（a) （i) Identify and explain FOUR financial statement assertions relevant to account balan

第1题

(a) Explain the external auditors’ responsibilities in relation to the prevention and dete

ction of fraud and error. (4 marks)

You are the audit manager of Currant & Co and you are planning the audit of Orange Financials Co (Orange), who specialise in the provision of loans and financial advice to individuals and companies. Currant & Co has audited Orange for many years.

The directors are planning to list Orange on a stock exchange within the next few months and have asked if the engagement partner can attend the meetings with potential investors. In addition, as the finance director of Orange is likely to be quite busy with the listing, he has asked if Currant & Co can produce the financial statements for the current year.

During the year, the assistant finance director of Orange left and joined Currant & Co as a partner. It has been suggested that due to his familiarity with Orange, he should be appointed to provide an independent partner review for the audit.

Once Orange obtains its stock exchange listing it will require several assignments to be undertaken, for example, obtaining advice about corporate governance best practice. Currant & Co is very keen to be appointed to these engagements, however, Orange has implied that in order to gain this work Currant & Co needs to complete the external audit quickly and with minimal questions/issues.

The finance director has informed you that once the stock exchange listing has been completed, he would like the engagement team to attend a weekend away at a luxury hotel with his team, as a thank you for all their hard work. In addition, he has offered a senior member of the engagement team a short-term loan at a significantly reduced interest rate.

Required:

(b) (i) Explain SIX ethical threats which may affect the independence of Currant & Co’s audit of Orange Financials Co; and

(ii) For each threat explain how it might be reduced to an acceptable level. (12 marks)

(c) Orange is aware that subsequent to the stock exchange listing it will need to establish an audit committee and has asked for some advice in relation to this.

Required:

Explain the benefits to Orange of establishing an audit committee. (4 marks)

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第2题

(a) ISA 300 Planning an Audit of Financial Statements provides guidance to assist auditors

in planning an audit.

Required:

Explain the benefits of audit planning. (4 marks)

(b) ISA 530 Audit Sampling provides guidance on methods for selecting a sample of items for testing.

Required:

Identify and explain THREE methods of selecting a sample. (3 marks)

(c) Describe the three types of modified audit opinions. (3 marks)

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第3题

Pear International Co (Pear) is a manufacturer of electrical equipment. It has factories a

cross the country and its customer base includes retailers as well as individuals, to whom direct sales are made through their website. The company’s year end is 30 September 2012. You are an audit supervisor of Apple & Co and are currently reviewing documentation of Pear’s internal control in preparation for the interim audit.

Pear’s website allows individuals to order goods directly, and full payment is taken in advance. Currently the website is not integrated into the inventory system and inventory levels are not checked at the time when orders are placed.

Goods are despatched via local couriers; however, they do not always record customer signatures as proof that the customer has received the goods. Over the past 12 months there have been customer complaints about the delay between sales orders and receipt of goods. Pear has investigated these and found that, in each case, the sales order had been entered into the sales system correctly but was not forwarded to the despatch department for fulfilling.

Pear’s retail customers undergo credit checks prior to being accepted and credit limits are set accordingly by sales ledger clerks. These customers place their orders through one of the sales team, who decides on sales discount levels.

Raw materials used in the manufacturing process are purchased from a wide range of suppliers. As a result of staff changes in the purchase ledger department, supplier statement reconciliations are no longer performed. Additionally, changes to supplier details in the purchase ledger master file can be undertaken by purchase ledger clerks as well as supervisors.

In the past six months Pear has changed part of its manufacturing process and as a result some new equipment has been purchased, however, there are considerable levels of plant and equipment which are now surplus to requirement. Purchase requisitions for all new equipment have been authorised by production supervisors and little has been done to reduce the surplus of old equipment.

Required:

(a) In respect of the internal control of Pear International Co:

(i) Identify and explain FIVE deficiencies;

(ii) Recommend a control to address each of these deficiencies; and

(iii) Describe a test of control Apple & Co would perform. to assess if each of these controls is operating effectively. (15 marks)

(b) Describe substantive procedures you should perform. at the year end to confirm each of the following for plant and equipment:

(i) Additions; and

(ii) Disposals. (4 marks)

(c) Pear’s finance director has expressed an interest in Apple & Co performing other review engagements in addition to the external audit; however, he is unsure how much assurance would be gained via these engagements and how this differs to the assurance provided by an external audit.

