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December 2014–June 2015 Edition
REVISION QUESTION BANK
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ACCA
Paper F8 | AUDIT AND ASSURANCE
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ACCA
PAPER F8
SA
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AUDIT AND ASSURANCE
REVISION QUESTION BANK
For Examinations to June 2015
®
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
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Past ACCA examination questions are the copyright of the Association of Chartered Certified
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(ii)
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
REVISION QUESTION BANK – AUDIT AND ASSURANCE (F8)
As shown by the Specimen Examination provided, the examination will have two sections:
Section A: 8 two mark and 4 one mark multiple choice questions (MCQs);
Section B: four 10 mark and two 20 mark questions.
The 20 mark questions will predominantly examine one or more aspects of audit and assurance from
planning and risk assessment, internal control or audit evidence, although topics from other syllabus
areas may also be included.
CONTENTS
Question
MULTIPLE CHOICE QUESTIONS (Section A)
Page
Answer
1
2
3
5
7
8
9
10
11
13
14
15
17
18
19
21
22
23
24
26
27
28
29
30
31
32
33
35
36
37
38
40
41
1001
1001
1002
1003
1003
1004
1004
1005
1005
1006
1006
1007
1007
1008
1008
1009
1009
1010
1010
1011
1011
1012
1012
1013
1013
1013
1014
1014
1015
1015
1016
1016
1017
Marks Date worked
8
13
10
11
8
8
10
6
9
8
8
11
8
8
13
9
8
7
10
8
8
8
8
8
7
8
10
8
9
9
8
7
8
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Audit and other assurance engagements
External audit
Corporate governance
Professional codes of ethics and conduct
Auditor appointment
Documentation
Audit planning
Understanding the entity
Internal control
Audit materiality
Fraud, law and regulations
Tests of control
Communication on internal control
Service organisations
Audit evidence
Analytical procedures
Accounting estimates
Using the work of an expert
Audit sampling
Written representations
Computer-assisted audit techniques
Non-current assets
Inventory
External confirmations, receivables and sales
Share capital, reserves and directors’ remuneration
Loans, bank and cash
Liabilities, provisions and contingencies
Small business and not-for-profit organisations
Audit finalisation
The auditor’s report on financial statements
Going concern
Internal audit
Using the work of internal audit
SA
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1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
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Questions indicated ** are not exam style but provided for further revision of areas of the syllabus.
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
(iii)
AUDIT AND ASSURANCE (F8) – REVISION QUESTION BANK
Question
Page
Answer
Marks Date worked
43
1018
10
43
43
1018
1020
10
10
44
44
45
46
1022
1023
1024
1025
10
10
10
10
46
46
1026
1028
10
20
47
48
1029
1030
10
10
49
1031
20
49
50
51
52
1034
1036
1038
1041
20
20
20
10
53
53
1042
1044
10
20
54
54
1046
1048
10
10
(Section B)
AUDIT AND OTHER ASSURANCE ENGAGEMENTS
1
Non-audit engagements and true and fair
(ACCA J10 adapted)
2
3
Conoy (ACCA J09 adapted)
Serena VDW (ACCA D11 adapted)
PROFESSIONAL CODES OF ETHICS AND CONDUCT
Client confidentiality (ACCA D03 adapted)
Stark (ACCA D08 adapted)
LV Phones (ACCA J10 adapted)
Goofy I (ACCA J11 adapted)
AUDIT APPOINTMENT
8
9
Melton Manufacturing (ACCA J95 adapted)
Bondi (ACCA J99)
DOCUMENTATION
Specs4You I (ACCA J07 adapted)
Specs4You II (ACCA J07 adapted)
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10
11
PL
4
5
6
7
E
CORPORATE GOVERNANCE
AUDIT PLANNING
12
Bridgford Products (ACCA D98)
UNDERSTANDING THE ENTITY
13
14
15
16
EuKaRe Charity (ACCA D08)
Redsmith (ACCA D10)
Abrahams (ACCA D11)
Donald Co (ACCA J11 adapted)
INTERNAL CONTROL
17
18
Internal control
Bestwood Engineering (ACCA D98)
AUDIT MATERIALITY
19
20
(iv)
Mistiread I (ACCA J07 adapted)
Documentation and materiality (ACCA D10 adapted)
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
REVISION QUESTION BANK – AUDIT AND ASSURANCE (F8)
Question
Page
Answer
Marks Date worked
54
55
56
1049
1051
1052
20
10
10
57
1054
20
FRAUD, LAW AND REGULATIONS
21**
22
23
Tye (ACCA J09)
Tinkerbell I (ACCA J11 adapted)
Bestwood Trading (ACCA J98 adapted)
TESTS OF CONTROL
Tinkerbell II (ACCA J11 adapted)
COMMUNICATION ON INTERNAL CONTROL
25
26
Blake (ACCA D08 adapted)
Greystone (ACCA D10 adapted)
27
28
57
59
1056
1058
20
20
PL
AUDIT EVIDENCE
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24
Boulder (ACCA D04)
Obtaining Evidence (ACCA J11 adapted)
60
61
1062
1063
20
10
61
61
1065
1066
10
10
62
1067
10
63
1069
10
63
63
64
1070
1071
1072
10
20
10
64
65
65
66
1073
1074
1075
1076
10
10
10
20
67
67
1078
1080
20
20
ANALYTICAL PROCEDURES
29
30
Analytical procedures
Planning analytical procedures (ACCA J02 adapted)
ACCOUNTING ESTIMATES
Newthorpe Engineering I (ACCA J97 adapted)
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31
USING THE WORK OF AN EXPERT
32**
Expert, rights and assertions (ACCA D08)
AUDIT SAMPLING
33
34
35
Audit sampling (ACCA J03)
Tam (ACCA D06)
Sample selection and assertions (ACCA J09 adapted)
WRITTEN REPRESENTATIONS
36
37
38**
39**
Written representation letter (ACCA J05 adapted)
Crighton-Ward (ACCA J05 adapted)
Sufficent evident (ACCA J08)
Greenfields (ACCA D10)
COMPUTER-ASSISTED AUDIT TECHNIQUES
40
41
Walsh (ACCA D06)
Delphic (ACCA D07)
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
(v)
AUDIT AND ASSURANCE (F8) – REVISION QUESTION BANK
Question
Page
Answer
Marks Date worked
68
69
1081
1083
20
10
70
70
72
1084
1087
1089
20
20
10
NON-CURRENT ASSETS
42
43
WW (ACCA J06)
JonArc I (ACCA D07 adapted)
INVENTORY
Trent Textiles (ACCA Pilot 1997)
Smoothbrush (ACCA J10 adapted)
MistiRead II (ACCA J07 adapted)
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44
45
46
EXTERNAL CONFIRMATIONS, RECEIVABLES AND SALES
Lidcombe (ACCA D00)
Alternative Procedures (ACCA D02 adapted)
External confirmations (ACCA D06 adapted)
72
74
74
1090
1093
1094
20
10
10
PL
47**
48
49
LOANS, BANK AND CASH
50
51
Bank & Cash (ACCA J02)
Jayne (ACCA D06 adapted)
74
75
1095
1097
20
10
75
76
76
1098
1099
1101
10
20
20
77
77
78
1104
1104
1106
10
20
20
79
80
81
82
82
1109
1110
1112
1113
1114
10
20
10
10
10
83
84
84
1116
1117
1118
10
10
20
85
85
86
86
1120
1121
1122
1123
10
10
10
10
LIABILITIES, PROVISIONS AND CONTINGENCIES
52
53**
54
Newthorpe Engineering II (ACCA J97 adapted)
Tourex and Pudco (ACCA J03)
Metcalf (ACCA J07)
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SMALL BUSINESS AND NOT-FOR PROFIT ORGANISATIONS
55
56
57
Small firm internal controls (ACCA J03)
Firefly Tennis Club (ACCA D06)
Bluesberry Hospital (ACCA D10)
AUDIT FINALISATION
58
59**
60
61
62
Dylan
Sharp
ZeeDiem (ACCA D08 adapted)
Humphries I (ACCA D11 adapted)
Humphries II (ACCA D11 adapted)
THE AUDITOR’S REPORT ON FINANCIAL STATEMENTS
63
64
65**
Cremorne (ACCA J99 adapted)
JonArc II (ACCA D07 adapted)
Daffy (ACCA J11)
GOING CONCERN
66
67
68
69
(vi)
Going concern status (ACCA D03 adapted)
Corsco (ACCA D03 adapted)
Medimade I (ACCA J10 adapted)
Medimade II (ACCA J10 adapted)
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
REVISION QUESTION BANK – AUDIT AND ASSURANCE (F8)
Question
Page
Answer
Marks Date worked
87
88
88
1124
1125
1126
10
10
10
89
1128
20
INTERNAL AUDIT
70
71
72
Octball I (ACCA D05 adapted)
Octball II (ACCA D05 adapted)
Goofy II (ACCA J11 adapted)
USING THE WORK OF INTERNAL AUDIT
ZPM (ACCA J06)
RECENT EXAMINATIONS
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73
June 2012
1A
Pear International I (adapted)
[internal control, substantive procedures]
1B
Pear International II (adapted)
[external audit, internal audit)
2**
Planning and sampling
3
Orange Financials (adapted) [ethics]
4
Pineapple Beach Hotel
[evidence, substantive procedures, documentation]
5A
Strawberry Kitchen Designs (adapted)
[going concern]
5B** Serious concerns (adapted)
[going concern]
1131
20
91
91
92
1134
1136
1137
10
10
10
92
1138
20
93
1141
10
94
1143
5
December 2012
1A
Lily Window Glass I (adapted) [inventory]
1B
Lily Window Glass II (adapted) [CAATs]
2**
External audits [external audit, internal control]
3
Sunflower Stores [evidence, risks, internal audit]
4
Rose Leisure Club [ethics, substantive procedures]
5A
Written and oral representations (adapted)
5B
Violet & Co (adapted) [audit finalisation]
95
96
96
97
98
98
99
1144
1146
1147
1149
1152
1154
1155
20
10
10
20
20
10
10
June 2013
1
Fox Industries (adapted) [internal control,
deficiences, substantive procedures]
2**
Independence and objectivity [ethics, going concern]
3
Kangaroo Construction [materiality, audit risks]
4
Bush-Baby Hotels (adapted) [fraud, internal audit]
5
Panda (adapted) [subsequent events]
100
101
101
102
103
1157
1161
1163
1166
1168
20
10
20
10
10
104
1170
20
105
105
106
106
107
1173
1174
1177
1180
1181
10
20
10
10
10
SA
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PL
90
December 2013
1
Minty Cola (adapted)
[audit risks, substantive procedures]
2**
Audit procedures [tests of controls,
substantive procedures, audit evidence]
3
Oregano [internal control]
4A
Salt & Pepper I (adapted) [audit report]
4B
Salt & Pepper II (adapted) [ethics]
5
Paprika (adapted) [audit report]
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
(vii)
AUDIT AND ASSURANCE (F8) – REVISION QUESTION BANK
Question
Page
Answer
2
6
6
7
7
8
9
13
14
15
15
16
16
17
19
Marks Date worked
SPECIMEN EXAM
Multiple Choice Questions
Hazard
Balotelli Beach Hotel
Savage & Co
Torres Leisure Club
Walters
Garcia International
Marking Scheme
20
10
10
10
10
20
20
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1
2
3
4
5
6
(viii)
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
REVISION QUESTION BANK – AUDIT AND ASSURANCE (F8)
1
AUDIT AND OTHER ASSURANCE ENGAGEMENTS
1.1
Which of the following best describes the concept of assurance?
An assurance firm’s high level of satisfaction with the reliability of an assertion
being made by one party for the use of another party
B
An assurance firm’s satisfaction with the reliability of an assertion being made by
one party for the use of another party
C
A user’s satisfaction with the reliability of an assertion being made by another party
(1 mark)
In any assurance engagement there are three parties involved: the responsible party, the
practitioner and the user.
E
1.2
A
In respect of the given subject matter which party prepares the subject matter?
1.3
Responsible party
Practitioner
User
PL
A
B
C
(1 mark)
“Based on our review, nothing has come to our attention that causes us to believe that the
accompanying financial statements do not give a true and fair view in accordance with
International Financial Reporting Standards.”
Which of the following BEST describes the type of assurance provided by this
statement?
Positive assurance expressed negatively
Negative assurance expressed positively
High level of assurance expressed negatively
Limited level of assurance expressed negatively
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A
B
C
D
1.4
(2 marks)
The level of assurance given by an assurance engagement will depend on the type of
engagement. Assurance levels are often described as being either:
(1)
(2)
(3)
(4)
Absolute
Reasonable
Limited
Zero
What level of assurance would normally be given to an audit of financial statements and
what level of assurance to a review of financial statements?
A
B
C
D
1 and 4
2 and 4
1 and 3
2 and 3
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
(2 marks)
1
AUDIT AND ASSURANCE (F8) – REVISION QUESTION BANK
1.5
Which of the following best describes professional scepticism?
A
The assurance provider should not believe anything that management tells him
B
The assurance provider should not believe anything that management tells him,
without obtaining supporting evidence
C
The assurance provider should apply a questioning mind to the information and
evidence he obtains
D
The assurance provider should be prudent and always assume the worst outcome in
cases of uncertainty
(2 marks)
E
(8 marks)
2
EXTERNAL AUDIT
2.1
What is the objective of the external audit of a limited company?
2.2
To protect the interests of minority shareholders
To detect fraud and other irregularities
To assess the effectiveness of the company’s performance
To provide assurance on the directors’ assertions about the financial statements
(2 marks)
PL
A
B
C
D
Who would approve the appointment of a company’s auditor?
