ACCA

Paper F8 (INT & UK) Audit and Assurance

Tuition Mock Examination June 2012 Question Paper
ALL questions are compulsory and MUST be attempted Time Allowed 15 minutes 3 hours Reading and planning Writing

DO NOT OPEN THIS PAPER UNTIL YOU ARE READY TO START UNDER EXAMINATION CONDITIONS

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ALL FIVE questions are compulsory and MUST be attempted

1
You are the senior auditor in charge of the audit of Fitzgerald Ltd, which sells, services and repairs a wide rage of agricultural machinery. Your notes of the purchases system include a number of points that need to be considered in the audit. These are as follows: 1. Delivery notes accompanying goods are checked on arrival by the stores department. Where there is no delivery note from the supplier, a goods received note is completed by stores. Delivery notes and goods received notes are listed by stores and passed to the buying department for checking against orders. Only the goods received notes are sequentially numbered. Purchase invoices are passed immediately upon receipt to the buying department to check for the receipt of goods and prices charged. If there is a query, the buying department holds the invoice until the matter is resolved. Invoices are then passed to the accounts department for input to the accounting system. A grid stamp on the purchase invoices to record the checks made is not completed in every case. Invoices are approved for payment by the accounts department but, when a cheque is prepared, the invoice is not marked as paid. Reconciliation of supplier statements to the ledger balances is not carried out on a regular basis; only the year-end statements are retained for the audit.

2.

3. 4. 5.

Required: (a) Identify the weaknesses in the above purchases system and for each weakness (i) (ii) (b) Explain the potential consequences to Fitzgerald; and Recommend a control to mitigate the weakness. (15 marks)

Describe the audit procedures that you would perform in order to ensure that (i) (ii) Trade payables are fairly stated in the financial statements; Cut off procedures in respect of purchases and payables are adequate. (10 marks)

Inventories are currently ascertained by physical count at each month and year-end. In order to avoid the disruption caused by the monthly counts, management intend to introduce an inventory control system consisting of computerized inventory records supported by a system of continuous counting. Management has acquired a software package that will integrate with the existing purchase and sales ledger systems. Inventory movements will be determined from purchase and sales invoice details, which will be input by clerks in the general office. Terminals will be located in the warehouse to enable staff to access the inventory records and enter adjustments.

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Management is anxious to ensure a smooth transition and obtain the maximum benefit from the system. (c) Describe (i) (ii) The physical controls required to prevent unauthorised access to the terminals to be sited in the warehouse; The software controls required to prevent unauthorised access to the purchase and sales ledger. (5 marks) (30 marks)

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ISA 315 states that the auditor should obtain an understanding of the control environment at a client. (a) Explain what is meant by the term control environment and list THREE factors that would indicate a strong control environment. (4 marks)

ISA 500 states that auditors should obtain sufficient, appropriate audit evidence to be able to draw reasonable conclusions on which to base the audit opinion. (b) List three factors that should be considered by an auditor when assessing the sufficiency of audit evidence and for each factor identified, briefly state the effect it has on the amount of evidence required. (3 marks) State three types of threat to an auditors objectivity and independence. For each, give an example of how the threat may arise for an auditor. (3 marks) (10 marks)

(c)

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You are planning the audit of Basher Ltd for the year ended 31 March 2012. The principal activity of the company is the sale of mobile telephone handsets and accessories. All products are purchased from international suppliers outside of the United Kingdom. You have been provided with the following information in respect of the years ended 31 March 2012 and 31 March 2011. Extracts from the Income Statement Draft 2012 $000 472,953 (456,076) 7,877 (4,703) 3,714 Actual 2011 $000 325,033 (317,573) 7,460 (4,174) 3,286

Revenue Cost of Sales Gross Profit Administration expenses Profit from operations

Extracts from the Statement of Financial Position Draft 2012 $000 Non Current Assets Property Plant and Equipment Current Assets Inventories Trade Receivables Sales Tax Receivable Prepayments Cash Current liabilities Bank Overdraft Trade Payables Other Payables Accruals and Deferred Income 437 7,453 4,190 1,336 102 2 Actual 2011 $000 224 4,952 3,152 1,637 40 1,843

423 6,227 352 28

593 6,137 413 221

Your firm has prepared the corporation tax returns for the company for the last three years. Your firm has also been asked to provide advice on the selection and installation of a new computer system for Basher. Required: (a) (b) (c) State when analytical procedures should be used in an audit, and explain the benefits of using such procedures. (4 marks) Using the results of analytical procedures, explain the audit risks arising for Basher Ltd. (10 marks) Explain the ethical issues to be considered regarding the provision of the other services set out above, and identify appropriate safeguards that should be applied. (6 marks) (20 marks)

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You are the auditor of Leviathan Ltd, a manufacturer of heavy machinery for use in the railway industry. Extracts from its balance sheets for the years ended 31 March 2012 and 21 March 2011 are as follows: 2012 $000 Current assets Inventory Receivables Cash Payables Warranty Provision 129 228 68 (218) (314) 2011 $000 108 197 121 (196) (216)

The company offers a one-year warranty on all machinery supplied. The warranty provision is calculated by the company using a combination of the estimated cost of making good known defects at the reporting date, together with a percentage of that years sales. During the year ended 31 March 2012, the company suffered a large bad debt due to the appointment of a liquidator at a major customer one week after the final delivery of an order of machinery. Required: (a) Set out audit procedures that you would perform to reach a satisfactory conclusion on the value of the warranty provision, the value of trade receivables at the year-end. (10 marks) Describe the issues faced by the auditor when auditing provisions, such as the warranty provision described above. (4 marks)

(b)

In November 2011, Leviathan dismissed its sales director because of an alleged fraud. The director is contesting the allegation and commenced legal proceedings against the company in late February 2012. The company lawyers have suggested that there is a possibility that Leviathan may lose the case but are unsure as to the exact amount of damages that may have to be paid, although they are likely to be significant. There is no mention of the case anywhere in the financial statements. (c) (i) (ii) List the audit procedures and actions that you should now take in respect of the above matter. (3 marks) Explain the effect on the audit report if the directors refuse to disclose the details of the case in the financial statements. (3 marks) (20 marks)

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You are the external auditor of Garb Ltd for the year ended 31 January 2012. Its principal activity is the design, manufacture and sale of clothing. The company made a loss in the year ended 31 January 2012, but the profit forecast indicates a return to profitability in the year ended 31 January 2013. The loss was due to redundancy and restructuring costs following the loss of its major customer, a national retailer, to whom it supplied clothing under the retailers brand name. The company is now focusing on its own branded goods, which have been sold historically at a higher margin. There are plans to develop its overseas market and to expand the customer base for its recently launched sports wear products and contracts have been recently agreed with several new overseas customers. The company has also negotiated a new contract with a major supplier, which has resulted in reduced prices for committed monthly purchases. During the year ended 31 January 2012, the company suffered severe cash flow difficulties but managed to stay within the overdraft facility by delaying payments to trade payables and the tax authorities. The company has a bank loan, which is due for repayment in April 2012 and is negotiating with its bankers for a replacement loan to repay the present loan. Required: (a) Explain what is meant by the going concern concept and describe the directors and the auditors responsibilities with regards to going concern. (6 marks) Explain the matters that give cause for concern with regards to Garbs going concern status. (10 marks) Discuss the implications for the audit report of Garb Ltd in respect of the financial statements for the year ended 31 January 2012, if the negotiations for the replacement loan are not completed by the time the audit report is due to be signed. (4 marks) (20 marks)

(b) (c)

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