Required:

Identify and explain the level of assurance provided by an external audit and other review engagements. (3 marks)

Pear’s directors are considering establishing an internal audit department next year, and the finance director has asked about the differences between internal audit and external audit and what impact, if any, establishing an internal audit department would have on future external audits performed by Apple & Co.

Required:

(d) Distinguish between internal audit and external audit. (4 marks)

(e) Explain the potential impact on the work performed by Apple & Co during the interim and final audits, if Pear International Co was to establish an internal audit department. (4 marks)

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第4题

(a) Defi ne the going concern assumption. (2 marks)Medimade Co is an established pharmaceu

(a) Defi ne the going concern assumption. (2 marks)

Medimade Co is an established pharmaceutical company that has for many years generated 90% of its revenue through the sale of two specifi c cold and fl u remedies. Medimade has lately seen a real growth in the level of competition that it faces in its market and demand for its products has signifi cantly declined. To make matters worse, in the past the company has not invested suffi ciently in new product development and so has been trying to remedy this by recruiting suitably trained scientifi c staff, but this has proved more diffi cult than anticipated.

In addition to recruiting staff the company also needed to invest $2m in plant and machinery. The company wanted to borrow this sum but was unable to agree suitable terms with the bank; therefore it used its overdraft facility, which carried a higher interest rate. Consequently, some of Medimade’s suppliers have been paid much later than usual and hence some of them have withdrawn credit terms meaning the company must pay cash on delivery. As a result of the above the company’s overdraft balance has grown substantially.

The directors have produced a cash fl ow forecast and this shows a signifi cantly worsening position over the coming 12 months.

The directors have informed you that the bank overdraft facility is due for renewal next month, but they are confi dent that it will be renewed. They also strongly believe that the new products which are being developed will be ready to market soon and hence trading levels will improve and therefore that the company is a going concern. Therefore they do not intend to make any disclosures in the accounts regarding going concern.

Required:

(b) Identify any potential indicators that the company is not a going concern and describe why these could impact upon the ability of the company to continue trading on a going concern basis. (8 marks)

(c) Explain the audit procedures that the auditor of Medimade should perform. in assessing whether or not the company is a going concern. (6 marks)

(d) The auditors have been informed that Medimade’s bankers will not make a decision on the overdraft facility until after the audit report is completed. The directors have now agreed to include going concern disclosures.

Required:

Describe the impact on the audit report of Medimade if the auditor believes the company is a going concern but a material uncertainty exists. (4 marks)

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第5题

(a) State the FIVE threats contained within ACCA’s Code of Ethics and Conduct and for each

threat list ONE example of a circumstance that may create the threat. (5 marks)

(b) You are the audit manager of Jones & Co and you are planning the audit of LV Fones Co, which has been an audit client for four years and specialises in manufacturing luxury mobile phones.

During the planning stage of the audit you have obtained the following information. The employees of LV Fones Co are entitled to purchase mobile phones at a discount of 10%. The audit team has in previous years been offered the same level of staff discount.

During the year the fi nancial controller of LV Fones was ill and hence unable to work. The company had no spare staff able to fulfi l the role and hence a qualifi ed audit senior of Jones & Co was seconded to the client for three months. The audit partner has recommended that the audit senior work on the audit as he has good knowledge of the client. The fee income derived from LV Fones was boosted by this engagement and along with the audit and tax fee, now accounts for 16% of the fi rm’s total fees.

From a review of the correspondence fi les you note that the partner and the fi nance director have known each other socially for many years and in fact went on holiday together last summer with their families. As a result of this friendship the partner has not yet spoken to the client about the fee for last year’s audit, 20% of which is still outstanding.

Required:

(i) Explain the ethical threats which may affect the independence of Jones & Co’s audit of LV Fones Co; and (5 marks)

(ii) For each threat explain how it might be avoided. (5 marks)

(c) Describe the steps an audit fi rm should perform. prior to accepting a new audit engagement. (5 marks)

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第6题

(a) (i) Defi ne a ‘test of control’ and a ‘substantive procedure’; (2 marks) (ii) State ON

(a) (i) Defi ne a ‘test of control’ and a ‘substantive procedure’; (2 marks)

(ii) State ONE test of control and ONE substantive procedure in relation to sales invoicing. (2 marks)

(b) Shiny Happy Windows Co (SHW) is a window cleaning company. Customers’ windows are cleaned monthly, the window cleaner then posts a stamped addressed envelope for payment through the customer’s front door.