The statutory authorities
The directors
The shareholders
The company’s bank
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A
B
C
D
2.3
Who is ultimately responsible for ensuring that the annual financial statements of a
listed company are prepared in accordance with IFRS and relevant legislation?
A
B
C
D
2.4
The auditors
The board of directors
The company secretary
The listing exchange
(2 marks)
Of which international body is the International Auditing and Assurance Standards
Board (IAASB) a member?
A
B
C
D
2
(2 marks)
OECD
IFRS Foundation
IFAC
WTO
(2 marks)
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
REVISION QUESTION BANK – AUDIT AND ASSURANCE (F8)
The following statements relate to International Standards on Auditing (ISAs) and
professional auditors:
(1)
(2)
(3)
(4)
(5)
(6)
All ISAs must be applied during the course of an audit.
ISAs override local regulations.
The entire text of a standard must be understood in order to apply its requirements.
ISAs are rules-based and all rules must be applied.
An individual is appropriately qualified as an auditor on passing professional
examinations.
In most jurisdictions only a statutory auditor is allowed to carry out audits of
companies.
Which of the above statements are true?
2.6
(2 marks)
Who, in most jurisdictions, may remove the auditors?
A
B
C
Directors
Members
Legal authorities
A
To have access to the company’s books, accounts and records
B
To require from company officials any information and explanations on any matter
whatsoever
C
To report to any legal authority any matter the auditor considers that authority needs
to know
D
To attend any board or committee meeting
(2 marks)
(13 marks)
3
CORPORATE GOVERNANCE
3.1
Which of the following correctly states the composition of an audit committee?
A
B
C
3.2
(1 mark)
Which of the following is generally accepted as a right of an auditor?
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2.7
All of them
3 and 6 only
1, 3 and 6 only
1, 2, 5 and 6 only
PL
A
B
C
D
E
2.5
Executive directors only
Non-executive directors only
Non-executive directors and internal auditors
(1 mark)
The following are statements that could be made about corporate governance:
(1)
(2)
(3)
(4)
(5)
The system by which business corporations are directed and controlled.
It involves entrepreneurism, innovation, development and exploration.
It aims to achieve a long-term increase in shareholder value.
It narrows the expectation gap.
It only applies to entities that are listed on a stock exchange.
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
3
AUDIT AND ASSURANCE (F8) – REVISION QUESTION BANK
What combination of these statements best describes the meaning of corporate
governance?
A
B
C
D
Who do audit committees normally liaise between?
A
B
C
D
3.4
The internal and external auditors
The internal auditor and entity’s staff
The executive and non-executive directors
The auditors and the directors
True
False
PL
A
B
Rights of shareholders
Board responsibilities
Auditor’s accountability and remuneration
Risk management and internal control
SA
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4
(1 mark)
Which of the following is NOT a principle of corporate governance?
A
B
C
D
3.6
(2 marks)
Under corporate governance it is illegal for the Chief Executive Officer to also act as the
Chairman of the Board.
Is this statement true or false?
3.5
(2 marks)
E
3.3
1, 4 and 5
1, 2 and 5
1, 2 and 3
2, 3 and 5
(2 marks)
Which of the following best describes an advantage of an audit committee?
A
It enables executive directors to contribute independent judgement to matters of
critical importance
B
It offers the internal auditors a direct, formal link with the executive directors
C
It enables management to delegate a thorough and detailed review of audit matters
D
It provides effective and informed oversight to help ensure confidence in highquality financial reporting
(2 marks)
(10 marks)
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
REVISION QUESTION BANK – AUDIT AND ASSURANCE (F8)
4
PROFESSIONAL CODES OF ETHICS AND CONDUCT
4.1
Which of the following best describes the Conceptual Framework of the Code of Ethics
for Professional Accountants?
It identifies all threats faced by professional accountants and the safeguards they
must implement
B
It assists professional accountants, through a set of rules, to identify the threats they
face and the action that must be taken
C
It allows (through principles and examples) professional accountants to consider the
risks they face and to match those risks with the appropriate action
(1 mark)
E
4.2
A
Panama & Co is an audit firm with 30 similar medium-sized audit clients, none of which are
listed. The firm has been asked to take on the role of internal auditor of one of its clients and
would be responsible for implementing its own recommendations.
A
B
C
4.3
PL
Which of the following is the most appropriate safeguard that should be applied by
Panama & Co?
Assign different personnel to the audit teams
Ensure that the combined fee threshold is not exceeded for the clients
No safeguards are possible; hence the engagement should be declined
(1 mark)
Talland &Co is the external auditor of Huntley Co, a retailer. The managing partner has been
called to a meeting with the board of directors of Huntley Co. At that meeting the firm has
been asked if it can provide the following non-audit services.
SA
M
Huntley Co plans to implement a new sales system. The board proposes that Talland & Co
takes on a consultancy project to evaluate several possible systems, advise on which system
should be selected, and oversee the installation of the new system.
Which of the following threats would arise from the above scenario, if the project was
accepted by Talland & Co?
A
B
C
D
4.4
Advocacy
Familiarity
Self-review
Intimidation
(2 marks)
Helena & Co is an eight-partner assurance firm which has been asked to consider taking on
the statutory audit of two separate companies:
(1)
Titania Co, a listed company, requires the assurance firm to prepare, as well as
audit, the financial statements.
(2)
The finance director of Puck Co, an unlisted company, is the brother of one of the
partners of the assurance firm.
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
5
AUDIT AND ASSURANCE (F8) – REVISION QUESTION BANK
What are the correct actions for Helena & Co to take regarding the potential audit
clients?
A
B
C
D
(2 marks)
The directors of Exit Co, a large unlisted company, have decided to issue an annual
environmental and corporate social responsibility report as they wish to follow best corporate
governance practice. They have asked the company’s auditors Stu & Co to provide an
assurance report on the new report. If accepted, the annual fees from Exit Co would be
slightly less than 15% of Stu & Co’s gross annual fee income.
E
4.5
Accept both companies
Decline both companies
Accept with safeguards Titania Co and decline Puck Co
Accept Puck Co with safeguards and decline Titania Co
Which of the following safeguards would be the most appropriate for Stu & Co to now
implement?
4.7
(2 marks)
Which of the following statements best expresses the auditor’s duty of confidentiality to
his client in respect of information acquired in the course of professional work?
A
The auditor should only reveal confidential client data after having received consent
from the board of directors to do so
B
The auditor must supply any client data requested of him by a shareholder at the
annual general meeting
SA
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4.6
Resign from Exit Co
Decline the additional work
Rotate the audit partner
Discuss the fee levels with Exit Co’s audit committee
PL
A
B
C
D
C
The auditor should never reveal client confidential data unless it is essential to the
understanding of a modified audit report
D
The auditor should reveal certain client confidential data if he believes that he has a
legal right or duty to do so
(2 marks)
Hugh, a chartered certified accountant, has recently set up in business as an auditor. He has a
few clients already and is looking to expand.
Which of the following potential assignments would Hugh be able to accept?
6
A
An offer from Hugh’s father to take over the audit of the company of which he is
managing director
B
An offer to carry out an annual audit for a fee which represents 5% of Hugh’s total
fee income
C
An offer from a client interested in a tax evasion scheme
(1 mark)
(11 marks)
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
REVISION QUESTION BANK – AUDIT AND ASSURANCE (F8)
5
AUDITOR APPOINTMENT
5.1
Which THREE of the following are purposes of a letter of engagement?
(2)
To provide constructive suggestions to management concerning improvements in
internal control
(3)
To document and confirm acceptance of the appointment
(4)
To document management’s and the auditor’s respective responsibilities
(5)
To provide evidence on matters where other evidence is not expected to exist
A
B
C
D
3, 4 and 5
1, 2 and 3
1, 3 and 4
2, 3 and 5
E
To set out the form of any report to be issued
(2 marks)
A potential client has asked a firm to act as auditor to his company and wants the audit to
commence immediately as the financial statements are required by the bank.
PL
5.2
(1)
What should the auditor’s response be?
A
B
C
D
Which of the following procedures should an auditor carry out as soon as practicable
after accepting a new audit appointment?
SA
M
5.3
Start work on the audit right away
Inform the previous auditors that they intend to commence work
Contact the previous auditors for professional clearance before they start work
Accept the assignment subject to written confirmation of appointment by the Board
(2 marks)
5.4
A
Send an engagement letter setting out his undertaking of his responsibilities as
auditor
B
Communicate with the previous auditor to see if there is any professional reason
why the appointment should not stand
C
Ensure that he is not disqualified in any way from acting as auditor under local
legislation
(1 mark)
Which of the following factors would be most likely to cause an auditor to decline a new
audit engagement?
A
The auditor lacks an understanding of the prospective clients operations and
industry
B
Management’s disregard of its responsibility to maintain an adequate internal
control environment
C
The auditor is unable to perform substantive procedures before the year end
D
The prospective client has already completed its physical inventory count (2 marks)
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
7
AUDIT AND ASSURANCE (F8) – REVISION QUESTION BANK
5.5
When accepting appointment which of the following is NOT true?
A
B
C
Firms must consider independence at all times
Firms must consider if they can offer an adequate service
Firms must ensure they have previous experience in that sector
(1 mark)
(8 marks)
6
DOCUMENTATION
6.1
With respect to audit documentation, is the following statement true or false?
6.2
True
False
(1 mark)
PL
A
B
E
Working papers should be prepared to enable an experienced auditor with no involvement in
the audit to understand the nature, timing, extent and results of the audit procedures
performed in the engagement.
The use of standardised working papers may improve the efficiency with which the audit file
is prepared and reviewed. However, the extent to which a standardised approach is desirable
will vary from audit to audit and will be more appropriate for some forms of documentation
than others.
For which document would a standardised approach be particularly appropriate?
An engagement letter
An annual bank confirmation letter
An audit programme
Written representations from management
SA
M
A
B
C
D
6.3
Why is preparing audit working papers important?
A
B
C
6.4
8
(2 marks)
To comply with the requirements of the Disciplinary Committee of the ACCA
To enable the auditor to escape liability in a subsequent lawsuit
To enable the partner to assess the standard of work carried out by the audit team
(1 mark)
Which of the following is an advantage of using standardised working papers?
A
Ensures the completeness of the audit working papers by the placing of a standard
programme on each section of the audit file
B
Introduces a standard approach to the conduct and documentation of the audit
C
Enables junior staff to follow properly documented and designed procedures
thereby reducing the need for excessive supervision
D
Facilitates briefing, delegation, supervision, review and quality control of the audit
work
(2 marks)
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
REVISION QUESTION BANK – AUDIT AND ASSURANCE (F8)
6.5
Auditors’ working papers are conventionally divided into current and permanent files for both
convenience and control.
Which of the following is most likely to appear on the permanent audit file as opposed to
the current audit file?
A
B
C
D
Written representations from management
Management (control weakness) letter
Letter of engagement
Receivables confirmation letter
(2 marks)
E
(8 marks)
7
AUDIT PLANNING
7.1
What document usually forms the basis of the audit team briefing?
7.2
(1 mark)
According to International Standards on Auditing, which of the following is the
objective of planning an audit?
A
B
C
To perform the audit in an effective manner
To formulate and agree a timetable with the client
To ensure that the audit team know what is expected of them
(1 mark)
What is an audit programme?
SA
M
7.3
An engagement letter
An audit planning memorandum
An audit programme
PL
A
B
C
7.4
A
A series of detailed questions to ascertain and evaluate all important characteristics
of the system of internal control in operation
B
A list of disclosure and other requirements which must be met in order to ensure
compliance with IFRS, statutes and listing rules
C
A list of general instructions on the audit firm’s methods of auditing in each area
and the firm’s general procedures
D
A clear set of detailed instructions on the work to be carried out by audit staff
(2 marks)
Which of the following statements is FALSE with regard to audit planning?
A
It helps the auditors to devote appropriate attention to important areas of the
financial statements
B
It helps the auditor to properly organise and manage the audit engagement, so that it
is performed in an effective manner
C
It provides assurance to the auditor that the risk of a material misstatement in the
financial statements will be reduced
D
It facilitates the direction and supervision of audit team members and the review of
their work
(2 marks)
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
9
AUDIT AND ASSURANCE (F8) – REVISION QUESTION BANK
7.5
Which of the following should an auditor consider when developing an overall audit
strategy?
A
Whether the allowance for sampling risk exceeds the achieved upper precision limit.
B
Findings from substantive tests performed at interim dates
C
Whether the inquiry of the client’s solicitor identifies any litigation, claims, or
assessments not disclosed in the financial statements
D
Preliminary evaluations of materiality, audit risk, and internal control
(2 marks)
A
B
C
D
E
Under what circumstances would an auditor be most likely to perform substantive
procedures at an interim date?
The account being tested fluctuates based on management’s discretion
The account being tested has very little activity from year to year
The account being tested has a high level of inherent risk and control risk
The account being tested is not reasonably predictable in terms of its relative
significance to the financial statements
(2 marks)
PL
7.6
(10 marks)
8
UNDERSTANDING THE ENTITY
8.1
Which component of audit risk should be considered if an entity has few employees in its
accounting department?
Inherent
Control
Detection
SA
M
A
B
C
8.2
(1 mark)
To understand an entity, auditors use various sources of information. Such sources include:
(1)
(2)
(3)
(4)
(5)
The company’s systems procedure manuals
The internal audit function’s system notes
The prior year audit file
Inquiries made of company staff
The company’s website
Which THREE would be the best sources of information about a company’s financial
systems?
