SECTION A
ANSWER ALL QUESTIONS
Question 1
Discuss the factors for consideration at the planning stage of an audit whether to place too reliance on internal controls? (6 marks) (approx. 120 words)
Question 2
Explain which three categories the assertions fall under when complying with ISA 500. (6 marks) (approx. 120 words)
Question 3
Discuss the audit procedures you would undertake for identifying contingencies while conducting an audit. (6 marks) (approx. 120 words)
Question 4
ABC Ltd has asked your firm to engage as auditors for their firm after dismissing the previous auditor due to a difference of opinion with the directors. This disagreement related to particular costs incurred by the directors: the auditors believed these should have been written off. And, the previous year’s audit report was qualified due to this dispute.
Required:
a) Discuss the audit procedures you would undertake to verify the opening balances. (8 marks) (approx. 160 words)
b) Explain why it is important to confirm opening balances during the audit. (4 marks) (approx. 80 words) (Total marks: 12 marks)
Total marks for section A: 30
SECTION B
Answer ALL questions.
Question 5
Roberts is a family owned company: the principle activity is planning high-end wedding cakes and supplies to major wedding fairs. The Company 20 stores in Scotland and employs 900 staff. The company share structure consists of 10 individuals all from within the family and maximum shareholding is 25%. The executive board of directors are also the shareholders. Roberts has one nonexecutive director but he is the son-in-law of the CEO. The board of directors are considering an expansion which includes purchasing a warehouse with state-of-the-art fridges to store the cakes. The finance manager has prepared the financial statements because the finance director has not been at work due to a bereavement. The bank is concerned with the financial statements as they do not seem to be complete. Roberts has no internal audit function and the board fails to recognize the importance of an internal audit function and also dismiss the internal control systems that may need reviewing. The board of Roberts have received a proposal from the finance manager outlining that the company needs to determine an audit committee; consisting of two executive directors, three new appointments, including the senior internal auditor, non-executive to form the new board of directors.
Required:
a) Explain the importance to Roberts of forming an audit committee and ensure compliance with the Financial Reporting Council (FRC). (15 marks) (approx. 300 words)
Question 6
Rodwell Limited is a major retailer in the UK: focus on selling clothes directly its website. The company is experiencing significant growth due to its successful combination of fashionable items offering value for money. Turnover for the current year is budgeted to be £40 million. During this financial year, Rodwell Ltd opened its third distribution center. Also, during the year, the company upgraded its current computerized inventory system with the view to monitoring orders. The company continues to experience challenges with retaining staff to manage the rapid growth and recruiting is also an issue. The call center in particular has experience issues with staff; thus impacting after sales care as well as the distribution and dispatch departments. As a solution to manage the work-load, Rodwell Ltd has been actively recruiting students from local Universities with a view to offering a place on the graduate management program.
Required:
a) Using the information given about Rodwell Ltd, outline the key audit risks to be addressed by the external auditors of Rodwell Ltd. For each risk identified, briefly explain why you consider that risk to be material for the audit. (10 marks) (approx. 200 words)
b) The auditors of Rodwell Ltd are reviewing the internal control for the new computerised inventory and ordering system as part of their audit planning. List the internal control activities that you would expect to see which would provide ensure auditors can place reliance on the internal controls. (10 marks) (approx.200 words)
c) Explain the steps the auditors of Rodwell Ltd would take if internal controls were found to be weak. (5 marks) (approx.100 words)
(Total: 25 marks)
Question 7
TMT, a family owned manufacturer, specializes in making mountaineering clothing, from thermals to waterproof jackets, footwear and climbing gear operating twelve outlets in UK. The company is planning to sell the stores in Cardiff and Cumbria as a going concern. The directors’ friend has valued the two properties and the inventory. TMT has been an audit client of Baker Lee for almost ten years. You have taken over the audit from your colleague, who has had to step aside due to ill health. Below is the extract from auditor’s report your colleague prepared:
1. It is the auditors’ responsibility to express an opinion on every aspect of the financial statements.
2. The audit was conducted in accordance with some of the ‘Conceptual Framework to Financial Reporting Standards (IFRS) and the International Accounting Standards Board (IASB).
3. The standards adopted ensured compliance with the ethical aspects, in relation to planning and performing the audit with the view to offering reasonable assurance to the financial statements being free from material misstatements and free from fraud.
4. The audit process involves gathering evidence by conducting procedures and reviewing disclosures. The type of procedures performed and sample selected depends on the availability and competency of the members of the audit team.
5. It is our responsibility to detect for fraud and errors.
6. It is our responsibility to ensure the financial statements are prepared in accordance with the IASB and IFRS.
7. It is the management’s responsibility to ensure presentation of the financial statements presented appropriately.
8. It is our responsibility to review the internal controls and express an opinion on the effectiveness of such controls.
9. As this is an existing client, we expect the policies to be the same, as the previous years; therefore will not review the accounting policies.
10. We relied on the valuation provided for both properties for sale and the inventory. Your audit partner has informed you that an independent expert is required to value the inventory and the properties.
Required:
a) From the above extract, identify and discuss seven factors that require attention and need amending in the audit report. (15 marks) (approx.300 words)
b) Discuss what the auditor should evaluate in order to determine the extent to which the work undertaken by the independent expert is reliable in accordance with ISA 620 Using the Work of an Auditor’s Expert. (5 Marks) (approx.100 words)
c) Explain the concept ‘material but not pervasive’ and ‘material and pervasive’ in accordance with ISA 705. (10 marks) (approx.200 words) (30 marks)
Total marks for section B: 70
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