SHW has a large number of receivable balances and these customers pay by cheque or cash, which is received in the stamped addressed envelopes in the post. The following procedures are applied to the cash received cycle:

1. A junior clerk from the accounts department opens the post and if any cheques or cash have been sent, she records the receipts in the cash received log and then places all the monies into the locked small cash box.

2. The contents of the cash box are counted each day and every few days these sums are banked by which ever member of the fi nance team is available.

3. The cashier records the details of the cash received log into the cash receipts day book and also updates the sales ledger.

4. Usually on a monthly basis the cashier performs a bank reconciliation, which he then fi les, if he misses a month then he catches this up in the following month’s reconciliation.

Required:

For the cash cycle of SHW:

(i) Identify and explain THREE defi ciencies in the system; (3 marks)

(ii) Suggest controls to address each of these defi ciencies; and (3 marks)

(iii) List tests of controls the auditor of SHW would perform. to assess if the controls are operating effectively. (3 marks)

(c) Describe substantive procedures an auditor would perform. in verifying a company’s bank balance. (7 marks)

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第7题

(a) Auditors are frequently required to provide assurance for a range of non-audit engagem

ents.

Required:

List and explain the elements of an assurance engagement. (5 marks)

(b) ISA 320 Materiality in Planning and Performing an Audit provides guidance on the concept of materiality in planning and performing an audit.

Required:

Defi ne materiality and determine how the level of materiality is assessed. (5 marks)

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第8题

Introduction and client backgroundYou are an audit senior in Staple and Co and you are com

Introduction and client background

You are an audit senior in Staple and Co and you are commencing the planning of the audit of Smoothbrush Paints Co for the year ending 31 August 2010.

Smoothbrush Paints Co is a paint manufacturer and has been trading for over 50 years, it operates from one central site, which includes the production facility, warehouse and administration ffices.

Smoothbrush sells all of its goods to large home improvement stores, with 60% being to one large chain store Homewares. The company has a one year contract to be the sole supplier of paint to Homewares. It secured the contract through signifi cantly reducing prices and offering a four-month credit period, the company’s normal credit period is one month.

Goods in/purchases

In recent years, Smoothbrush has reduced the level of goods directly manufactured and instead started to import paint from South Asia. Approximately 60% is imported and 40% manufactured. Within the production facility is a large amount of old plant and equipment that is now redundant and has minimal scrap value. Purchase orders for overseas paint are made six months in advance and goods can be in transit for up to two months. Smoothbrush accounts for the inventory when it receives the goods.

To avoid the disruption of a year end inventory count, Smoothbrush has this year introduced a continuous/perpetual inventory counting system. The warehouse has been divided into 12 areas and these are each to be counted once over the year. The counting team includes a member of the internal audit department and a warehouse staff member. The following procedures have been adopted;

1. The team prints the inventory quantities and descriptions from the system and these records are then compared to the inventory physically present.

2. Any discrepancies in relation to quantities are noted on the inventory sheets, including any items not listed on the sheets but present in the warehouse area.

3. Any damaged or old items are noted and they are removed from the inventory sheets.

4. The sheets are then passed to the fi nance department for adjustments to be made to the records when the count has fi nished.

5. During the counts there will continue to be inventory movements with goods arriving and leaving the warehouse.

At the year end it is proposed that the inventory will be based on the underlying records. Traditionally Smoothbrush has maintained an inventory provision based on 1% of the inventory value, but management feels that as inventory is being reviewed more regularly it no longer needs this provision.

Finance Director

In May 2010 Smoothbrush had a dispute with its fi nance director (FD) and he immediately left the company. The company has temporarily asked the fi nancial controller to take over the role while they recruit a permanent replacement. The old FD has notifi ed Smoothbrush that he intends to sue for unfair dismissal. The company is not proposing to make any provision or disclosures for this, as they are confi dent the claim has no merit.