A
B
C
D
10
1, 2 and 4
3, 4 and 5
1, 3 and 5
1, 2 and 3
(2 marks)
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
REVISION QUESTION BANK – AUDIT AND ASSURANCE (F8)
8.4
What is detection risk in the context of audit risk?
A
That the company’s control system will fail to detect and correct material errors in
the processing of transactions
B
That the auditor’s substantive procedures will not detect and correct material errors
which exist in the financial statements
C
The susceptibility of financial statement transactions and balances to material errors
which may or may not be detected
(1 mark)
A client high-tec company has financial problems, a dominant chief executive, poor internal
control and unusual transactions.
What are all of these factors indicative of?
Inadequacies in the systems of reporting
The presence of going concern problems
Increased scope for potential fraud
A higher than normal risk audit
(2 marks)
PL
A
B
C
D
E
8.3
(6 marks)
9
INTERNAL CONTROL
9.1
Which TWO of the following are reasons why organisations need to have effective
systems of control?
Managing going concern risk
Maximising its profitability
Managing its assets and liabilities
Cutting down the time needed for the audit
Complying with laws and regulations
A
B
C
D
2 and 3
1 and 3
1 and 5
4 and 5
SA
M
(1)
(2)
(3)
(4)
(5)
9.2
(2 marks)
An effective system of internal control requires segregation of basic functions (segregation of
duties).
Which THREE of the following functions should ideally be segregated?
(1)
(2)
(3)
(4)
(5)
Authorisation of transactions
Preparation of financial statements
Custody or handling of assets
Budgetary control
Recording of transactions
A
B
C
D
1, 3 and 5
1, 2 and 3
1, 2 and 5
3, 4 and 5
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
(2 marks)
11
AUDIT AND ASSURANCE (F8) – REVISION QUESTION BANK
9.3
ISA 315 Identifying and Assessing the Risks of Material Misstatement through Understanding
the Entity and Its Environment states that an internal control system in an organisation
consists of five components: the control environment, the entity’s risk assessment process, the
information system, control activities and monitoring of controls.
Which component would include the review by a senior financial manager of monthly
bank reconciliations produced by her assistant?
A
B
C
(1 mark)
Two examples of internal controls operated at Fairweather Co include the financial
accountant signing the bank reconciliation (which had been prepared by a member of his
staff) and the finance director comparing monthly expenditure on consumables to budgeted
expenditure.
E
9.4
Control environment
Control activity
Monitoring of controls
(1)
(2)
(3)
(4)
(5)
PL
Control activities include:
Authorisation
Performance reviews
Information processing
Physical controls
Segregation of duties
What TWO control activities do the examples at Fairweather Co illustrate?
1 and 5
1 and 2
3 and 4
5 and 3
SA
M
A
B
C
D
9.5
(2 marks)
The auditor’s preliminary evaluation of the internal control system of a company is that it is
effective in ensuring the completeness and accuracy of the accounting records because the
company has implemented multiple controls, including good segregation of duties. However,
the auditor is aware that the effectiveness of the company’s internal controls is limited by the
possibility of collusion.
What level of reliance on internal controls and what types and extent of testing would
the auditor normally plan to carry out?
A
B
C
D
12
Level of reliance
on controls
low
moderate
high
low
Extent of
tests of control
nil
reduced
extensive
extensive
Extent of
substantive procedures
extensive
reduced
reduced
extensive
(2 marks)
(9 marks)
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
REVISION QUESTION BANK – AUDIT AND ASSURANCE (F8)
10
AUDIT MATERIALITY
10.1
Which of the following statements is FALSE?
A
B
C
The external auditor of Aaron Co has set a planning materiality threshold of $40,000 and a
performance materiality of $30,000. The audit testing approach to the following financial
statement items is being considered:
(1)
(2)
Harry, a director of Aaron Co, owes $1,000 to the company (borrowed during the year).
Sundry income of $35,000
Which of the two items should be tested?
10.3
Neither 1 nor 2
Both 1 and 2
1 only
2 only
PL
A
B
C
D
E
10.2
Materiality depends on the monetary amount of an item
Materiality may depend on either the nature of an item or its monetary amount
Materiality is a matter of professional judgment
(1 mark)
(2 marks)
As an audit team member with two years of experience, you were assigned to carry out a
substantive test on directors’ expenses. The result of the test showed that in several cases
involving the same director, the Chief Financial Officer (CFO) had authorised the over
payment of his expenses. Each expense item was less than the performance materiality level.
What action should be taken?
Draw conclusion
Discuss with a senior member of the audit team
Extend sample
Discuss with the CFO
SA
M
A
B
C
D
10.4
10.5
(2 marks)
Which is the best way of describing a material item?
A
Its omission or disclosure would reasonably influence the decisions of a user of the
financial statements
B
It is large in relation to the same figure in previous years
C
It amounts to more than 10% of the total of which it forms a part
D
It is one which would reduce a company’s profits
(2 marks)
“The materiality level calculated at the planning stage should NOT be revised during later
stages of the audit.”
Is this statement true or false?
A
B
True
False
(1 mark)
(8 marks)
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
13
AUDIT AND ASSURANCE (F8) – REVISION QUESTION BANK
11
FRAUD, LAW AND REGULATIONS
11.1
The auditor of Woodferns Agencies Co is facing a legal claim for negligence. It is alleged
that a fraud was perpetrated by the manager at one of the smallest of the company’s 80
branches. The auditor had not visited that branch for three years as he had adopted a
rotational testing approach. As a consequence the fraud had gone undetected for two years.
What is the auditor’s BEST defence against the claim?
B
An up-to-date letter of engagement which points out to the directors that the audit
should not be relied upon to detect all frauds which may exist
C
Written representations from management or other documentary evidence from the
directors in which they acknowledge primary responsibility for the prevention and
detection of fraud
D
Case law judgements which indicate that an auditor should not be held responsible
for ingeniously laid frauds
(2 marks)
Which of the following procedures is NOT likely to result in the discovery of possible
non-compliance with laws and regulations?
A
B
C
Making inquiries of management or the entity’s lawyer
Reviewing internal control questionnaires
Performing tests of details of transactions
(1 mark)
A material fraud was discovered at Conner Co shortly after the auditor had presented an
unmodified audit report to the annual general meeting. His standard letter of engagement
indicated that he “would plan the audit so as to have reasonable expectation of detecting
material misstatements in the financial statements resulting from errors or fraud”, but also
stated that the primary responsibility for the prevention and detection of fraud lay with
management.
SA
M
11.3
E
Audit documentation shows that the audit was carried out in accordance with
International Standards on Auditing
PL
11.2
A
Which of the following statements most accurately reflects the likelihood of the auditor
being held liable for the failure to find the fraud?
14
A
He is likely to be liable because his engagement letter accepted specific
responsibility to find material misstatements
B
He is likely to be found liable if he found indications of a possible fraud but
dismissed them as immaterial having failed to adequately investigate them
C
He is likely to be held liable if he has not designed specific tests to look for fraud in
all areas of the accounting records
D
He is unlikely to be held liable because the engagement letter specifically stated that
management were responsible for the prevention and detection of fraud (2 marks)
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
REVISION QUESTION BANK – AUDIT AND ASSURANCE (F8)
11.4
An auditor has discovered a $10,000 wages fraud by a director of a listed company. The
amount is not material in relation to the financial statements of the company and the auditor
has determined that the fraud does not constitute money laundering.
To whom does the auditor have a primary duty to report this matter to?
A
B
C
(1 mark)
E
Which of the following items of information that comes to an auditor’s attention would
be most likely to suggest non-compliance with laws and regulations?
A
The client’s failure to develop adequate internal controls that prevent or detect
unauthorised purchases
B
The presence of several difficult-to-audit transactions affecting expense accounts
C
An exchange of property for similar property
D
The discovery of unexplained payments made to government employees
PL
11.5
Those charged with governance
The company’s shareholders
The tax authorities
(2 marks)
(8 marks)
12
TESTS OF CONTROL
12.1
The following situations are all covered by general controls:
Changes to data files
Program changes
Continuity of operations
SA
M
(1)
(2)
(3)
Which general control would be appropriate to all three scenarios above?
A
B
C
D
12.2
Password protection
Back-up procedures
Authorisation
One-for-one checking
(2 marks)
Which of the following is an example of a general control in a computerised accounting
system?
A
The sales department matches a list of computer-produced invoices to its copies of
the manual input documents which originated the production of the invoice
B
The personnel department review a monthly printout of all changes to payroll
standing data which is then checked against manual records
C
The sales ledger system includes a sequence check on pre-numbered sales input
documents received from the sales department
D
Access to the computer facility is via a locked door and is restricted to selected
personnel who are issued with a personal key
(2 marks)
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
15
AUDIT AND ASSURANCE (F8) – REVISION QUESTION BANK
Which of the following procedures is considered a test of controls?
A
B
C
12.5
When planning the audit of the purchases cycle, which of the following internal controls
should the auditor test in order to ensure that liabilities are not understated?
A
Goods inwards records (GRNs) are matched to invoices and regularly reviewed for
items in respect of which no invoice has been received. An authorised list of
unmatched GRNs is produced at the end of each month
B
Invoices are authorised as matched with goods inwards/service received notes
before being recorded in the purchases day book
C
Invoices are matched with copy purchase orders and authorised before being
recorded in the purchases day book
D
Periodic purchase ledger reconciliations are performed (and signed) by personnel
independent of the goods inwards department
(2 marks)
E
12.4
Reviewing cash payments after the year end for unrecorded liabilities
Evaluating whether a liability was recorded at the proper amount
Interviewing and observing appropriate personnel to determine segregation of duties
(1 mark)
PL
12.3
Which of the following internal controls is most likely to contribute to the auditor’s
confidence that all sales have been recorded in the accounts?
Matching pre-numbered sales invoices to despatch notes
Sales manager authorising all invoices before they are issued
Matching pre-numbered despatch notes to invoices
Preparing and following up an aged receivables analysis by someone independent of
the sales ledger function
(2 marks)
SA
M
A
B
C
D
12.6
An auditor has identified the financial controller’s review of the bank reconciliation as a
control to test. In connection with this test, the auditor interviews the financial controller to
understand the specific data reviewed on the reconciliation. In addition, the auditor verifies
that the bank reconciliation is properly prepared by the accountant and reviewed by the
financial controller as evidenced by their respective sign-offs.
Which of the following types of audit procedures do these actions illustrate?
A
B
C
D
16
Inquiry and inspection of records
Confirmation and reperformance
Analytical procedures and reperformance
Observation and inspection of records
(2 marks)
(11 marks)
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
REVISION QUESTION BANK – AUDIT AND ASSURANCE (F8)
13
COMMUNICATION ON INTERNAL CONTROL
13.1
During the audit of a new client numerous weaknesses have been identified. The auditor is
considering the content and format of his report to management (letter of weakness).
Which of the following best summarises the auditor’s approach to the report?
B
Report only major points to be dealt with by directors, leaving less important items
to be discussed informally with members of the client’s staff
C
Report only those matters which potentially have a material effect on the true and
fair view shown by the financial statements, indicating that this should not be
regarded as a comprehensive statement of all weaknesses that exist
D
Issue separate reports for each area to the executive directors with specific
responsibility in those areas
(2 marks)
Which of the following is used by the auditor to determine if a deficiency in internal
control is significant?
A
B
C
13.3
E
Include all matters of sufficient importance identified, but structure the letter to take
account of the varying levels of significance of matters included
PL
13.2
A
Professional scepticism
Performance materiality
Professional judgement
Which of the following would NOT normally be considered to be a significant deficiency
by an auditor?
No sensitivity analysis was carried out on the objective determination of estimates
contained within the financial statements
SA
M
A
13.4
(1 mark)
B
An immaterial fraud carried out by a senior manager had not been detected by the
internal control system
C
Transactions in which directors have financial interests are not being scrutinised by
the audit committee
D
No action has been taken to address a significant deficiency reported during the
audit of the previous year
(2 marks)
As a number of deficiencies within the sales cycle are individually not significant, there is no
requirement to discuss or report any of them to those charged with governance.
Is this statement TRUE or FALSE?
A
B
True
False
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
(1 mark)
17
AUDIT AND ASSURANCE (F8) – REVISION QUESTION BANK
Which of the following items may be included within the report to management?
(1)
(2)
(3)
(4)
An indication of areas in which the client can assist in improving audit efficiency.
Constructive feedback on business systems, risk systems and risk management.
Details of the audit work carried out to detect deficiencies.
Details of additional extensive work that could have been carried to try and detect
further significant deficiencies.
A
B
C
D
1 and 2 only
1 and 3 only
1, 2 and 4 only
2, 3 and 4 only
(2 marks)
E
13.5
(8 marks)
SERVICE ORGANISATIONS
14.1
Alhare Co uses a service provider to produce its payroll. Originating documents are kept by
Alhare and regularly reconciled (i.e. through control totals and reviews/re-computation of
data sent to and received from the service provider). Audit approach options available to the
auditor include:
PL
14
Assess the design and implementation of the service provider’s controls relevant to
the payroll processing
(2)
Test the service provider’s controls
(3)
Assess the design and implementation of the payroll controls at Alhare
(4)
Obtain a representation from the directors of Alhare concerning the operation of
Alhare’s payroll
SA
M
(1)
Which of the following would be the most likely approach taken by the auditors of
Alhare concerning the service provider?
A
B
C
D
14.2
1 only
3 only
1 and 2 only
3 and 4 only
(2 marks)
A finance company uses a service provider to process its high volume, complex transactions.
Which of the following circumstances is most likely to affect the auditor’s ability to form
his opinion?
