated.
Audit software could be used to help extract an aged inventory analysis. This could in
turn be used to identify any obsolete or slow-moving items, which may require a write-
down or an allowance.
Audit software can be used to perform calculations during testing of inventory, such as
recorded cost (eg weight or quantity· multiplied by cost per kg or unit).
Automated tools can be used to confirm whether inventory adjustments recorded during
attendance at the count have been correctly recorded in the final inventory records
forming the basis of inventory in the financial statements.
Automated tools can be used to verify cut-off by testing whether the dates of the last
· GRNs and GDNs recorded relate to pre !:Jear end, and that any with a date after the
year end have been excluded from the inventory records.
Note. Only four procedures were required.
(ii) Automated tools - advantages
• · Automated tools· allow the audit team to test a large volume of inventory data more
accurately and more quickly than if tested manuaii!:J.
Automated tools decrea·se the scope for human error during testing and can provide
evidence of a higher quality.
By using automated toolsj auditors can test actual inventory transactions within the
system rather than working on printouts from spool or previewed files which are
dependent on other software (and therefore could contain errors or could have been
tampered with following export).
• Assuming the inventory system remains unchanged, automated tools used in the
audit ofUiy year on· year should bring time (and therefore cost) savings in the long
· term, which should more than compensate forany set-up costs.
• Auditors can utilise automated tools to test program ·controls as well as general
internal controls associated with computers.
Results from· automated tools can be compared with· results from traditional testing. If
the results correlate~· overall confidence is increased~ ·
• The use of automated-tools allows audit team members more time to focus on risk
areas and issues requiring judgement, rather than performing routine calculations
that can be carried out by audit software.

320 Audit and Assurance @sPP

I ...

Note.- 9nly four advantages were needed to gain full mcirks.

(iii) Automate~ tools - disadvantog~s- _
Setting up the software needed for automated tools-in the first year is likelyto be time
consul')ling and expensive. · ·
• Audit staff working on Lily'$ audit will need tope trained so -they have a sufficient level
of IT knowledge to apply automated tools when Ollditing the inventory-system.
lftesting is performed on data in the live inv~)1tory system~ there_is a risk that live
client data may be corrupted and lOst.
• If the inventory system at Lily changed then It may be expensive and time consuming
to redesign the automated tools.
·. • lfthe inventory system at Lily is not compatible with Daffodil & Co's automated tools
software then they will need to be tailored to Lily's system, which may be costly.
• If testing is performed on data from copies of the live files rather than the live data
itself~ there is the risk that these files have been affected by the copying process or
have been tampered with.
• If there is not adequate systems documentation available, it will be difficult to design
appropriate techniques due to a lack of understanding of the inventory system at Lily.
Note. Only four advantages were needed to gain full marks.

163 Purrfect Co

Course Book reference

Chapters 13, 14) 16 and 20.

Top tips
Parts(a) to (c) ask forsubstantive procedures in relation to an inventory valuation, a
receivables balance, and some legal claims. This is a standard question for AA qnd you should
expect to find something of this natwre in your exam.
Part (d), on auditor repo.rting, was made relatively simple by the requirement to describe the
impact of the issue in both possible situations. The important points when considering the
effect of a matter on th-e auditor's report are usually the type of modified opinion that COULD ·
be required, and then the materiality or pervasiveness of the issue. When describing the
impact on the auditor•s report there are usually easy marks available for desGribing how the
auditor's opinion and basis for opinion paragraphs will change.

Easy marks
Part (d) offers easy marks for giving a description of albasis for' section in the aud)tor's report.

f},~,·, Marks

(a) Substantive procedures for inventory of Vego Dog

1 rnark per well-described procedure 6
Maximum 6
(b) Substantive procedures for receivable due from Ellah Co
1_ mark per well-described procedure 4
Maximum_ 4
(c) Substantive procedures for contamination --legal claims
· .1 mark per well-:described procedure 5
Maximum 5
(d) Issue and impact on auditor•s report

@BPP Answers 321

 Marks

Discussion of issue 1
Adequate disclosure 2
Inadequate disclosure 2
Maximum 5
Total 20

(a) Inventory of Vego Dog

• Obtain and cast the inventory listing of Vega Dog products and agree the total cost of
$2.4m to inventory records.
• Agree the quantity of Vego Dog products shown as held at the year end to the year-end
inventory count records.
• Request a breakdown of the cost calculation of each unit of this product and discuss with
management how the standard cost was derived.
• Recalculate the cost calculations to confirm that the quantity multiplied by the standard
cost is $2.4m.
• For a sample of finished goods items, obtain standard cost cards and agree:
- raw material costs to recent purchase invoices;
- labour costs to time sheets or wage records;
- overheads allocated to invoices and that the!:J are of a production nature.
• Compare sales prices over time to establish if the price has been reduced because of
falling demand to determine whether an allowance is required.
• Compare actual sales units per month to budgeted sales per month from before and after
the year end to establish how much lower actual sales are than expected and discuss with
management.
• Select a sample of items included in inventory of Vego Dog and review post !:Jear-end sales
invoices to ascertain if net realizable value (NRV) is above cost or if an adjustment is
required.
(b) Receivable due from Ellah Co
.• Review correspondence with Ellah Co to establish if there was a discussion about poyrnent
difficulties and whether Ellah Co intends to fully settle the outstanding amount.
Review the age of the outstanding debt with Ellah Co and discuss the circumstances with
the credit controller to establish if it has exceeded the agreed credit terms and consider if
an allowance is required. ·
Review post year-end receipts from Ellah Co to establish how much of the debt was
recovered by the audit completion date and to assess how much of the year-end balance
remains outstanding.
Inspect board minutes to identif.y whether there are any significant concerns in relation to
payments by Ellah Co.
Discuss with management of Purrfect Co wh!:J no allowance has been made in respect of
this debt and assess the justification.
(c) Contamination - legal claims·-
• Review customer correspondence to establish the details of the claims and the amounts
being claimed.
• Review correspondence with Purrfect Co's lawyers or, with the clienfs permission, contact·
the lawyers to establish the likely outcome of the customer claims made tb date.

322 Audit and Assurance @BPP

 .• Discusswith the lawyers the likelihood and amount of potential- future claims.
Inspect board minutes to establish details of thE;! circumstances of the contamination and
to ascertain management's view ds to the likelihood that the existing claims will be
successful a·nd the extent of possible future claims. .
• Compare levels of returns arid claims to date against sale$ yolumes of the product to
assess the potet1tiallevel offuture claims.
• Review post-yearend payments for da-mage' settlements and compare with any amounts
provided at the year end to _assess the reasonableness of the pr()vision. ·
Obtain written representations from management that there have been no other
contamination. incidents and no other product liability claims of which management are
aware and for which provision may be required.
• Review the draft financial statements to establish that the legal Claims have been
appropriately provided for or disclosed in accordance with lAS 37 Provisions, Contingent
Liabilities and Contingent Assets.
(d) Issue and impact on auditor's report
According to lAS 37, the possibility of additional claims should be disclosed as a contingent
liability as it is possible but not probable and quantifiable.
As the claims may be significant, this issue represents a matter which is fundamental to users)
understanding of the financial statements. The impact on the auditor's report depends on
whether this matter is deemed to be adequately disclosed in the financial statements.
Adequate disclosure
If Purrfect Co adequatelbJ discloses the issue, then an unmodified audit opinion should be
given but the auditor's report should include an emphasis of matter paragraph. This would
draw attention to the disclosure in the financial statements by c"ross-referencing the user to
the note in the financial statements which discloses the possible claims, emphasising that the
audit opinion is unmodified. ·
Inadequate disclosure
If there is no disclosure in the financial statements orthe disclosure is considered to be
inadequate. then this indicates that the financial statements are materially·misstated. As this
a
lack of adequate disclosure is likely to be material but not pervasive, then. qualified opinion
will be given. A basis for qualified opinion paragraph will be added to the auditor's report
discussing the matter and the opinion paragraph will be modified to state that ·except for' the
a
failure to adequately disclose the matter, the financial statements give true and fair view.

161+ Rose

Course Book references

Chapters 14, 16, 17 and 19.

Top tips
Parts (a)-'-(c) required the application of knowledge 'to three issues ..
.When you write your answers here, \JOU need to try to be as
specific as possibfe about how the
procedures should be- performed. You will only get marks if your answer describes the.
procedures_ in enough detail. You can also think abo-ut saying first what the procedure 1s, and
then saying why you would be performing it, which will help to demonstrate that you
understand the purpose of the procedure.
Part (d) fqcusedon written representations. Although this wos a purely knowledge~based
requirernent, this is an urea that you< may have found-difficult - if this is the case, then you will
need to review the solution carefully.

@sPP Answers 323

 Ea~y· marks

These were available in parts (a) and {b), since these parts. cover areas that should be verbJ
familiar.t.o AAstudents·o~d whichJJOU should.l:le well prepared to answer. ·

Marks

(a) Trade payables and accruafs

Calculate trod~ payables payment period
Compare-total trade payables and list. of accruals again$t prior year
Discuss with management process to quantify understatement of payables
Discuss with management whether any correcting journal adjustment posted
Sample invoices received between 25 March and year end and follow to inclusion
in year-end accruals or trade payables correcting journal
Review after-date payments
Review supplier statements reconciliations
Perform a trade payables circularisation
Cut-off testing pre:. and post-year end GRN
Maximum 6
(b) Receivables
For non-responses arrange to send a follow-up circularisation
With the client's permission, telephone the customer and ask for a response
For remaining non-responses~ undertake alternative procedures to confirm
receivables
For responses with differences, identify an!:J disputed amounts. identify whether
these relate to timing differences or whether there are possible errors in the
records 1·
Cash in transit should be vouched to post year end cash receipts in the bank
·ledger account
Review receivables ledger to identify any possibte rnispostings
Disputed balaf!ces~ discuss with management whether a write down is necessary
Maximum 5
(c) Reorganisation ·
Review the board minutes where decision taken
Review the announcement to shareholders in late October
Obtain a breakdown and confirm that only direct expenditure from restructuring
is inciL1ded 1
Review expenditure to ensure retraining costs excluded t
Cast the breakdown of the reorganisation provision.
Agree costs included to supporting documentation_-
Obtain a, written representation
Review the adequocf:rof the disclosures
Maximum
(d) Written representations
Written representations are necessary evidence
Required to confirm directors' responsibilities
Required to support other evidence or required by ISAs

321t Audit and Assurance @BPP

 Marks

ReqL:Jired to qonfirm management have communicated all deficiencies in internal ·

controls
Letter addressed to the auditor
. Throughout fieldwork identify that require written representations
Maximum 5.
Total 20

(a) Trade payables and accruals

(1) Ask management about the action they have taken to establish the value of the
misstatement of trade payables. If they have ascertained the value of the error assess
the materiality of it and the impact of it remaining uncorrected.
(2) Enquire whether ang correcting journal entry has been calculated and whether it has
. been processed in relation to the misstatement.
(3) For a sample of purchase invoices received between 25 March and the end of31 March
20X6) verify that they are included within accruals or as part of trade payables via a
journal adjustment.
(4) Reconcile supplier statements to payables ledger balances and investigate any
reconciling items.
(5) Calculate and compare the trade payaqles payment period with prior years. Significant
differences should be investigated.
(6) Compare trade payables and accrualsagdinst.the previous year and expectations.
Investigate any significant differences dnd corroborate any explanations for differences
to supporting evidence.
(7) Review the bank ledger account payments and bank statements .In the period ·
immediately after the year end for evidence of payments relating to current·year
liabilities. Ensure any found are included in accruals, trade payables or the trade
payables journal.
(8) For a sample of payable balances. perform a trade payables circularisation. Any non-
replies should be followed up and reconciling items between thHbalance confirmed and
the trade payables balance should be investigated. ·
(9) Fqr a sample of goods received notes before the year end and after the year end, ensure
the related invoices have been recorded in the period to which the\) relate.
Note. Only six valid procedures were needed.
(b) Receivables
(1) For those receivables who don't respondt the team should arrange to send,.gJollow-up
circularisation if agreed-by the client. ~-· ··
(2) For non--responses to the follow-up·, and after obtaining client consent, the audit. senior
should telephone the customer and requ~st the customer- responds in writing to the
circularisation request.
(3) Where ali follow-ups are uru;uccessful, alternative procedures must be carried out to
confirm receivables, such as reviewing cifter:-date cosh receipts for year-end receivables.
(4) Where responses highlight differences~ these should be investigated to establish if any
amounts are disputed or require adjustmeht.
(5) Where it is found that differences are in relation to disputed invoices, they should be
discussed with management and the.need for on allowance or write--off as~essed.

@BPP Answers 325

 (6). For timing differences identified on responses. or otherwise (eg cash in transit). these
should be agreed to post year end cash receipts in the bank ledger account and bank
statement.
(7) For those responses highlighting an unresolved difference, the receivables ledger should
be reviewed for unusual entries that could suggest errors made when posting
transactions.
Note. Only five valid procedures were needed.
(c) Reorganisation ,
(I) Verify the dnnouncem.~nt to_ shareholders was actually made in late March by inspec~ing
documentary evidence of the announcement.
(2) ·Board minutes should also be reviewed to confirm that the decision to reorganise the·
business was taken pre year end.
(3) Obtain an analysis of the reorganisation provision and confirm that only expenditure
attributable to the restructuring is included.
(4) Cast the breakdown of the reorganisation provision to ensure it has been correctly
calculated.
(5) Review the expenditure and confirm retraining costs are not included.
(6) Agree costs included within the provision to supporting documentation to confirm the
appropriateness and accuracy of items included.
(7) Review the related disclosures in the financial statements to assess whether they comply
with the requirements of lAS 37 Provisions, Contingent liabilities and Contingent Assets.
(8) Obtain awritten representation confirming management discussions in relation to the
announcem~nt of the reorganisation.
Note. Only four valid procedures were needed.
(d) Written representations
Written representations are necessary information that the auditor requires in connection
with the audit of the entit~'s financial stotements. Accordingly, similar to responses to
inquiries, written representations are audit evidence.
The auditor needs to obtain written representations from management and, where
appropriate, those charged with governance that they believe they have fulfilled their
responsibility for the preparation of the financial statements and for the completeness of the
information provided to the auditor. ·
Written representations are needed to support other audit evidence relevant to the financial-
statements or specific assertions in the financial. statement$, if determined necessary by the
auditor or required by other ISAs. This may be necessary for judgemental areas where the
auditor has to rely on management explanations.
Written representations can be used to confirm that management have communicated to the·
auditor all deficiencies in internal controls of which management are aware.
Written representations are normally in the form of a letter, written by the company's
management and addressed to the auditor. The letter is usually requested from management
but can also be requested from the chief operating officer or chief financial officer.
Throughout the fieldwork, the audit team will note any areas where representations may be
required.
During the final review stage, the auditors will produce the written representations which the
directors will review and then produce it on their letterhead. It will be signed by. the directors
and dated as at the date the auditor's report is signed, but not after;

326 Audit and Assurance @BPP

 165 Hyac;inth _--

Course Book referenc.es.

Chapters 12; 13, 16and 19.

Top tips
--
Part (a) of this question covered substantive procedures in relation to inventory, thi~ time
;

focusing only on the valuation assertion. lt.should be obvious, . but this means that there are no
marks _for procedures that relate to ally other assertions.
Parts· (b) and (c) also cover-substantive procedures- in relation to research and development
expenditure and the sales tax liability respectively- but here no assertion is specified. This
makes these requirements easier. With all of the parts (a) to (c), you can approach the
question b!J reading the scenario with the requirements in mind, allowing the issues in the
situation to trigger your knowledge of procedures. which you can then tailor to this specific
question. ·
Part (d) featured a subsequent non-adjusting event. As long as you knew the material here
then part (i) should have been a nice source of marks, with part (ii) asking for yet more
procedures.

Easy-marks
Part (d) was likely to have been the easiest part of the question.

Examining team's comments

A key requirement of this part of the syllabus is an ability to describe 'relevant audit procedures
for a particular class of transactions or event. Overall performance in this key syllabus area in
this exam session was once again disappointing.
The June 2019 exam session contained a number of questions in this syllabus section covering
a variety of areas across both the statement of profit or loss and statement of financial
position, illustrating that candidates must be prepared to tailor their knowledge of substantive
testing to any area of the financial statements. In most cases candidates remain unable to
tailor their knowledge of general substantive procedures to the specific issues in th~ question
requirerT1ents, with many providing tests of contro~s- rather than substantive procedures, or
providing incorrect procedures, or concentrating on one type of test eg multiple examples of .
analytical review procedures. In particular, care must be taken to address the specifics of the
question; often the requirement is to describe substantive procedures to addressspecific
financial statement assertions, such as valuation, and any tests providedwhich do hot test this
assertion would not score any marks. For example, in this session a question asked-for
'substantive procedures in relation to the valuation of a con1pany's inventory'. Procedures
focused on attendance at the inventory count were therefore not awarded credit. It was also
particularly disappointing this session that relatively straightforward audit procedures, such as ·
in the audit of receivables, were not well answered.

Marks

(a) .Substantive procedures:...:- vqluation of inventory

Agree percentage completion recorded at inventor~ count to final inventory
re6o~s · -1
Confirm costs to invoice/timesheets 1
Inspect post year-end sales invoices for finished goods to assess NRV
Discuss basis of WIP valuation with rndnagernent
lnspectWIP valuation with sales prices less costs to complete
Review aged inventory reports arid discuss allowance
Discuss with management basis of valuotion for Crocus products

@aPP Answers · 327

 Inspect post year-end sales value of Crocus products
·Confirm adjustment regarding Crocus products
Maxfmu.m 6
(b) Substantive procedures- R&D expenditure
Obtain schedule, cast and agree to trial balonce 1 ·.
Review reasonableness of useful lives 1
Recalculate amortisation and confirm fn line with policy 1
Discuss with management treatment of costs for new products
Agree research costs expensed
For capitalised costs, confirm lAS 38 criteria met
Inspect budgets to confirm adequate resources to complete
Review disclosure and confirm in line with accounting standards
Maxim urn 4
(c) Substantive procedures - accrual for sales tax liability
Obtain schedule/return, cast and agree to trial balance
Recalculate sales tax in relation to sales and agree to return
Recalculate sales tax in ~elation to purchases and agree to return
Recalculate overall amount due to tax authority
Compare liability to prior year end, investigate differences
Confirm payment to post year-end bank ledger account and bank statements
Review correspondence with the tax authority for evidence of additional liability
Review disclosure and confirm in line with lAS 37
Maximum 4
(d) Subsequent event
Discussion of amendment 3
Audit procedures 3
Maximum 6
Total . 20
-~

(a) Inventory valuation

Obtain the breakdown of WIP and agree a sample of WIP assessed during the inventory
count to the WIP schedule, agreeing the percentage completion to that recorded at the
inventory count.
For a sample of inventory items (finished goods and WIP), obtain the relevant cost sheets
and agree row material costs to recent purchase invoices, labour costs to time sheets or
payroll records and confirm overheads allocated are of a production related nature;
Examine post year-end credft notes to determine whether there have been· returns which
couldsignif!:l that a write down is required.
Select a sample of year-end finished goads and cOmpare cost with post year-end sales
Invoices to ascertain if net realisable value (NRV) is above cost or if an adjustmel)t is
required ..
Discuss the basis
.
ofWIP valuation. with management and assess its reasonableness~
• Select a sample of items included in WIP at the year end and ascertain the final. unit cost
price by verifying costs to be incurred to completion to relevant supporting
_documentation. Compare to the unit sales price included in sales invoices post year-end
to assess NRV

328 Audit and Assurance @aPP

 ~ Review aged inventqry reports and idQntify any slow moving goods, discuss_ with
managemEmtwhy these itemshave not been written down_or ~:an atlowan_Se is required,
For the-d:efective batch of product Crocus, review board .. minutes ond disou.ss with
management their plans for selling these go6ds, and why they believe ~these goods have a
. NRV of $90,000.
If any Crocus products have been sold post year end, review the sales invoice to assess
NRV.
Agree the cost of $450,000for- product Crocus to supporting documeotation to confirm
the raw-material cost, labour cost and any overheads attributed to the cost.
· • -Confirm if the final adjustment for the damaged product is $360,000 ($450.000 -
- $90,000) and discuss with management if this adjustment has been made. lfso, follow
through the write down to confirm. ·
(b) Research and development
Obtain and cast a schedule of intangible assets, agree the closing balances to the general
ledger, trial balance and draft financial statements.
Discuss with the finance director the rationale for the four-year useful life and consider its
reasonableness.
Recalculate the amortisation charge for a sample of intangible assets which have
commenced production and confirm that it is in line with the amortisation policy of
straight line over four years and that amortisat.ion only commenced from the point of
production.
For the three new computing software projects, discuss with management the details of
each project along with the stage of development and whether it has been capitalised or
expensed.
For those expensed as research, agroe the costs incurred to invoices and supporting
documentation and to inclusion in profit or loss.
• - For those capitalised as development, agree costs incurred to invoices.
Confirm technicall[d feasible and intention to complete the project by discussion with
development managers or review of feasibility reports.
Review market research reports to confirm Hyacinth Co has the ability to sell the product
once complete and probable future economic benefits will arise.
Review the costs, projected revenue and cash flow budgets for the each of the- three .
projects to confirm Hyacinth _Co has adequate resources to complete the development
stage and that probable future economic benefits exist. Agree the budgets to supporting
documentation.
Review the disclosures for intangible assets in the draft financial statements to verify that
they are in accordance with lAS 38 Intangible Assets.
(c) Sales tax ·liability
Agree the year..;.end sales tax liabilitbl in the trial balance to the tax return/reconciliation
submitted to the tax authority and cost the return/reconciliation. · -·
• Agree the quarterly sales tax charged equates to 15% of the last quarter's sales as per the
sales day book. ··
• Recalculate the soles tax incurred as per the reconciliation is equal to.15% of the final
quarter's purchases ond expenses as per the purchase dog boo-k.
Recalculate the amount payable to the tax authority as being soles tox charged less sales
tax incurred.
Compare the yoar-end sales tax liability to the prior year balance or budget and
investigate any significant differences..
Agree the subsequent payment to the post year-end bank ledger ac~count and bank
statements to confirm completeness and that it has been paid in line with the terrns of the
tax authority.

@BPP _Answers 329

 Revie.w any current and post ye.ar-end correspondence with the tax authority to_assess
whether there are any additional outstanding payments due. If sof confirm they are
included in the yeo r-end liability;·
• . Review any disclosures made of the .sales tax liability to e·nsure t-hat it is shown as a
current liability and assess whether disclosures are in compiiance with accounting
standards and legislation.
(d) Subsequent event
A flood has occurred at the off-site warehouse and property, plantand equipment and
inventory valued at $0.7 .million have been damaged and now have no scrap value .. The
directors do not believe they are likely to be able to. claim on the company's insurance for the
.damaged assets. This event occurred after the reporting period and is not an event which
. provides evidenceof a condition at the year end and so this is a non-adjusting event.
The damaged assets of $0.7 _million are material as they represent 10.9% ($0.7rn/$6.4m) of
profit before tax and 3.0% ($0.7m/$23.2m) of total assets. As a material non-adjusting event,
the assets do not need to be written down to zero in this financial year. However, the directors
should consider including a disclosure note detailing the flood and the value of assets
impacted.
The following audit procedures should be applied to form a conclusion on any amendment:
Obtain a schedule showing the damaged property, plant and equipment and agree the
carrying amount to the non-current assets register to confirm the total value of affected
assets.
• Obtain a schedule of the water damaged inventory, visit the off-site warehouse and
physically inspect the impacted inventory. Confirm the quantity of goods present in the
warehouse to the schedule; agree the original cost to pre blear--end production costs.
Review the condition of other PPE and inventory to confirm all damaged assets identified.
Review the damaged property, plant and equipment and inventory and discuss with
management the basis for the zero scrap value assessment.
Discuss with management why thel:J do not believe that they are able to claim on their
insurance; if a claim were to be made, then only uninsured losses would require disclosure,
and this may be an immaterial amount.
Discuss with management whether they will disclose the effect of the flood, as a non-
adjusting event. in the year-end financial statements.

166 Sag_ittarii S Co

Course Book references

Chapters 14, 15, 17 and 20.

Top tips
This is a 20-mark question which tests substantive procedures relating to income, a
restructuring provision and bank loans,. together with the auditor's report.
Parts (a) to (c) were typical AA questions, asking for substantive procedures in relation to three
specific areas. You should base your answers here on the information.given in the scenario,.
. making use of your knowledge of audit procedures generally in order to generate ideas. Do
toke care to stick to the requirements, however, which ask for substantive procedures and not
tests of controls.
Part (d) moved the scenario onto the completion phase of the audit and the auditor's reportin
particular. This should have been a relatively simple question for you to answer, provided you
hod the requisite knowledge of the auditor's report. It is crucial to calculate materiality and to
make a judgement regarding the materiality of the issue. ·

330 Audit and Assurance @aPP

 Easy marks .
: There are sor:ne r~:latively easy tiJarks in part (~) for de$criblng the placement of the 'Bosis. for'
section in the auditor's report.Jhese are marks that are frequentl~rava!lobleon qu.estions of
th fs sort. • ' ..

Marks

(a) Substantive procequres for ir1come

1mark per w~ll-described procedure 5
Maximum 5
(b) Substantive procedures for restructuring provision
1 mark per well-described procedure up to a maximum of 5 marks 5
Maximum 5
(c) Substantive procedures for bank loans
1 mark per well-described procedure up to a maximum of 5 marks 5
Maximum 5
(d) Impact on auditor•s report
Discussion of issue
Materiality calculation and assessment
Type of modification required 2
Impact on auditor's report 1
Maximum 5
Total 20

(a) Substantive procedures for Vega Vista Co's income

Obtain a schedule of all Vega Vista Co's inco_me and cast to confirm corYlpleteness and
accuracy of thebalonce andagreetothe trial balance.
Compqre the Individual categories ofincome of festival ticket sales, sundry sales and.
donations against prior yea~s and investigate any significant differences.
For the annual festival. construct a proof.:-in-total calculation of the number of tickets sold,
approximately 15,000, multiplied by the ticket pri.ce of $35. Compare this to the income
recorded and discuss any significant differences with management.
For tickets sold oo the day of the festival reconcile from ticket stubs the number of tickets
sold rnvltiplied by $35 and agree these sales to ;ash banked in the bank statemet")t.
• · Discuss with management their procedures for ensuring advance ticket sales for the
• . September 20X5 festival are excluded from income and instead recognised as deferred
income in the statement offinancial position.
Select a sample of advance ticket sales made online, agreethat the transaction has been
exciLlded frorh
.
current year income
. and 'follow throi,Jgh to inClusion in deferred income. '

Agree journal entry to transfer prior- year deferred income relating to the 20Xlt festival. to .
currentyear income to the ledger and agree_figu_res to prior year financial statements.
• . For sundry sales, obtain a breakdown of the income received per stall and agree to ·
supporting doci,Jrnenlotion provided by each stall holder. Recalculate the fixed percentage
received is as per the agreement/c_ontract n1ade with Vega. Vista Co.
Corn pare sundry sales perstall holder to prior year sales qptq_and investigate any:
significant differences.·

@BPP Answers 331

 For morithly donations~ trace a sample gf donations from sign up documentation to the
barik statements. cash book and inc()me listing to ensure that they are recorded
qompletely and accurately.
Fo"r a sample of n~w donors in the year, agree the monthly .sum and start date from their
-completed forms and trace to the montnly donations received account and agree to the
cash book and bank statements.
(b) Substantive procedures for ~anopus (;ds restructuring provision
Cast the breakdown of the restructuring provision to ensure it is correctly calculated and
agree the total to the trial balance.
Review the board minutes where the decision to-restructure the production prOt;::ess was
taken and confirm the decision was made in March 20X5.
Review the announcement to shareholders and employees in late March, t6 confirm that
this was announced before the year end.
Obtain a breakdown of the restn:.Jcturing provision and confirm that only direct
expenditure relating to the restructuring is included.
Review the expenditure to confirm that there are no retraining costs of existing staff
included.
For the costs included within the provision. including acquisitions of plant and machinery,
agree to supporting documentation~ such as purchase invoices. to confirm validity and
value of items included.
Review post year end payments/invoices relating to the expenditure and compare the
actual costs incurred to the amounts provided to assess whether the amount of the
provision is reasonable.
Obtain a written representation confirming management discussions in relation to the
announcement of the restructuring and to confirm the completeness of the provision.
Review the adequacy of the disclosures of the restructuring provision in the financial
statements and assess whether these are in accordance with lAS® 37 Provisions,
Contingent Liabilities and Contingent Assets.
(c) Substantive procedures for Conopus Co's bank foans
Obtain a schedule of opening and closing loans detailing any changes during the year.
Cast the schE)dule to confirm its accuracy and agree the closing balances to the trial
balance and draft financial statements.
For the new loan taken out in the year, review the loan agreement to confirm the amount
borrowed, the repayment terms and the interest rate applicable. ·
For the new loan taken out in the year, agree the loan proceeds of $4.8 million per the loan
agreement to the cash book and bank statements.
For loans repaid, agree the final settlement amount per bank correspondence to
pa!::Jments out during the year in the cash book and bank statements.
Agree the quarterly repayment of the new loan of$150,000 paid on 31 March 20X5 to the
cash book and bank statement.
Recalculate the split of the loan repayment made on 31 March 20X5 between interest and
principal, recalculate interest and agree to inctusionin statement ofprofit or loss. and
outstanding loan balance reduced by principql amount repaid.
Review the bank correspondence and loan. agree-ments for confirmation of any early
settlement charges incurred on the loans repaid. Agree that these were charged to the
statement of profit or loss as a finance charge.
Obtain direct confirmation at the year-end from the loan provider of the outstanding
balances- and any security provided. Agreeconfirmed amounts to the loans schedule.
Review all loan agreements for details of covenants and recalculate all covenants to
identify any potential or actual breaches. ·

· . 332 Audit and Assurance @aPP

 Review the disclosure of non-current liabitities in the draft financial statements, including
any s~curity provided and a~sesswhether these or~ in accordance\,'Yith accountinft
-standards and local legislation. Additionally; confirm tha~f the spJit ofcurcent and non·
current loans in the financiai stat~m,entsjs correct.
(d) Impact on Auditor's report
-The restructuring provision of $2.1 ,million includes $270,000 of costs which do not meet the
criteria for inclusion as per lAS 37 Provisions, Contingent Liabilities and Contingent Assets.
Hence by including this amount the provision and expenses for this year dre overstated and
profits understated.
The e~ror is material as it represents 2~3% of total equity and liabilities/ total assets
(0.27m/11.6m) and hen~e the finance director should odjust the financial statements b\:j
removing this cost from the provision and instead expensing it t9 profit or:lciss as it is ineurred.
The argument that the provision is judgemental and has been deemed reasonable by the
board is not valid. lAS 37 has strict criteria for what can and cannot be included within a
restructuring provision. For example, training costs for existing staff must be specifically
·excluded.
If the finance director refuses to amendthiserror the audit opinion will be modified due to a
material misstatement. As managernenthas not complied with lAS 37 and the error is material·
but not pervasive, a qualified opinion would be appropriate.
A basis for qualified opinion paragraph would be included after the opinion paragraph and
would explain the material misstatement in relation to the incorrect treatment of the
restructuring provision and the effecton the financial statements. The opinion paragraph
would be qualified 'except for,.

167 Encore

Course Book references

Chapters 12, 14, 19 and 20.

Top tips
-Parts (a)-(c) required the application of knowledge to three areas. It is important to ~ote that
you are being asked to 'describe' procedures rather than 'list them' so you need to include
enough detail on each to obtain a full mark. Remember to stay focused on the procedures and
avoid being tempted to engage in a discu~sion of accounting-issues here.
Part (d) moved the scenario on in time in order to look at the-auditor's report. T~is. should have
a nice way to end the question, so it was crucial that you had stuck to your timings otherwise·
you may have missed out on some easy mprks here.

Easy marks
These are available in part (d) for describing the elements of the auditor's report that may
require modification. ·

Marks

(a) Substantive procedures for vehicle additions and disposals

1 mark per well..,described procedure up to a maximum-of 6 marks 6
Maximum 6
(b) Substantive procedures forvaluation of trade receivables
1 mark per well-described procedure-up to a maximum of 5 marks- 5
Maximum 5
(c) Substantive procedures for breach of regulations

@BPP Answers 333

 Marks

1 mork per well-descrl~ed procedure up to a maximum of 4 marks

Maximum
(d) Impact on auditor's r~port
Discussion of issue
Materiality cOiculationand assessment
Type of modification required 2
Impact on auditor's report 1
Maximum 5
Total 20

(a) Vehicles additions and disposals

Cast the schedule of additions to vehicles, cast it and agree the total to the disclosure
note for property, plant and equipment. Agree the cost of th~ vehicles given in part-
exchange to the disclosure note to confirm that they have been removed from cost carried
forward.
For a sample of new vehicles on the schedule of additiot1s agree the cost to the purchase
invoice, ensuring that the recorded cost includes the cash amount paid plus the trade-in
allowance for the old vehicle. Confirm that the invoice is made out to Encore Co.
Physically inspect a sample of additions, confirming that the registration number of the
yehicle agrees to that on the non-current assets register.
Review the non-current assets register to confirm that the 20 old vehicles were removed
and that the 20 new vehicles were included.
Recalculate the loss on disposal of $1.1m ($i.8- ($4.6m- $3.9m) and agree to the trial
balance and statement of profit or loss.
Agree the cash payment of $3.9 million to the cash book and bank statement.
Recalculate the depreciation expense, confirming that the depreCiation expense was
based on the old vehicles unti11 February and on the cost of the new vehicles after thot
date.
Recalculate accumulated depreciation on the vehicles disposed of and confirm that this
has been removed from accumwlated depreciation carried forward.
In light of the loss on disposal, review depreciation rates dh existing vehicles to establish if
the carrying amount of other vehicles may be overstated.
Discuss with management Encore Co's history of vehicle replacement'to establish if
vehicles are being used for the entire period of their estin1oted useful life.
Discuss with management wh!:J trade-in allowances were so much lower than the carrying
amounts of the vehicles to provide further evidence as to whether depreciation policies are
reasonable. ·
Review the notes to the financial statements to ensure that disclosure of the additions and
disposal$ is in accordance with lAS 16 Property, Plant and Equipment.
(b) Valuation oftrade receivables
Review the aged receivables listing to identify slow moving or old balances. Discuss the
status of .these balances with the credit controller to assess whether the customers are
likei!:J to pay or if an allowance for receivables is r~quired.
Review whether there are any after-date cash receipts for slow moving/old receivable
balances.

331t Audit and Assurance @BPP

I

- - - - - .. - .
Review correspondence with customers in order to identify any balances whicli are in
dispute or unlikely to be paid am;l discuss with management. whether any allowance is.-·
. required. .
·-Review board minutes to identify whether· there areany sign"ificant concerns:in relatiOn h; ""
outstanding receivable~ balances an~ assess whether the allowance is reasonable.
·Obtain a breakdown of the allowanc~ for trade receivables. Recalculate itat1d compare it.
to any potentially Irrecoverable balances to assess if the allowance is ac:lequate; .
Review the payment history for evidence of slow paying by any customers who·we·r:_G~
granted credit in the period when there was no credit controller and who may not,
therefore, have been properl!:J scrutinised.
Discuss with the finance director the rationale fo-r maintaining the allowance at the same
level in light ofthe increase in the receivables collection period and the absence of a credit
controller.
Inspect post year-end sales returns/credit notes and consider whether an additional
allowance against receivables is required.
(c) Potential breach of regulations
Review correspondence with the transport authority to establish details of ·the complaint
clhd the number of times the breach has allegedly occurred.
Enquire of the directors wh!d they are unwilling to provide or make disclosure~ whether they
accept that any breaches took place but believe that the effect is .immateria I or whether
the!:J dispute their occurrence.
Review Encore Co's policies and procedures to record driving hours and rest periods and
compare to the regulations to determine the likelihood that breaches have occurredand
how frequenti!:J. ·
Review correspondence with the transport authority to establish if there have been
discussions about other instances of potential non-compliance.
Review correspondence with Encore Co's legal advisers or, with the client's permission~
contact the lawyers to establish their assessment of the likelihood of the breach being
proven qnd any fines that would be payable.
·Review the board minutes to ascertain management's view as to the likelihood of payment
to the transport authorit!:J.
• Obtain a written representation to the effect that the directors are not aware of any other.
breaches oflaws orr?gulations that would require a provision or disclosure in the finqncial
statements.
Inspect the post year.,.end cash book and bank statements to identify whether any fines
have been paid. .
(d) Auditor's report
The breaches in regulation$ and the initial investigation into the breaches occurred before the
year end. The announcement by the authorities that the!:J are taking legal action: provides
further evidence regarding these conditions which existed at the year-end date therefore lAS
10 Events after the Reporting Period would classif!d this as an adjusting subsequent event. As
·it seems probable that the fine will be po!:Jable, a provision must be included rather than
merely the disclosure. Failure·to make s~ch a provision will cause profits to be overstated and
prqvisionsto be understated ..
. Tho potential fine of$850,000 (1.7 x $50,000) is 16% ($850k/$5.3m) of profit before tax dnd
2.1% ($850k/$L+0.1m) of total assets. It is therefore material.
If the directors refuse to make a provision* then Velo & Co should issue a modified opinion on
the grounds that there Js a material misstatement of profit and liabilities. As this is material
.. but not pervasive a qualified opinio_n would be appropriate.

@BPP Answers 335

 A basfs for qualified opinion pore graph would be included after the opinion paragraph. This
would explain the material-misl;ltaternent in relatio-n to the non-recognition of the· provision
and the effect on the financial stotements. The opinion paragraph would be qualified 'except
for'.

168 Gooseberry Co

Course Book references

Chapters 12, 17 and 20.

Top tips
This question tests audit evidence in relation to different t!Jpes of non-current assets, and then
llnks in with auditor reporting. ·
Part (a) is on development costs and lAS 38 Intangible assets. This is a standard that you wfll
need to be familiar with, but this is a difficult requirement at AA level. Most of the audit
procedures come from the financial reporting, so you can use this to help generate !JOUr
answers.
For part (b), you can use the scenario as a starting point for your description of the
procedures to perform to determine whether the depreciation charge is fairly stated.
Part (c) was another detailed requirement on audit evidence, and should be approached by
thinking practically about how these bonuses should have been processed, and then
considering how you would test them. The bonuses have been awarded to the directors and so
these amounts would be material by their nature. Furthermore the scenario tells you that
disclosure is required by local legislation and so it is important that your substantive
procedures include reviewing whether the required disclosures have been made.
Part (d) probably came as a relief. This is a familiar requirement on the auditor's report and
should have been within your reach.

Easy marks
Part (d) was likely to have been the easiest part ofthe question; the marks for materiality were
amon£-J the simplest to obtain.

Examining team's comments

This 20-mark question was based on Gooseberry Co, a company which develops an.d
manufoctures health and beaut!:J products and distributes these to wholesale customers. This
question tested candidates' knowledge ofsubstantive procedures for research and
developrnent, depreciation and director's' bonuses, and, auditor's reports.
Part (a) for five marks required candidates to describe substantive procedures the aud!tor
should perform to obtain sufficient and appropriate audit evidence in relation to Gooseberry's
r~seorch and development expenditure. Performance on this requirement was mixed.

·One mark was awarded for each well described substantive procedure. Hence for a five mark
requirernent, candidates should have provided at least five substantive procedures.
Disappointingly this was not the case, as some answers only contained one or two procedures
for each area and these were often not well described. resulting in a maximum of% mark each.
Candidates are severely limiting the opportunity to score marks and are reminded to ensure-
that the!:J employ effective exam technique.
ManbJ procedures were vague, often not giving the source for the test, or, stating 'ensure'-
. without explaining how the test would achieve this.
Part (b) for· five marks required the candidates to describe substantive procedures- the auditor
should perform to obtain sufficient and appropriate audit evidence in relation to depreciation.
Performance on this requirement was disappointing .
. As in part (a), one mark was awarded for each well described substantive procedure.-
Disappointingly often the substantive procedures were either not well described or were not
related to depreciation. A significant number of candidates did not clearly answer the specific
requirement of the question to describe depreciation substantive procedures.

336 Audit and Assurance @BPP

 In general there was clear evidence of a lack of tailoring of knowledge to the specific scenario
provided. Candidates have dearly learned that the depreciation charge should becompared
to-the prior year. However~ tl:lis substantive procedure is not relevantifthere is a change in the
useful life of the assets in the year.qs yvas detailed in this scenario~·As addressed in previous -·
examining team's repprts candidates must strive to understand substantive procedures.
Learning a generic list of tests will not translate to.exam success) as they must be applied to.
the question requirement. · · .
Part (c) for five marks required the candidates to describe substantive procedures the auditor
should perform to obtain sufficient and appropriate audit evidence in relation to the directors'
bonuses. Performance on this requirement for many candido!es was pleasing.·
Part (d) for five marks required a discussion of an issue and the impact on the auditor's report·
·if the issue remained unresolved. The issue presented related to $440)000 of development
costs which had been incorrectly capitalised by the client.
Auditorts report questioils have shown a gradual improvement in recent exams so it is
disappointing that performance for this question was mixed.
A number of candidates described the impact on the auditor's report if the issue was resolved
and also if the issue remained unresolved. The question clearly asked for the impact if the issue
remained unresolved. Once again, candidates are advised to read the question requirements
careful!~.

Marks

(a) Substantive procedures- Research S development

Cast and agree closing balance to TB and draft FS
Discuss amortisation policy with management and assess reasonableness
Recalculate amortisation charge/commenced in line with production
Discuss new projects and stage of development
For research costs agree invoices and to profit or loss
For development costs agree to invoices and cof}firm meets criteria
Review market research to confirm ability to sell
Review disclosures in line with lAS 38
Maximum 5
(b) Substantive procedures ~depreciation
Discuss reasons forchange with management
Compare to industry averages and knowledge of business
Review capex budgets to assess revised lives appropriate
Agree new rates to non-current asset reglster
Recalculate profit/loss on disposal and consider new rates
Recalculate depreciation charge for a sample of assets
Perform a proof-in-totaton depreciation charge
Review disclosure is in line with lAS 16
Maximum
(c) Substantive procedures- directors' bonuses
Cast schedule of bonuses and agree to TB
Confirm bonus - accrual as current
.
liability
Agree bonus pa~ments to payroll records
Recalculate bonus paurnents in line with contracts
Confirm post year-··end payment to bank statement

@BPP Answers 337

 Marks

Review board minutes for additional sums

Obtain ·written representation confirming completeness
Review disclosures in line with local legislation
Maximum 5
(d) Impact on auditor's report.
Discu~sion of issue
Materiality calculation and conclusion
Type of modification required 2
Impact on auditor's report
Maximum 5
Total 20

(a) Substantive procedures for research and development

Obtain and cast a schedule of intangible assets, detailing opening balances, amounts
capitalised in the current year, amortisation and closing balances.
Agree the closing balances to the general ledger, trial balance and draft financial
statements.
Discuss with the finance director the rationale for the three-year useful life and consider
its reasonableness.
Recalculate the amortisation charge for a sample of intangible assets which have
commenced production and confirm it is in line with the amortisation polic!:J of straight line
over three years and that amortisation only commenced from the point of production.
For the nine new projects, d.iscuss with managemeAt the details of each project along with
the stage of development and whether it has been capitalised or expensed.
For those expensed as research, agree the costs incurred to invoices and supporting
documentation and to inclusion in profit or loss. ·
For those capitalised as development. agree costs· incurred to invoices and confirm
technicaii!:J feasible by discussion with development managers or review of feasibility
reports.
Review market research reports to confirm Gooseberry Co has the ability to sell the
product once complete and probable future economic benefits will arise.
Review the disclosures for intangible assets in the draft financial statements to verif~:J that ·
they are in accordance with lAS 38 lritangib/e Assets.
(b) Substantive procedures for depreciaticm
Discuss with management the rationale for the changes to property, plant and equipment
(PPE) depreciation rates, useful lives, residual values and depreciation methods and
ascertain how these changes were arrived at..
. Confirm the reasonableness of these changes, by ·comparing the revised depreciation
rates, useful lives and methods applied to PPE to industry averages and knowledge of the
business.
Review the capital expenditure budgets for the next few years to assess whether the
revised asset lives correspond with the planned period until·replacement of the relevant
asset categories.
Review the non-current asset register· to assess ifthe revised depreciation rates have been
applied.

338 Audit and Assurance @BPP

 . . .
.

