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Auditing revision questions 2

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Ceecie Ltd manufactures custom made furniture and its year end is 30 April. The company
purchases its raw materials from a wide range of suppliers. Below is a description of Ceecie
Ltd’s purchasing system.
When production supervisors require raw materials, they complete a requisition form and this is
submitted to the purchase ordering department. Requisition forms do not require authorization
and no reference is made to the current inventory levels of the materials being requested. Staff in
the purchase ordering department uses the requisitions to raise sequentially numbered purchase
orders based on the approved suppliers list, which was last updated 24 months ago. The
purchasing director authorizes the orders prior to these being sent to the suppliers. When the
goods are received, the warehouse department verifies the quantity to the suppliers dispatch note
and checks that the quality of the goods received are satisfactory. They complete a sequentially
numbered goods received note (GRN) and send a copy of the GRN to the finance department.
Purchase invoices are sent directly to the purchase ledger clerk, who stores them in a manual file
until the end of each week. He then inputs them into the purchase ledger using batch controls and
gives each invoice a unique number based on the supplier code. The invoices are reviewed and
authorized for payment by the finance director, but the actual payment is only made 60 days after
the invoice is input into the system.
Required:
In respect of the purchasing system of Ceecie Ltd:
a) Identify and explain FIVE deficiencies;
5 marks
b) Recommend a control to address each of these deficiencies.
5 marks
a) Jay Co sells furniture from 20 retail stores. Sales are made to individuals and most
receipts are in the form of cash (multi – currency but mostly the United States Dollar and
the Bond note); eco – cash, debit cards and electronic transfers. Jay Co delivers all
furniture purchased using its own transport. The Directors indicate that the company has
had a difficult year but are pleased to present some acceptable results to the shareholders.
The last Statements of Comprehensive Income are as follows:
Revenue
Cost of Sales
Gross Profit
Administration Expenses
Selling and Distribution
Interest payable
Investment income
31 March 2018
$000
7 482
(3 520)
3 962
(1 235)
(981)
(101)
145
31 March 2017
$000
6 364
(4 253)
2 111
(1 320)
(689)
(105)
0
Profit/ Loss before tax
Statement of Financial Position Extract
Cash and Bank
1 790
(3)
253
(950)
Required:
As part of your risk assessment procedures for Jay Co, identify and provide a possible
explanation for the unusual changes in the Statement of Comprehensive Income.
9 marks
b) An extract of an audit report prepared by an audit junior is given below:
…… We have audited the accompanying statements of XX ltd which comprise…… We have also
evaluated the overall adequacy of the presentation of information in the company’s annual report.
Auditors’ responsibility
We have conducted our audit in accordance with International Auditing Standards. Those
standards require that we comply with ethical requirements and plan and perform the audit so that
we can confirm the financial statements are free from material mis – statement. The directors,
however, are wholly responsible for the accuracy of the financial statements and no liability for
errors can be accepted by the auditor.
An audit involves performing procedures to obtain as much audit evidence as possible in the time
available about the amounts and disclosures in the financial statements…..
Required:
Identify and explain the errors in the above extract.
10 marks
c) Outline the circumstances that necessitate an inclusion of “Other Matter” paragraphs in
the audit report.
6 marks
Your firm is the auditor of Mutare Nurseries, a company operating three large garden centers
which sell plants, shrubs and trees, garden furniture and gardening equipment (such as
lawnmowers and sprinklers) to the general public. You are involved in the audit of the
company's non-current assets. The main categories of non-current assets are as follows:
Description of asset
Depreciation Rates Applied
Land and buildings (all of which are owned Buildings 5% each year on cost
outright by the company, none of which are leased)
Computers (on which an integrated inventory 20% each year on the reducing balance basis
control and sales system is operated)
Motor vehicles, mostly used for the delivery of
inventory to customers
20% each year on the reducing balance basis
Equipment for packaging and pricing products
15% each year on cost
It is the company’s policy to measure its Property, Plant and Equipment using the cost model as
per IAS 16; investment property using the fair value model as per 40 and any biological assets
using the fair value as per IAS 41. The nursery’s land near Christmas Pass has been leased to a
farmer for the past five years. Management has decided to sell the land near Christmas Pass as
well as some of the older motor vehicles which it deems to be no longer efficient. The vehicles
auction has been advertised to employees who have indicated their interest in most of them.
Although the vehicles are still being used for business use, a date for the auction has been set.
Although a potential buyer has been identified for the land, management has not yet notified the
tenant farmer of its intention to sell the land.
Required
a) List and explain the main financial statements assertions (and the risks associated with
each) tested for in the audit of non-current assets.
4 marks
b) List the sources of evidence available to you in verifying the ownership and cost of:
a. The land and buildings
3 marks
b. The computers and motor vehicles.
3 marks
c) List the audit procedures you would use to check the appropriateness of the presentation
and disclosure of the non-current assets; with reference to the relevant International
Financial Standards.
5 marks
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