18
A
The possibility of loss of input documentation in transmission to the service
provider
B
Inadequate back-up and reconstruction facilities at the service provider
C
Failure of service provider staff to identify exceptions in output and bring them to
the attention of management
D
Refusal of permission to evaluate and test controls at the service provider (2 marks)
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
REVISION QUESTION BANK – AUDIT AND ASSURANCE (F8)
14.3
An auditor is auditing the financial statements of Aloe Co. Aloe uses a service provider to
process its payroll. The auditor of the service provider recently issued a report on the design,
implementation and effectiveness of the service provider’s internal controls.
Which of the following procedures should the auditor of Aloe perform with respect to
the assurance report issued by the service provider’s auditor?
14.4
Perform tests of controls at the service provider
Assess control risk at maximum when auditing Aloe’s payroll
Review the audit program followed by the service provider’s auditor
Inquire concerning the competence of the service provider’s auditor
(2 marks)
E
A
B
C
D
It is common practice for the auditor of a service company to provide a Type 1 or Type 2
report to be used by the auditors of that service company’s clients.
What is the main difference between a Type 1 and Type 2 report?
Details of the controls tested during the service provider’s annual audit
B
A separate assurance report on the effectiveness of the service provider’s internal
control function
C
Details of any modification made to the auditor’s report on the financial statements
D
Details of the controls tested which relate to the control objectives stated in the
description of the service provider’s clients’ function
(2 marks)
PL
A
(8 marks)
AUDIT EVIDENCE
SA
M
15
15.1
Which of the following is the LEAST persuasive method of gathering evidence?
A
B
C
15.2
Inspection of a supplier’s invoice
Reperformance of a depreciation calculation undertaken by the reporting accountant
Inspection of a sales invoice produced by the client
(1 mark)
An auditor recalculates the amortisation of intangible assets to determine whether the
amortisation period is reasonable.
Which financial statement assertion is being tested?
A
B
C
15.3
Valuation and allocation
Existence
Completeness
(1 mark)
During the course of an audit, the auditor may use the following documents:
(1)
(2)
(3)
An analysis of repairs expenditure for tax purposes
An aged debt listing
Suppliers’ statement reconciliations
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
19
AUDIT AND ASSURANCE (F8) – REVISION QUESTION BANK
Which of these are acceptable if prepared by the client as a basis for further audit
work?
A
B
C
15.4
1 only
1 and 2 only
1, 2 and 3
(1 mark)
Sufficiency of audit evidence depends, among other things, on the “risk of misstatement”.
Which of the following would increase this risk, and so indicate that more evidence
should be collected for “sufficiency”?
B
The use of audit staff who are unfamiliar with the client
C
The use of judgement sampling rather than statistical sampling
D
A reporting deadline which is unusually soon after the year end
(2 marks)
In order to detect an understatement of sales, which of the following procedures would
be most effective?
A
B
C
D
Select sales delivery notes and check the details with the related sales invoices
Select sales invoices and check the details with the related sales orders
Select sales invoices and check the details with the related sales delivery notes
Select sales orders and check the details with the related sales invoices
(2 marks)
Growers Co is a garden centre with 20 locations employing over two hundred people. To cope
with the current and expected future annual increase in transactions, Growers has
implemented a centralised computer system linked to processing and checkout terminals at
each centre. The new system will significantly improve the timing and quality of the
management control information. A well-qualified and experienced internal audit team was
also recently appointed.
SA
M
15.6
E
The knowledge that the audit working papers will be reviewed by an independent
external technical body
PL
15.5
A
What area of the external audit will see an increased emphasis on obtaining audit
assurance?
A
B
C
D
15.7
(2 marks)
Which of the following types of evidence would an auditor be most likely to examine to
determine whether internal controls are operating as designed?
A
B
C
D
20
Walk-through testing
Controls testing
Substantive testing of transactions
Substantive testing of balances
Gross margin information regarding the client’s industry
Confirmation of receivables verifying account balances
Sales orders documenting credit approval
Anticipated results documents in budgets or forecasts
(2 marks)
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
REVISION QUESTION BANK – AUDIT AND ASSURANCE (F8)
What assertion is an auditor testing when the auditor gathers evidence related to an
entity’s control of obtaining credit approval before shipping goods to customers?
A
B
C
15.9
Rights and obligations
Existence
Valuation and allocation
(1 mark)
What assertion is an auditor testing when the auditor gathers evidence to detect sales
made after the end of the year that have been recorded before year end?
A
B
C
Cut-off
Accuracy
Completeness
(1 mark)
E
15.8
(13 marks)
ANALYTICAL PROCEDURES
16.1
At which of the following audit stages is the auditor least likely to use analytical
procedures?
A
B
C
16.2
PL
16
Planning
Review and evaluation of internal control
Final review of financial statements
(1 mark)
For what purpose will the external auditor most likely use analytical procedures at the
planning stage of the audit?
To determine the extent of substantive procedures which will be necessary during
the audit
SA
M
A
16.3
B
To identify areas of potential audit risk or new developments to give direction to the
audit
C
To assess the adequacy of the performance of the entity and the efficiency and
effectiveness of its operations
(1 mark)
A review of the revenues and expenses in the detailed profit and loss account of a
company, involving investigation of significant variations in comparison with the
equivalent figures for the previous year, is most likely to detect which of the following
significant problems?
A
The fact that a line of inventory has become obsolete during the year and should be
written off
B
A misallocation of distribution costs as advertising expenses
C
The fact that the costs of some exceptional repairs to the company’s premises have
not been included in the profit and loss account
D
Failure to make a provision for volume discounts which have been introduced this
year for certain customers
(2 marks)
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
21
AUDIT AND ASSURANCE (F8) – REVISION QUESTION BANK
16.4
Hardware Co has a fixed mark-up of 50% on cost. The external auditor’s analytical review of
the current financial statements has revealed a gross profit margin of 40% of sales.
What could this indicate?
A
B
C
D
(2 marks)
As the new auditor of Elm Co (a listed company) you note that the company’s gross profit
percentage as per the draft accounts has fallen from 30% in the previous year to 20% in the
current year.
E
16.5
Some sales have not been invoiced
Some purchases have not been recorded
Closing inventory has been undervalued
Goods used for personal consumption have been included in purchases
Which of the following explanations is the most plausible?
B
Errors in computation led to opening inventory being overvalued and the company
has also increased sales as a result of a marketing drive based on undercutting
competitors
C
Errors in computation led to opening inventory being undervalued and margins have
fallen as a result of the entry into the market of a major new competitor
D
Errors in computation have caused opening inventory to be undervalued and this has
been compounded by the inclusion for the first time (so as to comply with IAS 2) of
indirect overheads in the closing inventory valuation
(2 marks)
PL
Errors in computation led to opening inventory being overvalued and this has been
compounded by the inclusion for the first time (so as to comply with IAS 2) of
indirect overheads in the closing inventory valuation
Which of the following assists an auditor in gaining assurance that a company’s
financial statements are consistent with his knowledge of the business?
SA
M
16.6
A
A
B
C
Adequate planning of the audit
Documenting all audit procedures in detailed working papers
Carrying out an overall review of the financial statements
(9 marks)
17
ACCOUNTING ESTIMATES
17.1
What is the general audit objective when assessing accounting estimates?
A
B
C
17.2
(1 mark)
Which of the following approaches to evaluating the reasonableness of an accounting
estimate would provide insufficient audit evidence?
A
B
C
D
22
Consistent with industry guidelines
Based on objective assumptions
Reasonable under the circumstances
(1 mark)
Review subsequent events or transactions occurring prior to audit completion
Develop an independent expectation of the estimate
Review and test the process used to develop the estimate
Review the minutes of board of directors and shareholder meetings for discussion of
the estimate
(2 marks)
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
REVISION QUESTION BANK – AUDIT AND ASSURANCE (F8)
Which of the following types of assumptions would an auditor be concerned about when
evaluating the reasonableness of an entity’s accounting estimates?
A
B
C
D
Which of the following is NOT a factor that may influence estimation uncertainty?
A
B
C
D
17.5
(2 marks)
Management judgement
Observable or unobservable inputs
The length of any forecast period
The auditor’s professional judgement
E
17.4
Assumptions that are susceptible to bias
Assumptions that are consistent with prior periods
Assumptions that are insensitive to variations
Assumptions that are similar to industry guidelines
(2 marks)
Which of the following procedures would an auditor NOT ordinarily perform in
evaluating management’s accounting estimates for reasonableness?
A
B
C
Develop an independent expectation of management’s estimates
Gather evidence to restate prior year estimates
Test the calculations used by management to develop the estimates
PL
17.3
(1 mark)
(8 marks)
18
USING THE WORK OF AN EXPERT
18.1
Which of the following statements is NOT correct concerning the auditor’s use of the
work of a specialist?
The specialist should have an understanding of the auditor’s use of the specialist’s
findings
B
The auditor is required to perform substantive procedures to verify the specialist’s
assumptions and findings
C
The client should have an understanding of the nature of the work to be performed
by the specialist
D
The auditor should obtain an understanding of the methods and assumptions used by
the specialist
(2 mark)
SA
M
A
18.2
Which of the following statements is correct concerning an auditor’s use of the work of
an appraiser in assessing the value of a client’s intangible assets?
A
The auditor is not required to understand the objectives and scope of the appraiser’s
work
B
The reasonableness of the appraiser’s assumptions is strictly the auditor’s
responsibility
C
The client is required to consent to the auditor’s use of the appraiser’s work
D
If the appraiser is not independent of the client, the auditor may still be able to use
the appraiser’s work
(2 marks)
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23
AUDIT AND ASSURANCE (F8) – REVISION QUESTION BANK
18.3
The only difference between a management’s expert and an auditor’s expert is that the
management’s expert is an employee of the company and the auditor’s expert is an employee
of the auditor.
Is this statement true or false?
A
B
18.4
True
False
(1 mark)
In using the work of an audit expert, an auditor referred to the expert’s findings in the
auditor’s report.
E
Under what circumstances would this be appropriate?
The client is not familiar with the professional certification, personal reputation, or
particular competence of the auditor’s expert
B
The auditor, as a result of the expert’s findings, adds explanatory detail to a
modified opinion regarding the reasons for the opinion
C
The auditor understands the form and content of the expert’s findings in relation to
the representations in the financial statements
D
The auditor, as a result of the expert’s findings, decides to indicate a division of
responsibility with the expert
(2 marks)
PL
A
(7 marks)
AUDIT SAMPLING
19.1
As part of the audit testing to satisfy the audit objective “Receivables are not overstated”, the
audit senior of a manufacturing company plans a receivables confirmation.
SA
M
19
Which of the following approaches would be the most appropriate in these
circumstances?
19.2
A
A random sample selected from the population of individual customers used during
the year
B
A sample selected from the population of individual customers used during the year,
with a bias towards those having the highest value of transactions in the year
C
A random sample selected from the population of customers’ year end balances
D
A sample selected from the population of customers’ year end balances, with a bias
towards large balances
(2 marks)
Which of the following will reduce non-sampling risk?
A
B
C
24
Ensuring that the sample is representative of the population as a whole
Adequately supervising and reviewing the conduct of the audit test by the audit staff
Reducing the level of tolerable error
(1 mark)
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
REVISION QUESTION BANK – AUDIT AND ASSURANCE (F8)
(1)
(2)
(3)
(4)
(5)
(6)
The higher the entity risk the greater the sample size
The bigger the population the bigger the sample size
The lower the acceptable detection risk the lower the sample size
The higher the tolerable error the lower the sample size
The higher the expected error the lower the sample size
The more effective the stratification the lower the sample size
A
B
C
D
2, 3, 5 and 6 only
2 and 5 only
1, 4 and 6 only
2, 3 and 5 only
Which of the following is generally NOT an appropriate method of sample selection?
A
B
C
19.5
(2 marks)
E
19.4
Which of the following statements are NOT true?
Block selection
Systematic selection
Haphazard selection
PL
19.3
(1 mark)
An auditor selects a sample using the total value of trade receivables as the population. The
sample is selected as follows:


one dollar is selected at random and deemed as the first dollar;
individual dollars are then selected at consecutive fixed intervals of $10,000.
Which of the following statements, in respect of this form of sample selection, is the most
accurate?
The basis of sample selection is more suited to the detection of understatement
errors than overstatement errors
B
The basis of selection would be ineffective where errors occur in the population on
a systematic basis
C
The basis of selection may be preferred when the book population under
examination has a highly-skewed value distribution
D
The basis of selection ensures that all errors in excess of $10,000 will be detected
(2 marks)
SA
M
A
19.6
In addition to evaluating the frequency of deviations in tests of controls, the auditor should
also consider the qualitative aspects of deviations.
Which of the following would be most likely cause the auditor to consider the broader
implications of a deviation?
A
B
C
D
It was the only deviation in the sample
It was identical to a deviation discovered in the prior year audit
It was initially concealed by a forged document
It was caused by an employee’s misunderstanding of instructions
(2 marks)
(10 marks)
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
25
AUDIT AND ASSURANCE (F8) – REVISION QUESTION BANK
20
WRITTEN REPRESENTATIONS
20.1
Which of the following describes the purpose of a written representation from
management?
To enable the auditor to bring to the attention of management any significant areas
of weakness identified in the accounting records, systems and controls examined
during the audit
B
To define clearly the extent of the auditor’s responsibilities and provide written
confirmation of the terms of the auditor’s acceptance of appointment
C
To provide written confirmation of matters material to the accounts where
knowledge of the relevant facts is confined to the management or where the matters
are principally ones of judgement and opinion
(1 mark)
E
20.2
A
In the course of auditing a company an auditor will receive verbal representations from
management for which independent evidence is not available.