-._ Review and recalcula~_-profits and losse$ o~ disposal of assets s_old/sQrapped in ~he year,
to assess the_Teasoncib~e_l}ess of the-revised depreciatio~_rates.- _ _
~Select a ~omple·ot" PPE and recalculate the depreciatior}charg·e to eps_ure that~he non:---
. current d$Sets register is correct ~nd ensure that new depreciation rates hove been
appropriq~ellJ applied. ·
• - Obtain a breakdown of depreciation by asset' categories, compare to prtorye~ar; where
.significant changes have occurred, discuss with r),onagement and asses's ·whether this
change is reasonable. '
· For asset categories where there have be_en a minimal number of additions and disposals,
perforrn a proof in total calculation for the depreciation charged on PPE, discuss with
mc:u1agement if significant fluctuations arise.
Review the disclosure of the depreciation charges and policies in the draft financial
statements and ensure it is in line with lAS 16 Property, Plant and Equipment.
(c) Substantive procedures fo~ directors' bonuses
Obtain a schedule of the directors' bonus paid in February 20X8 and cast the schedule to
ensure accuracy and agree amount disclosed in the financial statements.
Review the schedule of current liabilities and confirm the bonus accrual is included as a
year-end liability.
• Agree the individual bonus payments to the payroll records.
Recalculate the bonus payments and agree the criteria. including the exclusion of
intangible assets, to supporting documentation and the percentage rates to be paid to the
directors' service contracts.
• Confirm the amount of each bonus paid post year end by agreeing to the cash book and
bank statements.
• Agree the amounts paid per director to board minutes to ensure the sums included in the
current year financial statements are fully accrued and disclosed.
Review the board minutes to··identify whether any additional payments relating to this
uear have been agreed for any directors.
Obtain a written representation from management confirming the completeness of
directors' remuneration including the bonus.
Review the-disclosures made regarding the bonus paid to directors and assess whether
these are in compliance with local legislation~ - ·
(d) hnpoct on auditor's report·
One of the new health and beauty products Gooseberry Co has developed in the year doe!:!
not meet the recognition criteria under lAS 38 Intangible Assets for capitalisation but has
been included within intangible assets. This is contrary to lAS 38, as if the criterH:l are not met.
then this project is research expenditure and should be expensed to the statement of profit or
loss rather tho n co pita Used. - ·
·The error is material as it represents 6.9% of profit before tax (0.44m/6.4m) and t2% of net
assets (0.44m/37.2m) and hence management should adjust the financial statements b~
removing this amount from .intangible assets and charging it to the statement of profit or loss·
insteacJ. lAS 38 requires costs to date to be expensed; if the. project meets the recognition
criteria -in 20X9, then only from that point can an!:J new costs incurred be capitalised. Anu
costs already expensed 'cannot be-written back to assets: . .. .
If managen1ent refuses to·amend this error, then the auditor's opinion will need to be
modified. As management has not complied with IAS38 and the error is material but not
pervasive, then a qualified opinion would be necessary.
A basis for qualified opinionpa.rograph would be needed after the opinion paragroph and
would exploin the material misstatement in relcrtion to the incorrect treatment ofresearch and
development and tho effect on the financial statements. The opinion paragraph would be
qualified 'except for'.

@sPP Answers 339

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·169 Spadefish

Course Book references

Chapters 14, 19 and 20.

Top tips
Parts (a) and (b) of this question deal with the trade receivables circularisation.
In relation to part (b), your answer here will likely be made up of general procedures that you
have tailored to the specific circumstances of the scenario. The difference between passing
and failing questions of this nature is often the way that you write your answer- you need to
be as clear as possible about exactly what procedure should be performed, and why it should
be performed. Saying 'why' is a theme in the AA exam.
Part (c) deals with going concern indicators. The scenario here is not very long; so the
Indicators should hove been relatively straightforward to identify, making the three available
marks easy to get.
Part {d) asks for going concern procedures, which will involve pre-learned areas of focus but
again, these should be applied to the question. This need not be a source of diffic:ulty- the
scenario here contains a few hints at going concern difficulties, which in turn suggest areas of
testing.

Easy marks
Part (c) was likely to have been the easiest part of the question.

Marks

(a) Audit procedures -Trade receivables circularisation

Albacore Co 3
Flounder Co 3
Menhaden Co 3
Maximum 8
(b) Substantive procedures - Allowance for trade receivables
Discuss the rationale and reasonableness with the finance director
Obtain breakdown of opening allowance and confirm recovered
Inspect the aged receivables listing and discuss old or slow moving balances
Perform cash after-date testing on identified slow moving and old . balances
Review customer correspondence for evidence of disputed balances 1.
Inspect board minutes for ba,lances whiCh may not be recovered 1
Recalculate potential level of irrecoverable balance and compare to allowance
and discuss differences 1·
Maximum
(c) Going concern· indicators
·Withdrawal of credit - impact explained
Loss of main supplier- impact explained
Overdraft facility due for renewal- impact explained

31f0 Audit and Assurance

 Marks

No final dividend - impact explained

- Maximurn
(d) Going concern procedures ·
Obtain cash flow forecast and assess assumptions
Perform sensitivity analysis on cosh flow forecast
Evaluate management's plans for future actions
Review post year-end order book to assess levels oftrade -
Review agreements with the bank to determine whether any covenants
breached 1.
Review bank correspondence for evidence of renewal 1
Review correspondence with suppliers for dispute/legal action 1
Inspect contracts with supplier to confirm supply
Obtain confirmation from company lawyers about any legal action
Review post year-end board minutes for any indications of financidl difficulties
Review management accounts to assess if in line with cosh flow
Review financia I statement disclosure
Consider if going concern basis is appropriate
Obtain a written representation
Maximum .5

Total 20

(o) Exceptions in the receivables circularisation

Th.e following steps shou)d be undertaken rn regard to the exceptioi1s arising in the positive
receivables circulorisation:
Albacore Co
For the non-response from Albacore Co, with the client's permission, the team should
arrange· to ·send afollow...:up clrcularisation.
If Albacore Co does not respond to the follow up, then with the client's permission. the
auditor should telephone the customer and ask whether they are able to respond in
writing to the circularisation request.
If there is still no response, then the auditor should undertake altc~rnative procedures to
confirm the balance owing from Albacore Co. Such as detailed testing of the balance by
agreeirig to sales invoices and goods dispatched notes (GDN). . ··
:,:~

Flounder Co
For the response from Flounder Co, with a difference qf $5,850 the auditor should idrmtify
dny disputed amounts, and identify whether these relate to timing differences or-whether
there are possiblE;} errors in the records of Trigger. ·
If the difference is due to timing) such as cash in trcmsit, this should be agreed to post
year-end cash receipts in tho cash book.

1:
E.
If the difference relates to goods in transit, then this should be· agreed to a pre year-end
GDN.
Menhaden:co
The reason for the credit balance with Menhaden should be discussed with the credit
e: controller of-finance department to understand how a credit balance has arisen.

{i
@BPP Answers 3'+1

~·
 • Review t~e payables ledger to identify if Menhaden is a supplier as well as a c~ustomer; if
so, a purchase Lnvoice may have beeri posted in error to the receivables rather than .
payables ledger.
• -If the difference is due to credit notes, this should be agreed to pre year-end credit notes
dispatched around the year-end date. .
• The receivables. ledger should be reviewE?d to identify any possible mis-postings·as this
could be a reason for the difference with Menhaden Co.
(b) Substantive. procedures for allowance for trade receivables
• Discuss with the finance director the rationale for not providing against receivables and
consider the reosonablemess of the allowance.
• Obtain a breakdown of the opening allowance of $125,000 and consider if the receivables
provided for in the prior b:jear have been fully recovered as a result of the additional credit
· control procedures or if they have now been fully written off.
• Inspect the aged trade receivables ledger to identify any slow moving or old receivable
balances and discuss the status of these balances with the credit controllers to assess
whether they are likely to be received.
• Review whether there are any after any after-date cash receipts for identified slow
moving/old receivables balances.
• Review customer correspondence to identify any balances which are in dispute or are
unlikely to be paid and confirm if these have been considered when determining the
allowance.
• Inspect board minutes to identif~ whether there are any significant concerns in relation to
pa~ments by customers and assess if these have been considered when determining the
allowance.
• Recalculate the potential level of trade receivables which are not recoverable and
compare to allowance and discuss differences with management.
(c) Going concern indicators _
Marlin Co has paid some of its suppliers considarably later than usual and only after many
reminders; hence some of them have withdrawn credit terms meaning the company must pab:j
cash on delivery. This suggests that the compan~ was struggling to meet their liability as
they fell due and will also put significant additional pressure on the. company's cash flow,
because the company will have to pay for goods on delivery but is likely to have to wait for
cash from its receivables due to credit terms.
Marlin Co's main supplier who provides over 60% of the company's specialist equipment has
just stopped trading. lf.the equipment is highly specialised, there is a risk that Marlin Co rna~
not be able to obtain these products from other suppliers which would impact on the
con_1pany's abilit!::J to trade. More likely, there are other suppliers available but theb:l may be
more expensive or-may not offer favourable credit terms which will increase the outflows of
Marlin Co and worsen the cash flow position;
Marli"n Co's overdraft has grown significantly during the ~ear and is for renewal within the
next month. If the bank does not renew the overdraft and the company is unable to obtain
alternative finance, then it may not be able to continue to meet its liabiHties as they fall due,
especially if suppliers continue to demand cash on delivery, .and the company may not be
· able to continue to trade.
a
In order to conserve cash, Marlin Co has decided not to pay final dividend for the year
ended 30 Apri120X5. This may result in shareholders losing faith in the company and they
may attempt to sell their shares; in addition. they are hjghly unlikely to invest further equity
and Marlin Co may need to raise finance to repay their overdraft. ·
(d) Going concern procedures
• Obtain the company's cash flow forecast and. review the cash in and outflows. Assess the
assumptions for reasonableness and discuss the findings with management to understand
if the company will have sufficient cash flows.

31t2 Audit and Assurance @aPP

 ·• Perform a sensitivity al)alysls on the cash flows to understand the margin of safety the·
·company has in terms of its net cash in/outflow. ·
Evaluate management's plans for future action~, inq.luding thetr contingencbJ plans in
relation to ongoing financing and plcins.for generating revenue. and·consider the ..
feasibility of these plans. ·
Review the company's post blear-end s~l~s anq order book to ass~ss if the levels of trade
. are. likely to increase andifthe revenue figures in the cash flowforecast are reasonable.
Review a·ny agreements with .the bank to determine whether any covenants have been
.breached. especially in relation to the overdraft;
• Review any bank correspondence to assess the likelihood of the bank renewing the
overdraft facility .
.Review post year-end correspondence with suppliers to identify if an·y have thre.atened
legal action or any others have refused to supply goods.
Inspect any contracts or correspondence with suppliers to confirm supply of the
company's specialist equipment. If no new supplier has been confirmed, discuss with
management their plans to ensure the company can continue to meet customer demand.
Enquire of the lawyers of Marlin Co as to the existence of an!:Jiitigotion. ·
Perform audit tests in relation to subsequent events to identify any items which might
indicate or mitigate the risk of going concern not being appropriate;
Review the post year-end board minutes to identify any other issues which might indicate
fur the company.
Review post year-end management accounts to assess if in line with cash flow forecast.
Consider whether any additional disclosures as .required by lAS 1Presentation of Financial
Statements in relation to material uncertainties over going concern should be made in the
financial statements.
Consider whether the going concern basis is ar:>propriate for the preparation of the
financial statements.
• Obtain a written representation confirming the directors 1 view that Marlin Co is a going
concern .

. 170 Danube Co

Course Book references

Chapters 12, ~4, 17 and 20.

Top tips
This is ct20-mark question focusing on substantive procedures and auditor reporting.
Parts (a) to (c) require you to read the scenario carefully and. tailor your substantive
procedures. You do need to know the general procedures in each area, but in order to pass the
question you will need to think about the specifics of the scenario.
In part (b) there are five marks on offer~ and it was not entirely obvious how these would be
split between the two parts. In fact tho marking scheme does not distinguish part (i) from part
(ii), so you need just to make sure that ~JOU don,t spend more than your tirne allocation on part.
(b) as a whole) and structure your. answer clearly using subheadings where you can.

Easy marks
-The marks for the drafting of the KAMsection of the auditor~s· report should have been
relatively easy.

@aPP Answers 3"+3

 Marks

(a) Substantive procedures for land and buildings

1 mark per weiF-descdbed procedure up too maximum of6 marks. 6
Maxim urn 6
(b) Procedures for exceptions in.the trade receivables circularisation
Nile Co 2
Congo Co 2
Maximum 4
(c) Substantive procedures for provision and receivable arising from the sale of
defective goods
1 mark per well-described procedure up to a maximum of 5 marks 5
Maximum 5
(d) (i) Factors - Key Audit Matters
Matter communicated to those charged with governance
Assessment of risk
Areas of judgement
Effect on audit
Maximum 3
(ii) Content - Key Audit Matters
Description of issue
Why determined KAM
How addressed in audit
Maximum
Total

(a) land and buildings

• Obtain a schedule of all land and buildings, cast and agree to the-trial balance and
financial statements.
• Consider the competence and capability of the valuer, by assessing through enquirl:J their
qualification. membership of a professional bod!:J and experience in valuing these types of
assets.
• Review the assumptions and method adopted by the valuer in undertaking the revaluation
to confirm the reasonableness and compliance with principles of lAS 16.
• Agree the schedule of revalued land and buildings to the vatuation statement provided by
the valuer and to the non-current assets register.
• Agree .alllan_d and buildings on the non-current assets register to the valuation report to
ensure completeness of the land and buildings valued to ensure all assets in the same
categor!J have been revalued in line with lAS 16.
Recalculate the total revaluation adjustment and agree correctly recorded in the
revaluation surplus.
• Recalculate the depreciation charge for the gear and confirm that for assets revalued at
July 20X4. the depreciation was based on cost before the revaluation and based on the
valuation after on a pro rata basis.
• For a sample of land and buildings from the non-current assets register~ physically verify
to confirm existence. ·
• For a sample of land and buildings trace back to the non-current assets register and
general ledger to confirm completeness.

3Ltlt Audit and Assurance @aPP

 . - - .

Review the financial statements disclosures relating to-londand buildings to ensu~e they
comply with lAS 16.. . ,. ·
. - - .
(b) · Ex~eptions in the tra~e receivables circularisO,tion
Nile Co
. .

For the non-response from Nile Co, with the·_client's penpission, the team should arrange
to send a-follow-up confirmation req_uest. _ ___
• _ If Nile Co does not respOnd to the follow up, then With the client's permission,the auditor
should telephone the customerand ask-wheth¢r thebl are able to respond in writing to the
confirmation request.
If there is still no response, then the auditor s-hould undertake alternative procedures to
confirm the bola nee owing from Nile Co. These would inClude detailed testing of the ·
balance bbJ a review of after date cash receipts and agreeing to sales invoices and goods
dispatched notes (GDN).
Congo Co
For the response from Congo Co the auditor should investigate the difierence of $14t132,
and identifbl whether this relates to timing differences or whether there are possible errors
in the records of Danube Co.
If the difference is due to timing, such as cash in transit, details of the difference should
be agreed to post blear-end cash receipts in the cash book.
If the difference relates to goods in transit, then details should be agreed to a pre year-
end GDN.
The receivables ledger should be reviewed to identify anbJ possible mis-postings as this
could be a reason for the difference with Congo Co.
(c) Provision and receivable arising from the sale of defective 9oods
Review the correspondence with Kalama Kids Co-and establish the details of the claim to
assess whether a present obligation as a result of a past event has occurred.
Review correspondence with Tf1ames Co, the supplier of the hoverboards, to assess
whether the\:j accept liability for the defect.
Review correspondence with Danube Co's legal advisers or, with the client's permission,
contact the legal advisers to obtain their view as to the probabilitbl of either the legal claim-
from the customer and the request for reimbursement from the supplier being successful
as well as any likely amounts to be paid or received.
Discuss with management/enquire of the legal adviser as to whether anbl other customers
of Danube Co have experienced problems with sales of hoverboards and therefore the-
likelihood of any potential future claims.
Review board minutes to establish whether the directors believe that either claim will be
successful or not.
Review the post year-end cash book to assess whether any payments have been made to
the customer or cash received from the supplier and compare with the amounts
recognised in the financial statements.
·Discuss with management wh\d they have included a receivetble.for the claim against-the
·_ supplieras this is possibly a contingent osset and should only be recogr1ised as an asset if
the receipt of cash is virtually certain. Consider the reasonableness of the proposed
treatr'nent- -
Obtain-a written representation con-firming rnanagemenfs view that the .lawsuit by
Kalama Kids Co is likely to be successful and the claim agoinst Thames Co is virtuallbl
certain and hence a provision and a receivable are required to be included.
Review the adequac!::J of tho disclosures of the lawsuit and supplier claim ln the draft
finaricial stat€rnents to ensure they are in accordance with lAS 37.

@aPP Answers 3Lt5

 (d) Key augit matters
(i) Factors to consider
· As Danube Co Is listed,. a Key Audit Matters (KAM) sectionwill be required in the auditor's
report. The audit partner would_ have considered whether the matter was communicated
to those charged with governanQe gs KAM are selected from matters communicated with.
those charged with governance. The audit partner would also have c.orisidered wheth~r
the issue relating to the claims was an area of higher assessed risk of material
misstatement or a significant risk and as it is an accounting estimate the level of
judgement involved. The audit partner will have also considered whether, in their
professional judgement, the matters regarding the claim and counterclaim were of most
significance in the audit of Danube Co's financial statements for the year ended 31
. March 20X5 therefore requiring significant auditor attention.
(ii) Contents of KAM section
The KAM section of the auditor's report should provide a description of the issue. It
should detail why this issue was considered to be an area of most significance in the
audit and therefore determined to be a KAM. It would include·a reference to the audit risk
of completeness of the provision and recognition of the receivable and the level of
judgement re-quired in making this assessment. It should also explain how the matter was
addressed in the audit and the auditor should provide a brief overview of the audit
procedures adopted as well as making a reference to any related disclosures.

171 Spinach Co

Course Book references

Chapters 13, 14, 17 and 20.

Top tips
This is a 20-mark question covering substantive procedures and auditor reporting.
Parts (a) to (c) all ask for audit procedures but note that (a) and (c) ask specifically for
substantive procedures. Dodt Just list general procedures but instead consider which
procedures are relevant having carefully read the scenario. In (b) address procedures both
before and durin.g the cou-nt but not after it at the final audit Always pay special attention to
words in capitals In the requirements. ·
In part (d) for 5 marks you can break the requirement down into two parts.
• The factors the audit engagement partner .would have considered in determining that an
issue is a KAM
• The content of the KAM section of the auditor'sreport
In both cases !:JOU need to 'describe'. This means your points need to be sufficienti!:J detailed to
obtain a full mark for each.

Easy marks
The marks for describing the content of the KAM section of the auditor's report should have
been reasonably easy to obtain.

Examining team's comments

For (a) carefuii!:J reading the scenario and question requirement ensures that any procedures
listed dre tailored and more likely to score marks. Procedures such as
casting a-breakdown of
sales, varied analytical procedures, recalculating sales invoice totals, agreeing sa.les prices to
the authorised price lists and cut-off procedures would all gain credit. Where the question
requirement is for revenue then no credit will be awarded for any receivables procedures.
-when generat.ing substantive procedures, it is important to ensure the tests have suffiCient .
detail and are dear. For example, 'perform a cut off test" without describing what the actual
test is <;~ndwhat documents should be used will not gain any marks.
The requirement in (b) strictly focused on procedures both before and during the count and
although not required, it would be useful to split the procedures into before and then during
the count as this helps to ensure a good cross section of points are covered.

31t6 Audit and Assurance @aPP

~I

. . . . . '

Unfortunately$ many candidates did not corefullt:J read the requirement and therefore listed
procequres which would be undertaken after the count pn the final audit. These procedu-res ··
would not gain any credi_fcistheywere not addressing the questionrequirement. ·
' - ' . . .·. . ._

Fo.r (c) the sc~nario for this .requin3merit simply detailed that shares were issued ·at a pr~mium
in May 20X5. The rationa_le forth~ share issue was to purchase a factoryJ h()wever thiE) is
irrelevanffor the question requirement, which focused on the sha.reissueitself. Focusing on
whether th~ factory was purchased or auditing this purchase in any way would not gain credit
as it is not answering the question asked. In considering where to star_t. 'it is useful to co11sider
the accounting for_ the share issue as this thE;m provides areos to audit.. -
The starting point with (d) is to consider what knowledge a candidate has with regards to ISA
701 Communicating Key Audit Matters in the Independent Auditors Report. Knowledge of this ·
standard will help in considering what influences the decision as to whetheran issue is a KAM
or not. Although the scenario related to the valuation of inventory, knowledge marks could be
easily obtained without reference to the· scenario. Common incorrect answers attempted to
answer this question as if it related to a modified audit opinion. ltis importantto revise all audit
report options and not to simply assume that the focus of the question will contain o modified
opinion.

Marks

~~ (a) Substantive procedures for revenue

1 mark per well-described procedure up to a maximum of 5 marks 5
Maximum 5
(b) Inventory count procedures
1 mark per well-described procedure up to a maximum of 6 marks 6
Maximum 6
(c) Substantive procedures for issue of shore capital
1 mark per well-described procedure up to a maximum of 4 marks 4
Maximum 4
(d) Factors/content for key audit matters
. ' .

Matters communicated to those charged with governance

Assessment of risk
Areas of judgement 1
Effect on audit
Description of issue l
ii Why determined KAM
How addressed in audit 1
Maximum 5
Maximum
Total 20.

(a) Substantive procedures for revenue

,·~ i
• Cast a breakdown of revenue and ag-ree to the gen~ralledg~r, trial balance and draft
financial statem€mts.
· Compare the overall level ofrevenue against prior year/budget and investigate any
significant fluctuations.
• Obtain a breakdown of sales analysed by month and compare this to the prior
year/month. Investigate any significant fluctuations;

@BPP Answers 31t7

 Obtai!') a schedule of sales for the ·year disaggregatea into the main product
categories/hy type of customer by month and compare this to the prior year breakdown.·
Discuss any unqsual movement$ with management.
Perform a proof In total calculation for revenue bytakingthe prior year revenue and
increasing it for the three new product lines launched in February 20X5 and the price rise_
in line with inflation from September 20X4 and other known factors; This expectation
should be compared to d.ctual revenue and any· significant fluctuations should be
investigated.
Cak:LJ.Iate the gross profit margin for Spinach Co for the year, compare this to the prior
year and investigate any significant fluctuations.
• Select a sample of ~ales invoices for wholesale customers and agree the sales-prices back
to the price list or customer master data information, noting whether the price was pre or
post the price increase. to confirm the accuracy of invoices.
For a sample of invoices, recalculate invoice totals including any discounts and sales tax.
• Select a sample of credit notes raised, trace through to the original invoice and ensure the
invoice has ~een correctly removed from sales.
Select a sample of dispatch notes and agree these to sales invoices through to inclusion in
the sales day book and revenue accounts in the general ledger to confirm completeness of
revenue.
• Select a sample of dispatch notes both pre and post year end and follow these through to
sales invoices in the correct accounting period to ensure that cut-off has been correctly
applied.
• Select a sample of website sales made in the final week prior to the year end and where
goods were dispatched post year end, confirm that the sale proceeds received are
recorded as deferred income (contract liability) rather than as revenue.
(b) Inventory count procedures
Before the count
Review the prior year audit files to identify whether there were any particular warehouses
where significant inventory issues arose last yeor.
Discuss with management whether any of the warehouses this year ore new, whether any
significant changes have occurred this year with regards to inventory items or if any
warehouses have experienced significant control issues.
Decide which of the six warehouses the audit team members will atten_d. basing this on
· materiality and risk of each site.
• Obtain a copy of the proposed inventory count instructions, review them to identify any
control deficiencies and, if any are noted, discuss them with management prior to the
counts.
Discuss with management whether third-party inventory is stored in any of the other"
warehouses and what the procedures are for ensuring that third-party inventory is
omitted from the counts.
During the count .
• Observe the counting teams of Spinach Co to confirm whether the inventory count
instructions are being followed ·correctly.
• Select samples of inventory and perform test counts from inventory sheets to physical
inventory and from physical inventory to inventory sheets.
Observe the counts in order to confirm that the procedures for identifying and
segregating damaged goods are operating correctlb:J and inspect inventory for evidence of
any damaged or slow-moving items. · -
• Observe the procedures for movements of inventory -during the counts~ in order to confirm
that all movements have ceased,'

31t8 · Audit and Assurance @BPP

 Disc~ss with the internal audit supervisors how any raw materials quantities hove been
estimated. ·where possible, reperforrn the procedures adopted by the supervi~or~. ·
.• Obtain a copy of the completed sequentially numbered inventorysheets for follow .up
testing at the final audit._ ·· ·
Obtain copies of the last goods received notes (GRNs).and goods dispatched notes
· (GDNs) for 31 July and request copies of GRNs and GDNs raised on !August in order to ·
perform cut-offp~ocedures as at the year end. ·
• Observe the procedures carried out by Spinach_Co's staff in identifying third-party.
inventories are operating correctly and review the completed inventory count sheets to
confirm no third..:.party inventor!:J is included.
(c) Substantive procedures for issue of share capital
Review board minutes to confirm the number of additional shares issued in May 20X5 and
the issue price.
• Agree the issue of shares is permitted from a review of any statutory constitution
agreements in place.
Review legal documentation, correspondence or share issue prospectus to confirm the
details of the share issue.
• Agree the issue of new shares to the share register.
Inspect the cash book and bank statements for evidence of the amount of cosh received
from the share issue.
• Where the sum received is less than $4.3 million, confirm the difference is treated as share
capital called up but not paid in the financial statements.
Recalculate the splitof proceeds between the nominal value of shares and premium on
issue and agree correctly recorded within share capital and share premium account (other
components of equity).
Review the disclosure of the share issue tn the draft financial statement~ and ensure it is in
_line with relevant accounting standards and local legislation.
(d) Auditor's report

-·
~I (i) Factors to consider
~

As Spinach Co is listed; a key audit matters (KAM) section will be required in the auditor's
report. The audit partner would have considered whether the matter was communicated ·
to those charged with governance as KAM are selected from matters communicated to
those charged with governa nee. The audit partner· would have also considered the level
of risk in relation to the valuation of inventory and, as determining the net realisable
val.ue is on accountir1g estimate, the level of judgement involved. The audit par-tner would
have also considered whether, in their professional judgement, the matters regarding the
valuation of inventory were of most significance in the audit of Spinach Co's financial
statements for the year ended 31 JulbJ 20X5.
(ii) Contents of KAM
The KAM section of the. auditor's report should.include a reference to the audit risk in
relation to the valuation of inventory and the level of judgement required in rnaking this
assessment. It should detail why this issue was considered to be an area of significance
in the audit and therefore determined -to be· a KAM. It should ·also explain how the matter
was addressed in the audit and the auditor should provide a brief overview of the audit
procedures adopted as well as detailing that a review was undertaken of any related
disclosures.

@BPP Answers 3lt9

172 Pacific Co
Course ·eook references
14; 16, 17 and 20

Top tips
For parts (a), (b) and (c) the key was reading the requirements properly and rel.ating the
procedures_to the appropriate section of the scenario. Each section of the scenario related _to
one requirement. Keeping to time on each was important as there were lots of procedures yow
could have explained but you needed to focus on just enough good ones to gain the marks
available for each part.

Easy marks
Part (d) on reporting should have been familiar to you and it was straightforward to determine
that it was a material misstatement but not pervasive. As long as your reporting knowledge
was good you should have obtained the marks on offer.

Marks

(a) Substantive procedures for trade poyables and accruals

1 mark per well-described procedure
Maximum 5
(b) Substantive procedures for provision for legal claims
1 mark per well-described procedure
Maximum 6
(c) Substantive analytical procedures for revenue
1 mark per well-described procedure
Maximum 4
(d) Auditor's report
Discussion of issue
Materiality calc.
Type of modification 2
hnpact on report
Maximum 5
Total 20

350 Audit and Assurance @aPP

(a)

Substantive procedures for trade payables ahd accruals

. Calculate the payables payment period for Pacific Co,compore to prior years and
investigate any significant differences, in particular any decrease this year due to the
inclusion of the pa!::Jment run on 1 June. -~
• Compare the total trade payables, or significant supplier balances, and good received
not invoiced (GRNI) accrual against the prior year and investigate any significant
differences.
Compare the list of accruals this year to the prior year to identify any missing items or
unusual fluctuations and discuss with management.
Discuss with management the process they have undertaken to quantify the
misstatement of trade payables due to the payment run and consider the materiality
of the error in isolation as well as with other misstatements found.
• Review the journal entry processed to correct the misstatement of trade payables due
to the payment run to ensure all errors have been included.
Select a sample of purchase invoices received around the year end. Ascertain, through
reviewing goods received notes (GRNs), if the goods were received pre or pas~ year
end. If postw~arend, then confirm that they have been excluded from the ledger.
I) . Review after-date payments; if they relate to the current year, then follow through to
I the pa!:Jables ledger or GRNI accrual to ensure they are recorded in the correct period.
f • Reperform a sample of supplier statement ·reconciliations and agree these to the
I payables ledger balances. Investigate any reconciling items. ·
i
I• Select a sample of trade payables balances and perform a trade payables'
i circularisation. Follow up any non-responses and any reconciling items between the I.
balance confirmed and the trade payables' balance. · · ·I
• Select a sample of GRNs before the year end and after the year end and follow
through to inclusion of the liability in the correct period•s payabtes balance. to ensure
correct cut-off.

(b)
···-···········-··················-··················-·-·· ..
! ~ WordProc~sso~
···--·---~·-·--·····-····-······"'···--·······································"'··-·--·
Q , - . . . .· . ·. .. . .. . [Ell
·;··~::····.--:·-··-·-·-----~~.-:---:~·......,.-.,.-··-.,-·,---~~--~···-c··~,------:1

~ -

Substantive procedures for provision for legal claims

I
• Enquire with the directors or inspect relevant supporting documentation to confirm if a -I
·I present obligation exists at the .~ear end. ·!
• Discuss with di.rectors how the mislabelling of in~Jr~dients is alleged to hove occurred
and whether it is likely that an!J other customers have been -qffe<;ted.
Discuss the claim with management and review the in.terndl investigation report in
order to gain an insight into the circumstances which led to the mislabelling.
• Inspect board minutes to ascertain whether payment is probable.

Answers 351
 i • Inspect post year-end bank statements to identify whether any payments have b~en
I made in respect of the claim.
• Review correspondence with Pacific. ~o's lawyers or w1th the client's permission,
contact the lawyers and obtain confirmation regarding the claim to assess whether a
provision should be recognised and whether the amount of the provision is material.
! • Review correspond~nce or discuss· with lawyers the likelihood and amount of other

I potential future claims.

I. If evidence indicates that it is only possible that the claim will be successful, inspect-
the financial statement for contingent liability disclosures to ensure compliance with
lAS 37 Provisions, Contingent Liabilities and Contingent Assets. I
l·
Il
Obtain a written representation from management confirming their view that they
have an obligation at the year end in respect of the claim and that it is appropriate to
include a provision.
L--........ _.......,_.... ~·-···-·-------···-
___________j
lI
(c)

,,
I
j Substantive analyticol_procedures for revenue
1
• Compare the overall level of revenue against prior years and discuss the reasons for
the 9.4% increase with management and agree to supporting documentation.
1
I• Compare the overall level of revenue against the budget for the year and investigate
I
I
any significant fluctuations.
I• Obtain a" schedule of sales for the year disaggregated into the eight main product
I ~ines and compare this to the prior year breakdown and budget to understand.what _
1 1m pact the. new products have had on revenue. For any unusual movements, dJscuss
l with management.
1• Obtain a schedule of sa-les for the year analysed for the existing 13 stores. Compare
this to the prior·year and discuss any unusual movements/significant fluctuations with
management. I
• Perform a proof in total calculatioti for revenue. The prior year revenue for the eight
main product lines should be token and an adjustment should be made for sales from
the new product lines and for the new store for approximately nine months. This
expectation should be compared to actual revenue and whether this equates to 9.4%
growth over the prior year. Any significant fluctuations should be investigated.
Calculate the gross profit margin for Pacific Co and compare this to the prior year
II
1 •
l and investigate any significant fluctuations. . !
L---·--·--------·-··---·--------·-·-····---·-··---··--·~--·~··-··--·-·-·'-'"----·----------·-----·--·-···-----·-J

352 Audit and Assurance @BPP

 (d)

Auditor's. report
The financial statements containa-Provision for legal claims of $0._5 million, however, audit
work has identified that the provision should be So.a·million. Hence the provision is·.
understated and profits overstated by $0.3 million. The argument that the provision is. a
reasonable estimate is not valid.

1
The error of $0.3 million represents 7.3% of profit before tax (0.3m/4.1 m) and hence is a
I
1 material matter.
!
If the finance director refuses to increase the provision, the audit opinion will be modified
!.
li
due to a material misstatement. As provisions are understated and the error is material but ,:_·
1
not pervasive, a qualified opinion would be necessary.
A basis for qualified opinion paragraph would be needed subsequent to the opinion .
1 paragraph and would explain the material misstatement in relation to the understated
1
provision for the legal claims and the effect on th~ finanpial statements. The opinion
paragraph would be qualified 'except for', I
1····-·-·-··-··-·-...-,-:-·-···-----··-··-··-·-··-·-···········-·····························································•·······································--·····················•···-···-·······················································•·····························································-·····...l

173 Heron Co-

Course Book references

Chapters 12, 15, 17, 19

Top tips
The vast majority of marks oti this question were for describing substantive procedures. Tc
maximise your chances of d good score when describing. your procedures you need to read
the requirement for each part carefully and then rnak? sure:
(1) · Procedures arespecific the financial staternentorea you ore asked about(for example
only non-currentasset additions in part (a))
(2) Explain each substantive procedure fully (Lise the verb-document~ reason approach
covered in Skills Checkpoint4 of ~our Course Book)
(3) Use your financial accounting knowledge to help you generate procedures (eg ho'1' would
!::JOU establish whether the accounting treatment is correct). The examining team's. ·
comments that follow demonstrate this.

Easy marks
These were available-in (a) and(b) for audit procedures relating to non-current additions ana
bank ba Ia nces.

Examining_ tearn•s comments

F'or part (a) the scenario contained significant detail of the various costs capitalised as part of
thH now manufacturing line. Candidates should have considered whether eoch cost element is
allowable expenditure under lAS 16 Property, Plant and Equipment. At least one substantive
procedure should then have been generated to test each cost element. For· example, the
refundable purchase tax should be excluded from the asset cost and therefore should be
agreed tO the tax control account. There were_ five cost elements included within the cost
capitalised and if ccmdidates hod listed one well explained substantive procedure per cost
element, they would have been_awarded five marks.

@BPP Answers 353

 In part (b) is important when auditing bank balances to consider in detail the elements of the
bank reconciliation as this is the main focus of the auditor's testing! Utilising knowledge from
Financial Accounting and howJhe bank statement is reconciled to the:~ear-end balance as per
the cash book, should provide-candidates with sufficient points to audit. · -
Good exam technique was important for requirement (c). While some knowledge of accounting
for legal claims_ would have been helpful, the key here is to think logically. It is possible to
produce a good answer by thinking through the issues which are relevant for 6ny provision. for
example whether it should be recognised and if so, at what amount. Procedures can then be
designed to address these issues using the information from the scenario to add detail.
The starting point with (d) is to consider the accounting from lAS 10 Events After the Reporting
Period and to decide whether the event in the scenario is adjusting or non-adjusting. It is
important that candidates adequately prepare themselves for questions _from an!J part of
syllabus area E and not just assume that there will be a question on audit reports.

Marks

(a) Substantive procedures for plant and equipment

1 mark per well-described procedure
Maximum 5
(b) Substantive procedures for provision for bank balances
1 mark per well-described procedure
Maximum 5
(c) Substantive procedures re provision for legal claim
1 mark per well-described procedure
Maximum 5
(d) Subsequent event
(i) Discussion of issue 3
(ii) Procedures 2
1 mark per well described discussion/procedure
Maximum-
Total 20

(a) Substantive procedures for additions to plant and equipment

Obtain the detailed breakdown of the costs incurred for the new manufacturing line, cast
the breakdown and confirm that it is included in the non-current assets register in order to
confirm completeness of the addition.
Confirm the purchase price of $2.7 million and delivery and installation costs of $0.3
. million to supplier invoices and that the invoices are in the name of Heron Co in order to
confirm valuation and rights and obligations.
Discuss the treatment of the refundable purchases tax of $0.5 million with the finance
director as this should be excluded from cost. Agree to inclusion in the tax control account.
Request that management expenses the $0.1 million training costs and to profit or loss as
they are not eligible for capitalisation. Confirm to a journal entry that the adjustment has
been made.
Review the breakdown of the costs of $0.2 million incurred when testing the new line.
Discuss with management and.agree to supporting documentation to confirm the nature
of these costs to ensure they are eligible for capitalisation.
• Select a sample from the non-current assets register and physically verify the new
_ manufacturing line on the factory floor to confirm existence.

35.. Audit and Assurance @aPP

 Discuss with management the basis of the ergh!-year useful life dnd ~ow it was derived·
. and agree t~. s~pporting documentation such as the replacement p_?Hcy.
Recalculate the depreciation charge to confirm that the. colcylatlons have been
appropriately time apportioned andthat depreciation only commenced from December
20X4 when the asset was bought into use. ·
(b) Substantive procedures for provision for bank balances
Obtain a bank confirmation letter from Heron Co's bankers for ttll fourotits accounts.
Agree all balances listed on. the bank confirmation letter to the company's bonk ..
reconciliations or the trial balance/general ledger in order to ensure completeness c)fbank
balances.
For the curr~nt account, obtain Heron Co's b;nk recohciliation and cast it to check the
additions in order to ensure arithmetical accuracy.
Agree the balance per the bank reconciliation to an original year-end bank statement and
to the bank confirmation letter.
Agree the reconciliation's.balance per the cash book to the year-end cash. book.
• Trace all the outstanding lodgements to the pre-year-end cash book, post-year-end bank
statement and also to the paying-in book pre-year end.
Trace all unpresented cheques through to a pre..;yeor-end cash book and post-year-end
bank statement. For any unusual amounts or signif.icant delays, .obtain explanations from
management.
Examine any old unpresented cheques to assess whether they need to be written back.
Review the cash book and bank statements for any unusual items or large transfers
around the year end, as this could be evidence of window dressing.
Examine the bank confirmation letter for details of any security provided by Heron Co,
with regards to the bank overdraft or any legal right of set-off as these may require
disclosure.
For the savings accounts, review any reconciling items on the year-end bank
reconciliations and agree to supporting documentation.
Review the financial statements to ensure that the disclosure of bank balances-is complete
and accurate, and that the overdraft is within current liabilities and the savings accounts
within current assets. ·
(c) Substantive procedures re provision for legal claim
Discuss with management the facts of the case to determine the nature of the claim and
why only $0.6 million provided. ·
Review correspondence with Heron Co's lawyers or, with the client's permission, obtain
confirmation from the client's lawyer about the likely outcome arid possibility of pa!:Jment.
Inspect correspondence received from the customer regarding the· claim in order to assess
whether a provision should be recognised and, if so, Whether the amount of the provision
is reasonable.
Inspect the post year.;..end cash book and bank·stotements to identify whether any
payments have been made and compare any actuaf payments to the amounts provided
in the fir1ancial statements.
Inspect. relevant board rninutes and discuss with the finance director to asce~tain whether
payment is· probable and the basis for the provision.
Review the expense accounts in the statement of profft or loss for indusion of legal costs
cmd agree to correspondence from the legal advisers. ·
Obtairi a written representation from managementthat they believe the provision is
valued appropriately and· is complete.
Review tho financial statement· disclosures relating to the provision to ensure they are in
compliance with lAS 37 Provisions, Contingent Liabilities and Contingent Assets.

@BPP Answers 355

~~
~
(d) (i) The infon:nation regar.ding Sparrow Cds cash flow difficulties was received on 14 July
·· 20X5, after the year end, but provides further e.vidence of the recoverability of the
receivable balance at the year end; If Sparrow Co is expedencin'g cash flow difficulties ·
justa few months after the year end, it is highly unfikely that the $692,000 was
recoverable as at 31 fytay 20X5 and hence this is an adjusting event in accordance with
lAS 10 Events after the Reporting Period. ·
The receivables balance is overstated and consideration should be given toodjustingthis
balance, if material, either through the use of an allowance for receivables or by writing
off the balance relating to Sparrow Co depending on the assessment of the
recoverability.of the balance.
The total amount outstanding at the year end was $692,000 and is material as it
represents 7.8% (0.692rn/8.9m) of profit before tax and 1.1% (0.692m/65.4m) of total
assets. Hence the directors should amend the 20X5 financial statements by making an
allowance or by writing off the receivable balance relating to Sparrow Co~ depending on
their assessment.
(ii) The following audit procedures should be applied to form a conclusion as to the
adjustment:
• The correspondence with the customer should be reviewed to assess whether there is
an!:J likelihood of payment.
• Discuss with management and review board minutes to obtain an understonding as
to why they feel an adjustment is not required.
• Review the post year-end cash book and bank statements to see if any payments
have been received from the customer.

356 Audit and Assurance @aPP

 )

.Section A Questions
Chestnut
174 The correct answers are:
.

Review whether ani:J pai:Jments have s.ubsequentli:J been

made bi:J this customer since the audit fieldwork was . PERFORM
completed

Match the total of the aged receivables listing to the DO NOT

receivables ledger control account PERFORM
:-···· ...... _......

Vouch the balance owed bi:J the customer at the I:Jear end DO NOT
to sales invoices PERFORM

Review the latest customer correspondence with regards

to an assessment of the likelihood of the customer PERFORM
making payment
.............

The audit concern here is that receivables are overstated as the balance from this customer
does not appear to be recoverable. Audit procedures should therefore focus on the
valuation of receivables. Vouching the balance owed by the customer at the bjear end to
sales invoices will provide audit evidence in relation to the existence, rights and obligations
of receivables, but not their valuation. Matching the total of the aged receivables listing to
the receivables ledger control account will provide evidence of completeness.

· 175 The correct answer is:

Material Financial statement impact

Yes Gross profit ma~J be ove.rstated

Chestnut 8- Co was only appointed as auditors subsequent to Ash's yearend and hence
did not attend the I:Jear-·end invento.ti:J count. Therefore, it has not been able to gather
sufficient and appropriate ·audit evidence with rogards·to the completeness and existence
of ihventori:J. This mai:J mean that closing inveiltori:J is over- or understated and this will
have a resultant impact on gross profit and current assets.
lnyentori:J is a material amount as itrepresents 21.3% (0.5i/2.4m) of profit before tax and
5% (0.51/10.1m) of revenue.

.I
J

i
j

@sPP Answers 357

176 The corrE;lct answers are:
. . ··.. '

• Review the internal auditors' reports of the inventory count to identify the level of
adjustments made to the.records, in order to assess the reasonableness of relying on.
the inventory records for the. purpose of the year-end audit.
• Perform test counts of Inventory in the warehouse and compare these first to the
inventory records. and then from rnventory records to the warehouse, in order to assess.
the reasonableness of the inventory records maintained by Ash.
Audit procedures should foqus on testing the accurocy of the work performed by the
internal audit department at the year end in order to determine whether the year-end
inventory quantity exists and is complete.
Testing the accuracy of the aged inventory report will provide evidence over the valuation ·
of inventory.
Reviewing the sales order book for February, March and April 20X5 could provide audit
evidence as to the quantity of inventory at the year end but only if it is assessed to
determine whether there would have been sufficient inventory at the year end to fulfil
customer demand.
177 The correct answers are:

I Evaluation of all significant audit judgements INCLUDE

······-

Evaluation of the performance of specific audit

EXCLUDE
procedures performed
.......
i Evaluation of the cost-effectiveness of the audit process EXCLUDE

' Evaluation of conclusions reached in formulating

INCLUDE
, auditor's report

The evaluation of speCific audit procedures would not be part of an engagement quality
review- this would be part of the audit team's internal processes of monitoring and review,
but is too detailed to be included within this review.
The cost-effectiveness of the audit is not relevant to the engagement quality review, since it
does not have a bearing on whether the auditor expresses em appropriate audit opinion.
178 The correct answer is:

. Audit opinion Disclosure in the auditor's report

Qualified Basis for qualified opinion

The auditor will need to express a modified opinion as they are unable to obtain sufficient
appropriate evidence in relation to inventor!:!. The effect of this is material but not
pervasive. Therefore a qualified opinion will be required.
The opinion paragraph will explain that the audit opinion ·is qualified. A basis for qualified
opinion paragraph will be required to explain the limitation in relation to the lack of
evidence over inventory.

·Humphries
179 The correct answer is: 1, 2, 3 and 4
All the procedures are valid in identif!ding·subsequent events occurring up to the date of the
auditor's report.

358 Audit and Assurance @aPP

 180 The correct answers or~:.
lnve.ntor1:rshould not ~e written down,~because the ~a mage is not an adju~ting event ..
If a material amount of inventory .is uninsured, it rriby be ~ecessariJ_ to disclose the event .
· and an estimate
.
of the financial losses. ·- ·. ,-·-
.. .

The flood damage does not provid~ evidenc:e of concH~ions that existed at the. year end,
and therefore is not'an adj-usting event as defined by IA$10 Events After The Reporting
Period. On this basis, the Inventory should not be wrJtt~ri down, but the nature and amount
of expected uninsured losses may need to be disclosed.Jt is incorrect to recog·nise a
contingent asset in the 20X5 financial statemer;~ts: c()~~ingent assets should be disclosed,
not recognised, and it should only be disclosed whendhinflow of economic benefits is
probable (lAS 37). ·

181 The correctanswers are:

i
J
Reviewing the post year end period for payments r~oeived from the customer in respect
of the IJear-end debt · · ··
Reviewing correspondence with the customer to as~ess the likelihood of Humphries Co
recovering the $0.3 million
Writing to the customer is likely to be unproductive. In addition, it would only provide
persuasive-evidence that the receivable existed at the year end, not that it was recoverable.
Requesting a cash flow forecast is irrelevant, as it doe$ not give evidence as to the
recoverability of the receivable itself and there is no e\ffpence that the going concern
assumption needs to be revised.

182 The lawsuit relating to the breach of contract is considered to be ~i;"Q and therefore

if the financial statements are not revised in the light of the new information then the

auditor's opinion will be qualified due to material misstatement .

