ACCA INTERIM ASSESSMENT
Audit and
Assurance
JUNE 2009
QUESTION PAPER
Do not open this paper until instructed by the supervisor
This question paper must not be removed from the examination
hall
Time allowed Reading time:
15 minutes
Writing time:
3 hours
All FIVE questions are compulsory and MUST be attempted
© Kaplan Financial Limited, 2008
All FIVE questions are compulsory and MUST be attempted
QUESTION 1
Accounts receivable confirmations are a useful method of obtaining audit evidence relating to accounts receivables.
Required:
(a) In relation to accounts receivables confirmations:
(i) explain the difference between a positive and a negative confirmation
(ii) explain the two different types of positive confirmation and the advantages and disadvantages of each
(iii) give some examples of reconciling items highlighted by accounts receivables confirmations.
(7 marks)
(b) Describe the principal risks associated with financial statement assertions relating to
accounts receivables. (3 marks)
(c) Goodfoot is a small company which manufactures high quality shoes and sells them to small retailers. This is your first year as auditor. Goodfoot has a receivables ledger with approximately 750 accounts. A number of the accounts are old, some have nil or credit balances and some should probably be written off. The company’s client base is mixed. Bad accounts have generally represented about 2% of the total accounts receivable figure and a general provision of 1.5% has been made in the past in addition to any specific provisions. Most of the bad receivables relate to smaller customers but there are some very slow-moving larger accounts in the current year. The total value of accounts receivable is $750,000, 60% of which comprises some 30 large accounts and 40% of which comprises a large number of small accounts.
You have tested the system of internal controls over receivables and it appears to be working adequately. In your experience accounts receivable confirmations in this sector generally have a response rate of just over 50%.
Required:
(i) Describe the audit work you will perform on accounts receivable and bad
debts at Goodfoot. (12 marks)
(ii) Develop a lead schedule for the receivables section of your audit working
papers. (8 marks)
Note: You are not required to perform numerical calculations in this question.
QUESTION 2
'The auditor should obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the audit opinion.'
ISA 500 para 2
Required:
Discuss what is meant by sufficient appropriate audit evidence.
(10 marks)
QUESTION 3
Collins Cosmetics is a long-established family company that manufactures perfumes. These are sold to customers who re-package and market them under their own brand names. The company has five manufacturing units spread across its home country.
Fred Goodwin, who had been managing director for 21 years, died just over a year ago. Mike Barlow has been promoted from sales director to take over as managing director, and a new sales director has been brought in from outside the company.
The finance director, Ben Vashilli, has recently moved from a full-time to a part-time role, as he wishes to spend more time with his family. He has announced his intention to leave within the next 12 months, and the company is seeking a full-time replacement.
Profits have been falling over the last three years. The company wishes to gain a listing on the Stock Exchange, and all efforts are being focused on reversing the alarming profit trend. A bonus scheme has recently been introduced, where certain managers and directors are paid a lump sum if production exceeds a certain level.
You are the auditor of Collins Cosmetics, and are about to commence the planning for the forthcoming audit.
Required:
(a) Explain what is meant by the following terms:
(i) Audit risk (ii) Inherent risk (iii) Control risk
(iv) Detection risk (8 marks)
(b) List and explain the factors specific to Collins Cosmetics that you would consider
when assessing audit risk. (10 marks)
(c) Explain how an auditor's approach might be affected if he concludes that there is high
inherent risk. (2 marks)
QUESTION 4
(a) You work for a firm of auditors which has seven offices throughout England and Wales. The firm’s largest client, in terms of fee income, is Mart, a company which has grown steadily through a mixture of organic growth and acquisition of companies in the same industry sector.
Your firm has acted for this client since its incorporation 20 years ago and, in addition to the statutory audit, provides a range of non-audit services including tax planning (for the company and its individual directors) and consultancy work in respect of Mart’s acquisition policy.
Earlier this year, the finance director of Mart retired and was succeeded by a former member of your firm’s staff who had managed the audit of Mart for the preceding four years.
Required:
Discuss the ethical and professional issues raised by the situation described above, and identify the measures that should be implemented by your firm in order to mitigate any threats to objectivity which might arise. (10 marks)
(b) You work for a medium-sized firm of Chartered Certified Accountants with seven offices and 150 employees. You firm has been asked to tender for the provision of statutory audit and other services to Billington Travel, a private company providing discounted package holiday services in the Mediterranean.
The company is growing fast and would represent a substantial amount of fee income for your firm. The finance director has explained to you that the company would like the successful firm to provide a number of different services. These include the statutory audit and assistance with the preparation of the financial statements. The company is also struggling with a new computer system and the finance director considers that a systems review by your firm may be helpful. Your firm does not have much experience in the travel sector.
Required:
With reference to the ACCA’s Code of Ethics and Conduct, describe the ethical matters that should be considered in deciding on whether your firm should tender for:
(i) the statutory audit of Billington Travel (5 marks)
(ii) the provision of other services to Billington Travel. (5 marks)
QUESTION 5
The directors of Lopit, a newly-formed company, have written to you with a view to securing your services as auditor. Within their letter, you note the following comments:
'Your duties and rights as auditor will be determined by the board of our company. In the main, these duties are in line with the usual legal requirements, but in the event of conflict or exclusion we will indemnify you against any legal action brought as a consequence of the position adopted. The board also retains the right to dismiss you at any time without necessarily disclosing the reasons for their action.'.
Required:
(a) Describe your understanding of your duties as auditor of Lopit. (5 marks)
(b) What is your relationship as the auditor to the directors of Lopit? (2 marks)
(c) Outline your usual legal rights as auditor of a limited company. (6 marks)
(d) Would you agree with the directors that they have the authority to dismiss you?
(2 marks)
(e) What steps would you take prior to accepting the appointment as auditor to the
company? (5 marks)