A
To ensure that the directors formally accept their responsibility for providing such
information to the auditor
B
To enable the auditor to escape legal liability for any misstatement in the accounts
C
To prove that the directors have kept proper accounting records
D
To reduce the extent of the alternative procedures which the auditor would
otherwise have to undertake
(2 marks)
Which of the following would the auditor generally expect to be referred to in the
written representations from management?
SA
M
20.3
PL
On what basis should the auditor seek written confirmation of these representations
from the directors?
20.4
A
Confirmation from the directors that they will remedy any serious weaknesses in
controls reported by the auditors
B
Confirmation of the respective responsibilities of the auditors and the company for
tax work
C
Details of any material subsequent events or confirmation that there have not been
any
(1 mark)
The management of Relic Co has refused to provide the auditor with a written management
representation that the auditor considers essential in relation to the impairment of a material
asset.
Which of the following best describes the impact of this refusal?
A
B
C
D
26
Prima facie evidence that the financial statements are not presented fairly
An illegal act by the directors
Grounds for an opinion modified on the basis of material misstatement
Grounds for an opinion modified on the basis of insufficient audit evidence
(2 marks)
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
REVISION QUESTION BANK – AUDIT AND ASSURANCE (F8)
20.5
The following timetable relates to the audit of a company:
31 January
28 February
5 March
25 April
–
–
–
–
All audit field work completed
Financial statements approved by board of directors
Audit report signed
AGM held
A
B
C
D
31 January
28 February
4 March
24 April
E
What is the most appropriate date for an auditor to obtain a signed written
representation from management?
(2 marks)
(8 marks)
COMPUTER-ASSISTED AUDIT TECHNIQUES
21.1
How does the auditor use “test data” in computer assisted audit techniques?
A
B
C
21.2
PL
21
To test the operation of the entity’s computer programs
To examine the contents of the entity’s computer data files
To test the completeness of the items on a file
(1 mark)
A large manufacturer has a computerised open-item sales ledger, holding 2,000 customer
accounts. The principal files within the system are the customer master file, sales ledger file,
and transactions history file.
SA
M
What audit test could be assisted by a computer enquiry from the sales ledger files
against the customer master file?
A
B
C
D
21.3
Checking whether customers have exceeded their credit limits
Extracting a monetary unit sample of sales invoices
Verifying large credit notes
Verifying the age analysis of trade receivables
(2 marks)
During the final audit of Colossus, a large multi-national listed conglomerate, it is suspected
that systematic errors that have occurred within the integrated computer system are a result of
mainframe programming inadequacies.
Which tests are most likely to confirm these suspicions?
A
The use of test data together with a review of general controls over systems
development and implementation
B
Integrated test facilities or other embedded facilities designed to allow a continuous
review of data recorded and the manner in which it is treated by the system
C
File dumps at intervals, with manual recreation and comparison with actual output
D
Special computer audit programs to ensure the completeness of input and used to
simulate programmed controls
(2 marks)
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
27
AUDIT AND ASSURANCE (F8) – REVISION QUESTION BANK
Which of the following most closely represents the use of audit software?
A
B
C
D
21.5
Auditor’s
program
√
Client’s
program
√
Auditor’s
data
√
√
Client’s
data
√
√
√
√
(2 marks)
Which of the following could be established by test data processed by the payroll module
of a computerised accounts system?
A
B
C
Accuracy and completeness of tax calculations and deductions
Accuracy of employees’ personal tax codes
Validity of employees’ gross salary
E
21.4
(1 mark)
PL
(8 marks)
22
NON-CURRENT ASSETS
22.1
Which of the following describes how an assurance provider would check the existence
assertion for a non-current asset?
A
B
C
(1 mark)
The auditor of Kirby Co is currently planning the audit approach in respect of the containers
in which goods are delivered to customers. There is no charge to customers for the
containers, which remain the property of Kirby Co and must be returned. For production line
convenience, suppliers are also required to use these containers when supplying components.
The containers are expensive and have an average estimated useful life of three years.
Container records identify each container separately and record their current location.
SA
M
22.2
Trace the physical item to the non-current asset register
Trace the physical item to the financial statements
Trace an entry in the non-current asset register to the physical item
Which assertion is likely to cause particular problems for the auditor?
A
B
C
D
22.3
Checking depreciation rates and calculations for the vehicles
Examination of the vehicle registration documents
Inspection of the cars’ insurance certificates
(1 mark)
What evidence will inspecting the share certificate, contract note and statutory records
of an unquoted investment provide to the auditor?
A
B
C
D
28
(2 marks)
Which of the following audit procedures provides the most relevant evidence to verify
the carrying amount of a company’s fleet of cars?
A
B
C
22.4
Existence
Rights and obligations
Valuation and allocation
Presentation and disclosure
Existence of the investment
Existence and rights and obligations of the investment
Existence, rights and obligations, and cost of the investment
Existence, rights and obligations, cost and valuation of the investment
(2 marks)
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
REVISION QUESTION BANK – AUDIT AND ASSURANCE (F8)
22.5
Pillbox Co makes and sells medical equipment and has a sizeable research and development
unit. The directors have identified three material applied research projects whose results they
hope will be developed into viable products. They have therefore capitalised the expenditure
on these projects and will amortise it over three years. The accounts fully disclose the
treatment adopted.
What form should the audit report take?
Unmodified
B
Unmodified, with reference to the inherent uncertainty drawing attention to the
relevant disclosure note
C
Modified, disclaimer as a result of uncertainty about viability of the products
D
Modified, except for capitalisation of the expenditure
E
A
(2 marks)
(8 marks)
INVENTORY
23.1
Which of the following forms of evidence is the most reliable where an auditor is unable
to physically inspect inventory held by an agent on a sale or return basis?
PL
23
A copy of the pro-forma invoice to the agent
B
A certificate obtained directly by the auditor from the agent detailing the inventory
held on the client’s behalf
C
An analysis of cash received from the agent after the year end substantiating the
year-end inventory level
(1 mark)
SA
M
A
23.2
In order for a continuous inventory counting system to provide satisfactory evidence of yearend inventory levels it is essential that management maintains adequate inventory records and
investigates and corrects all material differences between the inventory records and the
physical counts.
How often must the inventory be counted?
A
B
C
D
23.3
(2 marks)
What is the primary assertion tested by the auditor when he attends an inventory
count?
A
B
C
23.4
All items at least once during the year
All items more than once during the year with the auditor in attendance
All items at the same time at least once during the year
All high value items at the year end
Existence
Control
Valuation
(1 mark)
An auditor analysing inventory turnover rates would NOT obtain evidence about which
of the following management assertions?
A
B
C
D
Existence
Rights and obligations
Completeness
Valuation and allocation
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
(2 marks)
29
AUDIT AND ASSURANCE (F8) – REVISION QUESTION BANK
23.5
An audit objective is stated as “to ensure that all inventory on hand is reflected in the
inventory balance at the reporting date”.
Which of the following management assertions should the auditor test?
A
B
C
D
Rights and obligations
Valuation and allocation
Completeness
Existence
(2 marks)
(8 marks)
EXTERNAL CONFIRMATIONS, RECEIVABLES AND SALES
24.1
In order to gather sufficient, appropriate evidence, the auditor may make use of external
confirmations. These may take the form of being a positive or negative request.
E
24
PL
A positive confirmation request for trade receivables always asks respondents to reply to the
auditor indicating whether or not they agree with the information provided.
Is this statement true or false?
A
B
24.2
True
False
(1 mark)
During their interim audit the auditors discover that there is often a delay between goods
being delivered to customers and the subsequent raising of a sales invoice.
SA
M
Which test is most likely to establish the extent of any understatement of receivables at
the year end?
24.3
30
A
Comparing goods despatch notes issued shortly after the year end with sales records
B
Comparing goods despatch notes issued shortly before the year end with sales
records
C
Comparing sales invoices issued shortly before the year end with goods despatched
notes
D
A receivables confirmation with a detailed investigation of all reconciling items
(2 marks)
The auditor of Lydney Co reviews the receivables ledger at the planning stage for the year
end audit and determines that it comprises a large number of small balances, with a few larger
balances, which are settled, on average, in two months. As in previous years, the reporting
deadline is one month after the year end. Internal controls are considered to be effective and
the error rate is expected to be low.
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
REVISION QUESTION BANK – AUDIT AND ASSURANCE (F8)
What is likely to be the most effective substantive audit procedure to assist in the
verification of year end receivables?
Request a sample of customers to confirm the balance on their account at an interim
date and review movements to the year end
B
Request a sample of customers to confirm the balance on their account at the year
end
C
Trace a sample of invoices and cash receipts through the system to the customers’
accounts
D
Review cash received after the year end and agree to customer balances
E
How would an auditor trace transactions if the objective of the auditor’s tests of details
is to detect possible understatement of sales?
A
B
C
24.5
(2 marks)
From purchase order to shipping documents
From cash receipts to sales invoices
From shipping documents to sales invoices
PL
24.4
A
(1 mark)
The managing director of a client company has refused to allow the auditor to write to a major
customer who is on the list of receivables selected for direct confirmation, as the customer is a
close personal friend who may be offended by the request.
In these circumstances the auditor’s next step would be to
Indicate that his refusal constitutes a restriction of scope which will lead to a
modification of the audit opinion
B
Perform the circularisation as planned since the auditor’s responsibility is to the
members and not the directors
SA
M
A
C
Perform the circularisation substituting another receivable
characteristics in order to preserve the integrity of the sample
with
similar
D
Perform the confirmation on the other receivable balances selected and search for
alternative audit evidence to confirm the balance of that customer
(2 marks)
(8 marks)
25
SHARE CAPITAL, RESERVES AND DIRECTORS’ REMUNERATION
25.1
The financial statements of a manufacturing company do not disclose a loan of $1,500 made
to a director during the year and repaid in full before the year end. The company’s profit for
the year was $2million.
What reference, if any, should be made to this matter in the audit report?
A
B
C
D
25.2
No reference is necessary
As an except for opinion, giving details of the loan (lack of evidence)
As an except for opinion, giving details of the loan (material misstatement)
An adverse opinion, giving details of the loan
(2 marks)
What is a key source of audit evidence for the issue of ordinary shares?
A
B
C
Numbered share certificates
Issuing agent’s records
Minutes of the board of directors
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
(1 mark)
31
AUDIT AND ASSURANCE (F8) – REVISION QUESTION BANK
25.3
A company uses the services of a company secretary agent to deal with all regulatory issues
relating to share capital including maintenance of the share register, share issues and statutory
returns.
What written confirmation should the auditor obtain from the company’s agent?
A
B
C
D
(2 marks)
An auditor is in the process of performing substantive procedures on a client’s equity balances
and traces share-related transactions recorded during the year to the board minutes.
E
25.4
Details of any restrictions on the payment of dividends
The number of shares issued and outstanding
Guarantees of preferred share liquidation value
The authorised share capital
Which of the following assertions is the auditor testing with this procedure?
Valuation
Understandability and classification
Existence and occurrence
Completeness
PL
A
B
C
D
(2 marks)
(7 marks)
26
LOANS, BANK AND CASH
26.1
Which of the following procedures would be the most appropriate for verifying the
interest accrued on borrowings?
Confirming the interest rate with the lender
Vouching the payment of interest on the borrowings
Recalculating the interest accrued on the basis of outstanding amount, interest rate
and period to which it relates
(1 mark)
SA
M
A
B
C
26.2
Obtaining annual bank confirmation letters and receivable confirmation letters are standard
audit procedures. The two forms of letterhead mostly used are:
(1)
(2)
Client’s letterhead
Auditor’s letterhead.
On whose letterhead are bank letters and receivable confirmation letters sent?
A
B
C
D
26.3
(2 marks)
Which of the following is NOT confirmed in the bank letter?
A
B
C
32
Both on 1
1 for the bank letter, 2 for the receivable confirmation
1 for the receivable confirmation, 2 for the bank letter
Both on 2
Cash in bank
Trade finance
Accounts receivable
(1 mark)
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
REVISION QUESTION BANK – AUDIT AND ASSURANCE (F8)
26.4
Farnham Co has a bank overdraft of $450,000, secured by a floating charge over its inventory.
It also has a deposit with the same bank of $200,000. The bank confirmation letter states that
the bank has the right to off-set these balances, and has set an overall net borrowing limit on
the company of $300,000. The finance director has disclosed these amounts as “secured
overdraft – $250,000” under “current liabilities”, with no further description in the notes other
than the nature of the security.
What steps, if any, should the auditor take in respect of this matter?
B
Insist upon classification of $200,000 under current assets and $450,000 under
current liabilities
C
Insist that the company discloses in the notes the full amount of the overdraft and
that it is in breach of its borrowing limit
D
Accept the treatment but include added emphasis in the audit report explaining that
these amounts have been off-set, and disclosing the overdraft limit
(2 marks)
E
None, as the treatment is correct
PL
26.5
A
During the audit of a company’s year-end bank reconciliation, the auditor discovered that a
material amount of cheques to pay the company’s suppliers were drawn and recorded in the
books just before the year end. The cheques were sent out two weeks after the year end.
What action should be taken by the auditor?
Not seek to make any adjustment to the amount of trade payables or bank balance in
the accounts
B
Confirm when the cheques were cleared before deciding if any adjustment is
necessary
C
Request the company to adjust the amount of trade payables and bank balance by
the total of the cheques
D
Request the company to adjust the amount of trade payables and bank balance by
the total of the above cheques which remain unpresented at the completion of the
audit
(2 marks)
SA
M
A
(8 marks)
27
LIABILITIES, PROVISIONS AND CONTINGENCIES
27.1
Which of the following procedures is UNLIKELY to provide useful evidence concerning
contingent liabilities?