~~
The probable payment and anticipated adjustment needed is $0.6 million represf)nting 8%·
of profit ($0.6m/$7.5m x 100%). This is material and ifrnanagement refuse to adjust for the
provision, the audit opinion will need to_be modified ohthe basis management has not
complied with lAS 37 p·rovisions, Contingent Liabilities arid Contingent Assets. The
misstatement is material but not pervasive, so a qualified opinion would be expressed. The.
opinion paragraph, would state that 'except for' this !~sue the financial statements are
presented fairly (or show a true and fair view). A 'bdsisfor qualified opinion' section would
explain the material misstatement in relation to the $0.6million not provided, and describe
the effect on the financial statements. · ·· ·

183 The correct answer is: If the auditor becomes aware ofa fact that, had it been known to
the auditor at the date of the auditor's report, may have caused the auditor to amend the
auditor's report,· the auditor shall discuss the need forcu1~ adjustments with management.
I~
I;? The first two options describe the auditor's responsibilitgwith regards to subsequent events
·occurring before the date of the auditor's report. It istrue that the auditor does not-bove
any obligation to perform procedures or make enquiries but, should an adjusting event
~
come .to light, adjLlstments to the financial statements about to be issued must be
considered and further audit procedures rnust beperfdrmed as necessary at H~e time,
_-~-

rather than deferring to next year, hence the third option is incorrect.

Strawberry
184 The correct onswer is: 1, 2 and 4
The fo!l in i-nventory holding period means that Strawl:)~[ry is turning over its inventory more
quickly; which if anything would improve its cash c~~cle>ond hove a positive rather than
negative impact on the ability of the companiJ to conHhue. In this ca$e the change is
relatively small so is unlikely to be_ a significant factor ettber way.

@BPP Answers 359

 ...

185 The correct answer i!?: At least 12 months from ~he date of the .financlal statements
In accordance with ISA 570 the assessment must cover a period of at _least 12 months from
the date of the financial statem.ents_: If the period covered is less than this the aud.itor must
request that the assessmer'lt period is extended~ · .

186 The correct answer is: Identification during your subsequent events review of a cash receipt
for the full amount ·
The receipt of the balance after the year end confirms that the debt is recoverable .at the
.year end.
The written representation is written evidence but is internally generated.·
The response to the circularisation provides evidence of existence but does not provide
evidence of recoverability.
The correspondence between the lawyers is externally generated and from trusted parties
but is less reliable than the receipt of the pa!Jment as it would still be possible for Grape Co
to default.

1B7 The correct answer is: Agreement by on alternative financial institution to lend Strawberry
$4.8 million in September 20X2
As part of the going concern review the auditor must consider mitigating circumstances. In
this case, the agreement with the alternative finance provider gives the most assurance as
there is a greater degree of certainty that Strawberry will receive the cash. The first three
options may provide the cash required but this cannot be guaranteed. There is also a
timing issue as the property may not sell for some time and cost savings will not have on
immediate effect.

188 The correct answer is:

Auditor's opinion Explanation of circumstances

Adverse opinion Basis for adverse opinion

An adverse opinion would be issued as the matter is material and pervasive ie the auditors
disagree with the whole basis on which the financial statements have been prepared. A
description of the circumstances would be included in the Basis for adverse opinion
paragraph in accordance with ISA 705.
A qualified opinion would appi!J if the issue were material) but not pervasive. DisClosure in
the Material uncertainty related to goihg concern section is made when the auditor ·agrees
that the company is a going concern but believes that there is a material uncertaintk:j
which needs to be brought to the attention of the shareholders (ISA 570). This does not
apply in this case.

Videos·can be viewed by accessing your ebook version on VitoiSource.

Clarinet
189 The correct answer is:

Material Adjust in 20X5 financial statements

Yes Yes

The uncorrected misstatement amounts to 15% of profit aftertax (PAT) and on this basis_.
would be material (ie it ls over 10% of PAT). It is an adjusting event as the discover!J provides
evideilce ·as to the value of the inventory at the year end. The 20X5 financiatstatements
should therefore be adjusted. ·

360 Audit and Assurance @aPP

 . ·Adjustment in the 20X5 "financial statements would not be requi;ed fqr-non-adjusting events
ie those which do not provide evidence of conditions which existed at the p-eriod end.- ·
190 The correctansweris_:_1, 2 and 4
.. The entry 'of the competitor has resulted in a loss of market ·share and the loss of a rflOjo·r "
customer~ There is a risk that this sizeable loss of market share will result in.a significant loss
of future reve_nues, as well as reducing future cash flows .
. 1
The overdraft has increased significantly and is due for renewaL This suggests liquidity
problems. If the bank does not renew the overdraft, and the company fails to obtain
alternative finance it may not be able to continue trading. ·
The failure of Clarinet's shareholders to Invest indicate doubts in relation to thecompany's
ability to generate healthy profits in future, or possible liquidity problems. It may also make
it less likely for others to invest. ·
of
The existence a bank loan in itself does not give rise to going concern issues. The bank
loan is long term so there is no imminent requirement to repay the balance. To date all
payments have been made therefore there is no breach of any loan terms which could
trigger early repayment.
191 The correct answer is: A review of post year-end sales and the order ~ook
All of the procedures provide evidence regarding the assumption used in the cash flow
forecast. However, the review of post y~ar end sales and the order book is the most reliable
as this shows sales which have actually taken place or sales to which the customer has
shown a commitment. Procedures described in the first, second and fourth options are
based on possible events.
i92 The correct answer is: 1, 2 and 3
The disclosures are set out in ISA 570 (Revised) paragraph 25.
(4) is incorrect. The management assessment should be at least 12 months frorn the date of
the financial statements. If not the auditors will ask that the assessment period is extended.
193 The correct answer is:

Opinion · Disclosure
·Unmodified Material uncertainty related to going .
concern

As the auditors agree with the basis of preparation of the financial statements and h(~lVe
concluded that the disclosures are adequate, an unmodified opinion is issued. As a
material uncertainty regarding going concern exists, this must be highlighted for the
benefit of the shareholders. In accordance with ISA 570 (ISA 570) and ISA 701 (ISA 701) this
must be disclosed in a 'Material uncertainty related to going concern' section, and not as a
Key audit matter.

@BPP Answers 361

Czech & Dawson
194 The correct answer:is: Awritten representation_ should be requested from management to
confirm whether they believe that the effects of the unadjusted misstatements ore
immaterial, both individuaHy and in aggregate. tothe financial statements -as a whole.
ISA 450 Evaluation of Misstatements Identified During the Audit states that the al,Jditor has
a responsibility to accumulate misstatements identified during the audit, other than those
that are clearly trivial (ISA.lt50).
All the accumulated misstatements should be communicated to the approp~iate levelof
management on a timely basis (ISA 450). The-auditor must request thatma~agement
- correct the misstatements.
If management refuses to correct some or all of the misstatements, the auditor must obtain
an understanding of the reasons for not making the corrections, and take these into
account when determining whether the financial statements are free from material
misstatement (ISA 450). This may affect the auditor's opinion if this results in the financial
statements being materially misstated, but the refusal to correct the misstatements does
not affect the opinion.
The auditor should determine whether uncorrected misstatements ore material, both
individually and in aggregate (ISA 450).
195 The correct answers are:
• Discuss the requirements of lAS 38 Intangible Assets with the directors in order to
determine whether they understand the required accounting treatment of research and
development expenditure
• Obtain a breakdown of the $5.3 million capitalised as an intangible asset and agree to
supporting documentation to determine the nature of the projects to which the
expenditure relates
Audit procedures should focus on determining the extent of research expenditure which has
been incorrectly capitalised.
Whilst it is generally important to authorise expenditure, the issue is not authorisation or
occurrence but its classification. ·
196 The correct answer is: Qualified opinion
Research expenditure of $2.1 million has been capitalised within intangible assets. This
accounting treatment is incorrect, as lAS 38 Intangible Assets requires research expenditure
to be expensed to profit or loss (lAS 38).
The error is material as it represents 89{> of profit before ta·x ($2.1m/$26.3m).
Management should adjust the financial statements by removing the $2.1m research
expenditure from intangibles and debiting the amount to profit or loss.
If management refuse to make the adjustment, the auditor's opinion will need to be
modified. As the erroris material but not pervasive, a qualified opinion would seem
appropriate.
The basis of opinion section would need to include a paragraph explaining the
misstqtement and its_effect on the financial statemen~s. The opinion paragraph would be
qualified.
197 The correct answer is:

Material · Financial statement impact -

Yes Wages may be materially mis$tated

Twa months' worth. of wages records have been lost and so audit evidence has not been
gained in relation to this expense. Wages and salaries for the 2-month period represent 11%
of profit before tax($1.1rn/$1Dm) and so wages and salaries may be materially misstated;·

362 Audit and Assurance @BPP

19.8 The correct answer is:

Au,d it ·opinion Oi$closUJ~e in the auditor's report

Qualified , Basisfor quaJifi~d opinion

The auditors should seek qlternative aud,it procedures to audit the wages and palaries
account. If no ~lternative audit procedures-are possible, the loss of data w'o"utd constitute a
, lack of sufficient appropriate audit evidence.
. .

The auditors will need to modify the auditor's opinion on the basis that they are unable to
. obtain sufficient appropriate evidence ih relation to a material amount in the financial
statements. As the two months' salary and wages are not pervasive, a qualified opinion
would seem appropriote.
The basis ofopinion section would require on explanation of the insufficientauditevidence
in relation to wages and salaries. The opinionparagraphwould be qualified on the grounds
of an inability to obtain sufficient appropriate audit evidence.

Medimade
199 . The correct answers are:
• The going concern basis of accounting is used when the entity will be able to continue
in business for the foreseeable future.
• The going concern basis of accounting assumes that the entity will be able to realise its
assets and discharge its liabilities in the normal course of business.
The term 'foreseeable future' is not defined withinlSA 570 Going Concern. but lAS 1
Presentation of Financial Statements deems the foreseeable future to be a period of 12
months from the end of the entity's reporting period (lAS 1).
The going concern basis of accounting does not require any specific accounting conditions
to hold true (such as that the entity will have net current assets for the next 12 mo'nths). but
rctther the more general assumption that the entity will be able to continue in business, ie
as a going concern.
200 Th~ correct answers are:
. .

Medimade Co now has to pay cash on delivery and this adds further cash flow strain
imposed by the overdraft
Some suppliers may end their relationship with Medimade Co, preventing the company
from producing its products, thus farther reducing sales. ·
Although all of the stated options are possible consequences, only these two options ,
describe the most direct effect on going concern: cash flow difficulties and reducing sales.
The main concern with bank covenants (which should already be in place) is that the bank
can withdraw finance if and when the covenants are breached- bank covenants do not
. usually restrict the way in which a company conducts its business.
201 The correct answer is: Review board minutes for meetings held after the blear end for
evidence which indicates, further financial difficulties or evidence of alternative sources of
finance
The bank letter will provide evidence of the currentlevel of overdraft but not about the
likelihood of the overdraft being renewed in future,, ·
The scenario clearly. states that the bank will not make a decision on the extension of the
overdraft facilitbj until after the auditor's report is signed. and banks will not agree to·
disclose such inforrnation to the auditor. While .written representations ate a valid form of
audit evidence, they do not provide sufHcient appropriate audit evidence on their own·
about any of the matters with which thebJ deal.

@BPP Answers 363

202 The correct answer is:

Audit opinion Disclosure in the auditor's report

·Unmodified opinion Describe the nature of the going concern
uncertainty in the Key audit matters
section

An unmodified opinion is issued as the auditor agrees with the use of the going concern
basis of accounting and the level of disclosure provided. The-existence of a material
uncertainty In relation to going concern would be disclosed in the 'Material Ul)certainty
related to going concern' section (ISA 570 (Revised)). A qualified opinion would be issued if
the going concern basis of accounting is appropriate, but a material uncertainty exists
which is not adequately disclosed (ISA 570 (Revised)). An adverse opinion would be issued
where the going concern basis of accounting is inappropriate (ISA 570 (Revised)). A
disclaimer of opinion would be issued if the auditor is unable to form an opinion.
203 The correct answer is: Discuss with management about their plans for the company and·
determine whether the 20X5 financial statements should now be prepared on a break-up
basis. If yes, request management to adjust the financial statements, audit the adjustments
and provide a new auditor's report.
If Medimade is no longer able to continue its operations, this constitutes an adjusting event
and the financial statements must be revised accordingly. lAS 10 Events After the Reporting
Period states that an entity must not prepare fts financial statements on a going concern
basis if management determine after the yearend that it has no other alternative but to
liquidate the company (lAS 10). Now that the bank has withdrawn its overdraft facility,
closure has become a very real possibility. In this case, disclosure in the financial
statements is no longer appropriate - the financial statements must be prepared on a
break-up basis.
Before the financial statements are issued, the auditors have a passive duty to consider the
impact of matters which, had they been known at the date of the auditor's report, would
have caused the auditor to amend the auditor's report.

Brown & Green Co

204 The correct answer is: Brown & Green Co ·should discuss any subsequent events they
become aware ofwith the directors of Strawberry Co to determine whether the financial
statements need amending.
This que$tlon tests knowledge of ISA 560 Subsequent Events and demonstrates the
· importance of having a detailed understanding of the ISAs. While the auditor is not
required to perform specific procedures after the signing of the auditor's report, if
information comes to light between the signing of the auditor's report and the date the
financial statements are issued, the auditor is required to discuss the matter with
management and determine whether the financial statements should be amended.
The first option sets out the auditor's responsibilities in the period between the year end
and the date the auditor's report is signed.
The auditor is required to obtain written representations in respect of subsequent events
but this would have been obtained prior to the auditor's report being signed._ Therefore, the
second option is not a valid response.
While the ·statement in the third option correctly identifies that the auditor has no duty to
perform subsequent events procedures after the auditor's report is signed, it is not always
the case that events in this period will be dealt with next year as in certain circumstances
the current year financial statements may be amended.

361t Audit and Assurance @BPP

)

205 The .issue of sh-are-capita_! i_s-l.:.~~--~-~-']·=-~-~_!-~-~!.~-~-...1 event-because it L~.i~=~n-~=~ information

about an eVent that did not exist at !:Jear-end date· and it is tr)aterial therefore it r~quires
----. .._...,.,.~-·--------·-

. to be disciosed in. the current yea~ fi~a~cial st~tem~nts·l· .

This question requires an understanding of the accounting treatment of events after the
reporting pedod which underpins the auditor's ability to· audit subspquent events and
highlights the interaction between lAS 10 Events after the Reporting· Period and ISA 560.
Note the importance of lobking carefully at any dat"es given in the question. In this case the
shares were issued in May 20X5, which was after the year end. However, the information
does not provide ~vidence of conditions which existed at the year end and therefore the
transaction would be a non-adjusting event. As this event is material, however, it would be
disclosed in the current year financial statements.
206 The correct answers are:
• Examine post year-end board meeting minutes to identify any reference to further
developments of the case ·
• . Review the correspondence with the company's legal advisers to assess the probable
outcome of the case
Reviewing correspondence with the company's legal advisers would provide third party
written evidence regarding the probable outcome of the case. Reviewing post year-end
board minutes would provide written evidence of discussions by directors regarding any
developments which may affect the overall outcome. Both of these procedures should
provide th~ auditor with substantive evidence to enable them to determine whether these
events have been appropriately recognised in the financial statements.
The first option would not be appropriate as the auditor does not have the authority to
contact the environmental agency directly. The fourth option describes a test of control~
not a substantive procedure. The opening statement in the stem of the question indicates
that the procedures which have been carried out, and are therefore relevant, are
·. substantive procedures. Mixing up-substantive procedures and tests ofcontrols is a
common error. Candidates must ensure that they understand the-difference cmd carefully
consider the context set within the scenario or the requirement.

@BPP Answers 365

207 The correct answers are:

Audit opinion Outcome 1

~ualified It is probable that the government

agency will wrn the case, but as the-
letter was received after tbe year end.
the directors did not plan to account-
for or disclose it in the financial
statements.

Audit opinion Outcome 2

Unmodified with emphasis of matter It is possible but not probable that the
government agency will win the case
and therefore the directors have
disclosed the matter in the financial
statements.

In outcome 1 the directors have failed to compi!:J with lAS 10. It is probable that Strawberry
Co will received fine but this has not been reflected in the financial statements. On the
basis that the financial statements are materially misstated a modified opinion will be
issued. As the misstatement is material but not pervasive a qualified opinion would be
appropriate.
(An adverse opinion would be issued if the misstatement had been material and pervasive.
A disclaimer. would be appropriate where the auditor is unable to obtain sufficient,
appropriate evidence and the possible effects on the financial statements of any
undetected mtsstatements could be material and pervasive.)
In outcome 2 the correct treatment has been adopted b!:J the directors. As this is the case
an unmodified opinion would be appropriate. The emphasis of matter would draw the
user's attention to the case disclosed in the notes to the financial statements.
Care shouJd be taken b!:l candidates when considering the use of an emphasis of matter. In
accordance with !SA 706 Emphasis, of Matter Paragraphs and Other Matter Paragraphs in
the Independent Auditor's Report, an emphasis of matter paragraph refers to a matter
appropriately presented or disclosed (as is the case in outcorne 2) that in the auditor's
judgement is fundamental to users' understanding of the financial statements. Importantly
· therefore, it cannot be used as a substitute for a modified opinion. Suggesting that an
emphasis of matter should be used where in fact a modified opinion is required is a
common mistake.
208 The correct answer is: 28 September 20X5
In this requirement extra information is provided in addition to the main scenario. Where
this th)pe of information is provided candidates must ensure that the!:j read it corefuii!:J
before attempting the question. This question requires candidates to apply their knowledge
of ISA 580 Written Representations. The ISA states that the date of written representations
must be as near as practicable to, but not after the date of the auditor's report. The
auditor's report is due to be signed on 28 September 20X5, therefore this would be the
most appropriate date for the directors to sign the written representation.

366 Audit and Assurance @BPP

 Se.ction B Questions ·

209 Panda
-;I_

Course Book reference

Chapter 1, 19 and 20.

Top tips ' . -

Part (a) is knowledge-based on the elements of as~urarice engagements a~d you shot.Jid be
able to score the full five marks here. In part (b), you first need to assess whether each of the
'Issues is material or not so make sure you use the figures providecfin the question for revenue
and profit before taxation to make your assessment. RemefTiber also to consider whether these
are adjusting events or not. Each issue is worth six marks so assume there are three marks for
explaining whether an amendment is required and three marksfor the audit procedures. In
part (c), you must fully explain how the non-disclosure/amendment relatingto the explosion ·
might affect the auditor's report- it is not enough to say that the opinion will be modified, for
example; you must explain the basis of any modification and whether it is material or
pervasive. Note that in this part you are only asked to discuss the explosion- you must not
include a discussion of the defective chemicals as this has not been asked for.

Easy marks
Part (a) offers easy marks for explaining the elements of an assurance engagement.

Marks

(a) Up to 1 mark per well-explained elemenL

Intended user. responsible party, practitioner
Subject matter
Suitable criteria
Appropriate evidence
Assurance report
Maximum· 5
(b) Up to 1 mark per valid point, overall maximum of 6 marks per event.
Event 1- Defective chemicals
Provides evidence of conditions at the year end
Inventory to be adjusted to lower of cost and net realisable value
- Calculation of materiality
Review bocrd minutes/quality control reports
Discuss with the directors, adequate inventory to continue to trade ·
Obtain vyrhten representation re going concern
Obtain schedule of defective inventor!:). agr~e to supporting documentation
Discuss with directors basis of the scrap value
Event 2 - Explosion
Provides evidence of conditions that arose subsequent to the yeqr end
_Non-adjusting event, requires disclosure if ma~erial

Ca-lculation of materiality:
Obtain schedule of damaged property, plant and equlprhent and agree val~es
to asset register

@BPP Answers 367

~
 -Marks
- . ,.. .
. Obtain latest inventory records to CC?nfirm damaged inventory levels
Discuss with the directors if they will make disclosures 1
Discuss with directorswhy no insuranc~ claim will be made
-·1
Maximum 10
·(c) Up to 1 mark per well-explained valid point _
Disclosure required in 20X3 financial statements and adjustment to the assets in
20X4 financial statements ·
Material but not pervasive misstatement, modified auditor's report, qualified
opinion
Basis for qualified opinion paragraph required
Opinionpciragraph- qualified opinion 5
Maximum 5
Total 20

(a) Ele~ents of an assurance engagement

There are five elements of an assurance engagement and these are explained below (JFAC,
2016).
A three party relationship
The three parties are the intended user, the responsible party and the practitioner. Intended
users are the person, persons or class of persons for whom the practitioner prepares the
assurance report The responsible party is the person (or persons) responsible for the subject
matter (in a direct engagement) or subject matter information of the assurance engagement.
The practitioner is the individual providing professional services that will review the subject
matterand provide the assurance.
A subject matter
This is the data to be evaluated that has been prepared by the responsible party. It can take
many forms. including financial performance (eg historical financialinformation), non-
financial performance (eg key performance indicators), processes (eg internal control) and
behaviour (eg compliance with laws and regulations).
Suitable criteria
The subject matter is evaluated or measured against criteria in order to reach an opinion.
Evidence
Sufficient appropriate evidence needs to be gathered to support the required level of
assurance.
Assurance report
A report containing the practitioner's opinion is issued to the intended user..
(b) Event 1: Defective chemicals
A batch of chemicals produced before the year end. costing $0.85m to produce, has been
found to be defective after the year end. Its scrap value is $0.1m: Inventory should be valued
at the lower of cost and net realisable value in accordance with lAS 2 Inventories (lAS 2). This
is an adjusting event in accordance with lAS 10 Events after the Reportfng Period (lAS 10). As it
stands, the inventory is overstated by $0.75m. This represents 13.4% of profit before tax and
1.4% of revenue and is therefore material to the financial statements. -
Audit procedures to be performed
Obtain a· schedule to confirm the cost value of the defective batch of $0.85m and
documentary proof of the scrap value of $0.1m.

368 Audit and Assurance @BPP

 - -
. ·-' . .

Discuss with management wheth<3r this is the only defective batch or whetherther:e are -•. "-
likely to_ be other batches affected. - - -
• Review quality control reports to assess the-likelihood of other batches beirig affected and
discuss results of testing with tE:lchnical team members at Panda.
Event 2: Explosion
An explosion shortly after the year end has resulted in damage toinventory and property, .
pbnt and equipment. The amount of inventory and .property; plant and equipme-nt damaged -
is estimated to be $0.9m. It has no scrap value; Inventory and property, plant and equipment
are therefore- overstated by $0.9m. This represents 16.1% of profit before tax and 1.6% of
revenue, and is therefore material. The explosion represents a non-adjusting event in
accordance with lAS 10 Events after the reporting period. It therefore does not require
adjustment in the financial statements but should be disclosed as it is material (lAS 10).
Audit procedures to be perform~d
Obtain a schedule of the inventory and property, plant and equipment damaged in the
explosion to verify the value of $0.9m.
'jJ
Visit the site where the explosion took place to assess damage.
• Discuss with directors the need to make disclosure in the financial statements and review
any disclosure note drafted.
• Inspect insurance agreement to assess whether any claim can be rnade on the insurance.
(c) Effect on ouditor•s report of the explosion
The directors should make disclosures in the financial statements pbqut the explosion and the
effect on inventory and property, plant and equipment. This is because the amount involved
is material and affects the value of opening inventory and property, plant and equipment in ·
the following financial year. - ·
If the directors refuse to rnake the disclosure, then the auditors would modify the opinion on
the financial statements on the basis of o material misstatement. The opinion would be
qualified as the matter is material but unlikely to be pervasive.
A 'Basis for qualified opinion' paragraph would be included in the auditor's report. describing
the auditor 1s reason for modifying the opinion and the effect of the explosion on the opening
balances in the financial statements for the following financial year (ISA 705). The 'basis for
qualified opinion' would be placed immediately after the Opinion paragraph.

@BPP Answers 369

 June 2018
210 The correct answer is: (1). (3) and (4) o~ly
Candidates are reminded to ensure that they understand the different between the
auditor's and management responsibilities in .relation to goi_ng·concern and to _ensure that
they understand the requirements set out in ISA 570 Going Concern. Statement (2), which
relates to determining the basis on which the financial statements should be prepared, is a
management responsibility.
· 211 The correct answer is: Limited assurance, negative conclusion
Candidates should ensure that they understand the difference between reasonable and
limited assurance and the circumstances iR which each will be offered. Reasonable
assurance is a high level of assurance and should only be provided when sufficient and
appropriate evidence can be gathered. In the circumstances, which were described, the
most appropriate level is assurance was limited assurance provided through a negative
conclusion.

September 2018
212 The correct answers are:
To consider the adequacy of the accounting records which have been maintained
To obtain an understanding of the internal control system in place
The auditor does not guarantee the going concern status of the company. Accessing the
books and records of the company represents one of the rights of the 9uditor which
enables them to achieve their objectives.
This question is a straightforward knowledge-based question. Candidates should be
reminded of the importance of having a good-understanding ofthe basic principles of the
role of the auditor. ·
This question was not well-answered in the exam~ with many candidates misunderstanding
the auditor1s responsibility regarding going concern and confusing the auditor's rights and
responsibilities.
213 The correctanswer is: 2 and 3 oni~J
This question demonstrates two important points. Firstly, candidates should ensure that
they understand the difference between a test of control and substantive procedures. The
test described in (1) is a test of control (ie it provides evidence as to whether the control of
board approval has operated effectively) and therefor~ does not provide substantive
evidence.
The question also highlights the importance of reading cill information provided carefully.
The test described in (4) is a valid p·rocedure but it provides evidence regarding other
assets, not the headquarters as specified in the requirenJent.

370 Audit and Assurance @BPP

December 2018 . .
214 The correct aJ1swer is~J. 3 and 4 only
· The effective date of the revaluation, the amount of the reva,luatiol:J increase and the
carrying amount of the head office under the cost model are disclosures required by lAS 16
Property, Plont ond Equipment.
This question demonstrates two key points~. Firstly it highlights the importance of .
disclosures to the audit. Obtaining sufficient appropriate evidence duringthe audit
·requires an assessment of the adequacy of disclosures included in the financial statements·.
Secondly candidates should also note the need for accounting knowledge to answer this·
question. An understanding of key accounting principles is critical to the audit process
therefore candidates must ensure.that thei:J are familiar with these.
Guidance for candidates regarding the accounting knowledge ass·umed forthis exam is
included in the examinable documents list.

215 The correct answer is: Unmodified opinion with no further disclosure
The amount of the disputed adjustment is not material, being 2.2% of profit before tax,
therefore there is no material misstatement. An unmodified opinion would be issued
meaning that options three and four are not correct.
The nature of the issue is such that it would not be disclosed in an emphasis of matter
paragraph so option two is incorrect; A significant number of candidates chose this option.
Candidates should note the applied nature of this question and the importance of using
the information provided in the scenario to come to a conclusion. Candidates must also
ensure that they understand that an emphasis of matter paragraph is included in the
auditor's report where a matter, appropriately presented or disclosed in the financial
statements~ is of such importance that it is fundamental to the users' understanding of the
financial statements and the auditor wishes to draw attention to that disclosure.

March 2019
216 The correct answer is: 1, 2. 3 and 4_
Although straightforward many candidates found this question challenging. This· question
demonstrates the level of detailed knowledge of an ISA which may be tested, in this case
ISA 700 Forming on Opinion and Reporting on Financial Statements.
Items described in (1) and (4) would be included in the basts for opi~ion paragraph.
Item (2) would appear at the start of the auditor's report so that the auditor's report is
clearly disting.uished from reports issued by others.
The item described in (3) would be included as. part of the auditor's responsibilities for the
audit of the financial statements section.

217 If the directors refuse to amend the inconsistency, then the auditor's opinion will be J-;::·

[:~-~-~?.~:~!~~~:] and the inconsistency will be explained in a [~~~-~!_~-~~~~~~:~;~ -~~~-:~~~~ .

As with the previous q-uestion this question requires a detailed knowledge and
understanding of an ISA, in this ca&~_ISA 720 TheAuditpr's Responsibilities Relating to Other
Information.
As the financial st-atements are not rnisstoted the audit opinion will be unmodified. However~
in accordance with ISA 720 as there fs an uncorrected material misstatement in the othe-r
information. the auditor's report n1ust ir_1c;lude a statement describing the. issue in the other
information sect1on. ·

@sPP Answers 371

 June2019
. 218· The correct qnswers dre: ·

The audit' committeers terms of reference should include· ---

reviewing and monitoring the external auditor's ..
TRUE
independence and objectivity
.....

The audit committee's terms of reference should include

FALSE
appointing and removing the external auditors

The audit committee's terms afreference should include

evaluating and monitoring the effectiveness of the TRUE
internal audit function

This question tests knowledge of corporate governance responsibilities and in particular

those of the audit committee and demonstrates the level of detailed knowledge which is
required. It also demonstrates the level of care which must be taken when reading the
question and thinking through the options.
The audit committee makes recommendations in relation to the appointment and removal
of the external auditors but it is the shareholders who are responsible for their appointment
and removal. Candidates who rush through this type of question or who word spot without
considering the whole of the context of the question are likely to answer incorrectly.

219 A & Co's evaluation of management's assessment of Z Co's abilit!J to continue as a going

concern must cover the period up to (i~_. ?=.~_:mber 2~ .

As with the previous question, this question requires detailed knowledge, in this case of ISA
570 Going Concern. However, it also demonstrates the need to be able to apply knowledge
to a practical scenario._ln accordance with ISA 570, the auditor is required to review the
same period as that used by management to determine whether the going concern basis is
a·ppropriate. This must be at least 12 months from the end of the reporting period.
The management of Z Co has used a cash flow forecast for 12 months to December 20X9.
As this is at least 12 months from the end of the reporting period, this is date to which A &
Co's assessment must cover.

September 2019
220 The correct answer is: Attend the cash count at the year end and reperform the count
This question tests audit procedures relevant to bank ond cash but also an ability to relate
procedures to a specific assertion. It demonstrates the importance of understanding wh!;J a
procedure is performed and the speci-Fic objective which it achieves.
By attending the cosh count and reperforming the count the auditor is able to physically
verify the existence of the cash. Agreeing a sample of accounts detailed on the bank
confirmation letters to the trial balance provides evidence of completeness of bank and
· cash balances. Reviewing bank statements to verify that they are in the name of the
company provides evidence of rights and obligations and the review of disclosures provides
evidence relating to presentation.

372 Audit and Assurance @aPP

221 The correct ansWer is:_1 and 4
This question.demonst.rates-~he need for.c·andidates tqhavea thorough understanding of
all aspects of the syllab"us. While the topic of auditors' reports is an important one,
candidat-es-areremindedthat section E of the syllabws also includes subsequent events-.
going concern, written·representations and audit finalisation and the final review.
Revising: the·audit plan to allow for changing circumstanoes helps to ensure that sufficient·
anduppropriate audit_evidence is obtoined:Perforrning audit work in accordance with
relevant auditing~-legai and professional standards enhances the quality of the audit work
and therefore the evidence on which the audit opinion is based; The audit firm ·should
ensure that it remains independent throughout the audit and the auditor is required to
communicate deficiencies which are of sufficient importance to merit management's
attention. However, neither of these issues has a direct effect on the evaluation of audit
evidence at the review stage and its suitability for ·providing the basis for the audit opinion.

December 2019
222 The correct answer is: 1 and 3 only
This question tests knowledge of corporate governance guidelines. It demonstrates not only
the level of detailed knowledge which is required but also the importance of reading the
question carefully rather than rushing to a conclusion. It is the chair, not the chief executive
officer who is responsible for the board. The audit committee will liaise with the external
auditor, although this is not its key role, but is not responsible for their appointment. The
audit committee may make recommendations regarding the appointment of the external
auditor but appointment is normaii!::J b!d the shareholders at a general meeting.
223 The correct answer is: Request that management extends the assessment period to 30 April
20X6
This question examines knowledge of ISA 570 Going Concern. However it also demonstrates
the need to be able to apply the principles to a practical scenario. ISA 570 requires that in
evaluating the entity's ability to continue asCi going concern the auditor must cover the
same period as that used by management to make its assessment. If management's
assessment covers a period of less than twelve months from the date of the financial
statements the auditor is required to request management to extend its assessment period.
In this case the auditor must request that management extend the assessment period to 30
April 20X6. Performing additional audit procedures would not resolve the fact that the
assessment period is not as required by ISA 570, therefore the third option is not an·
appropriate response in thisinstance.

March 2020
224 The correct answers are:
All transactions have been recorded in the accounting records and are refleCted in ttJe
financial statements --
Significant assumptions used in making accounting estimates are reasonable
This question examines knowledge of ISA 580 Written Representations. The ISA requires the
auditor to requesta number: of-written representations in relation to management's
responsibilities and these include the statement at A above. There are also a number of·
other ISAs which require subject rnatt~r specific written representations. These include a
requirement in ISA 540 Auditing Accounting Estimates, Including Fair Value Accounting
Estimates, and Related DisClosures for a written representation as set out in the fourth ·
option.
This question dso dernonstmtes the need .for candidates to think carefully and not to rush·
to a conclusion to avoid falling for the distracters. The secorid statement would be included
in the letter of engagement and the third in the auditor's report.

@BPP Answers 373

225 , The correct answers are:
Design and perform analytical procedures to-confirm the-_financiat statementsar:e
consistent with the auditor's understanding of the entity-
.. Redssess materiality to confirm whether it remains appropriate in th~ context of Y Co's
final financial statements -
ISA 520 Analytical Procedures requires the auditor to perform analytical procedures near
the end of -the audit to assist the auditor when performing an overall conclusion. ISA 320
Materiality in Planning and Performing an Audit states that materiality may n-eed to be
revised as the audit progresses. At the review stage of the audit, the auditor considers
whether the aggregate of uncorrected misstatements is material. In-doing so the auditor
must consider whether the materiality level is still appropriate:
This question is a reminder to candidates riot to overlook the finalisation and review stage
of the audit. It is an essential part of the audit process and candidates must be prepared
for questions on this. It also demonstrates the importance of understanding the process of
the audit overall and the procedures that are performed at each stage. For example, the
third, fourth and fifth procedures are all valid audit procedures but the third procedure is
performed as part of the work on acceptance of a client and the fourth and fifth are
performed as part of the fieldwork.
The first procedure is not valid as it is management that would make an assessment of the
company's ability to continue as a going concern. The auditor is required to gather
sufficient and appropriate evidence that management's assessment and use of the going
concern basis is appropriate.

July 2020
226 The correct answers are:
For a sample of assets held in the factory and warehouse record the asset identity
number as marked ·on the asset and trqce back to the relevant entry in the non-current
asset register
• Trace a -sample of costs recognised in the repairs ond maintenance account to invoices
and determine the nature of the expenditure and assess whether any capital items have
been expensed
Tracing from the asset to the non-current asset register provides evidence of completeness
a·s the total balance for plant and machinery will only be complete if the assets sampled
are recorded in the register. (Tracing from the register to the physical asset would provide
evidence of existence.) The plant and machinery balance must also include all relevant
capital expenditure. If capital expenditure has been expensed in error, then the balance will
not be complete.
Reviewing board minutes for evidence of authorisation is a test of controlsand therefore
does not provide substantive evidence. In addition, the fact that the capital expenditure
has been authorised does not mean that the corresponding assets have been included in
the accounting records. Enquiry regarding the fully depreciated assets would provide
evidence in relationto valuation.
This question der_nonstrates the need for candidates to be able to apply their knowledge of
substantive procedures and the importance of fully understanding the nature of the
evidence obtained by performing a specific procedure, in this case to·determine whether
they are relevant to the completeness assertion. It clso highlights the importance of being
able to distinguish between ·a substantive procedure and a·test of control. A test of control
is an audit procedure designed to evaluate the operating effectiveness of controls, whereas
a substantive procedure is designed to detect material misstatement at the assertion level.
Confusing tests of controls and substantive procedures is a corn-mon error. Candidates
must ensure they understand the difference-betw~en the two types of test and gcm.provide
examples of both as specified in the syllabus.

37'+ Audit and Assurance @aPP

227 The correct answer is: 2 and 3
Tracing loan-pc]yments·fr.om th~ general ledger tothe bank statement allows the auditor to
confirm how much capital ~.as.-been repaid and ·reconcile the dosing balance.
· CC!nfirmation of the balcince to the bank letter provides3td party evid.ence of the closing
balance. · · ·
The procedure described in statement 1 is a test of contro1s. As such lt does not provide
evidence of the yeqr:-end balance itself. Candidates should be .aware that tests of controls -- ·
·may be included as-distracter's in ques.~ions testing substantive procedures and vice verso,
therefore it is essential that they understand the difference. Comparing loon liabilities at
the end of the current year to the previous year would not be a valid procedure in this
instance as the information states that the company has sourced external financE? for the
first time during the year.. As- a result, this comparison would be meaningless. Candidates
must be able to apply their knowledge of substantive procedures. In this case candidates
were required to take in to account the specific circumstances described in the scenario
when considering whether a procedure would be appropriate. Candidates must ensure
that they answer OT questions within the context set in the scenario rather than responding
to them as standalone questions.

@BPP . Answers · 375

 .

376 Audit and Assurance

@BPP
Mock Exams
378 Audit and Assurance
@BPP
 -ACCA:

Audit and Assurance

Mock Exam~1

)__
September.2016 (amended)

Questions

Time allowed 3 hours

This mock exam is divided into two sections:

SECTION A- ALL 15 questions are compulsory and MUST be attempted
SECTION B-ALL 3 questions are compulsory and MUST be attempted

DO NOT OPEN THIS EXAM UNTIL YOU -ARE READY-TO START

UNDER EXAMINATION CO.NDITIONS

@BPP 379

I~
380 Audit and Assurance
\¥JBPP
 Section A
ALLi5 que:~tions are compulsory and MUST be attempted
ViolaS Co
· Each question is_worth 2 marks_.
The following scenario relates to questions 1-5.
Note_. Assume it is 1 July 20X5
You are an audit senior of Viola & Co ahd are currently conducting the audit of Poppy Co for the
year ended 31 March 20X5. ·
Materiality has qeen set at $50.000; and you are carrying out the detailed substantive testing on
·the year-end payables balance. The audit manager has emphasised that understatement of the
trade paya!Jies balance is a significant audit risk.
Below is an extract from the list of supplier statements as at 31 March 20X5 held by the company
and corresponding payobles ledger balances at the same date along with some commentary on
the noted differences:

Supplier Statement balance Payables /edger balance

$'000 $'000
Carnation Co 70 50
Lily Co 175 105

Carnation Co
The difference in the balance is due to an invoice which is under dispute due to faulty goods
which were returned on 30 March 20X5.
Lily Co
The difference in the balance is due to the supplier statement showing an invoice dated 29 March
20X5 for $70,000 which was not recorded .in the financial statements until after the year end. The
payables clerk has advised the audit tepm that the Invoice was not received until 2 April 20X5.

•- The audit manager has asked \:JOU to reviewthe full list of trade pdyables and select
balances on which supplier statement reconciliations will be performed ..
Indicate on the table below if the following items should be included in; or excluded from,
your sample. -

~
~

~
~-

(2 marks)

@BPP Questions 381

~
2 Which of the following audit procedures should be performed in relation to the balance .
with lily Co to deter~ine if the payables balance is understated? ·
0 Inspect the goods received note tb determine when the goods were received
0 . Inspect the purchase order to confirm itis dated before the ye9r end.
0 Review the post year end bank ledger account for evidence of payment of the invoice
0 Send a confirmation request to Lily Co to confirm the outstanding ba~ance (2 marks)

3 Which of the following audit procedur-es should be carried out to confirm the balance
owing to Carnation Co?
(I) Review post year end credit notes for evidence of acceptance of return
(2) Inspect pre year end goods returned note in respect of the items sent back to the
supplier
(3) Inspect post year end bank ledger account for evidence that the amount has been
settled
0 1, 2 and 3
0 1 and 3 only
0 1 qnd 2 only
0 2 and 3 only (2 marks)

4 The audit manager has asked you to review the results of some statistical sampling testing •
. which resulted in 20% of the payables balance being tested.
The testing results indicate that there is a $45,000 error in the sample: $20,000 which is
due to invoices not being recorded in the correct period as a result of weak controls and
additionally there is a one-off error of $25,000 which was made by d temporary clerk.
What would be an appropriate course of action on the basis of these results?
0 The error is immaterial and therefore no further work is required.
0 The effect of the control error should be proje~ted across the whole population.
0 Poppy Co should be asked to adjust the payables figure by $45,000.
0 A different sample should be selected as these results are not reflective of the
population.· (2 marks)

5 To help improve audit efficiency, ViolaS Co is considering introducing the use of

automated tools and techniques for some audits, You have been asked to consider how
these could be used during the audit of Poppy Co.
Which of the following is on example of using test data for trade payables testing?
0 Selecting a sample of supplier balances for testing using monetary unit sampling
0 Recalculating :the ageing of trade payables to identify balancef? whfch may be in
dispute
0 Calculation of trade payables payment period to use in analytfcalprocedures
0 Inputting dummy purchase invoices into the client system to see if processed correctly
(2 marks)_

(Total =10 marks)

382 Audit and Assurance @aPP

Blenkin S Co·
·The following.~cenario ·relates to questions 6-10.
Note •. Assume it is 1 ~uly 20X5
You are an audit.manager at Bien kin & Co and are .approaching the ~nd of the audit of Sampson
Co, which is a large listed retail.er. The draft financial statt:~ments cl:lrrently show a profit before ..
tax of $6.5 millic>n ond revenue of $66 million fort he finanCial year ended 31·March 20X5. You
have been informed_thatthe fin.ance director left Sampson Co ori 28.February 20X5.
As part of the subsequent events audit procedures, you reviewed post year en_d board m~eti!J9
minutes and discovered that a legal case for unfair dismissal has beeri brought against Sampson
Co by the finance direptor. During a discussion with the huma·n resources (HR) director of .
Sampson Co, you established that the company received notice of the proposed legal claim on 10
April 20X5. .
The HR director told you that Sampson Co's lawyers believe that the finance director's claim is
likely to be successful, but estimate that $150,000 is the maximum amount of compensation
which would be paid. However, management does not intend to make any adjustments or
disclosures in the financial statements.

6 Blenkin 8Co has a responsibility to perform procedures to obtain sufficient) appropriate

evidence that subsequent events are appropriately reflected in the financial statements of
Sampson Co. The timeline below shows four dates. ,
Indicate, by selecting from the following options, up until which date the auditor should
perform subsequent events procedures.
0 The date the subsequent events review is performed
0 The date of the approval of the financial statements
0 The date of the auditor's report
0 The date the financial statements are issued (2 marks)

7 If, after the financial statements have been issued, Bien kin SCo becomes aware of a fact
which may have caused its report to be amended, the firm should consider sev~ral possible
actions.
· Which TWO of the following are appropriate actions for Blenkin &Co to take?
D Discuss the matter with management and, where appropriate, those charged with
governance
0 Obtain a written representation-from management
0 Consider whether the firm should resign fromthe engagement
0 Enquire how management intends to address the matter in the financial statements
where appropriate (2 marks)

Questions 383
8 Which of the folloWing audit procedures should be p~rformed to form a conclusion as to
whether th~. financial statements require amendment in
relation to the unfair dismissal
~~ .

j1) Inspect relevant correspondence with Sampson Co's lawyers

(2) Write to the finance director to confirm the claim and level of damages
. __ (3) Revi_ew the post year end bank ledger account for ·evidence of pqyments to the
finance director ·
(4) Request that management confirm their views in a written representation
0 1. 2 and 3
0 t 2,and 4.
0 1, 3 and 4
0 2, 3 and 4 (2 marks)

9 You are drafting the auditor's report for Sampson Co and the audit engagement partner
has reminded you that the report will need to reflect the requirements of ISA 701
Communicating Key Audit Matters in the Independent Auditor's Report.
According to ISA 701, which of the following should be included in the 'Key audit matters'
paragraph in the auditor's report?
0 Matters which required significant auditor attention
0 Matters which result in a modification to the audit opinion
0 All matters which were communicated to those charged with governance
0 All matters which are considered to be material to the financial statements

10 Which of the following audit opinions will be issued if the unfair dismissal case is NOT
adjusted for or disclosed within the financ:ial statements?
0 A qualified audit opinion/as the financial statements are materially misstated
0 A qualified audit opinion as the auditor is unable to obtain sufficient appropriate
evidence
0 An unmodified opinion with an emphasis of matter paragraph
0 An unmodified audit opinion (2·marks)

(Total= 10 marks)

Sycamore & Co
The following scenario relates to questions 11-15.
Note. Assume it is 1 July 20X5
Sycamore 8 Co is the auditor of Fir Co, a listed computer software company. The audit team
comprises an engagement partner, a recently appointed audit manager, an audit senior and a
number of audit assistants. The audit engagement partner .has only been appointed this year due
to the rotation of the previous partner who had been involved in the audit for seven years. Only
tbe audit senior has experience of auditing a company in this specialised industry. The previous
audit manager, who· is a close friend of the new audit manager, left the firm before· the completion
of the prior year audit and is now the finance director of Fir Cg_. -
The board of Fir Co has asked if Sycamore & Co can take on some additional work and have
asked if the following additional non-audit services can be provided:
Payroll: Routine maintenance of pabjroll records

381t Audit and Assurance @aPP

 Recn.Jitment: Assistance with.theselection of a new financial controller including the checking of
-references -
Tax; Tdx services whereby Sycamore & Co would liaise wlth the tax authority on Fir Co 1S behalf
- Sycamore &Co has ldentifled that the cur;ent year fees to be received from .Fir Co for audit and
other services will represent 16% of the firm's total fee income and totalled 15.5% in the prior year.
The audit eng·agement partner has asked you to consider what can· be done in relqtion to this
self-interest thredt. . .

11 Compfete the following sentence$ regar_9ing the audit team by selecting from the options
provided. .

In relation to the composition of the current audit team, the fundamental principle of

§_. . . . . . ._.____. :~:] is at risk.

