ACCA FINAL 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
(a) You are responsible for the audit of the tangible non-current assets of Bevs, a company engaged in the manufacture and supply of soft drinks and other beverages to the retail, catering and leisure industries. The accountant has provided you with the following schedule summarising the movements in tangible non-current assets during the year ended 31 October 2008.
Freehold
From your discussions with the finance director, you ascertain that a capital expenditure budget is prepared annually. Departmental managers can authorise capital expenditure up to $5,000, as long as it is within their budget. Board approval is required for amounts above this threshold but the managing director, who is also the major shareholder in the company, does not always adhere to this policy. He often commits the company to acquiring assets without considering how they are to be financed, leaving the finance director to arrange the borrowings. Capital expenditure proposal forms are required to be completed but this is not always done, particularly when items are required in an emergency, and there is no formal policy in respect of obtaining quotes for major items of expenditure.
There is a tangible non-current asset register which is reconciled to the nominal ledger on a monthly basis. No other checking procedures involving the non-current asset register are undertaken.
Required:
Identify weaknesses in the system described above and, for each weakness, explain the consequences that could result from it. (14 marks)
(b) You are the senior in charge of the audit of Adco, an advertising agency. The following significant points have been identified during the audit:
(i) The payables ledger clerk amends the payables’ master file with details of new suppliers, on the oral authority of the financial controller. A printout of amendments is not obtained.
(ii) The payables ledger clerk reconciles payables ledger balances on the face of supplier statements on a monthly basis, but the statements are not retained once the accounts have been reconciled.
(iii) In 25% of the transactions examined, expense claims submitted by employees were not supported by receipts, even though receipts are required by company policy.
Required:
Set out, in a manner suitable for inclusion in a report to management, the possible consequences of the above weaknesses and the recommendations to remedy the weaknesses. Your recommendations should clearly describe how the control
procedures should operate. (16 marks)
(Total: 30 marks)
QUESTION 2
Fraud and error present risks to an entity. Both internal and external auditors are required to deal with risks to the entity. However, the responsibilities of internal and external auditors in relation to the risk of fraud and error differ.
Required:
(a) Explain how the internal audit function helps an entity deal with the risk of fraud and
error. (5 marks)
(b) Explain the responsibilities of external auditors in respect of the risk of fraud and error
in an audit of financial statements. (5 marks)
QUESTION 3
Richard Pine is a senior audit manager for Ratcliffe, Barnes and Soames, a firm with several offices around two large towns in different parts of the country. These split locations have arisen from the merger two years previously of Barnes & Soames, a firm specialising in the audit of property and service companies, with Ratcliffe, whose fee income was based on the audit of farms and holiday resorts. The merger was seen as an opportunity for both firms to break away from their restricted markets.
Richard moved from the property and service division into the farms and resorts division, to take up a new portfolio of clients, including Golden Pond Fisheries. This is a family business with John Carnes running the 80-acre farm, and his wife, Claire, taking responsibility for the holiday cottages, fishing lakes and completion of the books and records.
The farming operation has been significantly curtailed in recent years and now comprises a small herd of cows and, as a recent addition, two geese sheds. These birds are fed on a chemical-free diet to offer a high quality alternative to turkeys over the Christmas period. John supplements the farm revenue by renting out pastures on a rotational basis to neighbouring farms for sheep grazing.
John is also considering the introduction of rare breeds (pigs and goats) to provide an additional attraction to holidaymakers with young families.
Claire Carnes trained as a bookkeeper before her marriage 30 years ago, and has informed Richard that the accounts are now maintained to a ‘high standard’ on her son’s personal computer. This has apparently saved a lot of time, and much of the previous paperwork is now not considered necessary.
Five years previously the family borrowed a substantial sum to convert three derelict barns into luxury holiday cottages, and these have proved to be a huge success, being fully booked from late May to November. During this period two extra helpers are employed on a part-time basis to assist with cleaning and maintenance. Both are paid in cash at the end of each week.
Most of the visitors are fishermen and their families, as the farm boasts excellent fishing. John Carnes is keen to maintain this quality and is always on the lookout for big fish to stock. He has recently become interested in the possibility of introducing from China some 30kg blue carp, which could be ‘sneaked in’ with a batch of koi carp being imported for a local garden centre.
A good relationship has always existed with the auditors and the Carnes are confident that this will be another quick audit.
Required:
(a) State what you understand by audit risk and explain why it is an important factor for an auditor to consider when conducting an audit. (6 marks)
(b) Identify, from the information above, the potential audit risks, and for each risk explain
why it is a risk. (14 marks)
QUESTION 4
(a) Outline the auditor's responsibility in relation to going concern. (5 marks)
(b) You are a partner of Heaton & Partners in charge of the audit of Caffyn, a public listed company; the audit manager has completed the audit for the financial year October 20X8 to September 20X9 and has given you the draft financial statements and audit file containing all the working papers. You are conducting your final review prior to signing the audit report and have identified that Caffyn currently has borrowings of $10 million which are due for repayment on 1 November 20X9 but it is currently trying to extend the due date; in addition it also has an overdraft of $250,000 which is $50,000 over the authorised limit; this was not identified as a cause for concern by the audit manager.
Required:
(i) Identify ten issues that you think the audit manager should have considered when assessing whether or not Caffyn is a going concern. (10 marks)
(ii) Detail typical types of evidence that you would have expected the audit manager to have considered when performing her going concern review.
(5 marks)
QUESTION 5
(a) What is the difference between positive and negative assurance? (5 marks)
(b) Described below are situations which have arisen in three audits. The year-end in each case is 31 March 2008.
Mercury
On 21 March 2008, the tax authorities commenced a major inquiry into all aspects of the tax affairs of the company. Until the inquiry is completed it is not possible to estimate, with any reasonable degree of certainty, any ultimate liability which may fall upon the company. Consequently, no liability in respect of this matter has been included in the financial statements. The directors have included a note to the accounts explaining the situation.
Pluto
Included in the balance sheet at 31 March 2008 are non-current assets at cost of $2.5 million which have been constructed by the company during the year. The costs include own labour capitalised of $180,000. The labour costs are based on the directors’ estimates of time spent by employees on the construction work, which are unsupported by time records. There are no satisfactory audit procedures to confirm that labour costs have been appropriately capitalised.
The pre-tax profit of Pluto for the year ended 31 March 2008 is $650,000.
Neptune
In January 2008, the company received a government cash grant of $1.6 million in respect of assistance with the acquisition of tangible non-current assets which have estimated useful economic lives of between five and ten years. The $1.6 million has been credited directly to the income statement for the year ended 31 March 2008. The directors insist on continuing with this treatment despite having been informed that this is not in accordance with the relevant accounting standard, which requires such grants to be credited to income statement over the useful economic lives of the assets to which the grant relates.
The pre-tax profit of Neptune for the year ended 31 March 2008 is $950,000.
Required:
In respect of each of the situations outlined above, reach a conclusion on whether or not you would qualify your audit report. Give reasons for your conclusion, and
describe the effect on your audit report. (15 marks)