A
B
C
27.2
Review of replies received from customers in response to a receivables
confirmation
Review of board minutes
A discussion with the company’s legal representatives
(1 mark)
During the course of their interim audit of a company, the auditors establish that purchases
may be understated because goods received at the end of one month are often not invoiced by
suppliers until the following month.
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
33
AUDIT AND ASSURANCE (F8) – REVISION QUESTION BANK
Which of the following audit procedures is most likely to assist in establish the extent of
any understatement of payables at the year end resulting from this problem?
B
A detailed year-end inventory count in those areas where cut-off inadequacies are
suspected
C
Comparing goods received notes for the last few days of the financial year with the
purchase ledger records and accruals (goods received not yet invoiced)
D
Reconciling suppliers’ statements as at the year end date with purchase ledger
records
(2 marks)
Which of the following documents would NOT assist the auditor in his audit of
unrecorded liabilities at a year end?
A
B
C
27.4
E
A payables confirmation at the end of the financial year with following up of
unsatisfactory replies
Unpaid purchase invoices
Goods receipt records
Purchase invoices received after the year end
PL
27.3
A
(1 mark)
In accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets there are
four elements to the accounting treatment of provisions, contingent liabilities and contingent
assets:
(1)
(2)
(3)
(4)
Remote
Possible
Probable
Virtually certain
SA
M
Which of the following relates to the situation where only a disclosure is required?
A
B
C
D
27.5
(2 marks)
Which of the following tests of details would be most effective in determining whether
accounts payable have been misstated?
A
B
C
D
27.6
1 only
4 only
2 and 3 only
1 and 4 only
Examining recorded purchase returns that appear too low
Examining suppliers’ statements for amounts not included in purchases
Searching for goods returned by customers that were not recorded as returns
Reviewing bank transfers recorded as cash received from customers
(2 marks)
What is the appropriate population to select from when using confirmations to provide
evidence about the completeness assertion for accounts payable?
A
B
C
D
Amounts recorded in the payables ledger
Invoices filed in the entity’s open invoice file
Payees of cheques drawn in the month after the reporting date
Suppliers with whom the entity has previously done business
(2 marks)
(10 marks)
34
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REVISION QUESTION BANK – AUDIT AND ASSURANCE (F8)
28
SMALL BUSINESS AND NOT-FOR-PROFIT ORGANISATIONS
28.1
It may be common for a professional firm to both prepare and audit the financial statements of
small businesses and not-for-profit organisations.
Which of the following procedures would NOT be acceptable for the auditor of a small
business to carry out as part of the accounting and auditing functions?
B
Inspecting non-current assets
C
Entering details of non-current assets into the books and records from purchase
invoices
D
Calculating the profit or loss on the disposal of non-current assets
(2 marks)
Which of the following is the best way to compensate for the lack of adequate
segregation of duties in a small organisation?
A
B
C
28.3
E
Estimating the remaining useful lives of non-current assets
Disclosing lack of segregation of duties to the external auditors during the annual audit
Replacing personnel every three or four years
Greater management oversight
(1 mark)
PL
28.2
A
Not-for-profit organisations do not need to be audited because they cannot be incorporated.
Is this statement true or false?
A
B
(1 mark)
Under International Standards on Auditing, revenue is identified as being an area of
significant risk.
SA
M
28.4
True
False
Which financial element of a typical not-for-profit organisation should also be
considered a significant risk?
A
B
C
D
28.5
Cash
Receivables
Administration expenses
Liabilities
(2 marks)
Which statement on internal controls is the most relevant for small entities?
A
There is a greater need for formal internal controls since segregation of duties will
be weaker
B
The same need for formal internal controls is required since the directors’ personal
involvement is counteracted by weaker segregation of duties
C
There is less need to depend upon formal internal controls since the lower number
of transactions will reduce the likelihood of unreliable records and other
information
D
Dependence on formal internal controls can be lowered because of the directors’
personal involvement in the operation of the entity
(2 marks)
(8 marks)
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35
AUDIT AND ASSURANCE (F8) – REVISION QUESTION BANK
29
AUDIT FINALISATION
29.1
Which of the following statements is NOT true regarding the auditor’s responsibility for
subsequent events?
B
The auditor has no active responsibility to make continuing inquiries after the date
of the auditor’s report
C
The auditor has an active responsibility to make continuing inquiries between the
date of the financial statements and the date of the auditor’s report
D
The auditor has an active responsibility to make continuing inquiries between the
date of the financial statements and the date on which sufficient appropriate
evidence has been obtained
(2 marks)
E
The auditor has an active responsibility to make continuing inquiries between the
date of the auditor’s report and the date the financial statements are issued
There are many elements within an audit that ensure the audit is completed effectively and
efficiently. Four such elements are:
(1)
(2)
(3)
(4)
PL
29.2
A
Direction and supervision of audit staff
Monitoring of time and costs
Preparation of adequate working papers
Review of work carried out by audit staff
What are the two most important elements relating to audit finalisation?
1 and 2
2 and 3
3 and 4
1 and 4
SA
M
A
B
C
D
29.3
(2 marks)
ISA 560 Subsequent Events sets out the auditor’s responsibilities for the period between the
year end and the annual general meeting (AGM).
What action is the auditor required to take after signing the audit report and before the
AGM?
29.4
36
A
Obtain a representation from the directors that no material events after the reporting
period have occurred in that period of time
B
Search for evidence of events after the reporting period that may cause him to
change his opinion
C
Consult with the directors on any events after the reporting period of which he
becomes aware which might have led him to give a different opinion
D
None, since his responsibilities cease after the audit report is signed
(2 marks)
The chairman’s report in the accounts of Table Co (a listed company) for the year ended 31
December states that the company’s trading resulted in a profit before tax of $5 million. The
profit and loss account and directors’ report, however, state that the company made an
operating profit for the year of $5 million but a net loss after taxation of $7 million. The
auditor considers that the information given in the chairman’s report is inconsistent with the
financial statements, but is unable to persuade the chairman to amend his report.
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
REVISION QUESTION BANK – AUDIT AND ASSURANCE (F8)
What should the auditor do?
A
B
C
D
Which of the following procedures would an auditor most likely perform to obtain
evidence about the occurrence of subsequent events?
A
B
C
Confirming a sample of material accounts receivable after the year end
Inquiring as to whether any unusual adjustments were made after the year end
Comparing the financial statements being reported to those of a prior period
(1 mark)
E
29.5
Modify the audit report using an Other Matter paragraph
Modify the audit opinion on the grounds of material misstatement
Seek legal and other professional advice on the appropriate course of action
Modify the audit report using an Emphasis of Matter paragraph
(2 marks)
(9 marks)
THE AUDITOR’S REPORT ON FINANCIAL STATEMENTS
30.1
Torte Co has not complied with certain aspects of an applicable financial reporting standard.
The auditor concurs with the departure in that if Torte Co had applied all aspects of the
standard, the company’s financial statements would not have shown a true and fair view. It
has not been disclosed as a departure from an applicable financial reporting standard in the
accounting policy note.
PL
30
What form should the audit report take?
Modified opinion for material misstatement over non-disclosure of the departure
B
Modified opinion for material misstatement over truth and fairness and noncompliance with disclosure requirements
SA
M
A
30.2
C
Modified opinion for material misstatement over truth and fairness
D
Unmodified opinion with an Emphasis of Matter paragraph referring to the nondisclosure of the departure from the financial reporting standard
(2 marks)
During the audit of Tiny Co, a small company with shares totally owned by the directors, it
has become apparent that the system of internal controls is not sufficiently reliable for audit
purposes.
What form should the audit report take?
A
Always be modified on the grounds of uncertainty, usually with an “except for”
form of modification
B
Be modified unless adequate assurance is obtained from extensive substantive
testing and a review of costs and margins
C
Be modified unless adequate assurances are received in the form of written
management representations
D
Be modified unless there is adequate evidence that control has been exercised
through the close involvement of the directors
(2 marks)
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37
AUDIT AND ASSURANCE (F8) – REVISION QUESTION BANK
30.3
The accounts of Jay Co include a material receivable that management believe will be paid
and does not require any allowance. The auditors do not believe that any part of the balance
will be paid.
What form should the audit opinion take?
A
B
C
A company’s financial statements include an investment of $45,000 in a company which is in
liquidation. It is not yet clear what, if anything, will be recovered. Pending the final report of
the liquidators, no allowance has been made in the financial statements. The situation is fully
explained in a note to the financial statements. Profit before tax is $200,000.
What form should the audit opinion take?
Adverse
Except for – material misstatement
Unmodified
Disclaimer
PL
A
B
C
D
30.5
(1 mark)
E
30.4
Disclaimer
Adverse
Except for
(2 marks)
An auditor considers that his work has been deliberately frustrated by management to such an
extent that he has been unable to carry out a proper audit because management has prevented
him from gathering sufficient appropriate evidence for accounts receivable, inventory and
liabilities.
What action should the auditor take?
Issue an adverse opinion
B
Issue a disclaimer of opinion or resign and ensure that the reasons are made known
to shareholders in a written statement
C
Obtain a court order requiring management to provide the necessary information
and explanations
D
Inform the relevant regulatory authorities
SA
M
A
(2 marks)
(9 marks)
31
GOING CONCERN
31.1
Which of the following factors is NOT relevant to an auditor’s decision to modify an
audit report on grounds of going concern?
38
A
The fact that such modification would lead to the appointment of a receiver or
liquidator
B
Forecast management information, cash flows and budgets
C
The repayment of a substantial bank loan which is due 18 months after the end of
the reporting period
D
Guarantees of financial support given by the directors
(2 mark)
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REVISION QUESTION BANK – AUDIT AND ASSURANCE (F8)
31.2
The auditor of Abrahams Co is uncertain whether the going concern assumption is an
appropriate basis for the preparation of the company’s financial statements. The company has
incurred heavy losses for a number of years and current liabilities have this year risen above
current assets for the first time. In addition, negotiations with the company’s bankers for
extended overdraft facilities are underway at the date on which the audit report must be
signed.
What action should the auditor take?
B
Issue a disclaimer of opinion on the grounds that the accounts may be
fundamentally wrong
C
Give an unmodified report on the grounds that the negotiations with the bankers are
incomplete and that a modified report may prejudice their outcome
D
Refuse to give a report unless the accounts are prepared on the basis that the
company may no longer be a going concern
(2 marks)
E
Give an unmodified opinion but with reference in an emphasis of matter paragraph
to the above material uncertainty providing it is properly disclosed in the financial
statements
PL
31.3
A
The following matters relate to Beta Co, a medium-sized company:
(1)
(2)
(3)
(4)
(5)
(6)
The chief executive officer is due to retire within six months of the year end
Escalating employee strikes at a major supplier of key raw materials
Adverse key financial ratios for the first time
No cash flow forecast for the next 12 months has been produced
Operating losses have continued to grow
Cash flows have moved from being positive in the prior year to negative this year
SA
M
Which of the above matters would be considered by the auditor during his planning of
the audit as indicators of potential going concern difficulties?
A
B
C
D
31.4
(2 marks)
Which of the following is an auditor most likely to consider to be a mitigating factor
when assessing a client’s ability to continue as a going concern?
A
B
C
31.5
All of them
2, 3, 5 and 6 only
1, 3, 4 and 6 only
3, 4, 5 and 6 only
Plans to discuss with lenders the terms of all debt and loan agreements
Postponement of research and development expenditures
Plans to strengthen internal controls over cash disbursements
(1 mark)
There is no need for the auditor to consider going concern matters beyond the assessment
period of one year from the end of the reporting period.
Is this statement true or false?
A
B
True
False
(1 mark)
(8 marks)
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39
AUDIT AND ASSURANCE (F8) – REVISION QUESTION BANK
32
INTERNAL AUDIT
32.1
The scope and objectives of the internal audit function vary widely and depend on the size
and structure of the entity and the requirements of its management.
Which THREE of the following functions could internal audit perform and be
considered an independent function of management?
A
B
C
D
1, 3 and 5
2, 4 and 5
3, 4 and 5
1, 3 and 4
(2 marks)
Which of the following would NOT be considered to be within the scope of a value for
money audit?
A
B
C
Unnecessary spending
Revenue opportunities
Management financial controls
(1 mark)
A company’s internal audit function have been asked, as part of the scope of a wide ranging
investigation to improve results, to establish relevant benchmarks to compare the performance
of a number of departments across a range of relevant indicators.
SA
M
32.3
E
Examination of financial and operational information for management
Authorisation of transactions in excess of limits set by management
Review of accounting systems and related controls
Advising management on cost effective controls for systems and activities
Routinely preparing bank reconciliations
PL
32.2
(1)
(2)
(3)
(4)
(5)
What type of assignment will the internal audit function be carrying out?
A
B
C
D
32.4
40
Laws and regulations
Value for money
Operational information systems
Business risk
(2 marks)
Under what circumstances could an internal audit function be carried out by the entity’s
external auditor?
A
When any threats to the external auditor’s objectivity have been reduced to an
acceptable level
B
When requested to do so by those charged with governance
C
When combining the two functions would result in lower costs
D
When the internal audit functions have no direct impact on the financial statements
(2 marks)
(7 marks)
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REVISION QUESTION BANK – AUDIT AND ASSURANCE (F8)
33
USING THE WORK OF INTERNAL AUDIT
33.1
At the commencement of their first audit of Hove Co the new auditors ascertain that the
company has its own flowcharts and detailed systems manual, which have been prepared by
the internal audit department.