An appropriate safeguard to deal with this risk would be to ~2)-. ---·--·--···--··-······;].
Pull down list 1
Confidentiality
Professional competence

Pull down list 2

• Appoint a completely new audit team
Provide industry training for team members
Reinstate the previous partner
Resign from the engagement
(2 marks)

12 Which of the following identifies the threat which could arise as a result of the finance
director•s previQUS employment at Sycamores Co and recommends an appropriate.
· safeguard?
0 · A self-review threat; review the work performed by the previous audit manager
0 A familiarity threat; a different audit manager should be appointed
0 A self-reviewthreat; change the existing audit plan
0 A familiarity threat; the firm should resign from the engagement (2 marks)

@BPP Questions 385

13 Ignoring the potential effect on total fee levels, match the I')On-audit service to the threat
to independence which would be created if Sycamore.&·Co were)9 provide the proposed
services.

Threat to
Non-audit service independence

Recruitment
&.......,----------'~ I Self-review

Tax .___ _ _ _ _ _ _ ___.I J Self-interest

Pa[Jroll L - -_ _ _ ____;,_ _ ___.1 I Advocacy

(2 marks)

14 Which of the following safeguards would NOT be relevant in mitigating the threat
identified in relation to fees?
0 Disclosure to those charged with governance that fees from Fir Co represent more than
15% of Sycamore 8 Co's total fee income
Q. A pre-issuance review to be conducted by an external accountant
0 The use of separate teams to provide the audit and non-audit services
0 A post-issuance review to be conducted by an external accountant or regulatory body
(2 marks)

15 During the course ofthe audit of Fir Co. a suspicious cash transfer has been identified. The
audit team has reported this to the relevant firm representative os·a potential money-
laundering transaction.
Which of the following statements is true regarding the confidentiality of this
information? · · ·
0 Details of the transaction can only be disclosed with the permission of Fir Co.
0 If there is a lega.l requirement to report money laundering, this overrides the principle of
confidentiality.
0 Sycamore 8 Co is not permitted to disclose details of the suspicious transaction as the
information has been obtained during the course of the audit.
0 In order to maintain confidentiality, Sycamore 8 Co should report its concerns
anonymously. {2 marks)

(Total =10 marks)

386 Audit and Assurance @BPP

 Section B
ALL THREE questions are compulsory and MUST be attempt~d.

16 Heraklion
It is 1 July 20X5. Heraklion Co is a manufacturer offootballi.ond is. a_ new audit client for your
firm. You are an audit Sl,lpervisor of Spinalonga & Co and are currently preparing for the
forthcoming interim and final audit for the year ending 30 June 20X5. You are required to
document and assess the sales system~ recommend control improvements to deal with o specific
ir fraud issue and undertake substantive testing of revenue.
The sales system is an integrated module within the computerised accounting system. The bank
and payroll systems are not integrdted.
Sales ordering, goods dispatched and invoicing
Heraklion Co sells footballs to a range of large and small sports equipment retailers in several
1_!,
countries. Sales are made through a network of sales staff employed by Heraklion Co, but new
!~
customer leads are generdted through a third-party company. Sales staff are responsible for
assessing new customers' creditworthiness and proposing a credit limit using an online form
within the sales system which is then electronically authorised or rejected by the sales director.
The sales staff have monthly sales targets and are able to use their discretion in granting sales
discounts up to a maximum of 10%. They then enter any discount granted which is recorded in the
customer master data file.
The sales staff visit customer sites personally with their laptops and orders are completed using
an online order form. When the form is completed and submitted one copy is automatically ·
erhailed to the customer's email address and the other copy is automatically emailed to the
salesperson that assisted with raising the order.
The company markets itself on being able to dispatch all orders within three working days. Once
the auto-emailed order is received, the salesperson prepares a separcte email to the finance
department and warehouse dispatch team with the customer ID and order details. From this a
pick list is generated. Sequentially numbered gpods dispatched notes (GDNs) are generated from
tho system when the sports equipment items are recorded as being taken out of inventory. These
completed GDNs are printed and filed in the warehouse. ·
Sequentially numbered invoices are generated using the pick lists for quantities and the customer
master data file for prices. Standard credit terms for customers are 30 days and on a monthly
basis s"ales invoices which are over 90 days outstanding are notified to the relevant salesperson to
chase paymentdirectly with the customer. · ·
Payroll fraud
The finance director, Montse Mirabelle, has informed you that a significant fraud took place
during the year in the payroll department. A number of fictitious employees were set up on the
payroll ond wages were paid into one bank account. This bank account belonged to two
supervisors; who were married, and were employed by Hemkllon Co. One had sole responsibility
for setting up new joiners in the payroll system and the other processed and authorised bank '
transfer requests for wages and supplier payments. These employees no longer work for the -·•
company and Montse has asked the au~ it firm for recormnendations or\ how to improve controls
in this area to prevent this type of fraud~ occurring again. Heraklion Co operates a huma-n
resources department.

Required
(a) Describe TWO methods for documenting the sales system, and for each -e~plain ONE
adv6ntage and ONE disadvantage of using this method. (6 marks)

(b) Identify and E?Xplain SEVEN deficienCies in the sales system of Heraklion Co and provide a
recommendation to address each of-these de.ficiencies.
Note. Use the below table structure to format your answer in the C8E software.

@BPP Questions 387

 Control deficiency Control recommendation

(1Lt marks)
(c) In relation to the payroll froud, identify and explain THREE controls Herakllon Co should
implement to reduce the risk of this type of fraud occurring again and, for each control, .
describe how it would mitigate the risk. · (6 marks)

(d) Describe substantive procedures the auditor should perform to obtain sufficien.t and
appropriate audit evidence in relatioll to Heraklion Co's revenue. ('+marks)

(Toted =30 marks)

17 Elounda
It is 1 July 20X5. Elounda Co manufactures chemical compounds using a continuous production
process. Its year end was 30 April 20X5 and the draft profit before tax is $13.6 million. You are the
audit supervisor and the year-end audit is due to commence shortly. The following matters have
been brought to your attention:
Revaluation of property$ plant and equipment (PPE)
At the beginning of the year, management undertook an extensive review ofEiounda Co's non-
current asset valuations and as a result decided to update the carrying value of all PPE. The
finance director, Peter Dullman, contacted his brother} Martin, who is a valuer and requested that
Martin's firm undertake the valudtion, which took place in July 20X4.
Inventory valuation
Your firm attended the year-end inventory count for Elounda Co and ascertained that the process
for recording work in progress (WIP) and finished goods was acceptable. Both WIP and finished
goods are material to the financial statements and the quantity and stage of completion: of all
ongoing production was recorded accurately during the count.
During the inventory count, the count supervisor noted that a consignment of finished goodsj
compound E243, with a value of $720,000, was defective in that the chemical mix was incorrect.
The finance director believes that compound E243 can still be sold at a discounted sum of
$400,000.
Bank loan
Elounclo Co secured a bank loan of $2.6 rrlillion on 1 Jui!J 20X3. Repaymehts of $.200~000 ore due
quarterly, with a lump sum of $800,000 due for repayment in October.20X5. The company met
all loan payments in 20X4 on time, but was late in pa!:Jing the January and April 20X5
repoyn1ents.
Required
(ci) Describe substantive procedures you should perform to obtain sufficient, appropriate audit
evidence in relation to the revaluation of property, plant and equipment (PPE). (5 marks)

(b) Describe substantive procedures you should perform to obtain sufficient, appropriate audit
evidence in relation to the inventory valuation. (6 marks)

(c) Describe substantive procedures you should perform to obtain sufficient, appropriate audit
evidence in relation to the bank loan. ('+marks)

(d) Describe the procedures which the auditor of Elounda Co should perform in assessing
whether.or not the compan!:J is a going concern. - · (5 marks)
(Total= 20 marks)

388 Audit and Assurance @.BPP

 18 Chania·
·It is 1 J~ly 20X5. Yoy are an audit supervisor of Chania S Co and.are planning the a·uditofyour
client, Sitio Sparkle Co, which manufacture~ cl~oning products,_ Its year-end was 3.0 April 20).<.5
and the draft profit before tax is $33.6 n1illion. You are supervising a large audit te.a_m for the first
time and will have specific responsibility for supervisjng and reviewing the work of the audit
assistants ln younearh. . . .· ·... .. . · · _ · · . ·
Sitia Sparkle Co purchases mostof-its.raw materials from suppliers in Africa and these goods·-are
· shipped directly to the company's warehouse-and the goods are_ usuaByin transit for up·to·thrae
weeks. The company has incurred $1.3 million of expenditure on developing d new range of
cleaning products which ore due to be launched into the marketplace in Augwst 20X5. In June
20X4, Sitio Sparkle Co also invested $0.9 million in a complex piece of plant and machinery as
part of the development process. The full amount has been capitalised and this cost includes the
purchase price, installation costs and training costs.
This year, the bonus scheme for senior management and directors has·been changed so that,
rather than focusing on profits, it is insteqd based on the value of year-end total assets. In
previous years an allowance·for receivobles 1 made up ofspecific balances. which equalled almost
1% of trade receivables, was maintaine<:f• However. the finance director feels that this is excessive
and unnecessary and has therefore notincluded it for 20X5 and has credited the opening
balance to the profit or loss account.
A new general ledger system was introduced in February 20X5; the finance director has stated
that the data was transferred and the old and new systems were run in parallel until the end of
May 20X5. As a result of the additional workload on the finance team. a number of control
account reconciliations were not completed as at 30 April 20X51 including the bank reconciliation.
The finance director is comfortable withthis as these reconciliations were completed successfully
for, both March and May 20X5. In addition, the year-end close down of the purchase ledger was
undertaken on 8 May 20X5.
(a) ISA 300 Planning on Audit of Financial Statements provides guidance to assist auditors in
planning an audit. ·

Required
Explain the benefits of audit planning. (It marks)

-
~ (b) Describe SIX audit risks, and explainthe auditor's response.to each risk. in planning the audit
of Sitia Sparkle Co. ·
Note. Use the below table structure to format your answer in the CBE software.

Audit risk Auditor's response

(12marks)
. (c) In line with ISA 220 (Revised) Quo/itg.Mdnogeinent for an Audit of Financial Statements, ·
~}
describe the audit supervisor's respon9ibilities in relation to supervising and reviewing the
~, audit assistants' work during the audit of Sitia Sparkle Co. (It marks)),,,

(Total =20 marks)

L
--·
: I @BPP Questions 389

:-
_2i~)
390 Audit and Assurance
@aPP
\

Answers
DO NOT TURN THIS PAGE UNTIL YOU HAVE
COMPLETED THE MOCK EXAM
392 Audit and Assurance @aPP
 Plan of attack
If this were the real Audit and Assurance exqm and you had been told to start the· exam~ what
would be going through yourminq? ·
An ·important thing to say (while there is still time) is that it is vital to have a good breadth of
knowledge of the syllabus because all the questions are compulsory. However, don~t panic. Below
we provide guidance_.on how to approach the exam~ ·
Looking through the exam
Section A has three objective test cases. each with .five questions. This is the section of the E)xam
where the examining. team can test knowledge across the breadth of the.syllabus. Make sure you
read these cases and questions carefully. The distraotors are designed to pr~sent plausible, but
incorrect, answers. Don't let them mislead you. If bJOU really have no idea-- guess. You may even
be right. · -
Section 8 has three longer questions:
• Question 16 is a 30-mark internal controls question mainly focused on control deficiencies and
recommendations in a sales system. You are also asked to consider controls that would help to
prevent fraud. Don't panic- take your time to read the scenario and what tJOU are asked to
do. TrtJ to relate tJOur answers to the specific scenario as much as tJOU can.
• Question 17 is a 20-mark question on audit procedures relating to PPE, inventory, a bank loan
and for assessing going concern. You have a number of individual areas to cover here so take
care with timing.
• · Question 18 is a 20-mark planning and audit risk question. Make sure you have noticed that
part (b) requires you to identiftJ risks and explain the auditor's response to these.
Allocating your time
BPP's advice is -to aiWObJ$ allocate your time according to the marks for the question. However,
use common sense. If you're doing a question but haven't a clue how to do part (b)~ you might be
better off reallocating your time and getting more marks on another question, where you can add
something you didn't have time for earlier on. Make sure tJOU leave time to recheck the OTs and
make sure you have answered them all. ·
Forget about it!
And don't worry if you found the exam difficult. More than likely other candidates will too. If this
· were the real thing tJOU would need toforget the exarn the mi.nute you finish the exam and think
about the next one. Ort if it is the last one, celebrate! -

@aPP Answers 393

Section. A

Viola &Co
The correct answers are:

Suppliers with _material bolances at the year enp INCLUDE

~Supplierswhich have a high volume of business with

INCLUDE
PoppbJ Co

Major suppliers with nil balances at the year end INCLUDE

Major suppliers where the statement agrees to the ledger EXCLUDE

Where completeness is the keb) assertion, the sample should be selected to verify where the
balance may be understated and therefore should include suppliers with material
balances, suppliers with a high volume of business with Poppy Co and major suppliers with
no outstanding balance at the year end.
2 The correct answer is: Inspect the goods received note to determine when the goods were
received
In order to determine if the balance with Lily Co is understated, the auditor should
determine if the goods should be included in payables.atthe year end by inspecting the
goods received note. ·

3 The correct answer is: 1 and 2 oni!:J

To confirm the balance with Carnation Co, the auditor must determine if the liability exists
for the disputed items at the year end b!:J reviewing pre year end goods returned notes and
post b)ear end credit notes to verifb) that the goods have been returned and the order
cancelled b!:J the supplier.
The correct answer is: The effect of the control error should be projected across the whole
population.
Although the error is immaterial, the auditor-must reach o conclusion on the sample
selected and ·rn order to do so the effect of the error must be considered in relation to the
whole population.
5 The correct answer is: Inputting dummy purchase invoices into the client system to see if
processed corroctlu ·
Test data involves inputting fake transactions into the client's system to test how the
transactions are processed. The other options are examples of audit software.

Blenkin S Co
6 The correct answer is: The date of the auditor's report
As per ISA _560 Subsequent Events, the auditor has on qctive responsibility to carry out
subsequent events procedures between the date of the financial statements and the date
of the auditor's report.

391t Audit and Assurance @BPP

7 The correct answers are:
___ •- Discuss the m9tter with m9nagement- and. whereo-c:lpproprt6te, those chargedwtth
- .
governance
-• .. Enquire how management intend~ to address the matter in the fina_ntiai stat~ments
where-appropriate -
_As per .ISA 560 pqragraph 15, in the circumstances described the a~ditor sho-uld.Jnitiallg
·discuss the matter with management ond understand how management inteflds.t6oddress·
-the matter in the.Jiflancial statements~ - · .

8 The correct answer is: 1, 3 and 4

The auditor is unlikely to ask the finance director, who is no longer an _officer of the.
company and the party involved in the claim., to confirm the level of damages pay(lble .. AII
other procedures would be appropriate. ··· ·

9 The correct answer ls: Matters which required significant auditor attention
As per paragraph 9 of ISA 701 Communicating Key· Audit matters in the Independent
Auditor's Report, in determining key audit matters, the auditor shall determine, fr()rl1 the
matters communicated to those charged with governance, those which required significant
auditor attention. ·

10 The correct answer is: An unmodified audit opinion

The maximum damages of $150,000 is not material to the financial statements ar2~3% of
profit before tax and 0.2% of revenue. Therefore no modification to the audit opinloh is
required.

Sycamore & Co
11 In relation to the composition of the current audit team, the fundamental principle of