Required:

(a) Identify and explain the audit risks identifi ed at the planning stage of the audit of Smoothbrush Paints Co. (10 marks)

(b) Discuss the importance of assessing risks at the planning stage of an audit. (4 marks)

(c) List and explain suitable controls that should operate over the continuous/perpetual inventory counting system, to ensure the completeness and accuracy of the existing inventory records at Smoothbrush Paints Co. (10 marks)

(d) Describe THREE substantive procedures the auditor of Smoothbrush Paints Co should perform. at the year end in confi rming each of the following:

(i) The valuation of inventory; (3 marks)

(ii) The completeness of provisions or contingent liabilities. (3 marks)

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第9题

One of your audit clients is Tye Co a company providing petrol, aviation fuel and similar

oil based products to the government of the country it is based in. Although the company is not listed on any stock exchange, it does follow best practice regarding corporate governance regulations. The audit work for this year is complete, apart from the matter referred to below.

As part of Tye Co’s service contract with the government, it is required to hold an emergency inventory reserve of 6,000 barrels of aviation fuel. The inventory is to be used if the supply of aviation fuel is interrupted due to unforeseen events such as natural disaster or terrorist activity.

This fuel has in the past been valued at its cost price of $15 a barrel. The current value of aviation fuel is $120 a barrel. Although the audit work is complete, as noted above, the directors of Tye Co have now decided to show the ‘real’ value of this closing inventory in the financial statements by valuing closing inventory of fuel at market value, which does not comply with relevant accounting standards. The draft financial statements of Tye Co currently show a profit of approximately $500,000 with net assets of $170 million.

Required:

(a) List the audit procedures and actions that you should now take in respect of the above matter. (6 marks)

(b) For the purposes of this section assume from part (a) that the directors have agreed to value inventory at

$15/barrel.

Having investigated the matter in part (a) above, the directors present you with an amended set of financial

statements showing the emergency reserve stated not at 6,000 barrels, but reported as 60,000 barrels. The final financial statements now show a profit following the inclusion of another 54,000 barrels of oil in inventory. When queried about the change from 6,000 to 60,000 barrels of inventory, the finance director stated that this change was made to meet expected amendments to emergency reserve requirements to be published in about six months time. The inventory will be purchased this year, and no liability will be shown in the financial statements for this future purchase. The finance director also pointed out that part of Tye Co’s contract with the government requires Tye Co to disclose an annual profit and that a review of bank loans is due in three months. Finally the finance director stated that if your audit firm qualifies the financial statements in respect of the increase in inventory, they will not be recommended for re-appointment at the annual general meeting. The finance director refuses to amend the financial statements to remove this ‘fictitious’ inventory.

Required:

(i) State the external auditor’s responsibilities regarding the detection of fraud; (4 marks)

(ii) Discuss to which groups the auditors of Tye Co could report the ‘fictitious’ aviation fuel inventory;

(6 marks)

(iii) Discuss the safeguards that the auditors of Tye Co can use in an attempt to overcome the intimidation

threat from the directors of Tye Co. (4 marks)

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第10题

(a) Contrast the role of internal and external auditors. (8 marks)(b) Conoy Co designs and

(a) Contrast the role of internal and external auditors. (8 marks)

(b) Conoy Co designs and manufactures luxury motor vehicles. The company employs 2,500 staff and consistently makes a net profit of between 10% and 15% of sales. Conoy Co is not listed; its shares are held by 15 individuals, most of them from the same family. The maximum shareholding is 15% of the share capital.

The executive directors are drawn mainly from the shareholders. There are no non-executive directors because the company legislation in Conoy Co’s jurisdiction does not require any. The executive directors are very successful in running Conoy Co, partly from their training in production and management techniques, and partly from their ‘hands-on’ approach providing motivation to employees.

The board are considering a significant expansion of the company. However, the company’s bankers are

concerned with the standard of financial reporting as the financial director (FD) has recently left Conoy Co. The board are delaying provision of additional financial information until a new FD is appointed.

Conoy Co does have an internal audit department, although the chief internal auditor frequently comments that the board of Conoy Co do not understand his reports or provide sufficient support for his department or the internal control systems within Conoy Co. The board of Conoy Co concur with this view. Anders & Co, the external auditors have also expressed concern in this area and the fact that the internal audit department focuses work on control systems, not financial reporting. Anders & Co are appointed by and report to the board of Conoy Co.

The board of Conoy Co are considering a proposal from the chief internal auditor to establish an audit committee.

The committee would consist of one executive director, the chief internal auditor as well as three new appointees.

One appointee would have a non-executive seat on the board of directors.

Required:

Discuss the benefits to Conoy Co of forming an audit committee. (12 marks)

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