How should the auditors normally proceed?
Accept the company’s systems documentation and evaluate the controls by means
of an internal control questionnaire
C
Design and carry out compliance tests on controls shown by the company’s systems
documentation
D
Carry out “walk-through” checks based on the company’s own systems
documentation to confirm its accuracy
(2 marks)
E
B
Which of the following is true about the auditor’s use of an internal auditor and a
specialist?
A
The auditor must assess the competency of both the internal auditor and the
specialist
B
A specialist may be related to the client, but an internal auditor may not
C
The auditor may share responsibility for the audit report with an objective and
competent internal auditor, but may not share such responsibility with a specialist
(1 mark)
During the course of his work, the external auditor performs many procedures. Three such
procedures are:
SA
M
33.3
Ascertain and record the systems independently to confirm the accuracy of the
company’s systems documentation
PL
33.2
A
(1)
(2)
(3)
Procedures performed in obtaining an understanding of internal control
Procedures performed in assessing the risk of material misstatement
Substantive procedures performed in gathering direct evidence
What procedures could the work of the internal auditor impact upon?
A
B
C
D
33.4
1 and 2 only
1 and 3 only
2 and 3 only
1, 2 and 3
(2 marks)
Which of the following would the external auditor most likely be able to utilise the work
of the internal auditor?
A
B
C
Existence of contingencies
Valuation of intangible assets
Existence of non-current asset additions
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(1 mark)
41
AUDIT AND ASSURANCE (F8) – REVISION QUESTION BANK
33.5
For which of the following judgments may an independent auditor share responsibility
with an entity’s internal auditor who is assessed to be both competent and objective?
A
B
C
D
Materiality of
misstatements
Yes
No
No
Yes
Evaluation of
accounting estimates
No
Yes
No
Yes
(2 marks)
SA
M
PL
E
(8 marks)
42
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REVISION QUESTION BANK – AUDIT AND ASSURANCE (F8)
Question 1 NON-AUDIT ENGAGEMENTS AND TRUE AND FAIR
(a)
Auditors are frequently required to provide assurance for a range of non-audit engagements.
Required:
(b)
List and explain the elements of an assurance engagement.
(5 marks)
Explain the concept of TRUE and FAIR presentation.
(5 marks)
(10 marks)
E
Question 2 CONOY
PL
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.
SA
M
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.
(10 marks)
Question 3 SERENA VDW
Serena VDW Co has been trading for over 20 years and obtained a listing on a stock exchange five
years ago. It provides specialist training in accounting and finance.
The listing rules of the stock exchange require compliance with corporate governance principles, and
the directors are fairly confident that they are following best practice in relation to this. However, they
have recently received an email from a significant shareholder, who is concerned that Serena VDW Co
does not comply with corporate governance principles.
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43
AUDIT AND ASSURANCE (F8) – REVISION QUESTION BANK
Serena VDW Co’s board is comprised of six directors; there are four executives who originally set up
the company and two non-executive directors who joined Serena VDW Co just prior to the listing.
Each director has a specific area of responsibility and only the finance director reviews the financial
statements and budgets.
The chief executive officer, Daniel Brown, set up the audit committee and he sits on this sub-committee
along with the finance director and the non-executive directors. As the board is relatively small, and to
save costs, Daniel Brown has recently taken on the role of chairman of the board. It is the finance
director and the chairman who make decisions on the appointment and remuneration of the external
auditors. Again, to save costs, no internal audit function has been set up to monitor internal controls.
E
The executive directors’ remuneration is proposed by the finance director and approved by the
chairman. They are paid an annual salary as well as a generous annual revenue related bonus.
Since the company listed, the directors have remained unchanged and none have been subject to reelection by shareholders.
Required:
Describe FIVE corporate governance weaknesses faced by Serena VDW Co.
(5 marks)
(b)
Provide recommendations to address each weakness, to ensure compliance with
corporate governance principles.
(5 marks)
PL
(a)
(10 marks)
Question 4 CLIENT CONFIDENTIALITY
Explain what is meant by “corporate governance” and why it is important.
(b)
Client confidentiality underpins the relationship between Chartered Certified Accountants in
practice and their clients. It is a core element of ACCA’s Code of Ethics and Conduct.
SA
M
(a)
(4 marks)
A waste disposal company has breached tax regulations, environmental regulations and
health and safety regulations. The auditor has been approached by the tax authorities, the
government body supervising the award of licences to such companies and a trade union
representative. All of them have asked the auditor to provide them with information about
the company. The auditor has also been approached by the police. They are investigating a
suspected fraud perpetrated by the managing director of the company and they wish to ask
the auditor certain questions about him.
Required:
Describe how the auditor should respond to these types of request.
(6 marks)
(10 marks)
Question 5 STARK
You are a manager in the audit firm of Ali & Co; and this is your first time you have worked on one of
the firm’s established clients, Stark Co. The main activity of Stark Co is providing investment advice
to individuals regarding saving for retirement, purchase of shares and securities and investing in tax
efficient savings schemes. Stark is regulated by the relevant financial services authority.
44
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REVISION QUESTION BANK – AUDIT AND ASSURANCE (F8)
You have been asked to start the audit planning for Stark Co, by Mr Son, a partner in Ali & Co. Mr
Son has been the engagement partner for Stark Co, for the previous nine years and so has excellent
knowledge of the client. Mr Son has informed you that he would like his daughter Zoe to be part of the
audit team this year; Zoe is currently studying for her first set of fundamentals papers for her ACCA
qualification. Mr Son also informs you that Mr Far, the audit senior, received investment advice from
Stark Co during the year and intends to do the same next year.
E
In an initial meeting with the finance director of Stark Co, you learn that the audit team will not be
entertained on Stark Co’s yacht this year as this could appear to be an attempt to influence the opinion
of the audit. Instead, he has arranged a balloon flight costing less than one-tenth of the expense of
using the yacht and hopes this will be acceptable. The director also states that the fee for taxation
services this year should be based on a percentage of tax saved and trusts that your firm will accept a
fixed fee for representing Stark Co in a dispute regarding the amount of sales tax payable to the taxation
authorities.
Required:
Explain the ethical threats which may affect the auditor of Stark Co.
(b)
For each ethical threat, discuss how the effect of the threat can be mitigated.
(5 marks)
PL
(a)
(5 marks)
(10 marks)
Question 6 LV FONES
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.
SA
M
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 financial controller of LV Fones was ill and hence unable to work. The company
had no spare staff able to fulfil the role and hence a qualified 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 firm’s total fees.
From a review of the correspondence files you note that the partner and the finance 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:
(a)
Explain the ethical threats which may affect the independence of Jones & Co’s audit of
LV Fones Co.
(5 marks)
(b)
For each threat explain how it might be avoided.
(5 marks)
(10 marks)
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45
AUDIT AND ASSURANCE (F8) – REVISION QUESTION BANK
Question 7 GOOFY I
You are an audit manager in NAB & Co, a large audit firm which specialises in the audit of retailers.
The firm currently audits Goofy Co, a food retailer, but Goofy Co’s main competitor, Mickey Co, has
approached the audit firm to act as auditors. Both companies are highly competitive and Goofy Co is
concerned that if NAB & Co audits both companies then confidential information could pass across to
Mickey Co.
Required:
Explain the safeguards that your firm should implement to ensure that this conflict of
interest is properly managed.
(4 marks)
(b)
The audit engagement partner for Goofy Co has been in place for approximately six years and
her son has just accepted a job offer from Goofy Co as a sales manager; this role would entitle
him to shares in Goofy Co as part of his remuneration package. If NAB & Co is appointed as
internal as well as external auditors, then Goofy Co has suggested that the external audit fee
should be renegotiated with at least 20% of the fee being based on the profit after tax of the
company as they feel that this will align the interests of NAB & Co and Goofy Co.
Required:
PL
E
(a)
Explain the ethical threats which may affect the independence of NAB & Co in respect
of the audit of Goofy Co, and for each threat explain how it may be reduced. (6 marks)
(10 marks)
Question 8 MELTON MANUFACTURING
SA
M
The directors of Melton Manufacturing have asked your firm to act as the company’s statutory auditor
for the next financial year. They will be asking their existing auditors to resign as they say they do not
provide a cost effective service.
Required:
(a)
Describe the steps an audit firm should perform prior to accepting a new audit
engagement.
(5 marks)
(b)
Briefly describe the main contents of a letter of engagement which you should send to
the directors of Melton Manufacturing.
(5 marks)
(10 marks)
Question 9 BONDI
You are a partner with a firm of Chartered Certified Accountants that has been invited, by the board of
directors, to accept nomination as external auditors to Bondi. Bondi operates a number of car
dealerships and has grown rapidly over the past two years through an aggressive take-over strategy.
You are aware that the company’s existing auditors, a much smaller firm, modified their last auditors’
report. Over lunch with a number of your firm’s partners, the company’s finance director maintained
that their existing auditors could not cope with the audit of a company their size and, in particular, were
not equipped to audit the recently installed sophisticated computer accounting program. He also
suggests that they need a firm of your reputation in order to reassure the market as they intend to seek a
public listing within two years.
46
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
REVISION QUESTION BANK – AUDIT AND ASSURANCE (F8)
The existing auditors, in response to your enquiry, advise against accepting the audit on the following
grounds:
Insufficient consideration has been devoted by management to developing the accounting
system in line with the expanding business. In particular there is a lack of concern as to
control. The auditors detected a number of petty employee frauds as a result of control
weaknesses. No action was taken against the employees identified as engaged in fraud. The
attitude seems to be to encourage risk taking employees who, if they make money on the side
whilst securing good deals for the company, that is seen as a legitimate bonus.
(ii)
The newly installed computer accounting system is unreasonably complicated. Bondi claims
this is necessary because of the need to maintain records to justify the company’s claims for
volume rebates, and bonuses under the complex incentive schemes by which car
manufacturers reward dealers.
(iii)
The auditors have no evidence of deliberate misrepresentation by the directors but audit staff
were hindered in their audit work by a less than helpful attitude by senior management who
adopted an aggressive stance whenever a query was raised.
PL
E
(i)
Further, the existing auditor mentioned that the finance director was constantly phoning the partner
claiming the audit staff were incompetent and accusing them of wasting his time asking unnecessary
questions.
At a partner’s meeting a majority of partners accepted the story that the existing auditors were out of
their depth and that their complaints were merely an attempt to cover up their own shortcomings. Your
firm accepted nomination and was duly appointed as auditors.
Required:
State factors the partners should have considered for and against accepting nomination.
(7 marks)
(b)
Detail the matters to which you should pay particular attention in obtaining the
required knowledge of the business and in developing your audit plan.
(7 marks)
(c)
During the first audit your firm discovers that the reason for the complexity of the computer
system is to falsify records in order to reduce the amount of tax payable to the government.
SA
M
(a)
Describe the action you should take on discovery of the fraud.
(6 marks)
(20 marks)
Question 10 SPECS4YOU CO I
ISA 230 Audit Documentation establishes standards and provides guidance regarding documentation in
the context of the audit of financial statements.
Required:
(a)
List the purposes of audit working papers.
(b)
You have recently been promoted to audit manager in the audit firm of Trums & Co. As part
of your new responsibilities, you have been placed in charge of the audit of Specs4You Co, a
long established audit client of Trums & Co. Specs4You Co sells spectacles; the company
owns 42 stores where customers can have their eyes tested and choose from a range of
frames.
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
(3 marks)
47
AUDIT AND ASSURANCE (F8) – REVISION QUESTION BANK
Required:
List the documentation that should be of assistance to you in familiarising yourself with
Specs4You Co. Describe the information you should expect to obtain from each
document.
(7 marks)
(10 marks)
Question 11 SPECS4YOU CO II
Year end 30 April
Page xxxxxxx
PL
Client Name Specs4You Co
Working paper Payables transaction testing
E
You are the audit manager in charge of the audit of Specs4You Co, a long-standing audit client. The
company sells spectacles through 42 retail outlets. The time is now towards the end of the audit and
you are reviewing working papers produced by the audit team. An example of a working paper you
have just reviewed is shown below:
Prepared by
Reviewed by CW
Date
Date 12 June
Audit assertion: To make sure that the purchases day book is correct.
Method: Select a sample of 15 purchase orders recorded in the purchase order system. Trace details to
the goods received note (GRN), purchase invoice (PI) and the purchase day book (PDB) ensuring that
the quantities and prices recorded on the purchase order match those on the GRN, PI and PDB.
SA
M
Test details: In accordance with audit risk, a sample of purchase orders were selected from a
numerically sequenced purchase order system and details traced as stated in the method. Details of
items tested can be found on another working paper.
Results: Details of purchase orders were normally correctly recorded through the system. Five
purchase orders did not have any associated GRN, PI and were not recorded in the PDB. Further
investigation showed that these orders had been cancelled due to a change in spectacle specification.
However, this does not appear to be a system weakness as the internal controls do not allow for changes
in specification.
Conclusion: Purchase orders are completely recorded in the purchase day book.
Required:
Explain why the working paper shown above does not meet the standards normally expected of a
working paper.
Note: You are not required to reproduce the working paper.
48
(10 marks)
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REVISION QUESTION BANK – AUDIT AND ASSURANCE (F8)
Question 12 BRIDGFORD PRODUCTS
Your firm has been the auditor of Bridgford Products, a listed company, for a number of years. The
engagement partner has asked you to describe the matters you should consider when planning the audit
for the year ended 30 June 2014.
During a recent visit to the company you obtained the following information:
The management accounts for the 10 months to 30 April 2014 show sales of $130 million and
profit before tax of $4 million. Sales and profits are assumed to accrue evenly throughout the
year. In the year ended 30 June 2013 Bridgford Products had sales of $110 million and profit
before tax of $8 million.
