Monitoring Test MT2A
Audit and Assurance
Time allowed 1.5 hours
All THREE questions are compulsory and MUST be attempted.
Do NOT open this paper until instructed by the supervisor.
Accountancy Tuition Centre Ltd
Accountancy Tuition Centre (International Holdings) Ltd 2008 2
1 There are similarities and differences between the responsibilities of internal and external auditors. Both internal and external auditors have responsibilities relating to the prevention, detection and reporting of fraud, for example, but their responsibilities are not the same. Both internal and external audit are part of an organisation’s overall corporate governance arrangements. Sometimes, the responsibilities of internal auditors are out-sourced to external organisations.
(a) Explain the difference between the responsibilities of internal auditors and
external auditors for the prevention, detection and reporting of fraud and
error. (7 marks)
(b) Explain the role of internal audit in the context of:
(i) corporate governance; (3 marks)
(ii) risk management; (3 marks)
(iii) organisational control. (2 marks)
Your answer should include one example of how an internal audit department in a manufacturing company might fulfil its role under each of the headings above.
(c) Outline the issues that should be considered when an organisation decides to
out-source the internal audit function. (5 marks)
2 You are the auditor of Microprods for the year ended 31 March 2008. The company’s main activity is assembling laptops using bought-in components. Detailed cost records are not kept but the production director has estimated that each laptop costs $670 to assemble as follows:
$ considerable amount on a New Year advertising campaign directed at the notebook market. Inventory of notebook computers has been included in the accounts at a translated invoice cost of $860 each.
All equipment is sold under a twelve-month warranty and the directors wish to provide $50,000 against warranty claims. This amount is considered material to the accounts.
Accountancy Tuition Centre (International Holdings) Ltd 2008 3 Required:
Describe the evidence you would seek to:
(a) check the cost of assembled laptops; (4 marks)
(b) ascertain net realisable value of computer inventory; (4 marks)
(c) confirm the adequacy of the warranty provision. (7 marks)
3 You are the senior in charge of the audit of Phoenix, a private limited liability company, which manufactures super alloys from imported zinc and aluminium. The company operates three similar foundries at different sites. The draft accounts for the year ended 31 March 2008 show profit before taxation of $1·7m (2007 – $1·5m).
Your assistants have bought to your attention the following points:
(1) A trade investment in 60,000 $1 ordinary shares of Pegasus, one of the company’s major shipping contractors, is included in the statement of financial position at cost of $80,000.
In May 2008, the published financial statements of Pegasus as at 30 September 2007 show only a small surplus of net assets. A recent press report now suggests that Pegasus is insolvent and has ceased to trade.
Although dividends declared by Pegasus in respect of earlier years have not yet been paid, Phoenix has included $15,000 of dividends receivable in its draft accounts as
at 31 March. (6 marks)
(2) Current liabilities include a new $500,000 provision for future maintenance. This represents the estimated cost of overhauling the blast furnaces and other foundry equipment. The furnaces were purchased five years ago and require their fire-brick linings to be replaced every five years.
The overhaul is planned for August 2008 when all foundry workers take two weeks
annual leave. (6 marks)
(a) For each of the above two points:
(i) comment on the matters that you would consider; and
(ii) state the audit evidence that you would require your assistants to
obtain. (12 marks)
(b) Discuss the impact this may have on your audit report if the client were to
refuse to consider the recommendations you make. (3 marks)