Audit and Internal
Review
(International Stream)
PART 2
TUESDAY 13 JUNE 2006
QUESTION PAPER
Time allowed
3 hours
This paper is divided into two sections
Section A
ALL THREE questions are compulsory and MUST
be answered
Section B
TWO questions ONLY to be answered
Do not open this paper until instructed by the supervisor
This question paper must not be removed from the examination
hall
Section A – ALL THREE questions are compulsory and MUST be attempted
1 (a) State the control objectives for the ordering, despatch and invoicing of goods. (5 marks)
(b) Atlantis Standard Goods (ASG) Co has a year end of 30 June 2006. ASG is a retailer of kitchen appliances such as washing machines, fridges and microwaves. All sales are made via the company’s Internet site with despatch and delivery of goods to the customer’s house made using ASG’s vehicles. Appliances are purchased from many different manufacturers.
The process of making a sale is as follows:
(1) Potential customers visit ASG’s website and select the kitchen appliance that they require. The website ordering system accesses the inventory specification file to obtain details of products ASG sells.
(2) When the customer chooses an appliance, order information including price, item and quantity required are stored in the orders pending file.
(3) Online authorisation of credit card details is obtained from the customer’s credit card company automatically by ASG’s computer systems.
(4) Following authorisation, the sales amount is transferred to the computerised sales day book. At the end of each day the total from this ledger is transferred to the general ledger.
(5) Reimbursement of the sales amount is obtained from each credit card company monthly, less the appropriate commission charged by the credit card company.
(6) Following authorisation of the credit card, order details are transferred to a goods awaiting despatch file and allocated a unique order reference code. Order details are automatically transferred to the despatch department’s computer system.
(7) In the despatch department, goods are obtained from the physical inventory, placed on ASG vehicles and the computerised inventory system updated. Order information is downloaded on a hand held computer with a writable screen.
(8) On delivery, the customer signs for the goods on the hand held computer. On return to ASG’s warehouse, images of the customer signature are uploaded to the orders file which is then flagged as ‘order complete’.
This year’s audit planning documentation states that a substantive approach will be taken on the audit.
Required:
Tabulate the audit tests you should carry out on the sales and despatch system, explaining the reason for
each test. (15 marks)
2 Wear Wraith (WW) Co’s main activity is the extraction and supply of building materials including sand, gravel, cement and similar aggregates. The company’s year end is 31 May and your firm has audited WW for a number of years. The main asset on the balance sheet relates to non current assets. A junior member of staff has attempted to prepare the non-current asset note for the financial statements. The note has not been reviewed by the senior accountant and so may contain errors.
Land and Plant and Motor Railway Total buildings machinery vehicles trucks
COST $ $ $ $ $
1 June 2005 100,000 875,000 1,500,000 – 2,475,000
Additions 10,000 125,000 525,000 995,000 1,655,000
Disposals – (100,000) (325,000) – (425,000)
–––––––– –––––––– ––––––––– –––––––– –––––––––
31 May 2006 110,000 900,000 1,700,000 995,000 3,705,000
–––––––– –––––––– ––––––––– –––––––– –––––––––
Depreciation
1 June 2005 60,000 550,000 750,000 – 1,360,000
Charge 2,200 180,000 425,000 199,000 806,200
Disposals – (120,000) (325,000) – (445,000)
–––––––– –––––––– ––––––––– –––––––– –––––––––
31 May 2006 62,200 610,000 850,000 199,000 1,721,200
–––––––– –––––––– ––––––––– –––––––– –––––––––
Net Book Value
31 May 2006 47,800 290,000 850,000 796,000 1,983,800
–––––––– –––––––– ––––––––– –––––––– –––––––––
Net Book Value
31 May 2005 40,000 325,000 750,000 – 1,115,000
–––––––– –––––––– ––––––––– –––––––– –––––––––
– Land and buildings relate to company offices and land for those offices.
– Plant and machinery includes extraction equipment such as diggers and dumper trucks used to extract sand and gravel etc.
– Motor vehicles include large trucks to transport the sand, gravel etc.
– Railway trucks relate to containers used to transport sand and gravel over long distances on the railway network.
Depreciation rates stated in the financial statements are all based on cost and calculated using the straight line basis. The rates are:
Land and buildings 2%
Plant and machinery 20%
Motor vehicles 33%
Railway trucks 20%
Disposals in the motor vehicles category relates to vehicles which were five years old.
Required:
(a) List the audit work you should perform on railway trucks. (10 marks)
(b) You have just completed your analytical procedures of the non-current assets note.
Required:
(i) Excluding railway trucks, identify and explain any issues with the non-current asset note to raise with management.
(ii) Explain how each issue could be resolved. (10 marks)
Note: you do not need to re-cast the schedule.
