(20 marks) 4 EduChar is a charity whose constitution requires that it raises funds for educational projects. These projects seek to educate children and support teachers in certain countries. Charities in the country from which EduChair operates have recently become subject to new audit and accounting regulations. Charity income consists of cash collections at fund raising events, telephone appeals, and bequests (money left to the charity by deceased persons). The charity is small and the trustees do not consider that the charity can afford to employ a qualified accountant. The charity employs a part-time bookkeeper and relies on volunteers for fund raising. Your firm has been appointed as accountants and auditors to this charity because of the new regulations. Accounts have been prepared (but not audited) in the past by a volunteer who is a recently retired Chartered Certified Accountant.
Explain the courses of action open to you in these circumstances. (10 marks) (b) You are the external auditor of the company in financial difficulties described in (a) above. You have noted that the calculations of the bad debt and depreciation provisions have been altered in the current year and that as a result, the bank’s requirements have been met. You also note that certain accounting policy changes have been made in relation to accounting for leases and that as a result, the profit targets expected by certain investment analysts have now been met. If the changes had not been made, the targets would not have been met. You have asked to speak to the internal auditor but you have been told that he is on long-term sick leave. The chief financial accountant is away on holiday and will not be back until shortly before the audit is due to be completed.
The duties of internal auditors are generally determined by the organisation that has set up the internal audit department and employs the internal auditors. Internal auditors normally have a general responsibility to perform their work and their reviews of systems with the possibility of fraud and error in mind.
30 The auditor’s report on financial statements This fundamentally important topic is deemed knowledge at Paper P7. In auditing terms, this is perhaps the most “technical” topic in the syllabus. If you do not understand any of the justifications to the audit opinions in the question bank answers, make a note to discuss it with your tutor on the revision course. After studying this session you should be able to: ¾ describe and analyse the format and content
Marking Scheme For most questions the marking scheme suggests you award 1 mark a point. However, the mark you award for each point will depend on its relevance and the depth of the student’s discussion. So, a brief point may be worth 1 / 2 mark or less while a point with a longer and deeper discussion could be worth 2
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During the year, Microprods started importing notebook computers from a Far Eastern manufacturer. Turnover has been slow but the directors are optimistic and spent a 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.
An acceptable procedure would be to apply alternative procedures to all balances, eg establish existence, makeup of balance, after date cash received PROVIDED a strong systems approach (manual or CAATs) had been applied and made clear in the answer. NOTE: Award no marks for any suggestion of using CAATs to select balances etc. As there are only ten balances, this would clearly be inappropriate. CAATs would be appropriate to establish closing balances from initiating records which could then be tested for after date cash. )
(a) Describe basic sources of information you would find useful when familiarising yourself with the nature of business in which Edco is involved. (5 marks) (b) Describe the possible assertions risk areas within Edco (eg consider inherent risk and control risk as defined within ISA 200). (9 marks) (c) List the internal control objectives of Edco in respect of:
The existence of an internal audit department will improve controls in the company. Firstly, this is because of the “policing” effect, in that the existence of an internal audit department will make employees aware there is an increased risk the internal auditors will detect fraud or errors in their work. Thus employees will be more careful to minimise and correct any errors and they will be deterred from perpetrating a fraud. In addition, the internal auditors should improve the effectiveness and extent of controls as a result of the tests they carry out and the recommendations they make. Thus, the existence of an internal audit department reduces control risk. So, with an internal audit department, the external auditor should be able to carry out fewer tests of controls and/or substantive procedures in order to achieve the planned level of audit risk.
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You are the external auditor of Tracey Transporters, a public limited company (TT). The company’s year end is 31 March. You have been the auditor since the company was formed 24 years ago to take advantage of the increase in goods being transported by road. Many companies needed to transport their products but did not always have sufficient vehicles to move them. TT therefore purchased ten vehicles and hired these to haulage companies for amounts of time ranging from three days to six months. The business has grown in size and profitability and now has over 550 vehicles on hire to many different companies. At any one time, between five and 20 vehicles are located at the company premises where they are being repaired; the rest could be anywhere on the extensive road network of the country it operates in. Full details of all vehicles are maintained in a non-current asset register. Bookings for hire of vehicles are received either over the telephone or via e-mail in TT’s offices. A booking clerk checks the customer’s credit status on the receivables ledger and then the availability of vehicles using the Vehicle Management System (VMS) software on TT’s computer network. E-mails are filed electronically by customer name in the e-mail programme used by TT. If the customer’s credit rating is acceptable and a vehicle is available, the booking is entered into the VMS and confirmed to the customer using the telephone or e-mail. Booking information is then transferred within the network from the VMS to the receivables ledger programme, where a sales invoice is raised. Standard rental amounts are allocated to each booking depending on the amount of time the vehicle is being hired for. Hard copy invoices are sent in the post for telephone orders or via e-mail for e-mail orders.
The emphasis of questions in this area will be on explaining reports rather than having to draft them. Extracts will normally relate either to an explanation of how a standard report can be modified, or (in a limited number of cases) supplying appropriate wording for the modification only. To be clear, candidates will not be expected to provide the wording for an entire audit report (as per ISAs). Knowledge of the content of ISAs in the 700 series will be expected. Questions will potentially provide extracts of audit reports, and require candidates to identify where ISA guidance has not been followed.
The cash flows generated from operations of $685 million are relatively healthy and more than adequate to pay the interest costs and taxation, but not as large as the equivalent profit figure. For most companies the operating cash flows tend to be higher than the profit before interest and tax due to the effects of depreciation/amortisation charges (which are not cash flows). In the case of Nedberg the depreciation/amortisation effect has been more than offset by a much higher investment in working capital of $645 million. Inventory has increased by over 50% and accounts receivable by 45%. This may be an indication of expanding activity, but it could also be an indication of poor inventory management policy and poor credit control, or even the presence of some obsolete inventory or unprovided bad accounts receivables.
The motor vehicles are assembled using a mix of robot and manual production lines. The ‘human’ workers normally work a standard eight hour day, although this is supplemented by overtime on a regular basis as Blake has a full order book. There is one shift per day; mass production and around the clock working are not possible due to the specialist nature of the motor vehicles being assembled.
Section A of each of the Options papers contains 50-70 compulsory marks from two questions, each attracting between 25 and 40 marks. Section B will offer a choice of two from three questions totalling 30-50 marks, with each question attracting between 15 and 25 marks.
Calculate the amounts to be included in the financial statements of Carlisle Inc for the year ended 30 September 2008, preparing all relevant extracts of the financial statements but excluding accounting policy notes. The directors do not recognise profits until the contracts are 5% complete and it is the accounting policy to calculate percentage completion on a cost basis.
¾ They must thoroughly understand the entity, its environment and in particular the business risks faced (in much greater depth than the external auditor as they will be dealing with the entity on a day-to-day basis). As a significant part of their work may well be testing that business and risk systems operate, a thorough understanding of systems and controls in operation and their effectiveness is essential (that is all business systems and controls, not just those that will have an impact on the financial
“The system by which business corporations are directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation … and spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the company objectives are set, and the means of attaining those objectives and monitoring performance.”