Essional c~-~-~:::.~~=...J is at risk.

~~~-~~~~~~-i-~-~-:._sateguard to deal with this ris~ would be to ["-P-~~~id-~--i-~~;t:;iTt;~~-t;-
~-=-~--~.:--~-=-~-~-~~J .
The fundamental principle at risk is professional competence~ as many of the audtttearn
· are_new and do not have relevant experience in relation to the specialised industry in which
Fir Co operates. It is not appropriate to reinstate the previous. partner as, in line with the
· ACCA Code of Ethics and Conduct, the previous partner has been rotated -after seven
years to prevent a familiarity threat The audit firm should offer appropriate training for the ''
audit team to ensure they have the necessary knowledge to carry out the work.
12 The correct answer is: A familiarity threat; a different audit manager should be appointed
As the· previous audit manager has taken up employment with the client as the finance
director, there is a familiarity threat due to the ongoing relationship between the o.ldand
new audit manager. The familiarity threat is not so severe that the firm would need to
resign but C1 new audit manager shoufd be appointed. ·

@BPP Answ~rs 395

13 The correct answers are:

Non-audit service Threat to independence

I Pdyroll I I Self-review
I
I Recruitment
I I Self..;interest
I
I Tax· I I Advocac~
I
As per the ACCA Code of Ethics and Conduct, the following threats would be created from
carrying out the non-audit services requested by Fir Co:
Payroll -Self-review as the auditor will also be involved in auditing the figures included in
the financial statements in relation to wages and salaries.
Recruitment - Self-interest as the auditor would be involved in selecting an officer 9f the
company who has significant influence over the financial statements.
Tax- Advocacy as the auditor may be perceived to be representing and promoting Fir Co's
interest in liaising with the tax authority.
14 The c'?rrectanswer is: The use of separate teams to provide the audit and non-audit
services
Using separate teams will not address the self-interest threat from the fee levels, as
separating the teams will not alleviate the firm's potential financial dependence on Fir Co
and therefore the risk that work is not carried out independently for fear of losing the client.
15 The correct answer is: If there is a legal requirement to report money laundering, this
overrides the principle of confidentiality.
A's per the ACCA Code pf Ethics and Conduct- Confidential information may be disclosed
when such disclosure is required by law.

396 Audit and Assurance - @aPP

 -S_ectionB
16 Heraklion
j .
· Co_urse Book- references
Chapters 9) 10 and 14.

Top tips
This is a 30-mark question which looks primarily at the issue of systems and controls. There are
a number of requirements so it is important that you are careful with your time and deal with
all four requirements. Notice thatin requirements (a), (b)" and (c) the number of issues that you
needto identify is specified. Make sure you take note of this.
Almost half of the marks available relate to part (b). This is a very· common requirement and is
likely to be examined on a rE:!gular basis. The examining team's report on this question ·
indicated that whilst candidates were able to identify the control deficiency they did not
clearly explain the implications of the deficiency. The report also commented that whilst some
candidates were able to provide good recommendations, others provided recommendations
which were either poorly described, did not address the specific control deficiency identified,
or were impractical or incomplete. ,

Easy marks
Part (a) should be straightforward. Although part (b) requires application to the scenario, you
should be familiar with the requirement to identify deficiencies and make recommendations.

Note
The exam is a computer-basedassessment and the answers for this question have been shown
as they would appear in theword processer available on the assessment platform. Where an
is
. answer tabular a table template with the appropriate columns will be provided for you to
type intq. Otherwise, you will just type your answer into the blank area provided.

Marks

(a) Methods for documenting the sales system

• No rrative notes 3
• Questionnaires 3
• Flowcharts 3
Maximum 6
(b) Control deficiencies and recommendations (only 7 issues required) 2
• New customers' creditworthiness assessed by sales staff 2
• Sales staff have discretion to grant discounts up to 10%· 2
Access to master file data 2
• . Inventory not checked prior to order being placed 2
• No copy of order with the sales ordering department, unaple to identif~
unfulfilled orders 2
• Orders not sequentially numbered 2
• Warehouse dispatch team do not receive a copy of the sales order 2
·• Goods dispatch notes. filed by ware(lOuse dispatch team 2
.. Salesperson responsible for chasing invoices over· 90 days old 2
Max 7 issues, 2 marks each
Maximum 14

@BPP Answem> 397

 Marks

(c) Controls to reduce risk of payr~ll fraud

Proof of identity checks undertaken for all new joiners 2
.• Review of the number of employees per department to the payroll system 2
Human resources department initiates request for new jotners 2
• Authorisation-of all new joiners by payrolf director 2
Relatives not permitted to undertake interrelated processes 2
Payroll system reviews same bank account name and number 2
Bank transfer requests authorised by senior responsible official; independent 2
Maximum 6
(d) Substantive procedures for revenue
• Analytical review over revenue compared to budget and prior year
Analytical review of main product categories of sales compared to prior year
• Gross margin review
• Agree sales prices for customers to price list or master flle data
Review credit notes
Follow orders to goods dispatched note, to sales invoice· and to receivables
ledger
Sales cut-off
Maximum 4
Total 30

(a)
ri~rw=.~~;;;;,:~;~~-'if -------~---------::-:-----------;'·-------:---:--c:------··----·-· ..,[Efl
--c··---··-·-·-o-··---·-·------'C;'' ____ ,_,__

l'b ,. ~ ro 11] f) ~ Q B I 1! -5- : X, x' r. X II

I ParagrapO v 1m v ! =. . . :: _. _ ·- ·- € . •E
l
j Documenting the sales system
I1 There are several methods which can be used to document the sales system.
I Narrative notes
!Narrative notes consist of a written description of the system; they would detail what I·
j' occurs in the system at each stage and would include any controls which operate at each l
! stage.
i .
I
I Advantages of this method include:
i
i • They are simple to record; after discussion with staff members~ these discussions are
I easily written up as notes.. ·
\ • They can facilitate understanding by all members of the audit team, especially more
I
.I
junior members who might tind alternative methods too complex.·
.
j Disadvantages of this methbd include:
l
l • Narrative notes may prove to be too cumbersome~ especially if the system is complex
·. j
or heavily automated.
l
I• This method con make it more difficult to identify missing internal controls as the notes
record the detail but do not Identify control exceptions clearly.
I

398 Audit and Assurance ·.@BPP

 [_·Questionnaires _ . .
+Internal control-questionnaires (IC.Qs) or internal control evaluqtion questicmnciires.(ICEQs)
. contain~ listofquestions; ICQs are used to assess whether controls exist whereiasiCEQs
assess the.effe?tive_ness of the controls in-place. ··
Advantages of this method include:
• Questionnaires are quick to prepare. which means they "are a timel,y method for_
recording the system~
• They ensure that all controls present within the system are considered· arrd recorded;
her1ce missing controls or deficiencies are clearly highlighted by the audit team.
--Disadvantages of this method include:
• It ca.ri be easy for the staff members to overstate the level of the controls present as
they are asked a series of questions relating to potential controls.
I' • A standard list of questions may miss out unusual or more bespoke controls used by
II the company.
I Flowcharts
I Flowcharts are a graphic illustration of the internal control system for the sales system.
1 Lines usually demonstrate the sequence of events and standard symbols are used to
Ii signify controls or documents.
I Advantages of this method include:
i
! • It is easy to view the system in its entirety as it fs all presented together in one
i
II diagram.

I• Due to the use of standard symbols for controlsj it can be effective in identifying
missing controls.
I!
Disadvantages of this method include:
• The!:J can sometimes be difficult to amend, as any amendments may require the whole
flowchart to be redrawn.
• There is still the need for narrative notes to accompany the flowchart and hence it can
be a time-consuming method.

Note. Full rnarks will be awarded for describing two methods for documenting the sales
system and explaining one advantage and one disadvantage for each method.
(b)

-! ~ WordProt~ssor ·• 8
I
Ii D ~ ro [Q!f) r' Q ·e 1 !1
i
!
I t Pttr«grt<Ph v
!)·-

Deficiencies ond controls over the sales system

Control deficiency Control recommendation

New customers' creditworthiness is New customers should complete a credit

. assessed by a salesperson who sets the application which should be checked
credit limit, which is authorised or · through a credit qgenc~::~ with a credit
rejected by the sales director: limit set. Once authorised by the sales
The sales staff have saiE~s targets, and director, the limit should be entered into
·hence mai::J suggest that new customers the system by a credit controller.
ore c·reditworthy simply to meet their
targets. This could result in sales being ·
made to poor credit risks.
--~------------------...l . . . . . . . . . . -.. . . . . . . . ~--------·-------- . --.. -~~-----'

@BPP Answers 399

 Control deficiency - Control recomruendotion
"

Sales staff have discretion to grant sales All discounts to be granted to customers
discqunts to customers-of up to 10%. This should be-authorised in advance by a
could result in a loss of revenue as they r~sponsible official; such as the sales
may award unrealistic discounts simply director. If not practical, then the
to meet sales targets. " supervisor of the sdles_staff should
The discounts granted by sales staff are undertake this role.
not being reviewed and could result in
unauthorised disc"ounts allowed.

Sales staff are ableto.make changes to Sales staff should not be able to access
the customer master data file, in order to the master data file to make
record discounts allowed and these amendments. Any such amendments to
changes are notreviewed. master file data should be restricted so
There is a risk that these amendments that only supervisors and above can
could be made incorrectly resulting in a make changes.
loss of sales revenue or overcharging of An exception report of changes made
customers. In addition. the sales staff should be generated and reviewed by a
I
are not senior enough to be given access responsible official.
to changing master file data as this I
could increase the risk of fraud.

Inventory availability does not appear to

be checked by the salesperson or
Prior to the salesperson finalising the
order, the Inventory system should be
I
automaticaii!:J at the time the order is checked in order for an accurate
placed. In addition, Heraklion Co assessment of tne availability of goods I
markets itself on being able to dispatch to be notified to customers.
all orders within three working days.
There is a risk that where goods are not
available, the customer would not be
made aware of this prior to placing their
order, leading to unfulfilled orders and
customer dissatisfaction, which would
impact the company's reputation.

Customer orders are recorded using an The completed order form should also be .
online order form; one cop!::J is emailed to automatically sent to-the warehouse
tho customer and one. to the department and the finance ·-
salesperson. department.
The sales department of Heraklion Co The copy the salesperson receives
does not hold receive orders centrally should be emailed to a central in box in
and hence would not be able to monitor the sales department~ preferably with
if orders-are being fulfilled on atirnely the details also automatically·
basis. This could result in a loss of transferred-to create a new sales order
revenue and customer goodwill. record within the sales module.
Upon dispatch, the goods dispatch note
(GDN) should be matched to the order; a
regular review of unmatched orders
should be undertaken by the sales
department to identify any unfulfilled
orders.

The salesperson prepares a separate When the order is finalised and

email to send to the warehouse dispatch submitted an automatic email should be
team with the customer ID and the sales forwarded directly to the warehouse
order details, rather than a copy ofthe department, as happens for the
sales order itself, and a pick list is salesperson. If that is not possible the

ltOO Audit and Assurance @aPP

'I
I

- --
Control deficienaw- . Control recommendation

generated from .thls. salesperson should forward a copy of

There is d riskthafincorrect or the order they received rather than _.---
insufficientdetails may be recorded by drafting a sepatate.email.
the salesperson anc:fthis could result in The pick list should be generated from ·
incorrect orders J:?¢iD9 dlspatched,- this cop~fof original order form and the -
orders being dispotbhed late. qr Orders warehouse team should check corr.ect
failing-to bedispat9hed otall,·resulting quantities·and product descriptions. are
in a loss of custornergoodwill and being dispatched. as well as checking .
revenue. the quality of goods being dispatched to
·ensure they are notdamaged.
j ~----~--~~~~~----~----~~----~------------------~--__,
! Sequentially numb.ered goods ·Upon dispatch of goods and generation
! 'dispatched notes (GDNs) are generated of GDNs. copies should be auto emailed
!!
and filed by the wqrehouse department. to the customer, warehouse department,
i If the "finance department does not sales department (to confirm dispatch of
I receive a copy of tryese GDNs, they will goods) and finance department. Upon
I not know when to rciisethe related sales receipt of the GDN. once matched to the
I invoices.This could result in goods being copy of the sales order form, a clerk
1 dispatched but nofl:>ein 9 invoiced, should raise the sales invoices in a timely
I leading to a loss of revenue~ manner, confirming all details to the
i GDN and order.

The salesperson is given responsibility to A credit controller should be appointed

chase customers directly for payment and it should be their role, rather than
once an invoice is outstanding for 90 that of the salesperson, to chase any
I days. This is considerably in excess of outstanding sales invoices which are
the company's credit terms of 30 days m()re than 30 days old.
I which will lead to poor cash flow.
I Further, as the salespeople have sales
targets, they are more~ likely to focus on
generating sales orders rather than
chasing payments~ This could result in
an increase in baddebts and reduced
profit cmd cash flows.
-·--·---------------'----------------·---:
(c)

~ ~l ~ord Ptocessor;
•••···•·••••••··•·•·•-••··•·••:-·•"'r•'!y:·•··''l''';.,

B]('i'-' ...... iEfl

I P1>rfi[FHph ~/ g
Ii Controls to . reduce . dsk of payroll fraud
I ~:___. . . . . . . . . . .:·:·--~-----~·-·-·-·-·-.. .----·-·---.. ;:. . ,. . .-.. .-.. . ··--·-·-----.. . . . . . . . ·-: ·. .-.. -------~-. ------------.
I Control
·I ,________:,. . . . . ______
Mitigate risk
. ·-:-::-·-------·--.. . . . .-.--......~-----·-·-···-. ·--..-··----------~----~ I l
iProof of identity checks should be This- should reduce the risk of fictitious l
J undertaken by the humorr resources (HR) · employees being set up, as in order to be·
1 department and recorded on individuals' set up on the system a fictitious set of
personnel files for all new employees s.et identification would be required which
LIP on the.pavroll sy$tem. · would be an onerous process.

@aPP Answers ·~to1

 A count should be undertaken of the . This would identify if there are extra
number of employees in each employees on the payroll system, which
· department of Heraklion Co; this should could then be irwestigoted further.
be reconc.iled to the number of
employees on the payroll system.

The HR department should initiate the This control introduces segregcition of

process for setting up new joiners by duties as in order to set up employees
i asking·new employees to complete a both the HR and payroll departments
. I joiner's form which will be approved by are involved. Without cal_lusion with an
I
the relevant manager and HR. This HR employee, the payroll supervisor
request should then be forwarded to the would be unable to set up fictitious
payroll department, who should set up employees.
the employee.

All new joiners should otily be set up by As all new joiners would be authorised by
payroll on receipt of a joiner's form a.nd the payroll director, it is unlikely that
any additions to the system should be payroll employees would risk
authorised by the payroll director. An establishing fictitious joiners. A further
edit report should be generated and review ~y the HR department would also
reviewed by HR. detect any employees without an .

Where possible, employees who are

authorised joiner form.

This should reduce the risk of related

II
related should not be allowed to staff colluding and being able to commit_
I
undertake proc~sses which are a fraud. I
interrelated whereby they can breach I
segregation of duty controls for key Ii
I
transaction cycles. A regular review of
job descriptions of related employees
should be carried out by HR.
l
·I
I
The payroll system should be amended Identifying the-same bank account
to run an exception report which name or number will prevent multiple
identifies any employees with the same fraudulent payments being made to the
bank account name or number and this same employee.
should be reviewed by HR.

All bank transfer requests should be This would introduce an additional layer
-outhorised bu a senior responsible of segregation of duties, which would
I
1 offici~:ll, who is independent of the reduce the risk of Fraud occurring. In
lprocessing of payments; they should addition, the spot checks to employee
Iundertake spot checks of payments to identification cards/records would
· ! supporting documentation; including confirm the validity of payments.
employee identification cards/records.

_ l- - - - - · - - - - - - - - - -

lt02 Audit and Assurance @aPP

 -- -.

(d)

Revenue substantive procedures

t Compare the overall level of revenue against prior years and IJU'.... H'"''·"
any significant fluctuations~
2. Obtain a schedule of sales for the year broken down into the main product categories
and compare this to the prior year breakdown and for any unusual movements discuss
with management.
3. Calculate the gross profit margin for HeraklionCo and compare thisto the prior year
and investigate any significantfluctuations.
4. Select a sample of sales invoices for customers and agree the sales prices back to the
price list or customer master data information to ensure the accuraCy ofinvoices.
5. Select a sample of credit notes raised, trace through tothe origlnallnvoice and ensure
the invoice has been correctly removed from sales.
6. Select a sample of customer orders and agree these tothe dispatch notes and sales
invoices through to inclusion in the receivables ledger and revenue general ledger
accounts to ensure completeness of revenue.
7. Select a sample of dispatch notes both pre and post year end and follow these
through to sales invoices in the correct accounting period to ensurethot cut-off has
been correctly applied. ·

17 Elounda

Course Book references

·Chapters i2~ 13~ 17 and 19.

Top tips
This is a 20-mark audit evidence and going concern question. In parts (a) to (c)~ the ke!:l is to
note that !:JOU are being asked for substantive procedures relating to specific aspects eg
revaluation of PPE, not all aspects of PPE. The examining team's report noted that in relation
to inventor~ a significant proportion of candidates focused on inventory counts rather than·
valuation as required by the question. Make sure you read the information cdr<:!fully noting
important details like these. · ··
You olso need to ensure that you tailor l:JOUr answer to the scenario rather thori sirnpi!:J lbi:ing
out standard audit procedures ..
. .

For part ·(d) make sure you understand the requirernent. fhe quesHo'n is asking' for procedures,
. not going cqncern indicators.

Eosy marks
. .

Overall this' is a demanding question due to the_ cOre required in reading the information and
H1e need to tailor the cmswer specificaii!:J. However, !:JOU should have b.een obJeto pick 1,1P good
rnarks for substantive procedures relating to the bank loon.

@BPP Answers lt03

 Marks

Substantive proc~dures for revaluation of propert~, plant and equipment (~PE)

Cast schedule of PPE revalued this year al}d agree to TB/FS ··
Consider' reasonableness ofthevaluer's qualifications, membe(ship of
professional body and experience
Discuss with management if the valuer has financial interests in the company
which along with family relationship may impact his independence
• Agree the revalued amounts to the valuation statement provided by the valuer
• Consider if all items in the same class of assets have been revalued
• Agree the revalued amounts included correctly in the non~current asset
register
Recalculate the total· revaluation adjustment and agree recorded in the
revaluation surplus
Recalculate the depreciation charge for the year
Review the financial statements disclosures for compliance with lAS 16
Property, Plant and Equipment
Maximum 5
(b) Substantive procedures for inventory valuation
• Cast a schedule of all raw materials, finished goods and work in progress
(WIP) inventory and agree to TB/FS ·
• Obtain breakdown and agree sample of WIP from the count to the WIP
schedule, agree percentage completion
• For a sample. obtain relevant cost sheets aod confirm raw material costs to
recent purchase invoices, labour costs to time sheets or wage records and
overheads allocated are of a production nature
For a sample of inventory items, review the calculation for equivalent units
and associated equivalent unit cost and recalculate the inventory valuation
• Select a sample of year-end finished goods and review post year end sales.
invoices to ascertain if net realisable value (NRV) is above cost or if an
adjustment is required
• Select a sample of items included in.WIP at the year end and ascertain the
final unit cost price, verifying to. relevant supporting documentation, and
compare to the unit sales price included in sales invoices post year end to
assess NRV
• Review aged inventory reports, identify slow-moving goods, discuss with
management
• Compound E-243, discuss with management plans for disposing of goods,
whbl NRV is $400,000
'• If an!:J of defective goods have· been sold post year end, agree to the sales
invoice to assess NRV ,
• Agree the cost of $720,000 for compound E24-3 to supporting documentation
• Confirm the final adjustment forcompound E243, discuss with management
if adjustment made~ if so, follow through the write down to confirm
Review the financial stater:nents disclosures for compliance with lAS 2.
Inventories
Maximum 6
(c)' Substantive procedures for bank loon
• Agree the opening balance to the prior year audit file and FS
For loan payments made, agree to bank ledger account and bank statements .
• Review the bank correspondence for late payment penalties, agree to
statement of profit or loss

I+Oit Audit and Assurance @BPP

 Review loon· agreement for details of covenants and reco16iJiate to identify
any breaehes
Agree closing ·balance to the trial bala~-ce and draft financial statements-dnd
review the disclosure of the current liabilit~:rbank loan in the draft financial
statements
Maximum. 4
(d) Going concern procedures
Review cash flow for~casts 1
Revievv bank loan agreements, breach o~ key rati?s or covenants ·1
Review post year end sales and order book
Review supplier's correspondence
Enquire of lawyers for any litigation
Subsequent events
Board minutes
Management accounts
Consider additional disclosures under lAS 1 Presentation of Financial Statements
Written representation
Maximum 5
Total 20

(a) Substantive procedures for revaluation of property, plant and equipment (PPE}
Obtain d schedule of all PPE revalued dudng the year and cast to confirm completeness
dnd accuracy of the revaluation adjustment and agree to trial balance andfinancial
staternents.
Consider the competence and capability of the valuer, Martin Dull man, by assessing
through enquiry his qualification, membership of a professional body and experience in
valuing these types of assets.
Consider whether the valuation undertaken provides sufficiently objective audit evidence.
Discuss with management whether Martin Dullman has any financial interest in Elounda
Co which along with the family relationship could have had an impact on his
independence.
Agree the revalued amounts to the valuation statement provided bbJ the valuer.
Review the valuation report and consider if all assets in the same category have been
revalued in-line with lAS 16 Property, Plant and Equipment.
Agree the revolued:arnounts for these dssets are included correctly in the non-current
assets register. ·
Recalculate the total revaluation adjustment and agree correctly recorded in the
revaluation surplus.
Recalculate the depreciation charge for the year to·ensure that, for the assets· revalued
during the !:JEKJr, the depreciation WaS based On the correct valuotiorj and WaS for 12 · .
months.
Review the:finoncial statHments disclosures relating t.o the revaluation to ensure they
comply with lAS 167 -
(b) Substantive procedures for inventory valuation ,
Obtain a schedule of all raw materials. finished goods and work in progress (WIP)
inventor~ and cast to confirm completeness and accuracy of the balance and agree to
trial balance ond financial statements.

@BPP Answer~ lt05

 • Obtain the breakdown of WIP and agree a sqmple of WIP assessed during the count to
.. the WIP schedule~ agreeing the percentage completion as recorded at tbe invento.ry
count .
.• For a sample of inventory items (finished goods a·nd WIP), obtain the. relevant cost sheets
and confirm raw material costs to recent purchase invoices, labour costs to time sheets or
wage records and overheads allocated are of a production nafure.
For a sample of inventory items, re_view the calcuk)tion for equivalent units and associated
equivalent unit cost and r~calculate the inventory valuation.
• Select a sample of year-end finished goods and review post year end sales invoices to·
ascertain if net realisable value (NRV) is above cost or if an adjustment is required.
• Select a sample of items included in WIP at the year end and-ascertain the finalt,.mit cost
price, verifying to relevant supporting documentation, and compare to the unit sales price
included in sales invoices post year end to assess NRV.
Review aged inventory reports and identify any slow-moving goods, discuss with
management why these items have not been written down or if an allowance is required.
For the defective chemical compound E243, discuss with management their plans for
disposing of these goods, and why they believe these goods have an NRV of $400,000.
• If any E2Lt3 has been sold post year end, agree to thG sales invoice to assess NRV.
• Agree the cost of $720,000 for compound E243 to supporting documentation to confirm
the raw material cost, labour cost and any overheads attributed to the cost.
• Confirm if the final adjustment for compound E243 is $320,000 (720 - 400) and discuss
with management if this adjustment has been made; if so follow through the write down to
confirm.
• Review the financial statements disclosures relating to inventory and WIP to ensure they
comply with lAS 2 Inventories.
(c) Substantive procedures for bank loan
• Agree the opening balance o-f the bank loan to the prior year audit file and financial
statements.
• For any loan payments made during the· year, agree the cash outflow to the bank ledger
account and bank statements.
Review bonk correspondence to identify whether any late pay merit penalties have been
levied and agree these have been charged to profit or loss account as a finance charge.
• Obtain direct confirn1ation ot the year end from the loan provider of the outstanding ·
balance and any security provided; agree confirmed amounts to the loan schedule and
financial statements. ·
• Review the loan agreement for details of covenants and recalculate to identify any
breaches in these.
Agree ~losing balance of .the loan to the trial balance and draft financial statements and
that the disclosure is adequate, including any security provided, that the loan iS' disclosed
as a current liability and that disclosure is in accordance with accounting standards and
local legislation.
(d) Going concern procedures
• Obtain Elounda's cash flow forecast and review the cash in- and outfiows. Assess the
assumptions for reasonableness and discuss the findings with management to understand
if the company will have sufficient cash flows to meet liabilities as they .fall due.
Discuss with management their ability to settle the next instalment due for repayment to
the bank and the lump sum paymentof$800k in October 20X5 and ensure these have
been included in the cash flow forecast. ·
Review current agreements with the bank to determine whether any key ratios or
.covenants have been breached with regards to the bank loan or any overdraft.

lt06 Audit and Assurance @BPP

 Review the compan!::j'S post !::jear end sales and order book tci _assess the levels -of trade and
·if the revenue figures in the ·cosh flow forecast ·are reason.able ...
~· Review post year end corresp6ndence with s·uppliers to identify whether an!:J n3~t~ictions in
credit have arisen and. if so, ·ensure that the casn llow forecast reflects the. current credit
.terms or where necessar!::J an immediate payment for trade payables.
Enquire of the laV'J!::Jers of Elounaa:Co as to the existence of litfgation and claims; if any
exist, then consider their materialit!::j ar1d impact or1 the going concern basi~.
~ Perform audit tests in relation to. subsequent events to identify any items·which might
indicate or mitigate the risk of going concern not being appropriate. · .
Review. the post !::Jear end board minutes to identify any other issues which might indicate
·financial difficulties for the company.
Review post year end management accounts to assess if in line with cash flow forecast
and to identify any issues which ma!::J be relevant to the going concern assessment.
Consider whether an!:J additional disclosures as required by lAS 1 Presentation of Financial
Statements in relation to material uncertainties over going concern should be made in the
financial statements. · ·
Obtain a written representation confirming the directors' view thatEiounda ~o is a going
concern.

18 Chania

Course Book references

Chapters 4, 6 and 7.

Top tips
)his is a 20-mark question covering audit planni_ng,audit risk andqualit!:J man·agement. As
stated below, pa_rt (a) and (c) are more· straightforward. Part (1:>) is more demanding as you are
; required to describe qudit risks and provide the auditor's response to address the risk. This is .a.
h!ghly examinable. topic. and is likely to be examined on a regular basis. One of the key
weaknesses in responses to this type of question is a failure to explain the audit risk as well as -
identifying it. The examining team's report states that to explain audit risk 'candidates need to
state the area of the accounts impacted with an assertion, a reference to
under/over/misstated, or a reference to inherer1t,control or detection riski.
· TrbJ to ensure that !:JOUr answers explain audit risks in this way.

Easy marks
Part (a) should represent easy marks as you should be fmniliar with the benefits of audit
planning. You should also be able to score well on part (c) on quality management.

Marks-

(a) Benefits of au~it planning

Important areas of the audit·
Potentia1 problems
Effective and efficient audit
• Selection of engagement team members and assignrn.ent of work 1
Direction, supervision and review 1
Co-ordination of work 1.
Maximum

@BPP Answers lt07

 (b) Audit risks ahd respons~s (onlg 6 risks required)
Goods in transit from.Africa 2
Research.Ood development expenditure 2
Capitalisation of-costs of plant and machinery 2
• Senior management bonus scheme . 2
• Allowance for receivables_ 2
Introduction of new general ledger system 2
Aprii20X5 control account reconciliations not undertaken 2
Purchase ledger closed down on 8 May 2
Max·6-issues; 2 marks each
Maximum 12
. (c) Supervising and reviewing audit assistants' work
Monitor the progress of the audit engagement to ensure the audit timetable
was met
• Consider the competence and capabilities of team members resufficient
available time, understanding of instructions and if work in accordance with
planned approach
• Address any significant matters arising, consider their significance and
modifying the approach
Responsible for fdentifying matters for consultation/consideration by senior
team members
• Work performed in line with professional standards and other requirements
• Work supports conclusions reaphed and properly documented
• Significant matters raised for partner attention or' further consideration
• Appropriate consultations hove taken place with con'?lusions documented
Maximum 4
Total 20

(a) Benefits of audit planning

Audit planning is addressed bylSA 300 Planning an Audit of Financial Statements. It states
that ad€~quote planning benefits the audit of financial stater-nents in several ways~
Helping the auditor to devote appropriate attention to important areas of the audit
Helplng the auditor to identify and resolve potential problems on a timely basis
Helping the auditor to properly organise and manage the audit engagement so that it is
performed in an effective and efficient manner
. . .

• _Assisting in the selection of engagement team members with appropriate levels of

capabilitiesand competence to respond to anticipated risks and the proper assignment of
work to them
Facilitating the direction and supervision of engagement team members and the review of
·theirwork
• Assisting, where applicable, in co-ordination of work done by experts
(b) Audit risk ~nd auditor's responses

Audit risk Auditor's response

Sitia Sparkle Co purchases its goods. from The audit team should undertake-detailed
suppliers in Africa and the goods are in cut·off testing of purchases of goods at the
transit for up to three weeks. At the year year end and the sample of GRNs from
end, there is a risk that the cut-off of before and after the year end relating to

lt08 Audit and A~surance @aPP

 inventory_, purchases and payobles may:-not
be accurate and ~ay be under/overstated.
\

Sitia -Sparkle Co has incurred expenditure of a breakdown of th~ expenditure and

$1;3 million in developing a new range of verify that it"relates to the development of
cieaning products. This expenditure:is the new products. Undertoke testing to
classed as re~earch and development under determine whether the costs relate to the
IAS$8/ntangib/e Assets. The standard research or development stage. Discuss the
requires research costs to be expensed to accounting treotrnent with the finance
profit or loss and development costs to be director and ensure it is in accordance with
capitalised as an intangible asset. IAS38.
If the company has incorrectly· classified
research costs as development expenditure~
there Is a risk the intangible asset could be
overstated and expenses understated.
In addition, as the senior management
I
bonus is based on year-end asset values,
this increases this risk further as
managementmay have a reason to
overstate assets at the year end.

In June 20X4, the company invested $0.9 Obtain a breakdown of the $0.9 million
million in a complex piece of plant ancl expenditure and undertake testing to
machinery. The costs include purchase confirm the level of training costs which
) pric'?., installation and training costs. As per have been included within non-current
lAS 16 Property, Plant and Equipment, the assets.· Discuss the accounting treatment
cost of an asset includes its purchase price with the finance director and the Ieve~ of
and directlu attributable costs oni!J. any necessary adjustment to ensure ·
Training costs are-not permitted under lAS treatment is in accordance with lAS 16...
16 to be capitglised os part of the cost and
therefore plant and machinery and profits
are overstated ..
I
The bonus scheme for senior management Throughout the audit, the team will need to
and directors of Sitia Sparkle Co has been ·be alert to this risk and maintain ·
changed; lt is now based on the value of
blear-end total assets.
I
There is o risk that management might be Detaileo review and testing on judgementol
. motivated to overstate the value of assets decisions, including treatment of provisions,
· through the judgements taken or through and compare treatment against prior years.
the use of releasing provisions or Any manual journal adjustmentsaffebti.ng
• capitalisation policy. ; assets should be tested in detail.
In addition, a written representation should
be obtained from mcmagement confirmin_g
the basis of. any signific-ar'lt judgements.

@sPP Answers 409

)
 ~-· -
The finance director of Sitia Sparkle Co Review and test the controls surrounding
believes that an alloWcmoe for receivables is . how Sitia Sparkle Co !dentifies receivables ·
excessive and unnecessary and therefore ' .. balanc·es which may require a provision to
has. not provided for it at the year end and ensure that they are. operating effectively in
has credited the opening balance to profit the current year.
or loss.· · · Discuss with the finance director the
Th~re ·is
a risk that receivables will be rationale for not maintaining an allowance
overvalued; some balances may be for r~ceivables and relea.sing the opening
irrecoverable and so will be overstated if not provision.
proVid9d for. ~
In addition, releasing the allowance for Extended post year end cash receipts
receivables will Increase asset values and testin9 and a review of the aged receivables
hence the senior management bonus which ledger to be performed to assess valuation
increases the risk further. and the need for an allowance for
receivables.

A new general ledger system was The auditor should undertake detailed
introduced in February 20X5 and the old testing to confirm that all of the balances at
and new systems were run in paralleluntil the transfer date have been correctll:J
May20X5. recorded in the new general ledger system.

There is a risk of the balances in May being The auditor should document and test the
misstated and loss of data if they have not new system. They should review any
been transferred from the old system management reports run comparing the old
completely and accurately. If this is not and new system during the parallel run to
done, this could result in the auditor not identify any issues with the processing of
identifying a significant control risk. accounting information.
In addition. the new general ledger system
will require documenting and the controls
over this will need to be tested.

A number of reconciliations, including the Discuss this issue with the finance director
bankreconciliation, were·not performed at and request that the JulbJ control account
the year end; however, they were reconciliations are undertaken. All
undertaken tn June and August. r~conciling ttems should be-tested in detail
Control account reconciliations prov1de and agreed to supporting documentation.
comfortthdtaccounting records are being
maintained completely and accurately. At
the. !:Jear end) it is important to confirm that
bakmces including bank balances are not
under- or overstated. This is an example of
a control procedure being overridden by
management and raises concerns over the
overall emphasis placed on internal control.

The purchase ledger of Sitia Sparkle Co was , The audit team should undertake testing of
closed down on 8 May)" rather than at the ' transactions posted to the purchase ledger .
8ear end of30 April. between.1 and 8 May to identify whether
There is a risk that the cut-off rriay be any transactions relating to the 20X6 year
incorrect with purchases and payables end have been included or any 20X5 ·
over- or understated. balances removed.

(c) Supervision ·and reviewing of the assistants' work

Supervision
Dudng the audit of Sitia Sparkle Co, the supervisor should k~?eptraok of the progress of the
audit engagement to ensure that the audit timetable is met and should ensure that the audit
manager and engagement partner are kept updated of progress.

lt10 Audit and Assurance @BPP

 The competence and capabinties of individual members of .the engagement team should be
considered~ including wh~ther they _have sufficient time to can:y out their work, whether they-
un<:1erstand their instructions and whether the work is peirig carried out in accordance with - ...
the· planned appr9ach to the._audit. · - -- · -
In additionfpart of the supervision process should involve addressing any significant matters
arising durin§ th~ au-dit of Sitia Sparkle Co, considering their significance and modifying the
planned approach appropriately. · · ··
The supervisor would also be responsible for identifying matters for consultation or
consideration- by the audit manager or engagement partner of Sitia Sparkle Co.
Review
· The supervisor would be requi;ed to review the work completed bid the assistants and consider
whether this work has been performed in accordance with professional standards and other
regulatory requirements and if the work perfo-rmed supports the conclusions reached and has
been pr?perly documented.
The supervisor should also consider whether all significant matters have been raised for
partner attention or for further consideration and, where appropriate consultations have
taken place. whether appropriate conclusions have been documented.
The overall responsibility for the direction, supervision and review of the audit rests with-the
audit engagement partner.

@BPP Answers '+11

1t12 Audit and Assurance
@BPP
 ACCA

A-udit and Assura.nce

MockExam2
Specimen Exam (amended)

Questions

Time allowed 3 hours

This mock exam is divided in two sections:

Section A- ALL 15 questions are compulsory and MUST be attempted
Section 8- ALL 3 questions <;Jre compulsory and MUST be attempted
~-
~
*-' Important note:

The ACCA have stated the Specimen exam will be updated to reflect changes to increase the
level of system integration in Audit and Assurance ahead of the September 2024 exam (please
see the introductory pages to this Exam Practice Kit for more detail). Due to printing and
~-
publication dates the revised Specimen will not have been released prior to publication of this
Exam Practice Kit. As a result there may be some difference_s between the Exam Practice Kit
version of the Specimen exam and the online version provided by the ACCA.

DO NOT OPEN THIS EXAM UNTIL YOU ARE READY TO START

.UNDER EXAMINATION CONDITIONS

@BPP 1+13
Lt11t Audit and Assurance
 -
Section A
- -

-_ALL FIFTEEN questions ore compulsory ~nd MUST be -atte~pted

Buffon &Co
Each question is worth 2 marks.
The followi-ng scenario relatesJciquestions 1....:5.
You are an audit marmger of Buffon 8 Co, responsible for-the audit of Moldini Co~ and you have
become aware of the followin·g information.
Audit engager:nent partner _- -. . _ .
The audit engagement partnerfor Maldini Co, a listed company, has been in place for
approximately eight years and her son has just been offered a role with Maldini Co as a sales
manager. This role would entitle him to shares in Maldini Co as part of his remuneration package.
Internal audit function
Maldini Co's board of directors are considering establishing an internal aud!t function, and the
finance director has asked the audit firm~ ButtonS Co, about the differences in the role of internal
audit and external audit. lfthe internal audit function is established, the directors have suggested
that they may wish to outsource this to Buffon S Co.
Auditor characteristics
Following management's request for information regarding the different roles of internal and
external auditors, the audit assistant hos collated a list of key characteristics:
(1) Appointed by audit committee
(2) Reports are publicl!d available'to shareholders
(3) Review effectiveness of internal controls to improve operations
(4) Express an opinion on the truth and-fairness of the financial statements
Fees
The finance director has suggested to the board that ifBuffon 8 Co are appointed as internal as
well as external auditors, then fees should be renegotiated with at-least20% ·of all internal and-
externa I audit fees being based on the profit after tax of the company, as this will align the
interests of Buffori S Co and Maldini Co. This fee income would be significant to Buffon 8 Co.

@BPP Questions lt15

 Your audit assistant has highlighted a number of potentlal.threats to independence in
respeclpf_the audit of Maldini Co. · ·
. Identify which of the following represent valid threats to independ~nce~ matching each
threat to the appropriate category. (Drag each box from the left i_nto_position to match a
relevant box on the right.)

Facts Category of threat

length of time· th~

audit engagement I Self-interest

partner has been in

position
I Self-interest

Maldini Co's request

for advice regarding
internal audit
l Familiarity

I Self-review

Potential holding of
shares by audit
partner,s son
I No threat

Possible provision of
internal audit
services

Basis of fee

{2 marks)

2 In relation to the audit engagement partner holding the rolefor eight years, and her son's
offer of emplo~Jment with Maldini Co:
Which of the following safeguards should be implemented in order to comply with
ACCA's Code of Ethics and Conduct?
0 The audit partner should be removed :from the audit team.
0 An independent quality reviewer should be appointed.
0 A third party such as a professional body should be consulted on key audit
judgements.
0 Buffon 8 Co should resign.from the audit. (2 marks)· .

lt16 Audit and Assurance @sPP

3 In line with ACCA's Code of Ethics·and Conduct, whi~h TWO of the foU6~ing factors
mu~t be consid~r~d before the.internal a_udit $ngagement should be a_ccepted?-
o. Whether the external audit team have the expertise to corry out the internal audir\r\tork.
- ' r •- .._ • •- •• :. -.,

·0 "If the assignme~ts will relate to the internal controls over.financlal reporting: .
0 If management will.accept responsibility for irnplerri"enting· appropriate,
recommendations.. · ·
0 The probable timescale for the outsourcing of the internal audit function. {2 marks)

4 Following management's request for information regarding the different ·roles of internal
and external audit, bJOU have collated a list of key characteristics.
Match the following characteristics to the appropriate auditor. (Drag each box from the
left into position to match a relevant box on the right.)

Characteristic Type of auditor

Appointed by audit
committee
'----'----'--------~~ lntemal auditor

,__________.___ _.I Interna I auditor

Reports are publicly
available to
shareholders '--..__________.I External auditor

Review effectiveness
of internal controls·to
._________. . !. I External auditor

improve operations

Express an opinion on
the truth and fafrness
of the financial
statements

(2marks)

5 If the internal and external audit assignments are accepted, what.sofeguar~s, if any, are
needed in relation to the basis for the fee?.
0 As long as the total.fee received from Maldini Co is less than 15% of the fi"rm's total fee
income, no safeguards are needed.
·0 The-client should be informed that oni!J the internal audit fee can be based on profit
after tax. · ·
0 The fees should be based on Maldirii Co's profit before-tax.
0 No safeguards can be applied and this basis for fee determination shouid be rejected. ·
. . (2 marks}

(Total~ 10 marks)

Questioi1s '+17
 Bafotelli Co
The followin9. scenario relates to Questipns 6.:..10.
---It is I JuJy 20X5. Balotelli Co ~perqtesa riumber of hotels providing acpommodation, leisUre
facilities and restaurants. Yqu ore an audit senior of
Mario S Co and are currently conducting the
audit of Balotelli Co for the year ended 31 December 20X4. During the course of the audit a
number of events and issues have been broughtto your. attention: - -
Non-current assets
Balotelli Co incurred s-ignificant capital expenditure during the year updating the leisure facilities
at several of the company's hotels. Depreciation is chorged monthly ori all assets on a straight line
(SL) basis and it is compan!:J policy to charge a full month's depreciation in the month of
acquisition and none in the month of disposal. The audit team has obtained the following extract
of the non-current assets register detailing some of the new leisure equipment acquired during the
year:

Original Depreciation Accumulated Charge for Carrying

Date Description cost policy depreciation the year value

$ $ $ $
01/05/Xlt 15 treadmills 18,000 36 months SL 0 4-,000 14,000

15/05/)(4 20 exercise bikes 17,000 3 years SL 0 5,667 11,333

17/08/Xlt 15 rowing machines 9,750 36 months SL 0 2,167 7,583

19/08/Xlt 10 cross trainers 11,000 36 months SL 0 1,528 9,472

55,750 0 13,362 42,388

--- =
In order to verify the depreciation charge for the year the audit team has been asked to
recalculate a sample of the depreciation charges. The audit team has also been asked to carry
out detailed testing on the valuation of non-current assets.
Food poisoning - litigation
Balotelli Co's directors received correspondehce in November 20X4 from a group. of customers
who attended a wedding at one of the company's hotels. They have alleged that the_H suffered
severe food poisoning from food eaten at the hotel and are cfoftning _substantial damages.
Management has stated that, based on discussions with their lawyers, the claim is unlikely to be
successful.
Trade receivables circularisation ·
The audit team has obtained the following results from tho receivables circularisation:

Balance per receivables Balance per customer

Customer ledger confirmation Comment
$ $
Willow Co
42,500 42,500
Invoice raised 28
Cedar Co 35,000 25,000 December 20X4

Payment mOde 30-

Maple Co 60,000 4-5,000 December 20X4

A balance of $20,000 is
currently being
Laurel Co 55,000 55,000 disputed by Laurel Co

&t18 Audit and Assurance @BPP

 Trade-receivables·
Balotelli Co's trade receivables havehistorically b~en low asmdst-customers are require,dto pa~ ·"
in advance or at the time_of visiting the hotel. However~ during tbe year a number of compa_nies
opened corporate account~ which are.payable monthly in arrears. As .such,_ the trade. receivables
balance has risen significantly and is now a mat~rial balance. ·

6 Which of the following correctly calculates the depreciation expense for the new assets
for _the_ year ended 31 December 20Xlt_(u1d explains the r~sultant.impac~ on non-current.
assets? - ·
0 Depreciation should be $10,660, assets _are understated
0 Depreciation should be $18,583, assets are understated
0 Depreciation should be $9,111, assets are overstdted
0 DepreCiation should be $12,549, assets are overstated (2 marks)

7 Which FOUR of the following audit procedures are appropriate to test the VALUATION
assertion for non-current assets?
D Review board minutes for evidence of disposals during the year and verify that these
are appropriately reflected in the non-curren~ assets register
D Agree a sample ofadditions included in the non-current asset register to purchase
invoice and bank ledger account
0 Review the repairs and maintenance expense account for evidence of items of a capital·
nature
I
D Recalculate the depreciation charge for.a sample of assets ensuring that it is being
applied consistently and in accordance with lAS 16 Property, Plant and Equipment
D Review physical condition of non-current assets for any signs of damage
[] Ensure d_i.sposals are correct!.~ accounted for and recalculate gain/loss on disposal
I
· · (2 marks)

8 . Which of the following audit procedures would provide the auditor with the MOST reliable
~ audit evidence regarding the likely outcome of the litigation?
0 Request a written representation from management supporting their assertion that the
·claim will not be successful
0 Send an enquiry letter to the lawyers of Balotelli to obtain their view as to the
·probability of the claim being ·successful
0 Review the correspondence from the customers claiming food poisoning to assess
whether Balotelli has a present obligation as a resuJt of a past event
0 Review board minutes to understand why tbe directors believe that the claim will not b~
successful . (2 marks)

9 Which TWO of the following are benefits of carrying out a_trade receivables
circularisation? - ..
D It provides evidence from an independent exteinal source.
D It provides sufficient appropriate audit evidence over all relevant balance assertions.
0 It improves audit efficiencu as all customers are required to respond.-·
D It improves the reliability of audit evidenc~ as the process is underthe control of the . _
auditor. - · . (2 marks)

@BPP Questions lf.19

 10 The audit teani has been, asked to assess whether any additional aud.itwork is required.
Based on the results of the circularisation, match each customer to -the appropriate qud~t
.· procedure. (Drag each box from the left into position to match the, relevant box on the
right.) . ..

Customer Audit procedure

Willow Co Agree to po~t-year

end bank ledger
acco·unt and bank
Cedar Co statement

Maple Co Discuss with

management and
consider whether
Laurel Co amount should be
included in allowance
for receivables

No further audit
procedures required

. Agree to pre year end

invoice
I
, (2 marks)

(Total= 10 mark~)

Cannavaro
The following scenario relates to Questions 11-15.
It is 1 Julu 20X5. Cannavaro.com is a website design companu whose year end was 31 December
20X4. The audit is almost complete and the financial statements ore due to be signed shortly.
Profit before tax for the year is $3.8 million and revenue is $11.2 million.
Form and content of auditor's report
The company has only required an audit for the last two years and the board of directors has
asked !JOUr firm to provide more detail in relation to the form and content of the auditor's report.
In particular the!:J have queried why the following elements are included:
(1) Date of report
. (2) Addressee
. (3) Auditor's responsibilities
(4) Opinion paragraph

lf20 Audit and Assurance

 - - . - .

During the audit it has come to light .that a ke~j'customer, Pirlo Co, with a receivables balance at
the year end of$285,000. has jusfr1otified Cannavaro.comthat it is experiencing cash flow
. dlfficulties and is unable to make ani:J pai:Jments for the foresef?-able future. The finance direc;;tor of
Cannavaro.com has notified the audit team that he will write this balance off as an irrecoverable
debt in the 20X5 financial statements.
Auditwo.rk
.The audit partner has asked yo_I,J to perform the following work in respect of the receivables .
balance due from Pirlo Co:- · -
(1) · Make an initial assessment of the materialitbj of the issue and consider the overall impact on
tbe finanCial statements
(2) Perform additional procedures in order to c~nclude on wheth?r the financ:ial statements
require adjustment

11 Match the following elements of the unmodified auditor's report, to the correct
explanation for its inclusion. (Drag each box from the left into position to match the
relevant box on the right~)

Element of auditor's
report Reason for inclusion

Date of report Explains that the

financial statements
are presented fairly
Addressee

Demonstrates the
Auditor's point at which
responsibilities sufficient appropriate
evidence has been
obtained
Opinion paragraph

Clarifies who may

rely on the opinion
included in the report

Explains the role and

~--~--~--------~ I __ ~r_e_rn~it_o_f_t_h_e_a_u_d_i_t~--~

(2 marks)

@BPP Questions '+21

12 The audtt assistant o~signed to the audit t?f Cannavaro.com wants a better understanding
.of the effect subsequent events have on the audit and has made the following statem~r:1ts .
.Identify·, b~;~ clicking on the relevant b~~ in the table below) whether each of the following
statements is true ·or false. · .

All material subsequent events require the numbers in the

TRUE FALSE
financial statements to be adjusted.
.......................,........... ......... ,................ ,, . ., .. .

A non-.adjus.ting event is a subsequent event for which no

amendments to the current year financial statements eire TRUE FALSE
required.
··-------- ~ -~------- ..

The auditor's responsibilities for subsequent events which

occur prior to the audit report being signed are different
from their responsibilities after the auditor's report has
TRUE FALSE
been issued .
............... ... ... ····-···········

The auditor should request a written representation

confirming that all relevant subsequent events have been TRUE FALSE
disclosed.

(2 marks)

13 Which of the following correctly summarises the effect of the outstanding balance with
Pirlo Co?

B No Gross profit is understated

c Yes Profit is overstated

Yes The going concern basis is

in doubt

0 Option A
0 Option 8
0 Option C
0 Option D (2 marks}

14 Which TWO of the following audit procedures should be performed to form a conclusion
as to whether the financial statements require amendment?
D Disowss with management the reasons for not amending the financial statements
0 Review entries in the bank ledger:- account post year end for receipts from Pirlo Co
0 Send a request to Pirlo Co to· confirm the_ outstanding balance
0 Agree the outstanding balance to invoices and sales orders (2 marks)

l.f22 Aud!tand Assurance @BPP

 - - - . -

15 The-finance director has asked you tooutline the appropriate audit opinions whichM~ill-pe
pr9vided depending on whether the compqny..decides to amenp or not amend-th·e~OX:4 .
financial statements for the issu,e identified "regarding the rec'overability of the balofloe with
Pirlo Co. -
Complete the following sentences by. d·ragging and dropping the appropriate audit
opinions.

Jh:he 20X4_ financial statement~ are not amended; our opinion will·b~ I
If the appropriate adjustment is made to the financial statements, our opinion wiil ~e

L~--. ·-------~-...1· - .- - - .
Pull down list
• Adverse
Disclaimer
Qualified
• Qualified on the grounds of material misstatement
Unmodified
• Unmodified with emphasis of matter paragraph
(2 marks)

(Total = 10 marks)

@BPP Questions Lt23

 Section B
ALL THREE questions are compulsory a_nf:i MUST be att~rnpted

16 Milia
It is 1 July 20X5. Milia Cola Co (Millo) manufactures fizzy drinks such os colq and l~monade as
well as other soft drinks and its yeer end is 30 September 20X5:You ore an audit manager of Totti
S Co and are currently plannin9' th.e audit of Millo. You attended the. planning meeting with the
audit engagement partner. and finance director fast week and the minutes from the meeting are
. shown below. You are reviewing these as part of the process of preparing the audit strategy
do.cument.
Minutes of planning meeting for Milia
Millo's trading results have been strong this year and the company is forecasting revenue of $85
million, which is an increase from the previous year. The company has invested significantly in the
cola and fizzy drinks production process at the factory. This resulted in expenditure of $5 million
on updating, repairing and replacing a significant amount of the machinery used in the
production process.
As the level of production has increased. the company has expanded the number of warehouses it
uses to store inventory. It now utilises 15 warehouses; some are owned by Millo and some are
rented from third parties. There will be inventory counts taking place at all15 of these sites at the
year end.
A new accounting general ledger has been introduced at the beginning of the !:Jear. with the old
and new systems being run in parallel for a period of two months. In addition. Millo has incurred
expenditure of $4.5 million on developing a new brand of fizzy soft drinks. The company started
this process in July 20X4 and is close to launching its new product into the marketplace.
As a result of the increase in revenue, Milia has recenti!:J recruited a new credit controller to chase
outstanding receivables. The finance director thinks it is not necessary to continue to· maintain an
allowance for receivables and so has released the opE)ning allowance of $1.5 million.
The finance director stated that there was a problem in April in the mixing of raw materials within
the production process which resulted in a large batch of cola products tasting different. A
number of these products were sold; however, due to complaints by customers about the flavour,
no further sales of these goods have been made. No adjustment has been made to the valuation
of the damaged inventory. which will still be held ·at cost of $1 million at the year end.
As in previous years, the management of Milia is due to be paid a significant annual bonus based
on the value of year-end total assets.

Required
(a) Explain audit risk and the components of audit risk. (5 marks)

(b) Using the minutes provided, identify and describe SEVEN audit risks. and explain the auditor's
response to each risk, in planning the audit of Millo.
Note. Use the below table structure to format your answer in the CBE softwai·e.

Audit risk Auditor's response

(1'+ marks) ·
(c) . Identify the main areas. other than audit risks, which should be included within the audit
strategy document for Milia; and for each area provide an example relevant to the audit.
(ltmarks)

(d) The finance director has requested that the deadline for the 20X6 audit be shortened bbJ a
month and has asked the audit engagement partner to consider if this will be possible. The

lt21t Aodit and Assurance @aPP

 partnerhas· suggested that.in- order to meet this.newtighter d~adline, the firm maycarry out
b~tll'ati interim and o fino~ audit for the audit of Milia to 30 September 20X6.
Required . .
Explain the diffe;en~e between an interim and a fincil.audit. (3 marks)

(e) ·Explain the procedures which are likely to. be performed during an interim auditof Millo and ·
the impact which if would-have on the·final audit. ·.. ('+ marks)

(Total = 30 marks)

17 Baggio
It is 1 July 20X5. Boggio International Co (Boggio) is a manufacturer of electrical equipment. It
has factories across the country and its customer bose includes retailers as well as individuals, to
whom direct sales are made through its website. The company's year-end is 308eptember 20X5.
You are an audit supervisor of Suarez SCo and are currently reviewing documentation of Boggio's
internal control in preparation for the interim audit.
The sales and purchases systems dte fully integrated modules within the computerised
accounting system and the inventory system is partially integrated. The bank and payroll systems
are not integrated;
Boggio's website allows individualsto order goods directly, and full payment is taken in advance.
Although the website can be integrated into the inventory system, the interface between the
website and the inventory system has not been configured yet to check inventory levels at the
time an order is placed.
Inventory is valued at the lower of cost and net realisable value.
Goods are dispatched via local couriers who have handheld electronic devices to record a digital
signature from customers; however. they do not always remember to keep these charged. As a
result the!:J don't always collect the e-slgnature as proof that the customer has received the
goods. Over the past 12 months there have been customer complaints about the delay between
placing sales orders and receipt of goods. Boggio has investigated these and found that, in each
case, the sales order had been entered into the sales module within the accounting system'
correctly. However) an automatically generat~d emall which is supposed to send copi~s of new·
orders entered to the dispatch department for fulfilling· has been failing to send. .
Boggio's retail customers undergo credit checks prior to being accepted and credit limits are set
accordingly by receivaqles ledger clerks. These customers place their orders through one of the
sales team, who decides on sales discount levels.
Raw materials used in the manufacturing process are purchased from a wide range ofsuppliers.
As a result of staff changes in the poyablesledger departrmmt, supplier statement reconciliations
are no longer performed. Additionally. changes to supplier details in the payables ledger ma~ter
file. can be undertaken by payables ledger clerks as well as supervisors.
In the past six months_) Boggio has changed part of its manufacturing process and as a result
some new equipment has been purchased~ however, there are considerable levels of plcmt anGI
equipment which are now surplus to requirement. Electronic purchase requisitions raised for all
new equipment have been easily authorised with a click of a button by production supervisors.
This has contributed to thEdact that little action has been taken to reduce the surplus of old
equipment.

Required
(a) In respect of the internal control of Boggio International Co:
(1) Identify aodexplain SIX defiGiencies;
(2) Rocornmen_d q control to address each of these- deficiencies; and
(3) Describe· a test of control Suarez S Co would perform to asses.s whether each of these
controlst if implemented, is operating effectively.
Note. Use the below table structure to format !JOUr answer in the CBE software.

@BPP Questions 425

 (1) Control deficiency (2) Control recommendation (3) Test of control

(18 marks)
(b) Describe substantive procedures Suarez & Co should perform at the l:Jear end to confirm
plant and equipment additions.. . · (2 marks)

(Toto~= 20 marks)

18 Vieri
It is t July 20X5. Vieri Motor Cars Co (Vieri) manufactures a range of motor cars and. its year end
is 31 March 20X5. You are the audit supervisor of Rossi S Co and are currently preparing the audit
programmes for the year-end audit of Vieri. You have had a meeting with your audit manager
and he has notified you of the following issues identified during the audit risk assessment process:
Land and buildings
Vieri has a policy of revaluing land and buildings; this is undertaken on a rolling basis over a five-
year period. During the year Vieri requested an external independent valuer to revalue a number
of properties, including a warehouse purchased in October 20X4. Depreciation is charged on a
pro rata basis.
Work in progress
Vieri undertakes continuous production of cars, 24 hours a day, 7 days a week. An inventory count
. is to be undertaken at the year end and Rossi 8 Co will attend. You are responsible for the audit of
work in progress (WIP) and will be part of the team attending the count as well as the final audit.
WIP constitutes the partly assembled cars at the year end and this balance is likely·to be
material. Vieri values WIP according to percentage of completion, and standard costs or~ then
applied to these percentages. ·

Required
(a) Explain the factors Rossi 8 Co should consider when placing reliance. on the work of the
independent valuer. (5 marks)

(b) Describe the substantive procedures the auditor should perform to obtain sufficient and
appropriate audit evidence in relation to the· revaluation of Ia rid and buildings and the
recently purchased warehouse. (6 tnarks)

(c) Describe the substantive procedures the auditor should perform to obtain sufficient and
appropriate audit evidence in relation to the valuaticm of work in progress. (It marks)

(d) During the audit, the team has identified an error in the valuation of work in progress, as a
number of the assumptions contain out of date information. The directors of Vieri have
indicated that they do not wish too mend the financial statements.

Required
Explain the steps Rossi & Co should now take and the impact on the auditor's reporUn
relation to the directors' refusal to amend the finanCial statements.
{5 marks)

(Tota_l_= 20 marks)

lf26 Audit and Assurance · @sPP 0

\I

Answers
. DO NOT TURN THIS·PAGE_UNTIL YOU HAVE
COMPLETED THE MOCK EXAM

? ..

I~
lt28 Audit and Assurance @aPP
 Plan of attack
lfthiswere the real Audit and Assurance exom.ond-:you had been-~pldto start the exam, what
wouJd be going through ·your rnind? · -
. .

An important thing to say (while there is still time) isthat it is-vital to have ·a goodbreadthof
of
knowledge the syllabus because all the questions_are compulsory; However, don't panic. Below
we provide guidanqe on howto approach the exam. · _ ·
Looking through the exam
- Section A has three obj~ctive test cases, each with five q'-!estions. This is the section bfthe exam· .
where the examining t:eamcan test knowledge across the breadth of the syllabus. Make sure you-
read these cases and questions carefully. The distractors are designed to present plausibte; but
incorrect, answers. Don't letth_em mislead ~:~ou. If you really have no idea - guess. You may even
be right.
Section B has three longer questions:
• Question 16 is a 30-markquestion focused on the planning stage, covering audit risk and the
audit strategy documenft with an unrelated coda on interim audits. Don't panic- take your
time to read the scenario and what you are asked to do.
• Question 17 is a 20-mark: internal controls question. In part (a) it is crucial that you relate your
answer to the scenario.
• Question 18 is a 20-mdrk question dealing with a number of issues: an independent valuer,
revaluations, work in progress, and auditor reporting.
Allocating your time
BPP's advice is to always ollocote your time according to the marks for the question. However, use
common sense. If you're doing a question but haven't a clue how to do part (b), you 'might be
better off reallocating yourtime and getting more marks on another question. where you can add
something you didn't hav~time for earlier on. Make sure you leave time to recheck the OTs and
make sure you have answered them all. ·
Forget about it
And don't worry if you found the exam difficult. More than likely other candidates will too: If this
were the real thing you would need to forget the exam the mrnute yqu finished the exam and think
about the next one. Or, if it is the last one, celebrate! ·

@sPP Answers lt29

-Section A
Buffon.&Co
The correct answers are:

Facts Category of threat

Potential holding of shares b!::J audit Self-interest

partner's soh_

l. .
_s_a_s-..is_o_f_f_e_e_ _ _ _ _ _ _ _ _ _ ----~1 I Se~-interest
Length of time the audit engagement
partner has been in position
I Familiarity

Possible provision of internal audit Self-review

services

Maldini Co's request for advice No threat

regarding internal audit

Fact 1 -Partner has been in role for eight !::Jears, this contravenes the Code and represents
a familiarity threat;
. Fact 2- Providing information on internal audit is not a threat to independence.
· Fact 3 - Partner's son holding shares represents a self-interest threat as a close famii!::J
member of the portner holds a financial interest.
Fact 4.,... Providing internal audit services raises a self.:-review threat as it is likei!::J that the
audit team will be looking to place reliance on the internal control system reviewed by
internal audit. ·.
Fact 5- This represents fees on a contingent basis and raises a self-interest threat as the
audit firm's foe will rise ifthe cornpantj's profit after tax increases. ··

2 The correct answer is: The audit partner should be removed from the audit team.
If the engagement partner's son accepts the role and obtains shares in the company it
would constitute a self-interest threat but, as the partner has already exceeded the seven
year relationship rule, in line with ACCA's Code of Ethics and Conduct, the partner should
be rotated off the audit irrespective of the decision made by her son.
As Maldini Co is a listed company an engagement quality reviewer should already be in
plac·e in line with ISA 220 (Revised).
Consulting a third party on key audit judgements would be a potential safeguard in
respect of overdependence on fees but would not be adequate in the circumstances
described.
It is unlikely that the firm needs to resign from the audit(due to the stated circumstances)
as the threat to, objectivity can be mitigated.

Lt30 Audit and Assurance @ePP

 3 ·• The correct answers are:
If the assignments will· relate to the internal controls over financial reporting.
If management will accept responsibility for Implementing appropriate
recommendqtions .
is
. Statement 1 inappropriate as the external and internal audit team shqulc!be separate
and therefore considera.tion of the skills of the external audit team is not.oppropriate in the
circumstances. . ·
Statement 4 does not apply because the timescale of the work is not relevant to the
consideration of the threats to obJectivity.
Statements 2 and 3 are valid considerations- as per ACCA's CodeofEthics and Conduct~
providing internal audit services can result in the audit firm assuming a mcmpgement role.
To mitigate this, it .is appropriate for the firm to assess whether management will take
responsibility for implementing recommendations (ACCA Code of Ethics dnd Conduct:
para. 605.4). Further, for a listed company the Code prohibits the provtstc:>n of internal
audit services which review a significant proportion· of the internal.controls>over financial
reporting as these may be relied upon by the external audit team and the self-review threat
is too great (ACCA Code of Ethics and Conduct: para. R605.5).

4 The correct answers are:

Characteristic Type of auditor

1· APpointed by audit committee

Review effectiveness of internal

controls to improve operations
I internal auditor

Reports are publicly available to Extenial auditor

shareholders

Express an opinion on the truth and External auditor

fairness of the financial statements

Internal audit is appointed by the audit committee (external audit usually by the.
shareholders) and it is the role of intemal audit to review the effectiveiless>and efficiency of ·
internal controls to improve operations. External audit looks at the operating effectiveness
of internal controls on which they may rely for audit evidence and a by-product may be to.
comment on any deficiencies thebJ have found but this is not a key function of the role.
Therefore statements 1 and 3 relate to internal audit.
The external auditor's report is publicly available to the shareholders of the company
(internal audit reports are addressed to management/those charged with governance) and .
the external auditor provides an opinion on the truth and fairness of the.financial
statements. ·
Therefore statements 2 and 4 relate to external audit.

5 The correct answer is: No sofeguards can be applled and this basis for fee determination
should be rejected. ·
The proposal in relation to
the fee$ is a contingent fee basis which is expresslbJ prohibited
bk:) ACCA's Code·of Ethics and Conduct and therefore the oolg viable· option here is to
reject the fee basis (ACCA Code of Ethics and Conduct: para. R410.10-11)~

· ...

@BPP Answers lt31

Balotelli Co
6 The corre.ct answer is: Depreciation should be $10,660, assets are understated
. .

D'epreciation should be-¢alculated as:

. Tread111ills/exercise bikes= (18,000 + 17,000)/36 x 8 months=- 7.778

Rowing machines/cross trainers== '(9,750 + 11~000)/36 x 5 months=· 2,882

Total 10,660

Therefore depreciation· should be $10,660and assets ore currentlyunderstated os too

much depreciation has currently.been charged.
The second option is based on depreciation being applied for a full year instead of for the
relevant months.
The third option is based on depreciation not being charged in the month of acquisition (ie
seven and four months).
The fourth option is based on depreciation for the exercise bikes being divided by the three
years instead of allocated on a monthly basis.
7 The correct answers are:
• Agree a sample of additions included in the non-current asset register to purchase
invoice and bank ledger account
Recalculate the depreciation charge for a sample of assets ensuring that it is being
applied consistently and in accordance with lAS 16 Property, Plant and Equipment
Review physical condition of non-current assets for any signs of damage
Ensure disposals are correctly accounted for and recalculate gain/loss on disposal
The review of board minutes for evidence of disposals during the year and verify that these
are appropriately reflected in the non-current assets register is a test for existence and
reviewing the repairs and maintenance expenseoaccount for·evidence of items of a capital
nature is a test for completeness.
All other tests are relevant for valuation.·:
8 The correct answer is: .Send an enquiry letter to the lawyers of Balotelli to obtain their view·
as to the probability of the claim being successful
While all procedures wot,.tld be valid in the circumstances~ only the written confirmation
from the compan(/S lawuers WOUld a11ow the auditor to Qbt:ain an oXp<·:nt, third-partu
confirmation on the likelihood of the case being successful. This would provide the auditor
with the most reliable evidence in the circumstances.
9 The correct answers are:
It provides evidence from an independent external source.
It improves the reliabilit!:J of audit evidence. as the process is under the control of the
auditor.·
As per ISA 505 External Confirmations, the evidence obtained from the trade receivables·
circularisation should be reliable as it is from an external source and the risk of
management bias and influence is restricted· due to the process being under the control of
the. auditor (ISA 505).
Customers ore not obliged to answer and often circularisations have.a very low response
rate. A circularisation will not provide evidence over the valuation assertion for receivables
and therefore the second·and-third statef0ents are drawbacks of a circularisatidn.

lt32 Audit and Assurance _@BPP

__ 10 The· correct answers are:

Customer Audit procedure

Maple Co Agree to post-!dear end bank_ ledger

account and bank statement

Laurel Co Discuss with management and

consider whether amount should he-
included in allowance for receivables

..__W_i_ll_ow_c...,.o_ _ _ _ _ _......,._ _ _ ___.l No further audit procedures required .

...._c_e_d_a_r_c_o_......,._ _ _ _ _ _ _ _ _ __,l I Agree to pre year end invoice

Willow Co- The external confirmation has confirmed the balance and no further work is
required.
Cedar Co -The difference represents an invoice in transit and therefore should be
confirmed to a pre !dear end invoice to verif!d that it is a legitimate timing difference.
Maple Co - The difference represents a pa!dment in transit and should be agreed to post
!dear end payment to confirm that it is a legitimate timing difference.
Laurel Co -The customer is disputing the balance' and therefore the need for an allowance
against the balc;mce should be assessed.

Answers 433
Cannavaro
11: The correct answers ore:

Element of auditor's report Reason for inclusion

Opinion paragraph Expl_ains that the financial statement~

are presented fairly ·

Date of report Demonstrates the point at which

sufficient appropriate evidence has
been obtained

Addressee Clarifies who may rely on the opinion

I included in the report

!Auditor's responsibilities Explains the role and remit of the audit

Date of report- The auditor's report shall be dated no earlier than the date on which the
auditor has obtained sufficient appropridte audit evidence on which to base the auditor's
opinion on the financial statements. The date of the audit report is important in the case of
subsequent events which impact the financial statements.
Addressee- Sets out who the report is addressed to (usually the shareholders) and is there
to clarify who can plaqe reliance on the audit opinion.
Auditor's responsibilities -This paragraph sets out that the auditor is required to express an
opinion on the financial statements and seeks to explain the difference between the role of
the auditor and thdse charged with governance. Thus this paragraph sets out the role and
remit of the auditor.
Opinion paragraph- This paragraph sets out the auditor's conclusion on the financial
statements. In an unmodified report this takes the form of the auditor confirming that the
financial statements present a true and fair view or are presented fairly.

lt31t Audit and Assurance @BPP

 12 The correct answers are:
c

All rnaterialsubsequent events require the numbers in the_ FALSE

finangial statements tobe-adjusted.

A .non-adjusting event is a subsequent event for which no

amendments to the current year ffnc::mcial statements are FALS~ -·
required. ·

The auditor's responsibilities for su~sequent events which

occur prior to the audit report being signed are different
TRUE
'from their responsibilities after the auditor)s report has
been issued; .

The auditor should request a written representation

confirming that all rel.evantsubsequent evenfs have been TRUE
disclosed.
..•.. ..

Statement 1 is false as not all subsequent events will require an adjustment to the numbers
within the financial statements. lAS 10 Events Aft~r the Reporting Period makes a distinction
between an adjusting and no!l-adjusting event. Only material adjusting events would
·require an amendment to the figures within the financial statements (lAS 1~).
Statement 2 is false as, while a non-adjusting event would not require achange to the
numbers within the financial statements, lAS 10 may require a disclosqre to be made. If the
non-adjusting event is material, non-disclosure could still result in a modification to the
audit report.
Statement 3 is true as the auditor is required to carry out procedures up to the date of the
audit report to gain sufficient appropriate audit evidence that all relevant subsequent
events have been identified and dealt with appropriately. After the auditor's report is
-issued, the auditor does not need to actively look for subsequent events but is only· required
to respond to subsequent events which they become aware of.
. Statement 4 is true as-ISA 560 Subsequent Events requires the auditor. to obtain written·
confirmation from management/those charged with governance that all subsequent events
have been identified and dealt with in accordance with the appropriate reporting
framework (ISA 560). ·
- 13 The correct answer is: Option C

Option Material Impact on accounts

. The outstanding balance with Pi rio Co is likely to be irrecoverable as the customer is

experiencing financial difficulties.
The balance is- material at 7.4% of profit before tax and 2.5%. of revenue'.
Currently profit and assets are overstated by $285,000. Therefore the correct option is C.

@BPP ArlSwers lt35

14 The correct answers are:
• Discuss with management the reasons for not amehdfng the firianciaLstatements-.
Review entries in the bank ledger account po!;;t yearend fo-r receipts from Pirlo Co
Writing to the customer/agreeing to invoices, while valid procedures during the audit to
verify the existence of an outstanding balance, would not allow the auditor to assess the . _
recoverability of the balance which -is the key issue in-determining whether an adjustment is
required.
Post year end cash testing is the best way forthe auditor to assess if the balance is
recoverable wholly or in part and therefore the bank ledger account should be reviewed for
any receipts which will change the assessment of the debt after the year end. The issue
· should also be discussed with management to understand their reasons for not wonting to
amend the financiql statements as this may be due to a change in circumstances.

15 If the 20X4 financial statements are not amended, our.opinion will be I qualified on the
grounds of material misstatement I·
If the appropriate adjustment is made to the financial statements, our opinion will be
I unmodified j.
The debt with Pirlo Co should be provided for and is material to the financial statements at
Z4% of profit before tax and 2.5% of revenue. This represents a material misstatement
which is material but not pervasive. As such, if no adjustment is made the auditor will be
required to provide a qualified opinion. If the required change is made, then no material
misstatement exists and therefore the auditor will be able to issue an unmodified opinion.

lt36 ·Audit and Assurance @BPP

 section a
-·--~

16 Millt~. _
Marks

(a) Cqmponent of audit risk

Explcmatfon of audit risk 2".
Explanat-ion of ?omponents of audit risk: Inherent, control and detection risk- 3
Maximum 5
(b) Audit rfsk and auditor's response (only 7 risksrequired)
$5 miliion expenditure on production process 2
Inventory counts at 15 warehouses at year end 2
Treatment of owned v third-party warehouses 2
New general ledger system introduced at the beginning of the year 2
Release of opening provision for allowance for receivables 2
Research and development expenditure 2
Damaged inventory 2
Sales returns 2
Management borius based on asset values 2
Maximum 14
(c) Audit strategy document
Main characteristics of the audit
Reporting objectives of the audit and nature of communications required
Factors which are significant in directing the audit team's efforts
Results of preliminary engagement activities and whether knowledge gained on
other engagements is relevant
Nature, timing and extent of resources necessary to perform the audit
Maximum 4
(d) Difference between interim and final audit
Interim audit 2
Final audit 2
Maximum 3
(e) Procedures/impact of interim audit on final.audit
Example procedures 3
Impact on final audit 3
.-
Maximum 4
Total 30
-

(a) Audit risk and. its components

Audit risk is the risk that the auditor expresses ao inappropriate audit opinion when the
financial statements are materially misstctted. Audit risk is a function of two main components
being the risks of material misstatement and detection risk (I SA 200)~ Risk ol material
misstatemont is made up of two components, inherent risk and control risk.

Answers .'+37
 Inherent rrsk is the susceptibility of an assertion about a class of transaction, account
balance or disclosure-to a misstatement which could be material. either individually or when
aggregated with other misstatements, before consideration of any related controls (iSA 200).
Control risk is the risk that a misstate-ment which could occur in an assertion about a class of.
transaction, account ba.lance or disclosure and which could be material, either individually or
when aggregated with other misstatements, will not be prevented, o'r detected and .corrected,
_on a timely basis by the entity's internal control (ISA 200).
Detection risk is the risk that the procedures performed by the auditor to reduce audit risk.to
an acceptably low level will not detect a misstatement which exists and whic~ could be
material, either individually or when aggregated with other misstatements. Detection risk is
affected by sampling and non-sampling risk (ISA 200).
' ---
. ....,.-------.-·--·--·--·-..---·-··"1
! {a) Explain audit risk and the components of audit risk.
·--Here we~~ve used7~!
highlight tool to help us to
~eep in mind th~ main
pomts of the reqwrement.
j f
. ord Proceuor
• 8·
(5 marks)

[E)
You do not have to do this
but may sometimes find it D. ~ ro UJ •~ r> ' Q B !! 8 x2 xz . L
l__.hel~~~~~~.:~-~ . . ' •
Paragraph v 9 v §: ~ :S 9 ·- ,_ {§ )::§

Audit risk is the risk that the auditor expresses an inappropriate audit opinion when
the financial statements are materially misstated. Audit risk is a function of two main
components, being the risks of material misstament and detection risk (I SA 200).
(-This ~;:::;~;~;-·l Risk of material misstatement is made up of two components, inherent risk and
control risk.
requires the use of
I paragraphs within the Inherent risk is the susceptibility of an assertion about a class of transaction, account

I word processor
available on the exam
platform. There is no
. balance or disclosure to a misstatement which could be material, either individually
or when aggregated with other misstatments, before consideration of any related
controls (I SA 200).

I!
~
need to use different
fonts, or the
spreadsheet function.
Control risk is the risk that a misstatement which could occur in an assertion about a
class of transaction, account balance or disclosure and which could be material,
either individually or when aggregated with other misstatements, will not be
--~·-·--·~·-····---~--- .. -~../
prevented, or detected and corrected, on a timely basis by the entity's internal control
(ISA200}.

Detection rlsl< is the risk that the procedures performed by the a.uditor to reduce audit

l
risk to an acceptably low level will not detect a misstatement which exists alid which
ould be material, either individually or when aggregated wit.h other misstatements.

~ .. ___________
etection risk ls affected by sampling and non-sampling risk (ISA200).
................ _____
....... .... .....______ ...__
~
·
~ ___ ---
.._..............

(b) Audit risk and auditor's response

Audit risk Auditor's response

Millo has incurred $5 million on updating, The auditor should review a breakdown of
repairing and replacing a significant these costs to ascertain the split of capital
amount of the production process and revenue expenditure, and further
machinery. testing should be undertaken to ensure that
If this expenditure is of a capital nature, it the classification in the financial statements
should be capitalised as part of property, is correct.
plant and equipment (PPE) in line with lAS
16 Property, Plant and Equipment However,
if it relates more to repairs, then it should be
expensed to the statement of profit or loss
If the expenditure is not correctly classified,
profit and PPE could be·uhder- or -
overstated.

At the year end there will be inventory Th~- auditor should assess which of the

lt38 Audit and Assurance @BPP

 _i

counts undertaken. in all15 warehouses. inventory sites they attend the counts
It is unlikei!J thatthe auditor will be able to fcir. This will be,qt_ly~with_material inventory
cl
attend all15 inventor!J counts and therefore or which have a history of significant errors.
they need to ensur~ that they obtain For those no,t ·visited, the auditor will need to
sufficient appropriate audit evidence over review the.level of exceptions noted·duri_ng
the inventory counting controls, and the count and discuss with management
completeness and existence ofirwentory for any iss_ues which arose during the count.
any wqrehouses not visited.
--~·····''--·----------·-·-·--·- .... -...... _.., ............ ~ ................................ - ..........................................................................................--..!
Inventory is stored within 15 warehouses; The a~ditor shouldreview supporting
some are owned by Milia and some rented documentation-for all warehouses included
from third parties. Only warehouses owned within PPE to confirin ownership by Milia
by Millo should be included within PPE. and to ensure non..:current assets are not
There Is q risk of overstatement of PPE and overstated.
understatement of rental expenses if Millo
has capitalised all 15 warehouses.

A new accounting system The auditor should undertake detailed

has been introduced at the beginning of the testing to confirm that all opening balances
, year and the old system was run in parallel have been correctly recorded in the new
· for two months. There is a risk of opening accounting general ledger system.
balances being misstated and loss of data if They should document and test the new
they have not been transferred from the old system. They should review any
system correctly. management reports run comparing the old
In addition, the new accounting general and new system during the parallel run to
ledger system will require documenting and identify any issues with the processing of
the controls over this will need to be tested. accounting information.
e•·•··•··•··•• ••••••••••••••••••••••·••·•·•••••• .. • " " ' ' ' ' ' ' ' ' ' • • • • ' " '

Milia has incurred expenditure of $4.5 Obtain a breakdown of the expenditure and
million on developing a new brand of fizzy undertake testing to determine whether the
' drink. This expenditure is re-search and· costs relate to the research or development
deve-lopment under lAS 38 Intangible Assets. stage. Discuss the accounting treatment
The standard requires research costs to be with the finance director and ensure 1t is in
expensed and development costs to 'be accordance with lAS 38.
capitalised as an intangible asset (lAS 38).
If Milia. has incorrectly classified research
costs as development expenditure~ there is a
risk the intangible asset could be overstated
and expenses understated.

The finance director of Millo has decided to Extended post year end cash receipts
release the opening balance of $1.5 million testing and a review of the aged receivqbles.
for allowance for receivables as he feels it is ledger to be performed to assess valuation
unr~ecessary. There is a risk that receivables and the need for-on allowance for
will be overvalued, as despite having a receive bles.
creditcontroUer; some balanceswill be · Discuss with the director the rationale for__
irrecoverable and so will be. overstated if not releasing tbe $1.5 million opening allowance
provided against. for receivables.
In addition, due to the damaged hwentory.
there is on increased risk of customers
refusing to make payments in full.

A rarge· batch of cola products has been Detailed cost and net realisable value
damaged in the production process and will testing to be p·erformed to assess how rnucl~
be in inventory at the year end. No the inventory requires vvriting down by.
adjustment has been mode by
management

@BPP Answers '+39.

~
1: .
 The voluation of inventory as per lAS 2
Inventories $hould be at the lower of cost
and net .realisable value (lAS 2). Hence it is -
likely that this inventory is ov~rvalued .
,
. ...·.................................... ""'"'"'"'"'"' ., .. _........ , ........ ------ .. .--..-......""·'"'·''"•".. '"

Due to the damaged cola products, a Review the breakdown of sales of damaged
number of customers have complained. It is goods, and ensure that the1fhave been·
likely that for anbJ of the damaged goods accurately removed from revenue.
sold,· Milia wm need to refund these
customers.
Revenue is possibly overstated if the sales
returns are not completely and accurately
recorded.

The management of Milia receives a Throughout the audit, the team will need to
significant annual bonus based on the value be alert to this risk. They will need to
of !dear-end total assets. There is a risk that maintain professional scepticism and
management might feel under pressure to carefully review judgemental decisions and
overstate the value of assets through the compare treatment against prior years.
judgements taken or through the use of
releasing provisions.

{b) Using the minutes provided, describe SEVEN audit risks, and explain the
auditor's response to each risk, in planning the audit of Mitra Co. -
(14 marks)

I!] Word Procu_aor ' Q

Par.~graph v

I I~~~~~
!Aud~-- ~
, This answer bo_x ca~~l incu~red $5m-:;; --t----
prepared wtth a . ~~dating, repairing and
two-column table I, replacing a significant amount of
already. We then . the production process .
needed to write the 1
, , machinery.

answer into the ~i ~~~.If this expenditure is of a capital ·

appropriate boxes in The auditor should review a
the table, keeping our
· h . 1
I 1 nature, it should be capitalised
l i as part of the property, plan and
breakdown of these costs to
pomts for ea~ nskJ .
ascertain the split of capital
response on t e same I 11 equipment (PPE) In line with lAS
! 16 Properly, Plant and .
and revenue expenditure, and

L
. -~~:he ta~~....J
·
1 Equipment. ~owever;. if it relates
' more to repa1rs, then tt should
further testing should be
undertaken to ensure that the
classification ih the financial ·
be expensed to the statement of
profit or loss.
statements is correct. !
If the expenditure is not l lf
correctly clas~~~ ___j

(c) Audit strategy docuf1:1ent

The audit strategy sets out the scope. timing and direction of th"e audit and helps the
development of the audit plan (I SA 300). It should consider the following main areas:
It should identify the morn characteristics of the engagement which define its scope. For Millo
lt should consider the following:

ltlfO Audit and Assurance. @BPP

 Whether the financial information to be audited has been prepared in· ciccordanGe with
IFRS Accounting ·Standards · . . ·
. - '
• T? what extent audit evidence obtained in previous o~dits for ·Millo will be utilised
Whether computer-assisted audittechniques will be used and the effect of1T on ·audit
procedures·
The av9ilability of key personnel a_t Milia
- .
It should as-certain the reporting objectives of tbe engagement to plan the timing of the audit
and the nature of the communications required; such as (ISA 300):_
The audit timetable for reporting and~hether there will be an interim as well as final audit
Organisation of meetings with Millo's management to disc.uss any audit l$SUes arising
Location of the 15 inventory counts
Any discussions with management regarding the reports to be issued
• The timings of the audit team meetings and review of work performed
If there are an!J expected communications with third parties
The strategy should consider the factors which, in the auditor,s professional judgement, are
significant in directing Milia's audit team's efforts, such as:
The determination of materiality for the audit
The need to maintain a questioning mind and to exercise professional scepticism in
gathering and evaluating audit evidence
It should consider the results of preliminar!J audit planning activities and, where applicable,
whether knowledge gained on other engagements for Milia is relevant, such as:
Results of previous audits and the results of any tests over the effectiveness of internal
controls
Evidence of management's commitment to the design, implementation and maintenance
of sound internal control .
Volume of transactions, which ma!J determine whether it is more efficient for the audit
team to rei!J on internal control
Significant business developments affecting Millo, such as the chari"ge in the accounting
system and the significant expenditure on an overhaul of the factory
The audit strateg!J should ascertain the nature, timing and extent of resources necessary to
perform the audit, such as:
• The selection of the audit team with experience of this type of industry
Assignment of audit work to the tearn members
Setting the audit budget
Note. The a~swer is longer than required for four marks but represents a teaching ai\d.

@BPP .,t\nswers · lfLt1

 ~(~)- lde~tffy
the main areas, otJ:ter th. an audit ri. sks, which should beinclu~~--~
·within ~he audit strategy document for Milia Co, and for each area provide an
example relev_ant to the audit.· . ·.: , j

(4 marks) 1

~ Word Proce1~or •.. ~ :;

Cl · ~ · ro .10 ~- r . o. , a

• The audit timetable for reporting and.whether there will be an interim as well as
final audit
• Organisation of meetings with Milia's management to discuss any audit issues
arising
• Location of the 15 inventory counts
• Any discussions with management regarding the reports to be issued
• The timings of the audit team meetings and review of work performed
• If there are any expected communications with third parties

(d) Differences between an interim and a final audit

Interim audit
The interim audit is that part of the audit which takes place before the year end. The auditor
uses the interim audit to carry out procedures which would be difficult to perform at the year
end because of time pressure. There is no requirement to undertake an interim audit; factors
to consider when deciding upon whether to have one include the size and complexity of the
company along with the effectiveness of internal controls.
Final audit
The final audit will take place after the !::Jear end and concludes with the auditor forming and
expressing an opinion on the financial statements for the whole year subject to audit. It is
important to note that the final opinion takes account of conclusions formed at both the
interim and final audit. · ·
(e) Procedures which could be undertaken during the interim a.udit .include:
Review and updating of the documentation of accounting systems at Millo
Discussions with management on the recent growth and any other changes within the
business which have occurred during the year to date at
Millo to update the auditor's
understanding of the company
Assessment of risks.whichwill impact the·final audit of Milia
Undertdke tests of controls on Milia's key transaction cycles of sales, purchases and
inventory, and credit control ·
Perform substantive procedures on profit and loss transactions for the year to date and
any other completed material transactions

ltlt2 Audit and Assurance

@BPP
 Impact ofinterim audit on final audit
will
. _lf an .interim audit is undertqken at Milia,_ then it have an impact.on the final ~ud-i.f~nd the"
. extent of work undertaken after the year end. First, as some testing has alread_y.been - _
undertaken, there-will be.Jess work to be performed at_the final audit, which ma\:j resultin·a .
shorter audit ahd audited financial statements possibly being available earlier. The outoo.me
of the controls testing ·undertaken during the.interhn audit will impact the level of s_ubstdntlve ·-
testing to be undertaken. If the controls tested have proven to be operating effectively~ then
the ciudi~o·r may be able to reduce the level of detoi_led suostantive testing required cos they
··· · will be able to place reliance on the controls. In addition, if substantive procedur~s were
underta~en at-the interim audit, then only-the- period from the interim audit to the yea_r end
will require testing. . '

17 Baggio
Marks

(a) Control deficiencies, recommendations and tests of controls

Website not configuredto integrate with inventory system 3
Customer a-signatures 3
Unfulfilled sales orders 3
Customer credit limits 3
Sales discounts 3
Supplier statement reconciliations 3
Payables ledger master file 3
Surplus plant and equipment 3
Authorisation of capital expenditure 3
Max 6 issues, 3 marks each
Maximum 18
(b) Substantive procedures for PPE .
· Cast list of additions and agree to non-current asset r~gister
Vouch cost to recent supplierinvoice
Agree addition to a supplier invoice in the name of Boggio to confirm rights and
obligations
Review additions and confirm capital expenditure items rather than repairs and
maintenance · .1
Review board minutes to ensure authorised by the board 1
Physically verify them on the factory floor to confir.m existence
Maximum 2
Total 20

@BPP Ahswers · l.tlt3

 Boggio tnternational's (Bagg.io) internal control

Deficiency (i) Control recommendation (ii) Test of control (iii)

Currently the website is not The website interface should

configur~d to integrate with be properly configured to attempt to process orders
the inventory system. integrate with the inventory via the website for items
Thi& can resultin Boggio system; to allow checking of which are notcurrently held
accepting customer orders inventory levels and only in inventpry:
when they do not have the process orders if adequate The orders should be
goods ininventory. This can inventory is held. flagged as being out of
cause them to lose sales If inventory is out of stock, stock and indicate an
and customer goodwill. this should appear on the approximate waiting time.
For goods dispatched by website with an Select a sample of
local couriers, customer e- approximate waiting time. dispatches by couriers and
slgnatures are not always Boggio should remind all ask Boggio for proof of
obtained. This can lead to local couriers that customer delivery by viewing
customers falsely claiming e-signaturesmust be customer e-signatures.
that they have not received obtained as proof of delivery
their goods. Boggio would and payment will not be
not be able to prove that made for any dispatches
they had in fact dispatched with missing signatures.
the goods and may result in
goods being dispatched
twice.

There have been a number The failing automatic Review documentation used
of situations where the sales emailing routine should be to evidence review of email
orders have not been investigated and fixed as logs and check that errors
fulfilled in a timely manner. soon as possible. It should found were investigated -and
This can lead to a loss of be monitored to ensure it followed up on.
customer goodwill and if it continues to run as
persists will damage the expected by reviewing
reputation of Boggio as a automated email error logs
reliable supplier. - periodically for errors.
Results from the review Review the report of
should be recorded as outstanding sales orders; If
evidence it has taken place. significant, discuss with a
responsible official to
Once goods are dispatched,
understand why there is still
they should be matched to
a sig nificm1t time period
sales orders and flagged as
between sales order and
fulfilled. The system should
dispatch date.
automatically flag any
outstanding sales orders Select a sample of sales
past a predetermined orders and compare the
period. such as five days. date of order to the goods
dispatch date to ascertain
This report should be
whether this is within the
reviewed by a responsible
acceptable predetermined
official.
period.

Customer credit limits are Credit limits should be set For a sample of new.·
set by receivables ledger by a senior member of the customers accepted in the ~·
clerks. receivables ledger year, review the
Receivables ledger clerks department and not by authorisation of the credit
are not sufficiently senior receivables ledger clerks. limit, and ensure that this
and so may set limits too These limits should be was performed by a
high, leading to regularly revieWed by a -responsible official.

ltltlt Audit and Assurance @sPP-

 irrecoverable debts. or too responsible official. Enquire. of repeivcibles
low, leading to a loss of ledger clerks ds to who can
revenue. ·set credit limits.

Sales discounts are set by All members of the sales Discuss with members of the
Boggio's sales team. In · team should be given sales team the process for·
order to boost their sales, authority· to grant sales setting sales discounts.
members of the sales team discounts up to a set limit.· Review the soles discount
may set the discounts too Any sales discounts above report for evidence of review
high, leading to a loss of these limits should be by the sales director.
revenue and profit~ authorised by sales area
managers or the sales
director.
Regular review of sales
discount levels should be
undertaken by the sales .
director, and this review
should be evidenced.

Supplier statement Supplier statement Review the file or electronic

reconciliations are no longer reconciliations should be folder of supplier statement
performed. performed on a monthly reconciliations to ensure
This may result in errors in basis for all suppliers dnd that they are being
the recording of purchases these should be reviewed by performed on a regular
and payabies not being a responsible official. basis and thatthey have
identified in a timely been reviewed by a
manner. responsible official.

Changes to supplier details Only payables ledger Request a.poyables ledger

in the payables ledger supervisors should have the clerk to attempt to access
master file can be authority to rriake changes the master file and to make
undertaken by pa\dables to master file data. This an amendment; the system
ledger clerks. should be controlled via should not allow this.
This could lead to ke!d passwords. Review o report of master
supplier data being Regular review of any data changes and review
accidentally amended or changes to master file d·ata the authority of those
fictitious suppliers being set by a responsible official and making amendments.
up, which can increase the this review should be
risk of fraud. evidenced.
·~
Boggio has considerable Regular review of the plant Observe the review process
levels of surplus plant and and equipment on the by senior factprypersonnel,
equipment. Surplus unused - factory floor by senior identitwing the treatment of
plant is at risk of theft. factory personnel to identify a~1y old equipment.
In addition, if the surplus any oldorsurplus Review processed capital
plant is not disposed of, equipment. expenditure forrns to
< then the company could As part of the capital . ascertain if the treatment of
lose sundri:J income. expenditure PrD9eSS, there replaced eqUiprnent is as
should be a requirement to stated.·
, confirm the treatment of the
equipment being replaced.

Answers· · '+'+5

~
 t·'-"'··-·-···-------.
Electronic purchase Capital expenditure- Review a sample of
requisitions· ore authorised authorisation_ levels to be-- . - authorised capital.
b~ production supervis~r-s; establishec;L Production expenditure forms and_
Production supervisors are supervisors should onl~ be identif1J if the correc~
not sufficient!~ independent able to authorise low value approver has authorised
or senior to authorise capital ·items; arig high value items them.
expenditure. should be authorised by the
board.

(b) Substantive procedures - additions

Obtain a bre-akdown of additions) cast the list and agree to the non-current asset register_
to confirm completeness of plant and eq!Jipment (PSE).
• Select a sample of additions and agree cost to supplier invoice to confirm valuation.
• Verify rights and obligations by agreeing the addition of PSE to a supplier invoice in the
name of Boggio.
Review the list of additions and confirm that they relate to capital expenditure items rather
than repairs and maintenanc~.
Review board minutes to ensure that significant capital expenditure purchases have been
authorised by the board.
For a sample of additions recorded in PSE. physically verify them on the factory floor to
confirm existence.

18 Vieri
Marks

(a) Reliance on independent valuer

lSA 500 requires co·nsideration of competence and capabilities of expert
Consider if member of professional body or industry assoc.iation
Assess independence
Assess whether relevant expertise of type of properties as Vieri Motor Cars
Evaluate assumptions
Maximum 5
(b) Su_bstantive procedures for revaluation of land anci buildings
Cast schedule of land and buildings revalued this year
Agree the revalued amounts to the valuation statement provided by the valuer
Agree the revalued amounts included correctly in the non-current assets register
Recalculate the total revaluation adjustment and agree recorded in the
revaluation surplus
Agree the initial cost far the warehouse to invoices to confirm cost
Confirm through title deeds that the warehouse is awned by Vieri 1
Recalculate the depreciation charge for the year · 1
Review the financial statements disclosures far compliance with lAS 16 Property,
Plant and Equipment t
Maximum 6
(c) Substantive procedures for w_ork in progress (WIP) · ·
Discuss with management how the percentqgecompletions are attributed to WIP

ltlt6 Audit and Assurance

 Marks

Observe- the procedures carried out in.the countin assessing the leve_lof WIP;
consider reasonableness of the_OS$_Umptions used· ..
During the count, agree a sample of percentage completions are in accordance
with Vier:i's policies 1·
Discuss with management the- basis of the standard costs 1
. .

Review the level of\ldriances between standard and actual costs 1

Obtain a breakdown. of the standard costs and agree a sample of these costs to
actual invoices .
Cast the schedule of total WIP and ~gree to the trial b~lance and financial.··
statements
Agree sample of WIP assessed during the count to the WIP schedule, agree
percentage completion is correct and recalculate the inventory valuation
Maximum 4
(d) Impact on audit repQrt
Discuss with management reasons for non-amendment
Assess materiality
Immaterial- schedule of uncorrected adjustments
Material not pervosiV(3 - qualified opinion
Basis for qualified opinion paragraph
Opinion paragraph "'""·qualified
Maximum 5
Total 20

(a)
-.:-:----·-·- ..-.-.. -.. -.--.-..,.-~.....,.-~----
. ..,-.:,-.~.. -.-.. ~~,--.·---:-.-... ---'-..,...,--~··:··:...·-:-··1
IEl-1
,·· i

i g·vif·~. :· _
I Reliance on the work of an independent vdluer
f1SA 500 Audit EvicJence requires auditors to evqluate the competence, capabilities _
1 including expertise and objectivit!:j of a management expert. This would include

1 consideration of the qualifications of the valuer and assessment of whether they were

1 members of any professional body or industry association (ISA 500).

I The expert's independence should be ascertained, with potential threats such as undue
I reliance. on VierlMotor Cars Co (Vieri) or a self-interest threat such as share ownership ··
' consider~d. i
I
In addition, Rossi & Co should meet with the expert and discuss with them its relevant
expertise, in particular whether it has valued similor land and buildings to lhose of Vieri in
the past. Rossi SCo should also consider whether the valuer understands the accounting
requirements of lAS 16 Property. Plant and Equipment in relation to valuations.
! I
-i The valuation shoul(:j then
I .
be evaluoted .. The. assumptions uS()d .should becarefuii!:J
i reviewed and cornpared to previous revaluations at Vieri. These assumptions should be
! discussed with both mcmagement arid the valuer to undnmtand the basis of an!J -

l voluations. ·. ........................................................!

@aPP Answers 4'+7

(b) Substantive procedures for lan~ and buildings
(1) Obtain a schedule of land .and buildings revalued this ~ear and cast.to con·firm
completen(3ss and accurac~ .of the revaluation adjustment
(2) On a sample basis, agree the reva~ued amounts to the.valuation statemet]t provided b~
the valuer.
(3) ·Agree the revalued amountsforthese assets are included correctly in the non~current
assets register.
(4) Recalculate the total.revaluation adjustment and agree correctly recorded in the
revaluation surplus.
(5) Agree the initial cost for the warehouse addition to supporting documentation such as
invoices to confirm cost. ·
(6) Confirm through a review of the title deeds that the warehouse is owned by Vieri.
(7) Recalculate the depreciation charge for the year to ensure that, for assets revalued
during the year, the depreciation was based on the correct valuation and for the
warehouse addition that the charge was for six months only.
(8) Review the financial statements disclosures of the revaluation to ensure they comply with
lAS 16.
(c) Substantive procedures for work in progress (WIP}
(1) Prior to attending the inventory count, discuss with management how the percentage
completions are attributed to the WIP. For example, is this based on motor oars passing
certain points in the production process?
(2) During the count, observe the procedures carried out b~ Vieri staff in assessing the level
of WIP and consider the reasonableness of the assumptions used.
(3) Agree for a sample that the percentage completions assessed during the count are in
accordance with Vieri's policies communicated prior to the count.
(4) Discuss with management the basis of the stdndard costs applied to the percentage
completion of WIP, and how often these are reviewed and updated. ·
(5) Review the level of variances between standard and actual costs and discuss with
management how these are treated.
(6) Obtain a breakdown of the standard costs and agree a sample of these costs to actual
invoices or payroll records to assess their reasonableness.
(7) Ca$t the schedule of total WIP and agree to the trial balance and financial statements.
(8} Agree sample of WIP assessed during the count to the WIP schedule, agree porcentoge
completion is correct and recalculate the inventor~ vah.Jation.
(d) Auditor's report
Discuss with the management of Vieriwh~ they are refusing to make the amendment to WIP.
Assess the materialit!:J of the error; if immaterial, it should be added to the schedule of
· unadjusted differences. The auditor should then assess whether this error results in the total
of unadjusted differences becoming material; if so~ this should be discussed with
management; if not, there would be no impact on the audit report.
If the error is material ond management refuses to amend the financial statements, then the
auditor's opinion will need to be modified. It is unlikely that any error would be pervasive as,
although WIP in total is material, it would not have a pervasive effect oil the finqncial
statements as a whole. As management has not complied with lAS 2 Inventories ond if the
error is material but not pervasive. then a qualified opinion would be necessary •.
A basis for qualified opinion paragraph would need to be included after the opinion
paragraph. This would explain the material misstatement in relation to the valuation--of WIP
and the effect on the financial statements. The opinion paragraph would be t6report a
qualified opinion.

Ltlt8 Audit and Assurance @BPP

 I-

-AC·CA

Audit and. Assurance

MockExam3
December ·2016

Question~

Time allowed 3 hours

This mock exam is divided into two sections:

Section A- ALL 15 questions are compulsory and ~UST be attempted
Sectia·n 8 - ALL 3 questions are compulsory and MUST be attempted

DO. NOT OPEN THIS EXAM UNTIL YOU ARE READY TO START
UNDER EXAMINATION CONDITIONS ·.

,·
-
lt50 Audit and Assurance
@aPP
 ')
_

Section-A
ALL 15 questions ore co:rnpulsory and MUSTcbe attempted

Sistar Co.
Each questio.n is worth 2 marks.
The follo~ing scenario relates to que~tions 1-5.
It is 1 July 20X5. The board of directors of Sistar Co is cqncerned that they are not currently ·
applying best practice iri terms of corporate governance qnd are seeking tp make improvements.
The company currently has three non-executive directors (NEDs) on the board~ who are paid o fee
which changes annually depending on company performance. The NEDs all sit on the audit,
nomination and remuneration committees. There are currently no formal doquments setting out
the responsibilities of these cOmmittees.
At present, Sister Co does not have an internal audit function but the directors are establishing a
team which will be responsible for a range of internalauditassignments.
The following is the current proposed structure for the internal audit (lA) department.

The only role still to be filled Is the Head of internal audit. There are two potential candidates: Paul ·
Belling, a· consultant who helped design and implement the company's current coritrol system.
and Maria Marquez, who is currently an audit manager at Rossi S Bell, an audit firni which has
never been used by Sister Co.
Out of the other three members of the proposed lA depcirtment, two of them have moved from
other departments in Sistc:tr Co and one of the audit dssistants has audit experience.

Which of the following should be included in the document setting out the responsibilities
· of the audit committee?
(1) To monitor and review the effectiveness ofthe newly established internal audit
function
(2) To evaluate the balance of skills, .experience and independence of board members .
. (3) To take responsibility for the appointment and removol of the external auditors ·
(4). To monitor and review the effectiv~ness of internal financial controls established by
the company ·
'.
I· 0· 1 and 2
0 1 and 4
0 · 2and 3
0 3 and 4 (2 marks)

@·BPP Qu~:~stions Lt51

2 Indicate which of the following options correctly describes the c;leficiency relating to
.NED's remunera~ion and makes a valid recommenda~ion for improvement.

Deficiency Recommendation

0 (1) Compromises NED independence NEDs should be remunerated on the

same basts as the executive team
0- (2) Compromises the motivation of NEDs NED's remuneration should be tied to
profit targets
0 (3).Compromises ~ED Independence NED's remuneration should be a set
amount based on time committed ·
0 (4) Compromises the motivation of NEDs NED's remuneration should be linked to
individual performance

(2 marks)

3 Complete the sentences below to provide appropriate recommendations to improve the

effectiveness and independence of the lA deportment.
-;] .
.. ........................ - ..... .
The head of internal audit should report to the I (1)
[{
,__·2_)_ _ _ _ _T__.I should be appointed as head of internai audit.

The audit te·am requires @5.__(_3_)_ _ _ _ _ · ·~.;_. J:-·

.., .

Pull down Jist 1

• Audit committee
• Chief executive.
• Finance director

Pull down list 2

Maria Marquez
Paul Belling

Pull down list 3

More external staff to be app~inted

More senior staff with audit experience

No change to its current composition
(2 marks)

4 The board has started to compile a list of tasks for the I_A department to carry out once it is
up and running. It has been agreed that the first assignment to be completed will be for the
lA to review Sistar Co's processes over capital expenditure to verify if the right items are .
purchases atpn appropri?te time and competitive price~
What type of internal audit assignment does this represent?
0 A value for money audit
0 A management audit
0 A financial audit
0 An IT audit (2 marks)

'+52 Audit and Assurance @BPP

5 When deciding on the_ role of the- lA department in undertaking operational audits, which
of the following should the team NOT be involved in? --. ·
0 Observing procedqres carried out by Sistor Co's staff
0 Reperforming procedures documented in procedures manuals-
0 Designillg arid implementing internal control procedures to address deficiencie·s ·-
0 Reporting findings direCtly to the board of directors (2 marks)

(Total= 10 marks)

Elm &Co
The following scenario relates to questions 6-10.
It is 1 July 20X5. You are an audit manager of Elm & Co and are finalising the audit of the
financial statements of Oak Co for the year ended 31 December 20X4. You are reviewing the
results of the finalanalytical procedures and other outstanding points on the audit file, prior to
recommending the final audit opinion, which .is due to be signed on 12 July 20X5.
The following ratio analysis has been completed as part of the final analytical procedures:

20XIt 20XIt 20X3

final planning final

Gross profit margin 9% 11% 12%

Quick ratio 0.2 0.6 0.8

Payables payment period 45 40 37
Inventory holding period 50 40 42

Discussions with the finance director have also revealed the following:
(1) Oak Co lost a major customer, Beech Co, in December 20X4, but new business has beer\ won
post year end which has mitigated the impact of the loss of Beech Co.
(2) Oak Co is due to repay a substantial loan on 31 August 20X5. Oak Co is currently negotiating
revised terms with tho bank but it is unlikely that negotiations will be concluded.before the
auditor's report is signed. This will be disclosed in the financial statements.
The financial statements for the !:Jear ended 31 December ~OX4 have been prepared on a going
concern basis. ·

6 As part of the going _concern assessment, the following additional issues have been noted
on tho audit file.
Which·TWO of the following issues could il1dividually cast doubt over the going cooc-ern~: ··-
assumption for Oak Co?
o· A number of personnel in the purchasing department left during the year and have hot
been replaced. -
0 A major supplier to Oak Co ha.s just gone out of business with a· number ofunfulfHied
orders;
. .

0 A new product which was due to account for 30% of revenue has proved to be
unsuccessful.
0 A litigation claim has been raised against Ook Co after the year e.nd with pot~ntial
damages totalling 3% of this year's profit~ .. .(2 marks)

@BPP Questions lt53

7 As partqf your review of the fina_l analytical proce_qures, you compare_ the results to the
following com~ents on the audit file:
(1) The company has increased the sales prices charged to customers while maintdining
costs at a level comparable to 20X3.
(2) The company has become more reliant on its overdraft facility during the year.
(3) Due to cash restrictions, the company ha-s encou_ntered delays in paying suppliers.
(4) At the year-end inventory count, a lower level of.slow-moving inventory was noted
compared to the prior year.
. -

Which of the above comments are INCONSISTENT with the results of the final analytical
procedures?
0 1 and 2
0 1 and 4
0 2 and 3
0 3 and 4 (2 marks)

8 Which of the following procedures would provide the MOST reliable evidence in relation to
the new business won post year end?
0 Review ofpost-year end sales orders from the new customer·
0 Inspect email correspond~nce between the sales director of Oak Co and the new
customer
0 Obtain a written representation confirmin·g the level of business agreed with the new
customer
0 Review of board minutes discussing the contract with the new customer (2 marks)

9 The initial going concern assessment conducted by the management of Oak Co covers the
period to 30 J.une 20X5. -
Which of the following is an appropriate course of action in the circumstances described
above? -
0 Request management extend the assessment to the date of the auditor's report
0 Design and carry out procedures to only assess going concern in the period from 31
December 20Xt.f to the date of the auditor's report
0 Request management extend the assessment to cover at least until 31 December 20X5
0 Accept the· time frame used by management as the going concern review is their
responsibility (2 marks)

lt51t Audit and AssLJrance @BPP

·10 The audit engagement partner has concluded that the di~closure included in the financiaJ
statements i~ relation to the loan negotiations is ~dequate. Additi.onally, the a~itpartner
. has commented that this disclosure is fundamental to the users' understaridin'g of tlie ..
financidl statements.
Complete the following sentence, identifying what form of auditor's report should be
issued. . -

An auditor's report with!~.-(_1).......,....._ _ _ _.,-c..ll op{nion andjL (_2_)-~--~"'---'-J_J paragr~ph

should be issued.

Pull down list 1

• A modified
• An unmodified

Pull down list 2

• A material uncertainty relating to going concern
• An other matter
(2 marks)

(Total =10 marks)

Jones&Co
The following scenario relates to questions 11-15.
It is 1 July 20X5. You are an audit senior at Jones &Co and are currently performing the final
audit of Walker Co for the year ended 30 April 20X5. The company is a manufacturer arid retailer
of shoes and boots. The current audit senior is ill and you have been asked to complete the audit
of payroll in their absence .
. On arrival at the head office of Walker Co, !:JOU determine the following data from· a review of the
Cllrrent year and prior year audit files:
(1) As at30 Aprii20X4, Walker Co had 500 employees ..
(2) On 1 May 20X4, 10% of staff were rnade redundant, effective immediately, due to
discontinuation of a product line.
(3) On 1 July 20X4, all remaining staff received a 6% pa!:J rise.
(4) Over the course of the year, sales levels met performance targets which resulted in a fi:><ed.
bonus of $1,500 being paid to each employee on 30 Apri120X5.

11 Which of the following· statements explains the CUT-OF.F .assertion for wages and
salaries?
0 Wages and salaries have been fairi!:J allocated within the statement of profit or loss.
0 Wages and salaries hove been appropriateiy calculated taking into account all relevant·
taxation costs and adjustments.
·0 Wages and so lodes which have beet1Jncurred during the period have been accounted
for in respect of all personnel employed b!:! Walker Co.
0 Wages and salaries accounted for relate to the current year ended30 AprH20X5 .
. . .(2 marks)

@BPP Questions 455

12 Order: the evh:fence, in terms of its reliability, starting with the MOST RELIABLE. (Drag
each box from the left intop9slt~on to match the relevant box on the right.)

Audit evidence Order of reliability

Proof in total · 1- Most

calculation I I I
performed by an
audit team member
I I 2
I
3
Written
representation from I I I
the directors of
Walker Co confirming
the accura9y of
I I 4- Least
I
wages and salaries

Verbal confirmation
from the finance
director of Walker Co
confirming the
accuracy of wages
and salaries

Recalculation ofthe
gross and net pay for
a sample_of.
employees by an
· internal audit team
member of Walker Co

(2 marks)

13 The prior year financial statements forWalker Co included $17 million for wages and
salaries in the statement of profit or loss.
What would be the estimated current year wages and salaries expense., ignoring
redundancy costs~ based upon the data gathered from the review of the audit files?
0 $16,740,000
0 $16,893,000
0 $16,815,000
0 $18,600,000 (2 marks)

ItS~ Audit and Assurance @aPP

 i4 Which TWO of tht:! fpllowing·are substantive ANALYTICAL PROCEDURES for wages ond
salaries? ·
0 Trace and agree the totol wages and salaries: expense per the payroll system to the
draft. financial statements . . - ·

-. 0 . Recalcula~e- the gross and net pay for a sample of emplo~:Jees, qgree to pai:Jroll records
and investigate discrepancies · ·
0 Compare the current ~:Jear total pai:Jroll expense to the prior ~:Jear and investigate ani:J
significant differences
0 Perform a proof in total calculation and compare expected expense to actual expense
withinthe draft financial statements (2 marks)

15 You have been given a list of procedures to carri:J out on revenue and !::JOU have decided to
prioritisethose which deal with the kei:J assertion of occurrence.
Which of the following substantive procedures provide evidence over the OCCURRENCE
assertion for revenue?
(1) Compare the reported revenue figure to the budget and to the previous year,
investigating any significant differences
(2) Select a sample of goods dispatched notes (GDNs) and agree to invoices in the sales
day book
(3) Select a sample of invoices from the sales day book and agree to GDNs
(4) Select a sample of invoices and recalculate the invoiced amount agreeing to price list
0 1 and 2
0 1 and 3 ·
0 2 and 4
0 3 and 4 (2 marks)

(Total= 10 marks)

@BPP Questions ~57

 Section B.
ALL THREE questions are compulsory and MUST be attempt~d

16 Centipede
ltis 1 July 20X5. You are an .audit supervisor of Ant 8 Co and are planning thefinal audit of
Centipede Co~ which is a listed company, for the !:Jear ended 31 March 20X5. The company
purchases consumer packaged goods and sells these through its website and to wholesalers. This
· is a new client for your firm and your audit manager has alreadi:J had a planning meeting with the
finance director and has provided·you with the following notes along with financial statement
extracts.
Client background and notes from planning meeting
Rather than undertaking a full year-end inventory count, the company undertakes monthly
perpetual inventory counts, covering one-twelfth of alllinesmonthly. As part of the interim audit
which was completed earlier in the year, an audit assistant attended a perpetual inventory count
in September and noted that there were a large number of exceptions where the inventor!:) records
were consistently higher than the physical inventory in the warehouse. When discussing these
exceptions with the finance director, the assistant was informed that this had been a recurring .
issue all year. In addition, the audit assistant noted that there were some lines of inventory which,
according to the records) were at least 90 days old.
Centipede Co has a head office where the audit team will be based to conduct the final audit
fieldwork. However, there are four additional sites where some accounting records are maintained
and these sites were not visited during the interim audit. The records for these sites are
incorporated monthly through an interface to the gen~ralledger. A fifth site was closed down in
the t~ear ending 20X4; however, the building was only sold in 20X5 at a loss of $825,000.
One of Centipede Co's wholesale customers is alleging that the compan!d has consistently failed
to deliver goods in a saleable condition and on time, hence it has commenced legal action against
Centipede Co for a loss of profits claim.
The directors have disclosed their remuneration details in the financial statements in line with
IFRS, which does not require a separate list of directors' names and payments. However, in the
country in which Centipede Co is based, local legislation requires disclosure of the names of the
directors and the amount of remuneration payable to each director..

FINANCIAL STATEMENT EXTRACTS FOR THE YEAR ENDED 31 MARCH

Draft Finql

20X5 20XIt ·
$'000 $'000
Revenue 25,230 21,180
Cost of sales (15,840) (14,015)
Gross profit 9,390 7,165
Operating expenses (4,903} (3,245)
4,487 3,920
Inventory 2,360 1,800
Trade receivables 1,590 1,250
Cash 480
Trade payables 3,500 2,800
Overdraft 580

lt58 Audit and Assurance @aPP

 Required·
(a) ·Describe-the-matters which Ant s·co should ~qve considered prior tq acceptingthe.t;:~udit of
Centipede Co. · - (5 marks)

(b) Calculate· the FOUR ratios listed in the toble below, for BOTH ·!dears, to assist you in planning
·the audit of Centipede Co. ·
Note. Use the below tabJe structure to format your answer In the CBE ·software.-

20X5 20X4

Gross margin

Operating margin

Inventory holding
period

Quick ratio
..............................................................., ................................ ,... .

(Lt marks)
(c) From a review of the above information and the ratios calculated, describe EIGHT audit risks
and explain the auditor's response to each risk in planning the audit of Centipede Co.
Note. Use the below table structure to format your answer in the CBE software.

Audit risk Auditor's response

(16 marks}
(d) The finance director of Centipede Co informed Ant 8 Co that one of the reasons it was
appointed as- auditors was because of its knowledge of the industry. Ant & Co audits a
number of other consumer packaged goods companies, including Centipede Co's main rival.
The finance director has enquired into how Ant& Co will keep information obtained during the
audit confidential. ·

Required
Explain the safeguards which Ant & Co should .implement to ensure that this conflict of
interest is properly managed. . . . (5 marks}

(Total = 30 marks)

17 Caterpillar (amended)
It is 1 Jui!:J 20X5. Caterpillor Co is a clothing retailer which operates 45 stores throughout the
countrbJ. The companbJ's year end is 31 March 20X5. Caterpillar Co has an internal audit
department which has undertaken a number of internal control reviews specifically focusing on
cash controls at stores during the !:Jear. The reviews have taken place in the largest 20 stores as
this is where most issues arise. You are an audit supervisor of Woodlouse 8 Co and are reviewing
the internal controls documentation in relation to the cash receipts SbJstern in preparation 'for the
interim audit which wiH involve visiting a nLunber of stores ond the head office.
Each of Caterpillar Co's stores has on average three or four cash tills to take customer payments.
All ernplo!Jees bqsed at the store are able to use each till and individuals do not have their own
log.,on codes, although emplo~Jees tend to use the same-till each day. Customers can pay using
either cash or a credit card cmd for any transaction either the credit card payment slips or cash
are placed in the till by the cashier. Where ernplo!:Jees' ·friends or family n:~embers purchase
clothes in store, the employee is able to sc~rve thBm at the till- point

@BPP Questions Lt59

 At the end of each day, the tills are closed down with daily readings of sales takenfrom each till;
. these are reconciled to the total of the cash in the tills and the cr~pit card payment-slips and any
discrepancies are noted~-To save time, this reconciliotionJs -done by the store's assistant manager
in aggregate for all of the store tills together. Once this ~conciHation has taken place, the cdsh is_
stored in the shop's small safe overnight and-in -the morning it is transferred to the bank via
collection by a securit!:J c;:ompany. If the store is low on change for cash payments, ajlmior sales
clerk is sent by a till operator to the bank with money from the till and askedto chan-ge it into -
smaller denominations.
The daily sales readings from the tills along with the cash data and credit card payment data are
transferred daily to head office through an interface with the sales·and cash receipts records. A
clerk oversees that this transfer has occurred for all stores. On a daily basis, he-also agrees the
cash transferred by-the security company has. been banked in full by agreeing the cash deposit
slips to the bank statements, and that the credit card receipts have been received from the credit
card company. On a monthly basis, the same clerk reconciles the bank statements to the cash
book. The reconciliations are reviewed by the financial controller if there are any unreconciled
amounts.

Required
(a) State TWO control objectives of Caterpillar Go's cash receipts system. (2 marks)

(b) Identify and explain THREE DIRECT CONTROLS which the auditor may seek to place reliance
on in Caterpillar Co's cash receipts system; and describe a TEST OF CONTROL the auditor
should perform to assess if each of these direct controls is operating effectively.
Note. Use the below table structure to format your answer in the CBE software.

Direct control Test of control

(6 marks)
(c) Identify and explain SIX DEFICIENCIES in Caterpillar Co's cash receipts system and provide a
recommendation to address each of these deficiencies.
Note. Use the below table structure to format your answer in the CBE software.

Control deficiency Control recommendation

(12 marks)
(Total= 20 marks)

18 Snail &Co
It is 1 July 20X5. You are an audit manager of Snail S Co and you are in charge of two audits _
which are due to commence shortly. lnsects4U Co is a registered charity which promotes insect
conservation and has been an audit client fo~ several years. Spider Spirals Co, also an existing
audit client, manufactures stationery products and its draft total liabilities are $8.1milllon. Both
clients' financial years ended on 30 Aprii20X5. The following matters have been brought to your
attention for each company. -
lnsectslf.U Co
(i) Completeness of income - ('+ marks)
lnsects4U Co is a not-for-profit organisation which generates income in a number of ways. It
receives monthly donations from its many subscribers- and these are paid by bank transfer to the.
charity. In addition, a large number of donatio"ns_are sent through the post to t_he charity.
lnsects4U Co also sells tickets for its three charity events held annually. During the audit planning.
completeness of income was flagged as a key risk: -"

lt60 Audit and Assurance @BPP

 Note~ Assume that the charity. adopts IFRSs.-
Spider Spirals Co
(ii) Trade pa·yables - (6 marks}
The finance director of SpiderSpirals Co has informed you that at the year end the- payables
ledger was kept open for one week longer than normal as a large bank transfer and cheque
payment run was made-on 3 May 20X5. Sorne purchase invoices were received in this week and
were recorded in the 20X5 payables ledger as well qsthe payment run made on 3 May·.
(iii) Trade receivables.- (5 marks)
Spider Spirals Co has. a large number of small customers; the normal credit terms offered to them
is 30 days. However, the finance director has informed you that the average trade receivables
collection period has increased-quite significantly this yearfrom 34 days to 55 days. This is partly
due to difficult trading conditions and also because for six months of the year the role of credit
controller was vacant. The company has historically maintained on average an allowance for
trade receivables of t5% of gross trade receivables.
Required

(a) Describe substantive procedures the auditor should perform to obtain sufficient and
appropriate audit evidence in relation to the above three matters.
'·· Note. The mark allocation is shown aga!nst each of the three matters above. (15 marks)

(b) The finance director of Spider Spirals Co has informed you that he is not proposing to make
an adjustment for the trade payables payment run made on 3 May, as the total payment of
$490,000 would only require a change to trade payables and the bank overdraft, both of
which are current liabilities. ·

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

(Total = 20 marks)

\. :·

@BPP Questions lt61

)
lt62 Audit and Assurance ··0BPP
Answers
DO NOT TURN THIS PAGE UNTIL YOU HAVE
COMPLETED THE MOCK EXAM
lt61t Audit and Assurance
 Plan of attack _
If this were the real Audit and Assurance exam and you had been told to start the exam, what -.-
wot,lfd be going through yol)r mind?
An important thing to say (whilst there is still time) is that it is vital to have a good bre.adth of
knowledge of the syllabus beca~se all the questions are compulsory. However, don"t panic. Belo~
we provide guidance on how to approach the exam.
Looking through the exam
Section A has three objective test cases, each with five questions. This is the section· of the exam ...
where the examining team can test knowledge a c. ross the breadth of the syllabus. Make sure you
read these cases and questions carefully. The distractors are designed to present plau·sible; but
incorrect, answers. Don't let them mislead you.. If you really have no idea -guess. You may even
be right. ·
Section 8 has three longer questions:
• Question 16 is a 30-m ark question focused on the planning stage, covering .analytical
procedures, audit risk, acceptance procedures and ethics. Read the requirements carefully,
taking note in particular of the number of ratios that you have been asked to calculate and
that they must be calculated for both years.
• Question 17 is a 20-mark intern a I controls question. Here you need to consider strengths in the
system as well as identifying weaknesses.
• Question 18 is a 20-mark question dealing with substantive procedures relating to income,
trade payables and trade receivables. You are also asked to consider the impact on the
·auditor's report of .any unresolved issues.
Allocating your time
BPP's advice is to always allocate your time according to the marks for the question. However,
use common sense. If you're doing a question but haven't a clue how to do part (b), you might be
better off reallocating your time and getting more marks on another question, where you can add
something you didn't have time for earlier on. Make sure you leave time to recheck the OTs and
make sure you have answered them all.
Forget about it
And don't worry if you found the exam difficuJt. More than likely other candidates will too. If this
{t were the real thing you would need to forget the exom the minute you finish the exam and think
about the next one. Or, if it is the last one, celebrate! ·.
0.

@BPP Answers '+65

e
Section A
SistarC.o
The correct answer is: 1 and 4
The audit committee should be responsible for monitoring the effectiveness of the internal
audit function and the company's internal control system. Therefore statements 1 and 4
should be included.
2 The correCt answer is:

Deficiency Recommendation

(3) Compromises NED independence NED's remuneration should be d set .

amount based on time committed

NED's remuneration should not be tied to the performance of Sistar Co as this can
comp.romise their independence. NED's remuneration should be based on the time
committed to carry out the role.

3 .
The head of internal audit should report to the ['. A·~·dlt :~-~~-;;,Ttt;~J.

§;-i~·-M·~·~q~·;~J should be appointed as head of internal audit.

The audit team requires . ~-~~·=-~enior staff ~~~~~.~di~.=~!.::_r!.:.~~·=J .

To improve the effectiveness and independence of the internal audit function. the head of
internal audit should report to the audit committee. Maria Marquez should be appointed as
the head of internal audit as she is completely independent of Sistar Co and the audit
team needs more senior staff with relevant experience.
4 The correct answer is: Avalue·for money audit
The assignment described represents a value for money audit as it is focused on assessing
the economy~ efficiency and effectiveness of Sister Co's capital expenditure.
5 The correct answer is: Designing and implementing internal control procedures to address
deficiencies
Internal audit should not be involved in designing and then implementing internal control
procedures as this would result in a self-review threat to independence.

Elm&Co
6 The correct answers are:
• A major supplier to Oak Co has just gone out of business with a number of unfulfilled
orders.
• A new product which was due to account for 30% of revenue has proved to be
unsuccessful. ·· ·
The loss of a major supplier could have a serious impact on Oak Co if no alternative can be
found and poor results in a product line expected tci account for 30% of. revenue could also
have a significant impact on the corn pan!:! going forvvard.

lt66 Audit and Assurance @BPP

 :7- The correct answer is: 1 and 4 .
Gross margin. has dropped which implies that the ~ompany is not ga.ining as good a returr)
as in the prior~- year- this would most likely be due to an inc~ease in~.cpst of sales or drop in - -
sales price. Therefore the ·comment regarding ·increasing sales price contradicts the results
of the analytical proc~dures. ·
The inventory holding .period has increased significantly implying that items are taking
- longer to sellt given the comment regarding the observation ()1ade at the inventory cqunt .
this would warrantfurther investigation given the increase in the inventor!::J holding period.
Therefore comment 1 and 4 should be investigated and are inconsistent with the final
analytical procedures. ~
)
The cprrect answer is: Review of post-year end sales ordersJrom the new customer
The review of post year-end sales would provide the best evidence that the new customer is
genuine and is ordering goods. This to some extent will then allow the auditor to assess the
level of sales being made to the new customer and to determine whether this does therefore
mitigate for the loss of Beech Co.

9 The correct answer is: Request management extend the assessment to cover at least until
31 December 20X5
As per ISA 570(Revised) Going Concern, the period of assessment should be at least 12
months from the date of thefinancial statements.

10 An auditor's report with [~:~~-~-~-~?.~-!~~~] opinion and l__a.__~~~-=~ial uncertainty relating . . t~:·

-~--~-~-~-§concern J paragraph should be issued.

As per ISA 570 (Revised) Going Concern, where there is a ·matter of fundamental
importance to the users 1 understanding regarding an uncertainty over going concern, as
long as this is adequately disclosed the auditor should include a material uncertainty
paragraph related to going concern. The audit opinion is unmo9ified in this regard.

JonesSCo
11 The correct answer is: Wages and salaries accounted for relate to the current year ended
30 April 20X5. . . .
The cut-off assertion relates to ensuring that transaction are recorded in the correct
accounting period, and therefore that wages and salaries accounted for relate to the \:)ear
ended 30 Apri120X5. -

Answers '+67
12 The correct answers are:

Audit evidence Order of reliability

Proof in total calculation performed by 1 _,.Most

an audit team m~mber

Recalculation of the gross and net pal:J

for a sampl~ of employees by an
internal audit team member of Walker
Co

Written representation from the 3

directors of Walker Co confirming the
accuracy of wages and salaries

Verbal confirmation from the finance 4- Least

director of Walker Co confirming the
accuracy of wages and salaries

13 The correct answer is: $16,740,000

Working
17,000,000 X 90% X 2/12 = 2,550,000
(17,000,000 X 106%) X 90% X 10/12 = 13,515,000
450 X 1,500 = 675,000
2,550)000 + 13,515,000 + 675,000 =16,740;000
14 The correct answers are:
• Compare the current year total payroll expense to the prior [dear and investigate any
significant diff~rences ·
Perform a prpof in total calculation and compare expected expense to actual expense
within the draft financial statements
Comparisons with prior years and proof in total calculations are examples of substantiv~
analytical procedures.
15 The correct answer ls: 1 and 3
(2) provides evidence that goods dispatched have been invoiced
(4) provides evidence of accuracy

'+68 Audit and Assurance @BPP

I

Section B
.-.16 Centi-pede

Course Book references

Chapters 4, 6 and 7.-_

Top tips
This is a 30-mark question on client acceptance. planning and risk assessment. Note that in
part (b) you are required to calculate FOUR ratios for BOTH years. It is importdnfthat you
follow this instruction. Don't be temp_ted to calculate more ratios just because you can- there
will not be extra marks available for going above and beyond the requirement. You are then·
required to describe the audit risks. Do not confus~ this with business risk. Try to think in terms
of the effect on the financial statements. This could be by reference to assertions {eg
valuation, completeness), under/over/misstatement of the financial statements or a reference
to inherent. control or detection risk. For the auditor's response, whilst this refers to the
approach which would be taken rather than a detailed procedure, ensure your responses are
not too vague. Simply stating 'discuss with management' will not be sufficiently precise.

Easy marks
You should be able to score well on part (a) on client acceptance.

Marks

(a) Matters to be considered prior to accepting the audit of Centipede Co·

Compliance with ACCA's Code ofEthicsand Conduct
•- Competent
Reputation and integrity of directors
Level of risk of Centipede Co audit
Fee adequate to compensat~ for risk
Write to outgoing auditor after qbtaining permission to contact
Previous auditor permissionto.respond
Review response for any issues
Maximum 5
(b) Ratio calculations (1'2 mark for each year)
Gross rna rgi n
Operating margin ..
Inventory holding peri<)d/lnvemtory turnover
.Receivables collection period
Pa!:Jables payment period .1
Current ratio 1
Quick ratio 1
Maximum 4
(c) Audit risks and responses (only 8 risks required)
New client; increased detection risk 2
Perpetual inventory coUnt adjustments 2
• Valuation of inventory 2
Brcmch records 2

@BPP Answers '+69

 Marks

Disposal of builqing 2
Legal case 2
Directors' remuneration disclosure 2
Revenue grovvth 2
Misclassification ·of costs between cost of sales and operating 2
• Going concern 2
Max 7 issues, 2 marks each
Maximum 16
(d) Safeguards to deal with conflict of interest
Notif[J Centipede Co and its competitor
• Advise seek independent advice
• Separate engagement teams
Procedures prevent access to information
Clear guidelines on security and confidentiality
• Confidentiality agreements
Monitoring of safeguards
Maximum 5
Total 30

(a) Matters to be considered prior to accepting the audit of Centipede Co

ISA 220 (Revised) Quqlit!J Management for an Audit of Financial Statements provides
guidance to Ant 5 Co on the steps they should have taken in accepting the new audit client,
Centipede Co; It sets out o number of processes which the auditor should perform ·prior to
accepting·a new engagement.
Ant 8 Co should have considered any issues which might arise which could threaten
compliance with ACCA's Code of Ethics and Conduct or ani::Jiocallegislation, such as the
level of fees·from Centipede Co, to ensure thei::J are not unduii:J reliant on these fees. as well as
- considering whether any conflicts of interest arise with existing clients. lfissues arise, then
their significance must be considered.
In addition, they should have considered whether thei:J were competent to perform the work
and whether they would have appropriate resources available, as well as any specialist skills
or knowledge required for the audit of Centipede Co.
Ant 8 Co should have consldered what it alreadi::J knows about the directors of Centipede Co;
it needed to consider the reputation and integrity of the directors. If necessary, the firm may
have wanted to obtain references if it does not formally know the directors.
Additionaiii::J, Ant 8 Co should have considered the level of risk attached to the audit of
Centipede Co and whether this was acceptable to the firm-. As part of this, it should have
considered whether the expected audit fee was adequate iri relation to the risk of auditing
Centipede Co.
Ant 8 Co should have_ communicated with the outgoing auditor of Centipede Cq to assess if
there were any ethical or professional reasons why they should not have accepted
appointment. They should have obtained permission from Centipede Co's management to
contact the previous auditor; if this was not given, then the engagement should have been
refused. Once received, the response from the previous auditor should have been carefully
reviewed for ani::J issues which could affect acceptance. ·

lt70 Audit and Assurance @BPP

 (b) Ratios
Ratios to bssist the audit supervisor in planning the ~udit: ·

20X5 20X4
Gross margin . 9,390/25,230 = 37.2% 7,165/2j,i80 = 33.8%·
Operating margin 4.487/25~230 =17.8% 3,920/21,180 = 18.5%
Inventory holding
period 2,360/15,840 x 365 =54 days 1,800/14,015 x 365 = 47 days
I
Quick ratio (3,950- 2,360)/4,080 = 0.39. (3,530 - 1,SOb)/2,800 = 0.62

(c) Audit risks and auditor's responses

Audit risk Auditor's response

Centipede Co is a new client for Ant 8 Co · Ant 8 Co should ensure it has a suitably
and is a listed company. As the team is not experienced team. Also) adequate time
familiar with the accounting policies, should be allocated for team members to
transactions and balances of the company, obtain an understanding of the compon!J .
there will be an increased detection risk on and the risks of material misstatement)
the audit. including attendance at an audit team
briefing.

The company utilises a perpetual inventory The completeness _of the perpetual
Sb)stem at its warehouse -rather than a full inventory counts should be reviewed and
b)ear-end count. Under such a system, all the controls over the counts and
inventory must be counted at least once a adjustments to records should be tested.
year, with adjustments made to the In addition, the level of adjustments mode
inventory records on a timei!:J basis. to inventory should be considered to assess
Inventory could be under- or overstated if thei(significarice. This should be discussed ·
the perpetual inventory counts are not with management as soon as poss_ible as it
complete: may notbe possible to place reliarice on the
During the interim audit, it was noted that inventorb).records at the ~:~ear end, which
there were significant exceptions with the could result fn the requirement for a full
inventory records being higher than the ~:~ear-end inventory count.
inventory in the warehouse. As the year-end
quantities will. be based on the records, this
is likely to result in overstated inventory.