(20 marks)
3 You are the audit manager of Tela & Co, a medium sized firm of accountants. Your firm has just been asked for assistance from Jumper & Co, a firm of accountants in an adjacent country. This country has just implemented the internationally recognised codes on corporate governance and Jumper & Co has a number of clients where the codes are not being followed. One example of this, from SGCC, a listed company, is shown below. As your country already has appropriate corporate governance codes in place, Jumper & Co have asked for your advice regarding the changes necessary in SGCC to achieve appropriate compliance with corporate governance codes.
Extract from financial statements regarding corporate governance
Mr Sheppard is the Chief Executive Officer and board chairman of SGCC. He appoints and maintains a board of five executive and two non-executive directors. While the board sets performance targets for the senior managers in the company, no formal targets or review of board policies is carried out. Board salaries are therefore set and paid by Mr Sheppard based on his assessment of all the board members, including himself, and not their actual performance.
Internal controls in the company are monitored by the senior accountant, although detailed review is assumed to be carried out by the external auditors; SGCC does not have an internal audit department.
Annual financial statements are produced, providing detailed information on past performance.
Required:
Write a memo to Jumper & Co which:
(a) Explains why SGCC does not meet international codes of corporate governance
(b) Explains why not meeting the international codes may cause a problem for SGCC, and
(c) Recommends any changes necessary to implement those codes in the company.
Section B – TWO questions ONLY to be attempted
4 (a) Explain the situations where an auditor may disclose confidential information about a client. (8 marks)
(b) You are an audit manager in McKay & Co, a firm of Chartered Certified Accountants. You are preparing the engagement letter for the audit of Ancients, a public limited liability company, for the year ending 30 June 2006. Ancients has grown rapidly over the past few years, and is now one of your firm’s most important clients.
Ancients has been an audit client for eight years and McKay & Co has provided audit, taxation and management consultancy advice during this time. The client has been satisfied with the services provided, although the taxation fee for the period to 31 December 2005 remains unpaid.
Audit personnel available for this year’s audit are most of the staff from last year, including Mr Grace, an audit partner and Mr Jones, an audit senior. Mr Grace has been the audit partner since Ancients became an audit client. You are aware that Allyson Grace, the daughter of Mr Grace, has recently been appointed the financial director at Ancients.
To celebrate her new appointment, Allyson has suggested taking all of the audit staff out to an expensive restaurant prior to the start of the audit work for this year.
Required:
Identify and explain the risks to independence arising in carrying out your audit of Ancients for the year ending 30 June 2006, and suggest ways of mitigating each of the risks you identify. (12 marks)
(20 marks)
5 ISA 610 Considering the Work of Internal Auditing states that ‘when the external auditor intends to use specific work of internal auditing, the external auditor should evaluate and perform audit procedures on that work to confirm its adequacy for the external auditor’s purposes.’
Required:
(a) In relation to ISA 610, explain the factors the external auditor will consider when evaluating the work of the
internal auditor. (5 marks)
(b) ZPM is a listed limited liability company with a year end of 30 June. ZPM’s main activity is selling home improvement or ‘Do-It-Yourself’ (DIY) products to the public. Products sold range from nails, paint and tools to doors and showers; some stores also sell garden tools and furniture. Products are purchased from approximately 200 different suppliers. ZPM has 103 stores in eight different countries.
ZPM has a well-staffed internal audit department, who report on a regular basis to the audit committee. Areas where the internal and external auditors may carry out work include:
1. Attending the year end inventory count in 30 stores annually. All stores are visited on a rotational basis.
2. Checking the internal controls over the procurement systems (e.g. ensuring a liability is only recorded when the inventory has been received).
3. Reviewing the operations of the marketing department.
Required:
For each of the above three areas, discuss
(i) the objectives of the internal auditor; (5 marks)
(ii) the objectives of the external auditor; and (5 marks)
(iii) whether the external auditor will rely on the internal auditor, and if reliance is required, the extent of
that reliance. (5 marks)
(20 marks)
6 International Standards on Auditing (ISAs) are produced by the International Audit and Assurance Standards Board (IAASB), which is a technical committee of the International Federation of Accountants (IFAC). In recent years, there has been a trend for more countries to implement the ISAs rather than produce their own auditing standards.
A school friend who you have not seen for a number of years is considering joining ACCA as a trainee accountant. However, she is concerned about the extent of regulations which auditors have to follow and does not understand why ISAs have to be used in your country.
Required:
Write a letter to your friend explaining the regulatory framework which applies to auditors.
Your letter should cover the following points:
(a) The due process of the IAASB involved in producing an ISA. (4 marks)
(b) The overall authority of ISAs and how they are applied in individual countries. (8 marks)
(c) The extent to which an auditor must follow ISAs. (4 marks)
(d) The extent to which ISAs apply to small entities. (4 marks)
(20 marks)
