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Carlise’s internal audit team is likely to be involved in monitoring the internal controls relating to Carlise's
online ticket sales system.
UYE & Co may use the internal audit department to provide direct assistance to it in the audit of this system.
Indicate which of the following statements are true, if direct assistance is used?
True
False
Carlise’s internal auditors would perform audit procedures under the direction,
supervision and review of UYE & Co’s audit team
UYE & Co should only use direct assistance if the risk of material misstatement in
relation to the online ticket sales system is high
UYE & Co’s audit team should document its review of the work performed by
Carlise’s internal auditors
Carlise’s internal auditors will be separately liable for any material misstatements
in the work they have performed
70
All work carried out by the audit team should be documented in the working papers, regardless of whether it
relates to an interim or a final audit.
Indicate which of the following are valid reasons why the audit team for the Carlise audit might keep audit
documentation?
True
False
It prevents the auditor from being sued for negligence
It provides guidance for audit team members regarding the audit procedures to be
performed
It enables senior team members to direct, supervise and review the audit work
It enables external inspections to be performed in accordance with applicable
legal, regulatory or other requirements
(Total = 10 marks)
71 Sleeptight
54 mins
You are an audit senior for Mills & Co. Mills & Co was recently appointed as external auditors of Sleeptight Co for
the year ending 31 March 20X0 and you are in the process of planning the audit. The previous auditors issued an
unmodified audit opinion last year and access to prior year working papers has been granted.
Sleeptight's principal activity is the manufacture and sale of expensive high quality beds which are largely sold to
luxury hotels and owners of holiday apartments. Each bed is crafted by hand in the company's workshop.
Construction of each bed only begins once a customer order is received, as each customer will usually want their
bed to have a unique feature or to be in a unique style.
The business is family run and all the shares in Sleeptight are owned by the two joint managing directors. The
directors are two sisters, Anna and Sophie Jones, and they both have a number of other business interests. As a
result they only spend a few days a week working at the company and rely on the small accounts department to
keep the finances in order and to keep them informed. There is no finance director but the financial controller is a
qualified accountant.
Sleeptight requires customers who place an order to pay a deposit of 40% of the total order value at the time the
order is placed. The beds will take 4 to 8 weeks to build, and the remaining 60% of the order value is due within a
week of the final delivery. Risks and rewards of ownership of the beds do not pass to the customer until the beds
are delivered and signed for. Beds also come with a two-year guarantee and the financial controller has made a
provision in respect of the expected costs to be incurred in relation to beds still under guarantee.
Questions
27
Although the company does have some employees working in the workshop, it often uses external subcontractors
to help make the beds in order to fulfil all its orders. These subcontractors should invoice Sleeptight at the end of
each month for the work they have carried out, but sometimes do not get round to it until the following month.
The company undertakes a full count of raw materials at the year end. The quantities are recorded on inventory
sheets and the financial controller assigns the costs based on the cost assigned in the previous year or, if there was
no cost last year, using the latest invoice. Most beds are made of oak or other durable woods and the cost of these
raw materials is known to fluctuate considerably.
It is expected that work in progress will be insignificant this year, but there will be a material amount of finished
goods awaiting dispatch. Anna Jones will estimate the value of these finished goods and has said she will take into
account the order value when doing so.
There has been steady growth in sales in recent years and in January 20X0 Sleeptight purchased a building close to
its existing workshop. Anna and Sophie plan to turn this into another workshop which should more than double its
existing manufacturing capacity. The new workshop is currently undergoing extensive refurbishment in order to
make it suitable for bed manufacturing.
The purchase of the new premises was funded by a bank loan repayable in monthly instalments over 12 years and
has covenants attached to it. These covenants are largely profit related measures and if they are breached the bank
has the option to make the remaining loan balance repayable immediately.
(a)
Auditors are required to plan and perform an audit with professional scepticism, to exercise professional
judgement and to comply with ethical standards.
Required
(b)
(i)
Explain what is meant by 'professional scepticism' and why it is so important that the auditor
maintains professional scepticism throughout the audit.
(3 marks)
(ii)
Define 'professional judgement' and describe TWO areas where professional judgement is applied
when planning an audit of financial statements.
(3 marks)
(i)
Using the information provided, describe EIGHT audit risks, and explain the auditor's response to
each risk, in planning the audit of Sleeptight.
Note. Prepare your answer using two columns headed Audit risk and Auditor's response
respectively.
(16 marks)
(ii)
(c)
Describe Mills & Co's responsibilities in relation to the physical inventory count that will take place at
the year end.
(4 marks)
The workshop currently in use is owned by the company and will be included in the financial statements at
its revalued amount rather than at cost. The company has always adopted this policy for land and buildings
and the valuation of the workshop is to be brought up to date at 31 March 20X0 by an external valuer.
Required
Describe the procedures the auditor should carry out to gain evidence over the adequacy of the value of the
workshop and the related disclosures included in the financial statements.
(4 marks)
(Total = 30 marks)
28
Questions
72 Abrahams (12/11)
36 mins
Abrahams Co develops, manufactures and sells a range of pharmaceuticals and has a wide customer base across
Europe and Asia. You are the audit manager of Nate & Co and you are planning the audit of Abrahams Co whose
financial year end is 31 January. You attended a planning meeting with the finance director and audit engagement
partner and are now reviewing the meeting notes in order to produce the audit strategy and plan. Revenue for the
year is forecast at $25 million.
During the year the company has spent $2.2 million on developing several new products. Some of these are in the
early stages of development whilst others are nearing completion. The finance director has confirmed that all
projects are likely to be successful and so he is intending to capitalise the full $2.2 million.
Once products have completed the development stage, Abrahams Co begins manufacturing them. At the year end it
is anticipated that there will be significant levels of work in progress. In addition, the company uses a standard
costing method to value inventory; the standard costs are set when a product is first manufactured and are not
usually updated. In order to fulfil customer orders promptly, Abrahams Co has warehouses for finished goods
located across Europe and Asia; approximately one-third of these are third-party warehouses where Abrahams Co
just rents space.
In September a new accounting package was introduced. This is a bespoke system developed by the information
technology (IT) manager. The old and new packages were not run in parallel as it was felt that this would be too
onerous for the accounting team. Two months after the system changeover the IT manager left the company; a new
manager has been recruited but is not due to start work until January.
In order to fund the development of new products, Abrahams Co has restructured its finance and raised $1 million
through issuing shares at a premium and $2.5 million through a long-term loan. There are bank covenants attached
to the loan, the main one relating to a minimum level of total assets. If these covenants are breached then the loan
becomes immediately repayable. The company has a policy of revaluing land and buildings, and the finance director
has announced that all land and buildings will be revalued as at the year end.
The reporting timetable for audit completion of Abrahams Co is quite short, and the finance director would like to
report results even earlier this year.
Required
(a)
Explain the components of audit risk and, for each component, state an example of a factor which can result
in increased audit risk.
(6 marks)
(b)
Using the information provided, describe FIVE audit risks, and explain the auditor's response to each risk in
planning the audit of Abrahams Co.
Note. Prepare your answer using two columns headed Audit risk and Auditor's response respectively.
(10 marks)
(c)
Describe substantive procedures you should perform to obtain sufficient appropriate evidence in relation to:
(i)
(ii)
Inventory held at the third-party warehouses; and
Use of standard costs for inventory valuation.
(4 marks)
(Total = 20 marks)
Questions
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