During the interim· audit, it was noted that The aged inventory roport should be
there were some lines of inventor!:J .which reviewed and discussed with management
according to the records were at least 90 to assess if certain lines.of products are
days old. In addition, the lnventor!:J holding slow moving.
period has increased from 47 to 54 days. It Detailed cost and net realisable'value
would appear that there ma~ be an · testing to be performed to assess whether .
increase in slow-moving inventory. an allowance or write down of irwentor!:J is
The valuation of inventory as per lAS 2 required.
Inventories should _be at the lower ol cost
and net realisable value. Hence there is a-
risk thatobsolete inventor~J has not been
appropriately written down and inventory is
overvalued.

@BPP Answers lt71

 Centipede Co maintains accounting Discuss with -management the significance
records at four additionai sites which were and materiality pf the records maintained
not visfted during the interim_ audit, and the _at the four sites. The· team may then need
records from these sites are incorporated to visit some of.these sites during the final
monthly into the general ledger. audit to undertake t~sting of the records
AntS Co needs to ensure that it has held there.
obtained sufficient appropriate audit In addition, computer-assisted audit
evidence over all the accounting records of techniques could be utilised by the team to
the cornpany, not just for those at head sample test the monthly Interface of data
office. There is a detection risk if the team from each site to head office to identify any
does not visit or undertake testing of the errors.
records at these sites. Further, if the
interface does not occur appropriately,
there is a risk that accounting records are
incomplete.

During 20X5 a building was disposed of Agree that the asset has beef) removed from
with a loss on disposal of $825,000. There is the non,-current assets register, recalculate
a risk that the disposal has not been the loss on disposal calculation and agree
removed appropriately from the accounting all items to supporting documentation.
records or that the loss on disposal Discuss the depreciation policy for land and
calculation is incorrect. buildings with the finance director to assess
In addition, significant profits or losses on its reasonableness~ Review the level of losses
disposal are an indication that the on disposal generated from other asset
depreciation· policy for land and buildings sales to ascertain if this is a more
may riot be appropriate. Therefore widespread issue.
depreciation may b~ understated and
consequently assets overstated.

A customer of Centipede Co has Ant 8 Co should write to the company's

commenced legal action against Centipede lawyers to enquire of the existence and
Co for a loss of profits claim. likelihood of success of any claim frpm the
If it is probable that the company will make wholesale CL:~s.tomer. The resuhs of this
paym_ent to the customer, a legal provision should be l:Jsed to assess the level of
is required. If the payment is possible rather . provision or disclosure included in the
than probable, a contingent liability financial statements.
disclosure would be necessary. If Centipede
Co has not dono tht~,, there IS a nsk over the
'.

completeness of any provisions and the

necessary disclosure of contingent
liabilities.

The directors have not disclosed the Discuss this matter with management and
individual names and payments for each of review the requirements of the local
the directors' remuneration. This is in line legislation t~ determine if the disclosure in
with IFRS but disclosure of this is required the financial statements is appropriate.
bylocallegislation. In cases where the local
legislation is more comprehensive than IFRS.
it is likely the company must comply with
the local legislation.
The directors' remuneration disclosure will
not be complete and accurate if the names
and individual payments qre not disclosed.
in accordance with the relevant local
legislation and hen<?e the financial ·
statements will be misstated as a result of
the non~compliance.

lf72 .Audit and Assurance @sPP

 __Revenue has grown by19% in the year; During the a_udit a detailed breakdown of
however~ cost of sales has only increased by s9les will be obtained, discussed with
13%. This is,o significant increase in reverrue- management and tested in. order to
and along with the-increase in gross margin understand the sales increase. Increased
may be due·to on overstatement ofrevenue. cut-off testing should also be undertaken to
verify that revenue is recorded-in the right
period and is not overstated.

Gross margin has increased from 33.8% to The qlassification of costs between cost of
37.2%. OperaH_ng margin has decreased sales and operating· expenses will be
from 18.5% to 17.8%. This movement in gross compared With the-prior year to ensure
margin is significant and there is a risk that consistency. Also increased cut-off t~sting
costs may have been omitted or included in should be performed at the year end to
operating expenses rather than cost of ensure that costs are complete.
sales. This would risk overstating operating
expenses and understating costs of sales,
and would in turn overstate the gross
margin and understate the operating
margin.

The overall liquidity of the company is in Detailed going concern testing to be

decline, with the quick ratios decreasing performed during the audit as there may be
from 0.62 to 0.39. In addition, the cash a doubt over going concern and the basis of
balances have decreased significantly over accounting should be discussed with
the year. and the company now has an management to ensure that the going
overdraft of $580,000 at the end of the concern basis is reasonable.
year. Payables are also a higher proportion
of cost or sales.
These changes in key could signal going
concern difficulties.

(d) Safeguards to deal with conflict of interest

Both Centipede Co and its rival competitor should be notified that Ant & Co would be
acting as auditors for each company and~ if necessary, consent obtained.
Advising one or both clients to seek additional independent. advice.
The use of separate engagement teams, with different engagement partners· and team
members; once an employee has worked on one audit, such as Centipede Co, then they
should be pmvented from being on the audit of the competitor for a period of time.
. . Procedures to prevent access to information, for example,- strict physical separation of .
both teams, confidential and $ecure data filing. ·
Clear guidelines for rriembers of each engagement team on issues of sec-urity and
confidentiality. These guidelines could be included within the audit engagement letters.
Potentidly the use o-f confidentiality agreements signed by employees andpartnJ(s of the
finn.
Regular monitoring of the application of the above safeguards by a senior individuol in
Ant 8 Co not involved rn either audit. ·

@BPP. Answers lt73

17 Cat~rpillar

C~urse Book references

Chapters 9 and 10.

Top tips
This is a 20-mark question on controls and tests of controls in the cash S!:Jstem. Part (b) of the
question asks you to' identify direct controls in the system and tests of controls. Make sure you
can distinguish between tests of controls and substantive procedures. Tests of controls -aim to
. provide evidence that controls are operating effectively.
Part (c) should be a familiar requirement asking for the identification of weaknesses and
recommendations to address each weakness. This t!:jpe of requirement is typically ·well
answered but take care when making !:JOUr recommendations. Exa.mining team comments have
often referred to the fact that recommendations are often phrased in vague terms. Make sure
you explain clearly the procedure which needs to be performed, and if possible who should
perform it.

Easy marks
These are available in part (a).

Note
The exam is a computer-based assessment and the answers for this question have been shown
as the!:J would appear in the word processer available on the assessment platform. Where an
answer is tabular a table template with the appropriate columns will be provided for you to
t!:jpe into. Otherwise, !:JOU will just type your answer into the blank area provided.

Marks

(a) Control objectives - cash receipts system

• To ensure that all valid cash receipts are received and deposited promptly in
the bank
• To ensure all cash receipts are recorded in the cash book
• To ensure that all receipts are recorded at the correct amounts in the cash
books ·
• To ensure that cash receipts are correct!!:) posted to the general ledger
• To ensure that cash receipts are recorded in the correct accounting period
" To ensure that cosh is safeguarded to prevent theft
• To ensure that management has accurate and timely information regarding
the cash position
Maximum 2
(b) Direct controls and tests of control (3 strengths required)
• Internal audit department which undertakes cash control reviews at stores 2
• Daily sales readings taken from tills and reconciled to cashand credit card
payment slips, exceptions noted 2
• Cash collected daii!:J and taken to the bank by security company 2
• Daily interface to head office for sales~ cash and credit card data into sales
and cash receipts books 2
• Daii!:J agreement of cash banked by security company and cash received
from credit card company into bank statements 2
·• Monthly bank reconciliations undertaken 2
Max 3 issues, 2 marks each
Maximum 6
(c) Control deficiencies and recommendations (only 6 issues required) ·
• Internal audit only visits 20 largest stores rather than all 45 2

lt71t Audit and Assurance @BPP

 .Marks
·- .... . -

All employees able to use tills and no individuar log~on codes 2

Employees can serve friends and family ~embers atthe till ~oints 2
Daily .till reading reconcHiotions . performed ih aggregate for all tills in store
rather thon individually. - · · - · -2
Cashing up of tills undertaken by just one individual 2
Cash stored on site overnight 2
Junior sales clerks given cash and sent to the bank to change notes into
smaller denominations 2
Lack of segregation of duties in head office for recording and reconciling of
cash . 2
Bank_ reconciliations not always reviewed by the financial controller 2
Max 6 issues, 2 rnorks each
Maximum "12
Total 20
-
(a)
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II Control objectives - cash receipts system
j • To ensurethat all valid cash receipts are received-and deposited prompt!~ in the bank
j • To ensure all cash receipts are recorded in the cash book
·. To ensure that all receipts are recorded at the correct amounts in the cash ~ook

1
To' ensure that cash receipts are correcti!J posted to the general ledger I
• To ensure that cash rec-eipts are recorded in the correct accounting period
I
• To ensure that cash is safeguarded to prevei1t theft I-
I
• To ensure that management has accurate cind timely information regarding the cash 1

L.__l~.~~-~~-~2 . . . ····-·----.-.. :. . ---·-··-..--··-·7·---- ......................................................................._.............._............,.........................,..............-.......-.......................... ....l

@BPP Answers Lt75

•
(b)
.. ..-..
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·j Pa(agraph v _ _ . ·-

!
! .
.I Ca~(i!rpillar Co's cash cycle strengths and tests of control
I . . Direct controls Test of control

Caterpillar Co has an internal audit (lA) Discuss with lAthe programme of their
department which has undertaken a visits to stores and the areas addressed
number of internal control reviews~ which on these visits. This will assess the
specifically focused on cash controls at strength of this monitoring control. In
stores during the !:Jear. particular, enquire of lA whether over a
Thi~ds a strong monitoring control as rolling period all stores will be visited.
stores will aim to ensure that company Review the lA department files for the
procedures are maintained as they results of the store visits, to confirm that
would not wish lA to report any the 20 stores programmed to be visited
exceptions at their store. As a result of did all actually take place and for
this control risk is reduced for the exceptions noted and actions taken.
external audit.

At the end of each day~ the tills are For a sample of stores visited, the
closed down with daily readings of sales auditor should review the file of daily
taken; these are reconciled to the total of reconciliations to ascertain if end of day
the cash in the tills and the credit card till reconciliations have taken place on a
payment slips and any discrepancies daily basis.
are noted. For reconciliations with discrepancies,
Daily cashing up procedures should discuss with the store manager what
ensure that thecash is controlled and
reduces the risk of fraud as employees
actions were taken and how these '
differences were resolved.
I
are aware that the assistant manager I
will be looking for cash discrepancies.

Cash received frorn customers is taken to During the store visits, enquire of stoff
I
the bank daii!:J via collection by a how the cash is transferred to the bank.
security company. A sample of invoices from the collection
This ensures that cash is safeguarded company should be reviewed and
and that the risk of theft when confirmed that they are charging I
Centipede Co on a daily bdsis.
i

!i
transferring to the bank is minimised.
In addition, during these visits observe I
the cash collection process carried out
i by.the security company.

During the interim audit at head office~

I, The daily sales readings from the tills
along with the cash and credit card data compare the daily sales readings frorn
..
i are transferred to head office through a individual stores, including some visited
iI daily interface into the sales and cash by the audit team~ to the sales and cash
receipts records. receipt records within the general ledger.
I Review the date on which the sales and
I This should ensure that sales and cash
records are updated on a prompt basis cash receipt' records were updated to.
. and are complete and accurate, and .ensure this occurred promptly. Any
thot the bank balcmce is accurate. discrepancies should be discussed with
the clerk responsible for overseeing this
I process.
I
I

'+76 AucUt ond Assurance @aPP

 i Direct controls C•

Test of control·· ·
j ·On a daily basis the clerk agrees that
-.r.-

-.
Discuss with the clerk responsible for ·-
the cash banked and the creditcard reconciling the cash.!;lndcreditcard
receipts from the credit card cdmpony receipts the process he undertakes.
have been credited to the bank Review the daily. reconcilia~ions he has
statements in full. completed to confirm the process has
I
-
This should ensure the completeness of been undertaken as described. · I
cash receipts, os they.are transferred in Ii
from two sources, being the secyrity !!
company and the credit card operator. I
Bank reconciliations are undertake11 on a Review the file of bank reconciliations to
monthly basis. ascertain if there is one for each month I
This should ensure that any and that they ore either fully reconciled,
discrepancies between the cosh book or the financial controllerhas evidenced
and the bank statements are identified their review of any unreconciled
promptly. amounts.
I
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I· Caterpillar Cds cash system deficiencies and controls
I Control deficiency Control recommendation

The lA department only undertakes cash Caterpillar Co•s lA department should

control visits to the 20 largest stores as have a rolling programme of visits to all
they feel thfs is where most issues arise.· 45 stores. This programme cqn have a
However, Caterpillar Co has 45 stores in bias to large and high risk stores, but it
total which means over half of the stores should ensure that all stores ar~ visited
are.not being checked. This increases on a Qyclical basis.
the likelihood of control errors, as these
stores rnay not com pi~ with company
I procodures and with it being a cash
busin.ess heightens the chanc~ offrauds
i occurring.
......................
All store employees are able to use each Only employees for whom criminal
till and none have an individual log-on record/credit checks have been
code when using the tills. Allowing all undertaken should be able to use the tills
employees access to the till points to take customer payments •. -
increases the risk of fraud and error Each employee should have a
arising .. Also in the event of cash designated till and a log-on code, which
discrepancies arising in the tills~ it would is required for each payment
be difficult to ascertein which employees tro nsa ctio n.
may be responsible as there is no way of
tracking who used which till.
......... .,..... ·-••••••oo••••~ ... ~.._......u ....

@BPP Answers lt77

 Where employees' friends or family Caterpillar Co should instigate a pqlicy
members pw'chase clothes in store, the whereby employees are unable to serve
employee is able to serve them cit the till friends or family ..members at the till
point. -points. They should be required to
There is a significant fraud risk as request that a manager or supervisor
e.mployees.couldfail to put the goods put these goods through the till.
through the till~ but retain the cash paid In addition, CCTV cameras could be
by the friend/family members. placed in the shops, near to the till
Additionally, they could give the goods points to record the daily till
away·tor free or undercharge for goods transactions. This would act as a
sold~ thereby granting unauthorised deterrent to employees as well as
discounts. provide evidence in the case of
fraudulent transactions occurring.
Caterpillar Co should also carry out
regular inventory counts to identify if
goods in the stores ore below the levels
in the inventory records, as this could
identify goods being given away for free.

The daily reading of sales and The reconciliations should be undertaken

reconciliations to the tills is performed in on an individual till b!:J till basis rather
aggregate rather than for each till. This than in aggregate.
means if exceptions a rise, it will be
difficult to identify which till caused the
difference and therefore which
emplo!:Jees rna!:J require further till
training or have undertaken fraudulent
transactions.
-·
The cashing up of tills along with the The cashing up process should be
recording of any cash discrepancies-is undertaken by two individuals together,
undertaken by just one individual. the ideally the assistant and the store
assistant store manager.-There is a fraud manager. O;,e should count the cash
risk as the store manager could remove .and the other record it. Any exceptions
some of the cash and then simply record to the till reading should be double
that there was an exception on this till. checked to confirm that they are not
simpi!:J additioo errors.

The cash is kept at the store overnight in The cash should continue to be collected
a small safe. Although in a safe. this is daii!:J by the security company, but
not secure as it is likely that the cash rather than in the morning it should be
sales for one da!:J would be a significant collected as the store closes in the
sum. This cash is ot risk of being stolen evening so that cash does not have to be
overnight. stored overnight.

If a store needs change~ a junior sales Caterpillar Co's head office should
clerk is sent to the bank by a till operator stipqlate a float amount per till and how
to change ~t into smaller denominations. the note denominations should be
There is a risk ofthe cash b~!ng comprised. VVheli· assigning the cash
misplaced or stolen on the wa!:J to the float inthe morning, the store manager
bank or collusion· between the junior should ensure that this polio~ is adhered
clerk and till operator as no record- to.
appears to be kept of the mone!:J If, during the day, further smaller
removed from the till in these instances denomination notes are required, the
and no confirmation of how much cash store manager should authorise a
is returned is.carried out. _ member of staff toobtain cash from the
bank and should fuii!:J record moverrfents
in and out of the till.

lt78 Audit and Assurance @aPP

 ---
One clerk is responsible for several These key roles-should be split between a
elements of the _cqsh receipts system. He few individuals) With ideally th(fbpnk -
Ii oversees the daily interface from stores-. - . recondFations being t/ndertakem by
! agrees that cash has cleared into the another member of the finance team.~
l

I bank statements and undertakes the

bank reconciliations.
..

I a
-There is .. lack of segregation of du~ies
and errors will not be identified on a
timely basis as weJI ?s increasing the risk
I of fraud.

The bank reconCiliations are only The bank reconciliations should be

reviewed by the financial controller if reviewed by the financial controllerona
there are any unreconciled amounts. The monthly basis, even if there are. no
bank reconciliation could reconcile but exceptions. and he should evidence his
still contain significant errors as there review by way of signature or~ the bank
could be compensating errors which reconciliation.
I cancel each other out. In addition, for a
cash based business, the bank
I reconciliation is a direct control which
reduces the risk of fraud. If it is not
I reviewed, then this reduces its

I.------·---·---·-·------'---------'---C----···---------·---~--J
effectiveness.

18 Snail &Co

Course Book references

Chapters 14,16 and20.

Top tips
This is a 20-mark question which tests substantive procedures relating to income, trade
payables and trade receivables, together with auditors' reports. In ·part (a) you must read the
s·cenario carefully and tailor your substantive procedures. In the past the examining team has
commented th-at candidates often provide lists of standard audit W()rk without consideration of
the facts in the question. Also note that in relation to income the qu_estion considers the
assertion of completeness specifically. Again you mustensure you address this in your answer.
In part (b) the key is to note that you need to discuss the issues as well as commenting oh the
impact on the auditor's report. Your discussion should support the conclusion you have come
to.

Ea~y marks
No specific parf ofthis question is straightforward but there are some easier marks available in
part (b), ·

Marks

(a) (i) Su~stantiveprocedures for completeness of lnsects4U Co income

Cost schedule of all of the corn pony's income
•. ·Compare individual categories of income to prior year
·~~- Trace monthly donations from bank statements to cash book
New subscribers agree subscription forms to donations received account,
cash book dnd bank statements . 1

@BPP Answers '+79

 Perform proof in total of ti-ckets s<?ld multiplied by ticket price, compare to
actuaFand investigate significant difference - ·
(ii) Substantive procedures for Spider Spirals Co trade payobles
-• Calculate trade pdyables payment period
Compare total tradepayables.and list of accruals again~tprior year
Discuss with management process to quantify misstatement of payables
Sample invoices received between 1 and 7 May, if post year end, then agree
excluded from ledger
Review after-date payments
Review supplier statements reconciliations
Perform a trade payables circularisation
Cut-off testing pre and post year end GRN
(iii) Substantive procedures for Spider Spirals Co trade r~ceivables
Aged receivables report to identify any.slow-moving balances
Review customer correspondence to assess whether there are any invoices in
dispute
Review the after-dote cash receipts
Review board minutes
Calculate level of irrecoverable receivables, assess if material and discuss
with management
Recalculate allowance for receivables
Post year end sales returns/credit notes
Maximum 15
(b) Effect of uncorrected misstatement and impact on auditor's rep_ort
Discussion of issue
• . Calculation of mate~iality 1
Type of auditor's report modification required 2
Impact on auditor's report
Maximum 5
Total 20

(a)- (i) Substantive procedures for lnsects4U Co income·

Obtain a schedule of alllnsects4U Co's income and cast to confirm completeness and
accuracy of the balance.
Compare .the· individual categories of income against prior year and· investigate any
significant differences.
For monthly dC?nations, trace a sample of donations received in the bank statements to
the cash book to ensure that they are recorded completely and accurately. ·
For a sample of new subscribers in the year, agree from their completed subscription form
the monthly sum and start date, trace to the monthly donations received account and
agree to the cash book and b<::mk statements.
For donations received in the post, review correspondence from donors, agree to the
donations account and-tn::::tce sums received to the cash book and bank statements to
ensure all completely recorded.

lf80- Audit and Assurance @aPP

 .• For the charity events~ undertake a proof in total calculqtionof the number of tickets sold
multiplied by the ticket price. compare this to the income recorded and discuss any
significant differences with management.. · ·
(ii) Substantive procedures for Spider Spirals Co trade payables -
.Calculate the trade pabjdbles collection period for SpiderS.pirols Co.compare with prior
years and investigate any significant difference, in particular any decrease for this year
~due to the payment run on 3 May.
Compare the total trade payables and list of accruals qgainst prior year and investigate
any significant differences.
Discuss with management the process they have undertaken to quantify the misstatement
of trade payables due to the late payment run and cut-off error of purchase invoices and
consider the materiality of the error in isolation as well as with other misstatements found.
Select a sample of purchase invoices received between the period of 1 and 7 May,
ascertain·through reviewing goods received notes (GRNs) if the goods were received pre or
post year end; if post year end, then confirm that they have been excluded from the
ledger or follow through to the correcting journal entry.
Review after-date payments; if they relate to the current year, then follow through to the
payables ledger or accrual listing to ensure they are recorded in the correct period.
Obtain supplier statements and reconcile these to the payables ledger balances, and
investigate any reconciling items.
Select a sample of payables balances and perform a trade payables circularisation,
follow up any non-replies dnd any reconciling items between the balance confirnled and
the trade payables balance.
Select a sample of GRNs before the year end and after the year end and follow through to
inclusion in the correct period's payables balance, to ensure correct cut-off.
(iii) Substantive procedures for Spider Spirals Co trade receivables
-Review the aged receivables, listing to identify any slow-moving or old receivables
balances; discuss the status of these balances with the finance director to assess whether
they are likely to pay. ·.
Review customer correspondence to identify any balances which are in dispute or unlikely
to be paid. -
Review whether there areanl:J after-date cash receipts for slow-moving/old receivables
balances; . ·
Review board minutes to identify whether there are any significant concerns in relation to
payments b!:J customers.
Calculate the potential level of receivables which are not recoverable and assess whether.
this _is matedal or not and discuss with management.
Recalculate the allowance for receivables and compare to the potentially irrecoverable
balances to assess if the·allowance is adequate. - · _-;·
Inspect post !dear end sales returns/credit notes and consider whether an additional
allowance against" receivables is required.
(b) Impact on_auditor's report·
·The company made a payment run of $490,000 for payables on 3 May, which is post !dear
end. The trade payables which were outstanding at the year end have been understated as
they have been recorded as being paid. In addition, the bank overdraft is overstated as the
pahJments are recorded as earning out of the bjear-end bonk balance. This is evidence of
.. wi[ldow p_ressing, as the company has ottempted to record o lower level of payable
obligations at the year end. The finance director's orgurnent that no adjustment is necessary
because the bolances affectedare both current liabilities is irrelevant os) although both
bt11ances are liabilities,.theyshould each still be materially correct.
The amount of the pay men( run is $.490~000 which represents 6.0% of total liabilities
(490/8,100) and hence is.a material matter.

@BPP Answers Lt81

~j

f>
 l.f management refuses to adjust for the post year end payment run, the auditor's opinion will_
ne.ed to be modified. As trade payables are understated and the bank overdraft is overstate9
and there is a material mis.statemenfwhich is not pervasive, a qualified opinion would be
ne.cessar!:f~ A basis for qualified opinion section would..neec,l to be includedsub_sequent to the
opinion section. This would explain the material misstatement in relation to the treatment of · -
the trade pa!jables and bank overdraft and the effect on the financial statements. Th~
opinion would be qualified. -·

Lt82 Audit and Assurance

ACCA .
. ·-

Audit and Assuranc.e

·Mock Exam Lt

Section B from Sep/Dec 2023

Hybrid Exam

Questions

Time allowed

·DO NOT OPEN THIS EXAM UNTIL YOU ARE READY TO START
UNDER. EXAMINATION CONDITIONS

@BPP lt83
lt81t Audit and Assurance @BPP
 Section A~·
ALL 15 questions are compulsory . and MUST be attempted.
:)
. Horti &Co
Each question is wo_rt~ 2 marks.
The following scenario refates to questions 1-5.
You cue an audit manager at Horti S Co and you are considering a number of ethical issues which
have arisen on some of the firm's.long-standing audit clients. It is 1 July 20X5.
Tree Co
Horti 8- Co is planning its external audit of Tree Co. Yesterday, the audft engagement partner,
Charlie Thrower, discovered that a significant fee for information security services. which were
provided to Tree Co by Horti 8- Qo, Is overdue. Charlie hopes to be able to resolve the dispute
amicably and has confirmed that he will_ discuss thematterwith the finance director, Percy
Marsh~ at the weekend. as they are both attending a party to celebrate the engagement of
Charlie's daughter and Percy's son. ·
Bush Co
Horti & Co is the external auditor of Bush Co and also provides other non-audlt services to the
company. While performing the audit for the year ended 30 November ·20X4, the audit
engagement partner wasta ken ill and took an indefinite leave of absence from the firm. The
ethics partner has identified the following potential replacements and is keen that independence
is maintained to the highest level:

who is also the partner in charge of the tax services provided to Bush
Brian Smith Co . .

Monty Nod

Cassie Dixon

Pete Russo

Plant Go
Plant Co· is a large private company, with a financial year to 31 March~ and has been an audit
client of Horti 8 c6 for several years. Alan Marsh low, a par-tner of Horti_ 8- Co, has acted as the
Engagement Quality Reviewer (EQR) on the last two audits to the year ended 31 March 20X5. At a
recent meeting, he advised thdt he con no longer be EQR on the engagement as he is considering
accepting oppointment as a non-executive director and will sit on the audit committee of Plant
co.
The board of directors has also asked Horti B Co if they would be able to provide internal al.tdit
services to the company.
Weed Co
Weed Co, a listed company, is one of Horti S Co's largest clients. Last year the fee for audit and
other services was $1.2 million and this year it is expected to be $1.3 million which represents 16.6%
and 18.1% of Horti 8 Co's total income respectively.

@BPP Questions '+85

~
ti
 . Which of the following statements correctly explains the possible threats. to Horti & Co's
independence and recommends an appropriate safeguard in relation to thefr a.udit of-
Tree.Co? · · ·
(1) AnJntimidation threat exists. due to the overdue fee and Tree Co should be advised
that all fees must be paid prior to the auditor's report being signed
(2) A self-review threat exists due to the nature of the non-audit work which has been
perform~d and on engagement quality control review should be carried out ·
(3) A self-interest threat exists due to the relationship between Charlie and Percy and
Charlie should be removed as aqdit partner
0 1, 2 and 3
0 1 and 2 oni!:J
0 2onl!::l
0 3onl!::l (2 marks)

2 Taking into account the concern of the ethics partner, which of the partners identified as
potential replacements should take over the audit of Bosh Co for the year ended 30
November 20X4?
0 Brian Smith
0 Mont!:} Nod
0 Cassie Dixon
0 Pete Russo (2 marks)

3 Which of the following options correctly identifies the threats to Horti S Co's
independence and proposes an appropriate course of action for the firm if Alan Marshlow
accepts appointment as a non-executive director of Plant Co?

Threats Course of action

0 Option 1 Self-interest and Can continue with
familiarity appropriate safeguards
0 Option 2 Self-interest and self- Must resign as quditor
review
0 Option 3 Self-interest and Must resign as auditor
familiarit!:}
0 Option 4. Farniliarity only Can continue.with
appropriate safeguards

(2 marks)

'+86 Audit and Assurance @BPP

)

4· You are separately considering Plant Co's request to provide internal audit services and the
remit otthese services if they are accepted.
.
- · .

Which of the following would .result in Horti & Co assuming (]:management responsibility
in relation to the internal audit services? ·
(j) Taking responsibility for designing- and maintaining internal control systems
(2) Deterf!1ining which re~ommendations should take priorityqnd be imp.lemen~ed
(3) Determining the reliance which can be placed on the work of internal audit for the
external audit ·
(4) Setting. the scope of the internal audit work to be carried out
0 j and 3
0 2, 3, and 4
0 1, 2 and 4
0 3 and 4 only (2 marks)

5 Which of the following actions should Horti & Co take to maintain their objectivity in
relation to the level of fee income from Weed Co?

Take Do not take

Communicate level of fee income to those chargedwith 0 0

governance
Use separate teams for the audit and non-audit work 0 0
Request payment of the current year's audit fee in 0 0
advance of any work being performed
Request a pre-Issuance review be conducted by an 0 0
·external accountant

(2 marks)

(Total =10 marks)

-Chester
The following scenario relates to questions 6-10.
Chester Co manufactures and sells pet toys to the wholesale market. It has prepared its financial
statements to 28 February20X5. It is l.July 20X5. You are an audit assistant with Durham 8 Co
and you have been assign~d the current liabilities balances in the auditwork plan.
You have calculated the payables payment period to be 66 ·days in 20X5 (45 days in 20XLt) and
have asked the directors of Chester Co to provide an explanation as to the inc·reose in days.
Chester Co receives monthly statements fron1 its main suppliers and performs regular supplier
statement reconciliations. There were inconsistencies noted in respect of the following at 28
. February 20X5: ··

Supplier Bolo nee per purchase ledger Balance per supplier statement
($) ($)

Oxford Co 151,480 296,120

Poole Co (72.168) 8lf,235

Bath Co 82,348 92,340

@BPP Questions lt87

 Oxford Co
· Chester Co has a credit agreement with Oxford Co under which it receives goods 14- days before
the supplier raises the invoice. Chester Co received goods worth $144.640 on 18-F~bruary. 20X5
for which the invoice wa~ received shortly after the year end in accorda·nce with the agreement.
Chester 9o entered the transaction into its accounting records at the date of invoice.
Poole Co
The-difference on this balance h·as still to be investigated.
Bath Co
Chester Co's finance director has informed you that there WOf3 an errorin closing the purchase
ledger and it was closed three days early. Invoices received 26. 27 and 28 February 20X5 were
posted to the 20X6 ledger. The directors of Chester Co have confirmed that following discovery of
this error, a manual adjustment was made using thejournal book.

6 Which of the following supplier balances would indicate a high risk in relation to the
COMPLETENESS of the liability recorded at the year end?
0 A supplier with a high balance at the year end and with a low volume of transactions
during the year
0 A supplier with a low balance at the year end and with a high volume of transactions
during the year
0 A supplier with a low balance at the year end and with a low volume of transactions
during the year
0 A supplier with a high balance at the h)ear end and with a high volume of transactions
during the year (2 marks)

-7 Which of the following would correctly explain why the payables payment period has
increased from 45 days in 20X4 to 66 days in 20X5?
0 Chester Co received a prompt payment discount from one of its suppliers for the first.
time in 20X5
0 Chester Co obtained a trade discount from one of its biggest suppliers which has
reduced the amount owed to that supplier by10% in the l:Jear
0 Chester Co purchased an unusualll:J high level of goods in Februarl:J 20X5 to satisfl:J a
large order and had not paid for those goods by the year end
0 Chester Co took odvantage of extended credit terms offered by a new supplier in
respect of_ a large order which it had fully settled by the year end (2 marks)

8 Which of the following is an appropriate action in respect of the inconsistency in the

balance with Oxford Co?
0 The auditor should take no further action as this is a timing difference which was
resolved upon receipt and posting of the invoice
0 The auditor should request that the purchase ledger balance is amended at the
reporting dote to reflect the recent invoice
0 The auditor should contact·the supp11er and request a supplier statement as at the
current date
0 The auditor should request that an accrual is created in respect of the goods received
but not yet invoiced (2 marks)

lt88 Audit and Assurance @BPP

9 Which of the following would be a valid..e~planation fo~ the difference in respect of Poole
C& .
Complete the .following sentences regarding the difference in respect of Poole Co bg
selecting from the options provided. ··
An invoice for [""(1)·:. .·-·. --·-·-·-..~--·-·-··;-l has been r·-(2)·--·-·------.. . . . . . . . .;.].
Pull down list 1
• $156;403
• $72,168
• $84,235

Pull down list 2

Paid twice
Posted as a debit note
Received and processed prior to receipt of the goods
(2 marks)

10 Which of the following would NOT provide sufficient and appropriate audit evidence over
the COMPLETENESS of the purchase ledger balance in respect of Bath Co?
0 Obtain the journal book and confirm that all invoices recorded as received from Bath
Co dated 26-28 February have been manually adjusted for
0 Review the accruals listing to ensure goods received from Bath Co post year end for
which an invoice has not been received have been recorded in the correct period
0 Fo·r post year-end cash book payments to Bath Co, confirm date of matching invoice
and if pre year end agree to liability
0 Review a sample of invoices received from Bath Co recorcled post year end and match
to GRN to determine if they should have been recorded at the year end (2 marks)

·{Total = 10 marks)

Viola
The following scenario relates to questions 11~15.
Viola Co is a manufacturer of shoes. You are an audit mandger with Cello 8 Co and you or~
performing an overall review of the financial statements forthe year ended 31 December 20X4
prior to the issue of the auditor's report. It is 1 Jul~ 20X5. Profit before tax for the year was ..
$131.4rn (20X3: $120.9m). - .· . . _ .· . · --<P·

Analytical procedures
As part of your overall review, you have performed analytical procedures over the draft finoncial
statements and have noted that the trade receivables collection period is lower than it was during
the interim audit performed in October 20X4. You are.awqre that the credit controller of Viola Co
left the compan!-J in Novernber 20X4 and that the directors have said that, as a result, the
company is experiencing difficulties in debt collection.
Disclosures
During the lJear, Viola Co revalued its head office and as part of your review, you are considering
the detail which is disclosed in the property, plant and equipment note in the draft financial
statements.

@BPP Question$ lt89

Uncorrecte~ misstatements

Your review al$o includes an assessment. of uncorrected misstatements. These have been recorded
by the audit team as
follows: . . .- . -

$000
(i) - Interest payable omitted in error' i,942
(2) Additional allowance for receivables required 9,198
(3) Error in sales invoice processing resulting in understa'tement of' sales _ 8,541
(4) Write off in respect of fdultbJ goods 2,900

Faulty goods
The adjustment for faultbJ goods listed as an uncorrected misstatement above, relates to an entire
batch of shoes, which was produced on12 December 20X4. The audit workconcluded that the
cost of this inventory exceeded its net realisable value by $2.9 million. The directors dispute the
audit team's figures and believe that the realisable value of the inventory still exceeds its cost.

11 Which of the following would form part of the auditor's overall review of the financial
statements?
(1) · Establishing whether the pre-conditions for an audit are present
(2) Assessing whether the information and explanations obtained during the audit are
adequately reflected
(3) Performing a detailed review of the audit working papers to ensure the work has
been properly performed
(4) Reviewing the adequacy of the disclosure of accounting policies
0 1 and 2
0 3 and 4
0 1 and 3
0 2 and 4 (2 marks)

12 Which of the following is a valid explanation for the INCONSISTENCY between the results
of the anaJytical procedures on trade receivables and the directors' statement regarding
debt collection problems? · ·
0 A change in sales mix towards high value products
0 An increase in the proportion of cash sales since November 20X4
0 An increase. in the rate of sales tax in December 20X4
0 Sales growth of 1% per month over the year (2 marks)

lt90 Audit and Assurance @aPP

r)

13 Which ofthe following details should be disclosed in respe~t of the revaluation of th~
-head office if the auditor is to conclude that the disclosures are adequate?
(1) Effective dote of the revaluation
(2) Name of the valuer
(3) The amount of the revaluation increase
(4) Carrying omount of the head office under thecost model
0 1,2and3only
0 1, 3 and 4 only
0 2, 3 and4 only
0 1, 2, 3 and 4 (2 marks)

14 Which-of the uncorrected misstatements numbered (1), (2)·and (3) by the audit team
·MUST be adjusted for if the auditor is to issue an unmodified audit opinion?
0 Misstatements 2 and 3 only
0 Misstatements 1 and 3 only
0 Misstatements 1, 2 and 3
0 Misstatement 2 only (2 marks)

15 All adjustments required by the auditors hove been made to the financialstatements with
the exception of adjustment (4) relating to the faulty goods.
Which of the following correctly describes the effect of this matter on the auditor's
report?
0 Unmodified opinion with no further disclosure
0 Unmodified opinion with disclosure in an emphasis of matter paragraph
0 Qualified opinion due to material misstatement
0 Qualified opinion due to inability to obtain sufficient approprbte audit evidence
(2 marks)

(Total = 10 marks)

@BPP Questions '+91

 Section B
ALL tHREE q-uestions are compulsory and MUST be attempted.

16 Knight Electronics Co
This scenario relates to four requirements~
It is·1 July 20X5. Your firm, Hercules & Co, has recenti!:J won the audit of a new client, Knight
Electronics Co, for the year ending 30 September 20X5. Knight Electronics Co sells products
enabling ,smart building' systems which allow customers to efficiently control their security,
lighting and networking needs. The audit manager held a preliminary meeting with the finance
director and has provided you l,oVith the following notes:
Planning meeting notes
Since its launch five years ago, Knight Electronics Co has experienced high levels of growth such
that the founder and CEO, William Knight, is considering a stock exchange listing next year.
Knight Electronics Co has both corporate and domestic customers. On 1 October 20X4 Knight
Electronics Co began to offer customers the option to purchase a three-year servicing agreement.
This provides three annual services for products purchased. Customers pay for the servicing
agreement in full at the start of the agreement.
Component parts are purchased from a number of suppliers. Prices of components have been
steadily increasing over the past two years leading to a reduction in the gross profit margin. The
forecast financial statements for the year ending 30 September 20X5 show inventory valued at
cost.
In June 20X5, Knight Electronics Co decided to revalue its premises, which had previously been·
accounted for using the historic cost model. Properties with a carrying amount under the cost
model of $3.8 million were revalued to $8.4 million based on a valuation performed by
management. The finance director also carried out an extensive review of non-current asset lives
and decided to extend the useful life of plant and equipment from five years to eight years.
In May 20X5, defective equipment used by Knight Electronics Co resulted in a small tire at its··
premises. The company has commenced legal action against the supplier of the equipment.
Knight Electronics Co's lawyers have advised that the legal action is likely to be successful and, as
a result, the finance director has included a receivable for the damages likely to be received from·
the supplier in the forecast f~nancial statements,
During the year the company's credit controller was ill and was absent from work for four months.
Due to staff shortages, no replacement credit controller was appointed. The receivables collection
period hos increased from 45 da!::Js to 75 days.
An instance of payroll fraud was also discovered during the year. Apayroll clerk had set up a .
number of fictitious employees and the wages were then paid into the clerkts own bank account.·
Controls have now been implemented to prevent this from re-occurring and the clerk involved no
longer works for the company. However, the audit manager is concerned that additional fraud
may have taken place in the payroll department prior to the controls being implemented.
William Knight would like the audit to be completed by 31 October 20X5.

Required

(a) Briefly explain how each of the·following sources of information will be used by Hercules B Co
to gain an understanding of Knight Electronics Co at the planning stage of the audit: prior
year audited financial statements. current !:Jear budgets and management accounts, prior
year report to management, board meeting minutes and company website.

Notes;

. 1 You do not need to refer to the scenario to answerthis requirement

2 Use the below table structure to format your answer in the CBE software.

lt92 Audit and Assurance ·@aPP

 Source of information How used to gain an understanding

Current year budgets and management

accounts

Prior year report t'o management

Com.pa ny website

(5 marks)

(b) Describe EIGHT audit risks and explain the auditor's response to each risk in planning the
audit of Knight Electronics Co.
Note. Use the below table structure to format your answer in the CBE software.

Audit risk Auditor's response

(16 marks)
(c) Describe substantive procedures the auditor should perform to obtain sufficient and
appropriate audit evidence in relation to Knight Electronics Co's revenue. (5 marks)

(d) 'JSA 240 The Auditor's Responsibilities .Relating to·Fraud in an Audit of Financial Statements
provides guidance for auditors regarding fraud and error. Auditors must obtain sufficient
appropriate audit evidence regarding the assessed risks of material misstatement due to
fraud through designing and implementing appropriate responses.

Required
Describe procedures which should be undertaken during the audit_ of Knight Electronics Co as
~· a result of the payroll fraud. (Lt marks)
~.
~I (Total ~ 30 marks)
~·
~·

17 Silver Co_
This scenario relates to two requirements.
It is 1 July 20X5. You are an audit ~enior with Golden & Co a0d you are in the process of reviewing
the inventory count arrangementsfor ~~our audit client, Silver Co, ir1 preparation forattcndance at
the full year-end inventor~ count on 30 September 20X5. The compani::J rnanufactures household
furniture St..lch as tables, sofas and beds and has a factory and a large warehouse which-are
located on a single site.
~I Inventory count arrangements
The con:'lpany manufactures goods 2lt hours a day, seven days a week to meet customers~
demands. Production will still be continuing during the inVentory count as it is not possible for the
company to stop producing goods. Movements of goods in aod out of the factor-y and warehouse
will also have to continue for operational reasons. ·
The count will be undertaken by 20 tearns of two counters from the warehouse, and the
warehousEr supervisor wiU be overseeing tho inventory count. Each team will be given a specific
area of the warehouse to couht using sequentiallbJ numbered inventory sheets which detail the
- items·of inventory together with quantitiEiS held at the date ofthe count as per the invei)torbJ
system. It has been le.ft to. the individuals-within each team to decide how to allocate the
responsibilities between them.-

@sPP Questions lt93

,.';.·
~ :
..
 All goods present in the warehous~ on 30 September 20X5 will be arlocqted into separate
warehouse bays (designated areas of the. warehouse) in preparation for counting. When a ...!
· :_~·z~3 .
·warehouse bay has been counted~ it is crossed out on the warehouse map which is.held in the .. ;;,...--
.. "a'!-··
office-by the warehouse supervisor. As th-e warehouse supervisor is confident thatthe 20 teams
are familiar with the warehouse and the location of the inventor\:), he has· said that eaoh bay only
needs to be counted b!:J one team. One area of the warehouse, which includes a large quantit\:) of
spare parts left over from production, will be segregated so that this inventor\:) will not be counted,
as the wareh<?~~§--~-~~~~r ho.s stated that these items are unusable. ·
A numerical sequence check of the sheets will be carried out by the warehouse supervisor once
the count is finished. The inventory sheets will then be passed to a warehouse assistant to update-··
the inventory records to reflect the inventory ph!:Jsicall!:l present as per the inventory sheets.
Work in progress valuations have previously been carried out by an external inventory valuer.
However, the warehouse supervisor has suggested that he undertakes thfs valuation this year as
he is familiar with the compan!:J'S products. The directors have agreed to this on the basis that it
will save costs.
Lost week the company agreed to store 30 sofas belonging to a third party in its warehouse for
the next four months as the third party's storage facilities became flooded. For convenience, these
sofas have been stored alongside similar products which belong to Silver Co.

Required
Auditors have a responsibility under ISA 265 Communicating Deficiencies in Internal Control to
Those Charged with Governance and Management to communicate significant deficiencies in
internal controls to those charge~ with governance.
(a) Describe FQ_UR matters the auditor should consider in determining whether a deficiency in
internal controls is significant.
Note. You do not need to refer to the scenario to answer this requirement. ('+ marks)

(b) Identify and explain EIGHT deficiencies in Silver Co's inventory count arrangements and
provide a control recommendation to address each of these deficiencies.
Note. Use the below table structure to format !:JOur answer in the CBE software. (16 marks)

Control deficiency Control recommendation

(Total =20 marks)

18 Latte Co
This scenario relates to four requirements.
It is 1 July 20X5~ You are an audit supervisor with Macchiato 8 Co currently working on the final
audit 6flatte Co, a supplier of catering equipment, for the ~ear ended 31 March 20X5. Lotte Co is
a listed company with total assets of $22.7 million and profit before tax of $3.2 million. You are
responsible for finalising the-audit fieldwork in respect of the following:
Trade receivables
Lotte Co's net trade receivables balance is $5.1 million which comprises trade receivables of $5.5
million and an allowance for receivables of $0.4 million at 31 March 20X5 (20X4: receivables of
$4.4rn and an allowance of $0.6m): .As a result of a lack of responses in prior years, the audit
engagement partner has decided that a trade receivables circularisation win not be perfor:rned
this year. Instead. he has asked you to identify alternative substantive procedures to confirm the·
_ existence and valuation of trade receivables.

lf91t Audit and Assurance @BPP

 Provision for legal claim
A former employee of lotte Co has made a cl~im for ·so.6 million against the company in respect .
.of an injwr!d suffered while operating equipment which did not have the· correct safety equipm~nt
instalted. The directors have recognised a provision of$0.25-million in the current yearfinancTal
statements which is the maxim_um amount they are willing to pa!d to settle the claim.
· Bank loan
Lotte Co obtained a new three-year bank -loan of $1 million on 1 Octobe~r 20X4 to finance the
purchase of new equipment. The loan attracts an interest rate of 5%. Under the terms o(the loan,
10 payments of $105,000, comprising capital and interest, are due to be made on a quarterly
basis commencing 31 December 20X4. Lotte Co did not make the quarterly payment due on 31 ·
March 20X5 unti115 Aprii20X5. -
Required
(a) Describe substantive procedures the auditor should perform to obtain suffiCient and
appropriate evidence in relation to the EXISTENCE and VALUATION of Lotte Co's trade
receivables. (6 marks)

(b) Describe substantive procedures the auditor should perform to obtain sufficient and
appropriate evidence in relation to Lotte Co's provision for the legal claim. (4 marks)

(c) Describe substantive procedures the auditor should perform to obtain sufficient and
appropriate evidence in relation to Lotte co·s bank loan. (5 marks)

(d) It is now 12 August 20X5. During the audit of the legal claim against Lotte Co, the audit team
concluded that a provision of $0.6 million should be recognised, rather than the $0.25 million
originally provided for. A significant increase in the provision was required, in order to comply
with lAS 37 Provisions. Contingent Liabilities and Contingent Assets. The audit engagement
partner has determined that the provision is now appropriatelyvalued and that this issue -
should be communicated as a key audit matter (KAM) in accordance with ISA 701
Commui1icating Key AuditMatters in the lndependent-Auditor1s Report.
Required
(5 marks)

(i) Describe the factors which the audit engagement partner would have cor1sidered in
determining that this issue is a KAM; and
(ii) Describe the content of the KAM section of the auditor·s report for Lotte Co. ·
(Total =20 marks)

Questions Lt95

~I
lt96 Audit and Assurance
@BPP
~' Answers
DO NOT TURN THIS PAGE UNTIL YOU HAVE
COMPLETED THE MOCK EXAM
Lt98 Audit and Assurance
@aPP
 Plan Q.f attack
If this were the real Audit and Assurance exam and you had been told to turn over and bt?gin;
. whatwould be going through your mind? ·
· An important thing to say (whilst there is still time) is that itis vital to have a good breadth of
knowledge of the syllabus because all the questions are compulsory. However, don'tpanic. Below
. we provide guidance on how to approach the exam.
Looking throu~h the exam
Section A has three objective test Ca?eS, each with five questions. This is the section of the exam
where the examining team can test knowledge across the breadth·of the syllabus. Make sure you
read these cases and questions carefully. The distractors are designed to present plausible, but
incorrect, answers. Don't let them mislead you. If you really have no idea- guess. You may even
-be right.
Section .B has three longer questions:
• Question 16 is a 30-mark question covering understanding the entity, audit risks and
responses) and audit procedures. It is a long scenario $0 make sure you read the requirements
first so ·that you can actively read the scenario knowing what you are looking for. For the 16-
mark risk and response question, the scenario will typically contain more than the number of
risks required, so it is important that you plan your time carefully and only provide the number
of risks and responses asked for.
Question 17 is a 20-mark question seton internalcontrol deficiencies dnd recommendations.
The scenario relates to an inventory count and is reasonably lengthy so in (b) try and draft
answers as you go through it. 8 deficiencies and recommendations are needed so there is no
need to provide more and eat into your time for other questions.
Question 18 is a 20-mark question. The majority relates to substantive procedures and in (a)
you needed to be careful to keep your procedures related to the assertions asked for. No credit
would be gained where procedures related to other assertions. The final part required you to
apply your knowledge of communicating Key audit matters.
Allocating your time
BPP's advice is to always allocate your time according to the marks for the question. However,
use common sense. If you're doing a question but haveq't a clue how to do. part (b). you might. be
better off reallocating your time and getting more marks on an'other question) where you can add
something you didn't have time for earlier on. Make sure you leave time to recheck the OTs and
make sure you have answered them all. ·
Forget about it
And don't worry if you found the exam difficult More than likely other candidates will too. If this
were the real thing you would need to forget the exam the minute you left the exam hall and think
about the next one. Or, if it is the last one, celebrate!

Answers lt99
Section A
Horti &Co
The correct answer is: 3 only
In line withA.CcA•s Code of Ethics and(;onduct, a self-interest threat would arise due to
the personal relationship between the audit engagement partner and financedirector; A
self-interest threat, not intimidation threat, would arise as a result of·the overdue fee and
due to the nature of the non-audit work. it is unlikely that a self-review threat would arise.
2 The correct answer is: Cassie Dixon
In order to maintain independence, Cassie Dixon would be the most appropriate
replacement as audit engagement partner as she has no ongoing relationship with Bush
Co. Appointing any of the other potential replacements would give rise to self-review or
familiarity threats to independence.
3 The correct answer is:

Threats Course of action

Option 2 Self-interest and self-review Must resign as auditor

If Alan Marsh low accepts the position as a non-executive director for Plant Co, Self-interest
and self-review threats are created which are so significant that no safeguards can be
implemented. Further as per ACCA"s Code of Ethics and Conduct, no partner ofthe firm
should serve as a director of an audit client and as such, Horti S Co would need to resign
as auditor.
4 The correct answer is: 1, 2 and 4
Assuming a management responsibility is when the auditor is involved in leading or
directing the company or making decisions which are the remit of management. Designing
and maintaining internal controls, determining which recommendations to implement and
setting the scope of work are all decisions which should be taken by management.
5 The correct answers are:
Communicate level of fee income to those charged with governance- Take
Use separate teams for the audit and non-audit work- Do not take
Request payment of the current year's audit fee in advance of any work being
performed - Do not tal<e
Request a" pre-issuance review be conducted by an external.accountant- Take
Weed Co is a listed company and the fees received by Horti S Co from the company have
exceeded 15%of the firm's total fees for two years. As per ACCA"s Code of Ethics and
Conduct, this should be disclosed to those charged with governance and an appropriate
safeguard should .be implemented. In this case, it would be appropriate to have a pre-
issuance review carried out prior to issuing the audit opinion for the current year.

Chester
6 The correct answer is: A supplier with a low bal<?_nce at the year end and with a highvolume
of transactions during the year
This may indicate that not allliabllities have been recorded at the yea.r-end date.

500 Audit and Assurance @BPP

 .7 The correct answer is:. Chester Co purchased an unusuallg high level of goods in February
20X5 to satisfy a large ord1_3r and had .not paid for thos~.goods:by the year end · ·
of
A· purchase a lbrge volume of goods close to the yec;n-e.nd would increase the payables
payment period. The prornptpaymentond trade discounts would both decrease tb~
payables payment period, and the extended credit terms in this instance would have no
impa<?t as there is no closing· balance with the new supplier.
.. .

8 · The correct answer is: The auditor should request that an accrual is created in respect of
the goods received but not yetinvoiced
The difference of $144,640 with Oxford Co relates to goods which_were received by Chester
Co prior to the year-end but were not recorded in the accounting records until after the
year-end dete. As Chester Co had Ci liability to pay for the goods at the date of receipt, an
accrual should be created for thergoods received not .yet invoiced.

9 An invoice for j $156,403j has been ~twtee].

(1 The difference in respect of Poole Co may have arisen if the invoice had been paid twice in
error as an additional $156,403 will have been debited to the supplier account.
10 The correct answer is: Review the accruals listing to ensure goods received from Bath Co
post year end for which an invoice has not been received have been recorded in the correct
period
Reviewing the accruals listing vvould not help the auditor confirm the purchase ledger
balance with Bath Co as accruqls are recorded separately from the purchase ledger
balance.

Viola
11 The correct answer is: 2 and lt
As part of the overall review of the financial statements, the auditor should assess whether
the information and explanations gathered during the audit and accounting policies are
adequately reflected and disclosed. Pre-conditions should be considered as part of the
auditor's acceptance procedures and a detailed review of the audit working papers is
conducted as part of the firm's quality management procedures.
12 The correct answer is: An increase in the proportion of cash sales since November 20X4
An increase in the proportion of cash sales since the interim audit would increase sales but
not trade receivables resulting in a decreased trade receivables collection period.
13 The correct answer is: 1, 3 and 4 only
The effective date of the revaluation, the amount of the revaluation increase and the
carrying amount of the head office under the cost model are disclosures. required by lAS 16
Property, Plant and Equipment. ·,..
14 The-com:~ct cmswer is: Misstatements 2 and 3 only ".:~c

Misstatements (2) and (3) are individually material and would require adjustment for an
unmodified opinion to be issued. Misstatement (1) is ·immaterial and if Viola Co did not
moke this adjustment, an unrnodifiE3d opinion could still be issued.
15 The correct answer is: Unmodified opinion with no further disclosure·
Misstatement(4) is immaterial ot 2.2% of profit before tax ($2.9rn/$13t4m) and would I)Ot
require further disclosure. Therefore, as all other adjustments have been made, no material
misstatement exists and an unmodified opinion can be issued.

@BPP Answers ·501

 .Section .B

..1~ Knight Electronics C.o

Course Book references

Chapters 6, 14 and 16.

Top tips
There were 16 marks available for part (b) here and although the majority of the marks were on
this requirement you needed to be careful not to ov~rrun on it by continuing to add more risks
and responses than you needed. It can be tempting to do this with such a long scenario where
there are more than 8 risks within it But !:JOU needed to remember there may be (and were)
some straightforward marks amongst the other 14 marks available. You need to answer all
parts of the question to have the best chance of passing.

Easy marks
Part (a) was relativei!J straightforward. You should have been able to generate one good point
for each of the sources stated which is all you needed to get the five marks available.

Examining team•s comments

The examiners provided detailed feedback in the AA September/December 2023 report on
each of the questions and you can access that from within exam resources on the ACCA
website. A few key points have been picked up on in this section of the Exam Practice Kit for
each of the questions.
For part (a) the examiners stated that candidates should consider each source of information,
what they are and what information is available within them, then consider how this
information could be used by the auditor. Without considering both elements of what the
information is and how it can be used, it is difficult to achieve the available 1 mark per point.
Considering how each of the sources of information differs will also ensure that there is not too
much repetition of answer points.
For part (b) financial accounting knowledge is important as audit risks will often focus on the
accounting treatment used in the fin~mcial statements. In Knight Electronics Co, accounting
issues which give rise to audit risks include those relating to revenue, inventory, revaluation of
property, plant and equipment and contingent assets. Hence a strong knowledge of relevant
accounting standards is required to fully understand the audit risk and therefore a relevant
auditor re~>ponse.
In (c), when describing substantive procedures, one of the key things to consider is the level of j

detail provided. Many candidates fail to score well in this type of requirement because their
procedures are vague or too brief. Tests must be sufficiently detailed not~ng clearly which
source document should be used and what for. Candidates must ensure that they can
distinguish between a substantive procedurt;:l and a test ofcontrol. Many candidates lose
marks in this type of requirement by mixing up these procedures.
Man!:J candidates did not score well in (d). Incorrect answers focused on listing generic
substantive procedures for auditing_. payroll expense, rather than the fraud, or the!J focused on
the knowledge area of auditors) responsibilities relating to fraud, which did not gain ang credit.
Other incorrect answers focused on the controls management should adopt to prevent further
frauds. This is the wrong focus as it does not consider what the auditors should do.

Marks

(a) Sources of information and their uses

1 mark per well-explained point
Maximum 5

502 Audit and Assurance @BPP

 (b) Audit risks and-responses
·-
•.
··New client 2
)
Potential listing 2
Revenue recognition 2
)
lnve11tory ~aluatior1 2
) Property·revaluation 2
) Change in useful lives
. Legal action 2.
)
Receivables 2'
Payroll fraud 2
Reporting timetable 2
Other 2
Maximum 8 issues, 2 marks each

)
Maximum 16
(c) Revenue
I
1 mark per well-described procedure 5
) 5
Maximum
) (d) Procedures due to payroll fraud
1 mark per well-described procedure 4
Maximum 4
-
Total 30
I -
)
(a) Sources of information and their uses
)

Source Use

Current year budgets and management Provides relevant financial inforrnaticm for
accounts · the year to date. It will also help the auditor
at the planning stage to carr'y out
preliminary analytical procedures and to
identify risks.

To gain information on
internal control and any identified ccmtrol
deficiencies as~ if these have_not been
addressed by management, the
deficiencies may stilloe pres-ent onq may
impact upoh the audit approach.
!' I
To gain knowledge about the important
issu£:Js affecting the business which wen~
discussed by the directors and how these
issues were addressed.
\ I
'TO'gain information about the company's
rnojor products and services.

@BPP ·Answers . 503

(b) Audit risks.and response~

Audit risk Auditor's response

Knight.Eiectronics Co is a new client for Hercules 8 Co should ensurethey-.have a

Hercules 8 Co. As the team is not familiar suitably experienced team. Adequate time
with the accounting policies, transactions should be allocated for team members to
and balances of the com pan~. there will be obtain an understanding of tne company
an increased detection risk on the audit. and the risks of material misstatement,
There is also less assurance over opening including a detailed teorn briefing to cover
balances as Hercules 8 Co did not perform the key areas of risk.
the audit last year. Increased audit procedures over opening
balances will be required.

The company is considering a stock Hercules 8 Co should ensure that there is a

exchange listing and the CEO is likely to suitably experienced audit team. The audit
want to report a rising profit trend in the team should maintain professional
current year leading up to the listing. scepticism and be alert to an!:) manipulation
There is a possibility that the directors mabJ throughout the audit. This is particularly the
trbj to manipulate the financial statements case in any areas which require the use of
to achieve the desired result, resulting in directors' judgement.
possible profit, revenue and asset A review of judgemental decisions and
overstatement. significant one-off journal entries should be·
performed.

Knight Electronics Co offers a three-year The audit team should discuss with the
servicing agreement which is-paid for at the finance director how revenue was allocated
start of the agreement. and recognised for the servicing contracts_
Revenue for the service agreement may not and ensure this is in accordance with IFRS
be recognised in the correct accounting 15.
period. Under IFRS® 15 Revenue from A sample of service contract sales
Contracts wfth Customers. revenue should transactions should be recalculated to
be recognised as the service obligations are ensure that the amount recognised for the
sdtisfied. Therefore revenue from the year is in accordance with IFRS 15 and the
servicing agreements should be recognised company's accounting polichJ.
upon completion of each of the annual The audit team should request that revenue
services with the balance being recognised for service obligations not yet satisfied is
as deferred income (contract liability) in the removed and recognised as deferred
statement of financial position. income (contract liabilit~J) and should review
If all of the revenue received is recognised at the adjustment once made.
the start of the contract, revenue will be
overstated and liabilities understated .
..
.................... ········-··········· ·•·····•· ............ ············•······ '······-···················-·-·•
'
: Prices of components have been increasing The audit team should discuss with the
steadii!:J leading to a reduction in gross finance director whether they are aware of
profit morgin but inventory is valued at cost. this as an .issue. They ·could also select a
The net realisable value of components may sample of inventorhJ items and compare the
have fallen below the cost incurre9 by the cost shown on the purchase invoice with the
compan!:J, resulting in the inventory sales price charged at and after the year
valuation being overstated. end to confirm that NRV is above cost.

Property has been revalued from $3.8m to The audit team should discuss with the
$8.4-m based on a management directors the basis on which the revaluation
revaluation. The accounting policy with has taken place.
respect to properties was changed during The audit team should review the methods
the year and property values have been used and the assumptions made. They
substantially increased as a result. should agree the values on the valuation
There is a risk that the revaluation has not records to the non-current asset register·
been .carried out on an appropriate basis and confirm the revaluation has been

501t Audit and Assurance @aPP

 but has been designe.d .to inflate asset·-
values in the light of the potential listing.
This would result in an overstatement of
property, plant and equipment. ·

The period overwhich.plant andequipment The·cnJdit team should discuss with the
is to be depreciated is to be extended. from finance diregtorthe basis on "which the .
five to eight years. This will have the effect declsion·was made.
of reducing depreciation expense. The audit6r should review the condition of
Under lAS® 16 Property, Pfant and plant·and equipment currently being used
!
Equipment, useful lives are to .be reviewed (note: since the company is only five years
annually, and if asset lives have genuinely old, the plant will be a maximum of five
increased, then the change to the years old) and whether profits or losses
depreciation charge is reasonable. have been made when plant and equipment
However, there is a risk that this reduction have been sold. If the depreciation rates in
has occurred in order to boost profits. If this the post were too high, a profit on disposal
is the case, then plant and equipment are would be likely.
overvalued anddepreciation expense Also, the eight-year useful life shguld be
understated. compared to how often these assets are
replaced, as this provides evidence of the
useful life ofassets.

Knight Electronics Co has recognised a The auditor should discuss with the
receivable in respect of damages it has directors the justification for treating the
claimed against a supplier as its lawyer has damages as virtually certain.
advised that the action is likely to be The audit team should obtain written
· successful. confirmation from the supplier's lawyer that
lAS 37 Provisions, Contingent Liabilities and the claim has been settled.
Contingent Assets states that contingent
assets should only be recognised where it is
virtually certain that they will be received.
To be virtually certain, Knight Electronics
Co would need to have it confirmed in
writing b!J the supplier (or the supplier's
lawyer) that the claim will be settled. If the
receipt of damages by Knight Electronics
Co is not virtually certain by the year end,
then receivables and profits will be
il .. overstated.

During the year, the con1par)y's credit Review and test the controls surr_9unding
controller was absent for four months, and how the finance director identifie§ old or
they were not reploced. In addition, the potentially irrecoverable rec·eiv2,i!~s .
.receivables collection period has increased balances, especially during the period of
frorn 45 to 75 days. , absence of the credit controller, to ensvre
There is an increased risk with regards to that they are o·perating effectively.
the recoverability of receivobles balances·· Extended post year-end cash receipts
and an allowance may be required. If this is testing and a review of theaged receivables
. the case, receivables m<~Y be overvalued to be performed to assess valuation .
and the allowance understated. The need for an allowance should also be·
discussed with the finance director and the
odequac1:1 of any allowonce for receivables
assessed.

@aPP Answers 505

.f!

1
 During the year. a payroll clerk carried out - Discuss with the finance director.the details
fraudulent transactions at the company of the fraud perpetrated by the payroll Clerk
and there is a concetri that additional and what procedures have been adopted to
frauds may have taken place. date- to identify any adjustments which are
There is a risk that the clerk may have needed in the financial statements. In
undertaken a significant level of fraudulent addition. discuss with the-finance director.
trans.actions which h9ve not yet been what additional controls have been put in
identified, leading to an increased control place to prevent any similar"frauds.
risk. Any additional payments would need Additional substantive testing shou.ld be
to be written off to the statement of profit or conducted over the affected areas of the
loss. lfthese have not been uncovered, , accounting records, particularly payroll.
profit and payroll could be overstated. In addition, the team should maintain their
professional scepticism and be alert to the
risk of further fraud.

The client wonts the audit to be completed The auditor should assign more staff to the
one month after the year end. audit of Knight Electronics Co, as increased
With a short timescale, and given that this levels of substantive testing will be required
is the first year Hercules 8 Co has audited due to the increased risk of error and
this client, there is a risk that the client staff detection risk.
will be under pressure to complete the The composition of the audit team should
financial information readbJ for audit which be considered to ensure that staff have the
mabJ lead to increased errors. Further, there necessarbJ level of experience.
is an increased detection risk that the The auditor should also consider the need
auditor will not gather sufficient audit for an interim audit.
evidence.

(c)
~~~fW~;;;;,;;-~~[87--c------- - -- ---- -- ---------- --- ---··------- --~]

1 10 B J.JJ -s-,x,x' L I
l: !
j Pam-gn>.ph v fli v _ _
M-
·- ,_ ! s >::§

I Revenue
Compare the overall level of revcmue against prior bJeor and budget for the ueor and
\
ii investigate any significant fluctuations.
I! • Perform a proof in total calculation for revenue~ creating an expectation of the
average price for the main 'smart building' products multiplied by the sales volumes
I
for this year. This expectatlon should be corn pared to actual revenue and any
I significant fluctuations should be investigated.
I -
Obtain a schedule of sales for the year broken down into the main security, lighting
I. and networking product categories and compare this to the prior !dear breakdown and
for any unusual movements. discuss with mana-gement.
I
I • Calculate the final gross profit margin for Knight Electronics Co and compare this to

II • the prior- yea rand investigate any significant fluctuations.

Select a sample of sales invoices for customers and agree the sales prices back to the
price list or customer master data information to ensure the accuracy ot invoices.

lI' For a sample of lnvoices. recalculate invoice totals including discounts and s-ales· tax.
Select a sample of credit notes raised, trace through to the original invoice and ensure
the invoice has been_ correctly removed from sales.

506 Audit and Assurance @BPP

 I• For a sample of service ogreemGilts, recalcufato the split of revenue· recognised in the
year and that recognised as .deferred income·(controct liability) and confirm that this
has been recogRised in· line with-· the performance obligatio~s in the contract.
• S~lect a sample of customer orders arid agreethese to the dispatch-notes arid soles
invoices through to inclusion in the detailed sales listing and revenue general ledger
accounts to ensure completeness of revenue.
• Select a ?-ample of dispatch notes both pre and post year· end and followtbese
through to sales invoices in the-correct ·accounting period to ensure that cut-off has
been correctly applied.

(d)

f . .
f!l,_.wo;;~r~~es~·;;· ·~~----~~ ·-···~~-~----.~--~~-~:-~~~?---.-.-.-'---7-..- ... ----·-i:EJ-1
--~---_.--------------.:-~~-..~ ..

i I
I i
I
1
II
! I
i[ I
l
! i
I j
1 Procedures due to payroll fraud I

I• Discuss with managernent and those charged with governance as to whether they are f
I aware of any other payroll frauds or potential frauds. j

1 • Review board minutes for evidence of management discussion of the materiality of the j:
1
payroll fraud and to the existence of any additional instances of actual or suspected 1
fraud. - ~
• Discuss with the payroll manager the nature of the payroll fraud, how it occurred and
the financial impact of amounts incorrectly paid into the payroll clerk's bank account.
• Review the supporting documentation to confirm the total of the froudulent payments

.. mode and assess the materiality of this misstatement.

Review and test the internal controls surrounding setting up of, and pob)ments to, new
joiners to assess whether further frauds may have occurred.
• Compare the list of employees from the payroll and agree to the list or contracts of
employment in the human resources deportment.
• Review employee bonk acco.unt details for indications of more than one employee with
. the same details.
• Consider whether other information obtained by the audit team indicates risks of
I additional material misstatements with regards to payroll fraud.
I• Obtain o_written representation from n1anagement acknowledging that thebJ have
disclosed to the auditors all knowledge of actual and suspected fraud.
t.. "

@aPP Answers 507

·17 Silver Co

Course .Book references

Chapters 10 and 13•.

Top tips
In these. common questions on internal control deficiencies and recommendations try to be as
specific as you can when explaining your deficiency. If you an_swer the question ~what could
go wrong as a result of this deficiency?' that should help with generating your explanations.· _
V\fith recommendations make sure someone reading it could go away and implement it without
further questions by stating exactly what would be done, who should do it (identify an
. appropriate role), when and how often (monthly for example).

Easy marks
Part (a) was a knowledge requirement, but even if you were not entirely sure on what ISA 265
stated, you could havehad a good attempt at generating four appropriate matters the. audit
should consider in determinihg whether a deficiency in internal controls is significant.

Examining team•s comments

In part (a) it is important that candidates pay attention to any elements of the requirement
which are highlighted. In this session the word FOUR was in capitals. This was specifically done
to focus candidates' answers, so that they would know to provide four well described answers.
Additionally, there was a note under the requirement which stressed that the scenario did not
need to be referred to in answering this requirement. Notes and capitalisation of words in
requirements are there to guide candidates and to help, candidates should be careful not to
ignore them.
in (b) It is important that recommendations are as complete as possible. For the deficiency of
'no clear division of responsibilities within the team', the recommendation of 'responsibilities
should be allocated within the team' would not gain any credit, as they have not said HOW
these responsibilities should be allocated. The recommendation needs to state that 'one team
member should count and the other record the quantities• to gain the available 1 mark.

Marks

(a) Significant defiCiencies

1 mark per well--described point 4
Maximum 4
(b) Deficiencies and recommendations
Movement of goods 2
Count teams 2
Sheets include quantity 2
Division of responsibilities 2
Counted areas 2
One team 2
Spare parts excluded 2
No rnvestigation of differences 2
. WIP valuation 2
Third party sofas 2
Other 2
Maximum g issues, 2-marks each
Maximum 16
Total 20
-

508 Audit and Assurance

-(a) ! ~Word Pro~e$~~! t~J-
1.•. -. ......... , . .. -

1!'5 .r~ ro.-

1"
I ..
I Significant deficiencie-s I
1
·jiSA 265 Communicating Deficiencies in Internal Contro/t~ Those Charged With
Governance and Management details the matters the external auditor sh9uld consider in I·I
determining whether a deficiency in internal controls isslgnificant including: !
• The likelihood of the deficiencies leading to material misstatements in the financial
statements in the future.
• The susceptibility to loss or fraud of the related asset or liability.
• -The subjectivity and complexity of determining estimated amounts.
• The financial statement amounts exposed to the deficiencies.
• The volume of activity which has occurred or could occur in the account balance or
class of transactions exposed to the deficiency or deficiencies.
• The importance of the controls to the financial repQrting process.
• The cause and frequency of the exceptions detected as a result of the deficiencies in
the controls;

~__._____~he _int~-=-~~~~-~:~~-~-~~:~ien~~~-:-~.~-~~=~--~-~~-=-ie~=-~~=-:·~----~~-:-=-~-~·~·'-···=~~-~~~~------J .
(b) Deficiencies and recommendations

Control deficiency Control recommendation

Movements of goods in and out of the Any raw materials likely to be needed on 30
company•s factory and warehouse ore September 20X5 should be estimated and
being made on the day of the inventory set asid~ and included within. the work .in
count. While production cannot-stop, there progress valuation.
is a risk that the inventory count will be The company should try to minimise
incorrect if them are movements of goods planned dispatches for the day of the
during the count which are not adequately count. Goods to be dispatched to
controlled. Goods could be included in the customers shoulq be set aside so that they
count when they should not be, resulting in can be excluded frorn inventory.
double counting or omitted from the count Raw materials received from suppliers and
when they should be included. finished goods received from the factory ~
should be delivered to a different part of the
warehouse and counted separately for
inclusion as pdrt of raw materials or
finished goods at the end of the ~ount.

The c_ount is to be undertaken by 20 learns There should be a different department

from the warehouse and will be overseen by involved in the inventory count to ensure
the warehousq_supervisor. · adequate segregation of roles. For example,
While warehouse staff will be familiar with - . the teams could be co-mprised of one .
the inventory of the co.n1pan\;j, this· counter from the warehouse and one from-
represents a lack of segregation of duties os ; finance.
they are not independent and hence could In addition, the count should not be
de-liberately concea-l fraud and/or error. overseen by the warehouse supervisor.
a
Instead~ responsible official such as the
financial controller should oversee the

(f}BPP Answers 509

 The inventor_y sheets detail the quantities The iriventor!J 9ount sheets should no_t
held at the dc;~te of the count. contain details of quantities but should
If quantities are_contained on the inventorbJ instead only include product codes. This
she~ts, counters may not undertake a full should ensure that counters physica.lly
physical count of the inventory on hand, count the inventory and record the actual
instead relying on the pre-populated · quantities on hand on the inventory count
numbers. This could result in over or sheets.
understated inventory quantities.

There are 20 teatnscomprising of two The roles of the team members should be
individuals dnd there is no clear or defined defined in the count instructions and split so
division of responsibilities within the team. that one individual is responsible for
As a consequence) both members of the counting and one for recording the results.
team could be counting~ instead of one In addition, for each team, test counts
counting and one recording. There is a risk should be carried out by the count
that errors or omissions may go unnoticed. supervisor to ensure that each team is
counting effectivel~::~.

When an area has been counted, it is All warehouse bays which have been
marked off on the warehouse map in the counted should be ph~::~sicall!d marked as
office rather than marking the warehouse such so that it is not missed or
ba~s as counted. double-counted.
There is o risk that if the map is not updated All warehouse ba~s should be inspected at
properly, a warehouse bay could be the end of the count to ensure that all
omitted or double-counted resulting in areas/items have been marked to ensure
incorrect inventory quantities being the completeness of the count.
recorded.

Inventory is onl!d being counted by one Once the first count has been completed, a
counting team. second count should be undertaken by a
When the inventory count is then compared team who did not perform the first count.
to the book quantities, it will be difficult to Any differences on the first count should he
ascertain whether differences are due to notified to the count supervisor and a third
counting errors or are genuine adjustments, count undertaken if necessary.
resulting in errors in the final inventory Sample checks should be carried.out by the
valuation. count supervisor to ensure that items are
being counted properlu.
···-·············-··--········· ............... --··
There is a large quantity of spare parts This area of the warehouse should be
which are not being counted on the grounds included on the count sheets and
that the~ are unusable. warehouse map and included in the count
All items in the warehouse should be to ensure that all items are counted.
counted irrespective of whether the!::J are If the items are potentially obsolete, this
old~ damaged or obsolete as otherwise should be flagged on the inventorg count
there is a risk that inventory is understated. sheets to allow consideration of their
Furthermore, if these items are not counted subsequent valuation·by the finance team
and included on the inventory sheets, there following the count.
is o risk that items could be
misappropriated. ·

Completed inventory sheets are passed to All differences should be investigated to

the warehouse assistant for an immediate establish whether the inventory records are
update to the inventory records. incorrect, or the count has been inaccurate.
There does not appear to be any Once the investigation is completed, only
investigation into differences· between then-should the inventory records be
physical inventory and the inventory amended.

510 Audit and Assurance

 records prior to the adjustment being made.
Significant variations could be_anJndication
- ... ·
of fraud or inaccuracies in the recording of
inventory which could result ~rt under or
overstated inventory"

The warehouse supervisor is going to A specialist should continue to be. used to

undertake the valuation of work in progress value the work in progress at the year end
at the year end which has previously been . and the basis for the valuation should be
carried out by an expert. agreed with the specialist to ensure it is
While the warehouse supervisor is familiar appropriate.
with the company's products, he may not If the company no longer wishes to use a
have the necessary expertise to determine specialist this year, the warehouse
·the stage of completion of different supervisor could perform the valuation and
products, resulting in mistakes and have the specialist check the valuation.
inventory being over or understated.

The company has 30 sofas in its warehouse The sofas belonging to the third party
which belong to a third party and they are should be separated from the inventory of
to be stored alongside similar products to Silver Co and clearly marked to avoid them
Silver Co. being included in the count and the final
If these sofas are not segregated from Silver inventory valuation.
Co's own inventory, they rna!:J be counted
and included in the inventory valuation
resulting in ove.rstated inventory.

18 LatteCo

Course Book references

Chapters 14, 17 and 20.

Top tips . .

The majority of this question was oil substantive procedures. You must not state- tests of control
as you wouldn't have gained an!:J marks. You can though state analytical procedures which are
a form of substantive procedure. Whichever thjpe of substantive procedure you included you
should have used the verb, document, reason approach set out in your Course Book to he.lp
you_get a full mark instead of haifa mark (or no marks) for yourprocedures.

Easy marks
You should have found part (d)(ii) on the contents of the KAM relatively straightforward.

Examining team's comments

When describing substantive procedures, one of the key things·to considHr is the revel of detail
provided. Manw candidates fail to score well in this type of requirement because-their
procedures are vogue or too brief. Tests must be sutficie_ntly detailed, noting clearltJ which
source document should be used and for what purpose. For exarnple,"ln this session sorne
candidates included, 'review after-dotecash receipts' for (a) and would have oni!:J gained Y2
-mark. To gain the 1 mark available~ this test would need to be expanded to
'follow these
reCE;:ipts through to the pre year end receivables balance'.- 'Reviewing customer .
correspondence. for disputed balances'-would only have gained Y2 mark, as this needs to be

"' 'discussed with management with regards to whether an allowance may be required' to gain 1-
mark. -

@BPP Answers 511

 Marks

(a) Substa~tive procedures fo~ existence and valuatio~ of trade recei~ables

1 mark ·pe~ ~11-described procedure 6
-Maximum· 6
(b) Substantive procedures re provision for legal claim
1 mark per well-described procedure 4
Maximum
(c) Substantive procedures re bank loan
1 mark per well-described procedure 5
Maximum 5
(d) Auditor's report
1 mark per well-explained point 5
Maximum 5
Total 20

(a)

i
Calculate the average receivables collection period for 20X5, compare it to the -i

receivables collection period for 20X4 and investigate any significant differences._
Review the aged receivables to identify any slow moving or old balances. Discuss the
status of these balances with the credit controller and/or finance director to assess the
likelihood of payment.
I
I • Review board minutes to identify whether there are any significant concerns in relation
to payments by customers.
• Review the after-date cash receipts and follow through to pre l:Jear-end receivable
balances.
i • Discuss with the finance director the basis for the decrease in allowance for··
j receivables given the $1.1 million increase in the receivables balance and agree anl:J
1 change in assumptions to supporting documentation.
I• Obtain a breakdown of the allowance for receivables calculation. recalculate and
j agree the amount of the allowance is accurate.
t
1• Inspect a sample of post year-end sales returns/Credit notes to assess whether an
1 additional allowance against receivables is required.
I• Select a sample of goods despatched QOtes (GDN) before and just after the year-end
I and follow through to receivables to ensure they are r~corded in the correct
~- accounting period.
I• For any slow moving/aged balances~ review customer correspondence to assess
l_ whether there are any invoices in dispute or unlikely to be paid and discuss with
f management.
f

512 Audit and Assurance @aPP

 (b)

g.v .• r··~ ·= .
Substantive proc~dures re provision for legar claim
• Obtain and review a copy of the claim made and any correspondence with the former
emplo~Jee to understand the basis for and the amount claimed.

• Review correspondence with Lotte Co's lawyers, or with the client's permission contact
the lawyers, to establish the likelihood of success of the claim and the expected
amount payable to ascertain whether a provision or disclosure as a contingent liability
is required.
• Inspect relevant board minutes/discuss with the finance director to ascertain whether
payment is probable and the basis for the provision.
• Review the post year,.end bank ledger account and bank statements to identify
whether any poyr.nent has been made in respect of the claim and compare the actual
payment to provision created to assess whether the amount provided is reasonable.
• Obtain a written representation from management to confirm the completeness of the
provision.
• Review the financial statements for disclosure of the provision for legal claims to
ensure compliance with lAS 37 Provisions_, Contingent Liabilities and Contingent
Assets.·

•• . (c)

Cl ~ ro lO l~ c7 Q B I .Q s X.z x2 L
,_
P<li'"i'lprnph -...}' fmv - - - - ·- ·- 8 >:§

Substantive procedures re bank loan

• Obtain a copy of the loan documentation to confirm the amount borrowed, the
repa~Jment terms and the interest rate opplrcable.

• Request a bank confirmation letter from the bank to confirm the outstandin~ balance 1

and aniJ security provided and agree the details to the loan balance within the tridl
balance at the year end/financial-statements.-
1
• ln respect ofthe receipt of tho loan and payments mode to the bonk, agree the :Ii
amounts to the original loan documentation and to the bank ledge.r account and bank
statements. ·
• Review correspondence with the bank to identify whether any late payment penalties
have been levied in respect of the late payment and agree these are inCluded as a
finance cost ln the period.
I
i
\ . Confirm that repayments have bf~Em
correctly allocated into their. capital and
elements and qccouhted for accordingly.
inter~st"- .I
I
Recalculate the ari)ountincluded as a finance cost in the year by reference to the
I• interest ratetmd amounts outstanding during the year: .
I

@BPP Answers 513

 I• Review the loan agreement for.details ofcovenants and recalculate to identify if any
breaches have occurred. Discus~ ~he impact of any breaches with the ·finance dire.ctor.

j. Review the disclosure of non-current.liabilities in the draft"financial statements,

including ony security provided and confirm that it is in accordqnce with accounting
standards and local legislation. Additionally, confirm that the split of current and
II non-current loans in the financial statements is correct.
'-~...--~-···"_'_" ...... __........---·-···-~--............ ~------·....;.. .....--1

(d) Auditor's report

(i) Factors to consider
As Lotte Co is listed, a key audit matters (KAM). ·section will be required in the auditor's
report in accordance with ISA 701 Communicating Key Audit Matters in the Independent
Auditor's Report. The audit engagement partner would have cohsidered whether the_
matter was communicated to those charged with governance as KAtv1 ore selected from
matters communicated with those charged with governance; The audit engagement
partner would hove also considered the level of risk in relation to the valuation of the
provision and, as determining the size of the liability is an accounting estimate, the level
of judgement involved. The audit engagement partner will have also considered whether,
in their professional judgement. the matters regarding the valuation of the provision were
of most significance in the audit of Lotte Co's financial statements for the year ended 31
March 20X5.
(ii) Contents of KAM
The KAM section of the auditor's report·should include a reference to the audit risk in
relation to the valuation of the provision and the level of judgement required in making
this assessment. It should detail why this issue was considered to be an area of
significance in the audit and therefore determined to be a KAM. It must also explain how
the matter was addressed in the audit and the auditor should provide a brief overview of
the audit procedures adopted as well as detailing that a review was undertaken of any
related disclosures.

51lt Audit and Assurance @aPP

 Additional CBE ·Mock
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516 Audit and Assurance @aPP
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@BPP Appenoix 517

518 Audit and Assurance
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