(ii)
The company installed a new computerised inventory control system which has operated from
1 November 2013. As the inventory control system records inventory movements and current
inventory quantities, the company is proposing:

to use the inventory quantities on the computer to value the inventory at the year
end; and
not to carry out an inventory count at the year end.
PL

E
(i)
You are aware there have been reliability problems with the company’s products, which have
resulted in legal claims being brought against the company by customers, and customers
refusing to pay for the products
(iv)
The sales increase in the 10 months to 30 April 2014 over the previous year has been
achieved by attracting new customers and by offering extended credit. The new credit
arrangements allow customers three months credit before their debt becomes overdue, rather
than the one-month credit period allowed previously. As a result of this change, receivables
age has increased from 1·6 to 4·1 months
SA
M
(iii)
(v)
The chief financial officer and purchasing manager were dismissed on 15 January. A
replacement purchasing manager has been appointed but it is not expected that a new chief
financial officer will be appointed before the year end of 30 June 2014. The chief accountant
will be responsible for preparing the financial statements for audit.
Required:
(a)
Describe the reasons why it is important that auditors should plan their audit work.
(5 marks)
(b)
Describe FIVE audit risks and explain the auditor’s response to each risk in planning
the audit of Bridgford.
(15 marks)
(20 marks)
Question 13 EUKARE CHARITY
(a)
Explain the term “audit risk” and the three elements of risk that contribute to total
audit risk.
(4 marks)
The EuKaRe charity was established in 1960. The charity’s aim is to provide support to children from
disadvantaged backgrounds who wish to take part in sports such as tennis, badminton and football.
EuKaRe has a detailed constitution which explains how the charity’s income can be spent. The
constitution also notes that administration expenditure cannot exceed 10% of income in any year.
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49
AUDIT AND ASSURANCE (F8) – REVISION QUESTION BANK
The charity’s income is derived wholly from voluntary donations. Sources of donations include:
(i)
Cash collected by volunteers asking the public for donations in shopping areas;
(ii)
Cheques sent to the charity’s head office;
(iii)
Donations from generous individuals. Some of these donations have specific clauses attached
to them indicating that the initial amount donated (capital) cannot be spent and that the
income (interest) from the donation must be spent on specific activities, for example,
provision of sports equipment.
E
The rules regarding the taxation of charities in the country EuKaRe is based are complicated, with only
certain expenditure being allowable for taxation purposes and donations of capital being treated as
income in some situations.
Required:
Identify areas of inherent risk in the EuKaRe charity and explain the effect of each of
these risks on the audit approach.
(12 marks)
(c)
Explain why the control environment may be weak at the charity EuKaRe.
PL
(b)
(4 marks)
(20 marks)
Question 14 REDSMITH
In agreeing the terms of an audit engagement, the auditor is required to agree the basis on
which the audit is to be carried out. This involves establishing whether the preconditions for
an audit are present and confirming that there is a common understanding between the auditor
and management of the terms of the engagement.
SA
M
(a)
Required:
Describe the process the auditor should undertake to assess whether the
PRECONDITIONS for an audit are present.
(3 marks)
(b)
List FOUR examples of matters the auditor may consider when obtaining an
understanding of the entity.
(2 marks)
(c)
You are the audit senior of White & Co and are planning the audit of Redsmith Co for the
year ended 30 September 2014. The company produces printers and has been a client of your
firm for two years; your audit manager has already had a planning meeting with the finance
director. He has provided you with the following notes of his meeting and financial statement
extracts.
Redsmith’s management were disappointed with the 2013 results and so in 2014 undertook a
number of strategies to improve the trading results. This included the introduction of a
generous sales-related bonus scheme for their salesmen and a high profile advertising
campaign. In addition, as market conditions are difficult for their customers, they have
extended the credit period given to them.
The finance director of Redsmith has reviewed the inventory valuation policy and has
included additional overheads incurred this year as he considers them to be production
related. He is happy with the 2014 results and feels that they are a good reflection of the
improved trading levels.
50
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REVISION QUESTION BANK – AUDIT AND ASSURANCE (F8)
Financial statement extracts for year ended 30 September
Revenue
Cost of Sales
Gross profit
Operating expenses
Profit before interest and taxation
2·1
4·5
–
1·6
0·9
1·6
3·0
2·3
1·2
–
PL
Required:
ACTUAL
2013
$m
18·0
(10·0)
–––––
8·0
(4·0)
–––––
4·0
E
Inventory
Receivables
Cash
Trade payables
Overdraft
DRAFT
2014
$m
23·0
(11·0)
–––––
12·0
(7·5)
–––––
4·5
––––––––––
Using the information above:
(i)
Calculate FIVE ratios, for BOTH years, which would assist the audit senior in
planning the audit; and
(5 marks)
(ii)
From a review of the above information and the ratios calculated, explain the
audit risks that arise and describe the appropriate response to these risks.
(10 marks)
SA
M
(20 marks)
Question 15 ABRAHAMS
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 in two months’ time, on 31 January. You attended a
planning meeting with the finance director and 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 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 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.
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51
AUDIT AND ASSURANCE (F8) – REVISION QUESTION BANK
In order to fund the development of new products, Abrahams 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:
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, identify and describe FIVE audit risks and explain the
auditor’s response to each risk in planning the audit of Abrahams Co.
(10 marks)
(c)
Describe substantive procedures you should perform to obtain sufficient appropriate
evidence in relation to:
(i)
(ii)
PL
E
(a)
Inventory held at the third party warehouses; and
Use of standard costs for inventory valuation.
(4 marks)
(20 marks)
Question 16 DONALD
SA
M
Donald Co operates an airline business. The company’s year end is 31 July.
You are the audit senior and you have started planning the audit. Your manager has asked you to have
a meeting with the client and to identify any relevant audit risks so that the audit plan can be completed.
From your meeting you ascertain the following:
In order to expand their flight network, Donald Co will need to acquire more airplanes; they have
placed orders for another six planes at an estimated total cost of $20m and the company is not sure
whether these planes will be received by the year end. In addition the company has spent an estimated
$15m on refurbishing their existing planes. In order to fund the expansion Donald Co has applied for a
loan of $25m. It has yet to hear from the bank as to whether it will lend them the money.
The company receives bookings from travel agents as well as directly via their website. The travel
agents are given a 90-day credit period to pay Donald Co, however, due to difficult trading conditions a
number of the receivables are struggling to pay. The website was launched last year and has
consistently encountered difficulties with customer complaints that tickets have been booked and paid
for online but Donald Co has no record of them and hence has sold the seat to another customer.
Donald Co used to sell tickets via a large call centre located near to their head office. However, in May
they closed it down and made the large workforce redundant.
Required:
Using the information provided, describe FIVE audit risks and explain the auditor’s response to
each risk in planning the audit of Donald Co.
(10 marks)
52
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REVISION QUESTION BANK – AUDIT AND ASSURANCE (F8)
Question 17 INTERNAL CONTROL
ISA 315 Identifying and Assessing the Risks of Material Misstatement through Understanding the
Entity and its Environment states that an objective of the auditor is to identify and assess the risks of
material misstatement, whether due to fraud or error, at the financial statement and assertion levels,
through understanding the entity and its environment, including its internal control, thereby providing a
basis for designing and implementing responses to the assessed risks of material misstatement.
Required:
Explain why it is necessary for the auditor to understand an entity’s internal control
system when assessing risk.
(4 marks)
(b)
Explain and compare the use of internal control questionnaires and internal control
evaluation questionnaires in obtaining an understanding of internal control.
(6 marks)
E
(a)
(10 marks)
PL
Question 18 BESTWOOD ENGINEERING
Bestwood Engineering, a privately owned incorporated business, manufactures components for motor
vehicles and sells them to motor vehicle manufacturers and wholesalers. It has sales of $10 million and
a profit before tax of $400,000.
The company has a new chief executive (CEO) who inherited this role from his father. He has not
worked in the company before, has little financial background and has therefore asked your advice on
controls in the company’s purchases and accounts payable system.
SA
M
Bestwood Engineering has separate accounts, purchasing and goods received departments. Most
purchases are required by the production department, but other departments are able to raise
requisitions for goods and services. The purchasing department is responsible for obtaining goods and
services for the company at the lowest price which is consistent with the required delivery date and
quality, and for ensuring their prompt delivery.
The accounts department is responsible for obtaining authorisation of purchase invoices before they are
input into the computer which posts them to the accounts payable ledger and the general ledger. The
accounting records are kept on a microcomputer and the standard accounting software was obtained
from an independent supplier. The accounting software maintains the accounts payable ledger,
accounts receivable ledger, general ledger and payroll. The company does not maintain inventory
records, as it believes the costs of maintaining these records outweigh the benefits.
Required:
(a)
Describe the procedures which should be in operation in the purchasing department to
control the purchase and receipt of goods.
(8 marks)
(b)
Describe the controls the accounts department should exercise over obtaining
authorisation of purchase invoices before posting them to the accounts payable ledger.
(6 marks)
(c)
Explain how controls over the purchase of services (e.g. gas, electricity, telephone,
repairs and short-term hire of equipment and vehicles) from raising the purchase
requisition to posting the invoice to the accounts payable ledger, might differ from the
procedures for the purchase of goods, as described in your answers to parts (a) and (b)
above.
(6 marks)
(20 marks)
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53
AUDIT AND ASSURANCE (F8) – REVISION QUESTION BANK
Question 19 MISTIREAD I
(a)
You are an audit manager in Ron & Co. One of your existing audit clients, MistiRead Co, is a
specialist publisher of crime fiction.
During your preliminary audit planning you note that the engagement letter has been returned
unsigned by the directors of MistiRead. When asked to explain their action, the directors
indicate that they cannot allow you access to information on the company’s new website
development as this contains various trade secrets. You will not, therefore, be able to perform
audit procedures on the research and development expenditure incurred on the website and
included in non-current assets.
E
Required:
Briefly explain the actions you should take as a result of the directors not signing the
engagement letter.
(4 marks)
Amongst matters required to be considered by the auditor when planning the audit in
accordance with the requirements of ISA 300 Planning an Audit of Financial Statements is
“materiality”. Materiality is further the subject of ISA 320 Materiality in Planning and
Performing an Audit.
Required:
PL
(b)
Explain the concept of materiality and how materiality is assessed when planning the
audit. Your answer should include consideration of materiality at the overall financial
statement level and in relation to individual account balances.
(6 marks)
SA
M
(10 marks)
Question 20 DOCUMENTATION AND MATERIALITY
(a)
ISA 230 Audit Documentation deals with the auditor’s responsibility to prepare audit
documentation for an audit of financial statements.
Required:
State FOUR benefits of documenting audit work.
(b)
(4 marks)
ISA 320 Materiality in Planning and Performing an Audit provides guidance on the concept
of materiality in planning and performing an audit.
Required:
Define materiality and determine how the level of materiality is assessed.
(6 marks)
(10 marks)
Question 21 TYE (Not current exam style)
One of your audit clients, Tye Co, provides 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.
54
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AUDIT AND ASSURANCE (F8) – REVISION QUESTION BANK
Answer 1 NON-AUDIT ENGAGEMENTS AND TRUE AND FAIR
(a)
Elements of a non-audit engagement
An assurance engagement will involve three separate parties;
The intended user who is the person who requires the assurance report.

The responsible party, which is the organisation responsible for preparing the
subject matter to be reviewed.

The practitioner (i.e. an accountant) who is the professional who will review the
subject matter and provide the assurance.
E

A second element is a suitable subject matter. The subject matter is the data that the
responsible party has prepared and which requires verification.
PL
Suitable criteria are required in an assurance engagement. The subject matter is compared to
the criteria in order for it to be assessed and an opinion provided.
Appropriate evidence has to be obtained by the practitioner in order to give the required level
of assurance.
An assurance report is the opinion that is given by the practitioner to the intended user and the
responsible party.
(b)
True and fair presentation
SA
M
Financial statements are produced by management which give a true and fair view of the
entity’s results. The auditor in reviewing these financial statements gives an opinion on the
truth and fairness of them.
Although there is no definition in the International Standards on Auditing of true and fair it is
generally considered to have the following meaning:
True – Information is factual and conforms with reality in that there are no factual errors. In
addition it is assumed that to be true it must comply with accounting standards and any
relevant legislation. Lastly true includes data being correctly transferred from accounting
records to the financial statements.
Fair – Information is clear, impartial and unbiased, and also reflects plainly the commercial
substance of the transactions of the entity.
Answer 2 CONOY
Benefits of audit committee in Conoy
Assistance with financial reporting (no finance expertise)
The executive directors of Conoy do not appear to have any specific financial skills – as the financial
director has recently left the company and has not yet been replaced. This may mean that financial
reporting in Conoy is limited or that the other non-financial directors spend a significant amount of time
keeping up to date on financial reporting issues.
1018
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REVISION QUESTION BANK – AUDIT AND ASSURANCE (F8)
An audit committee will assist Conoy by providing specialist knowledge of financial reporting on a
temporary basis – at least one of the new appointees should have relevant and recent financial reporting
experience under codes of corporate governance. This will allow the executive directors to focus on
running Conoy.
Enhance internal control systems
The board of Conoy does not necessarily understand the work of the internal auditor, or the need for
control systems. This means that internal control within Conoy may be inadequate or that employees
may not recognise the importance of internal control systems within an organisation.
Reliance on external auditors
E
The audit committee can raise awareness of the need for good internal control systems simply by being
present in Conoy and by educating the board on the need for sound controls. Improving the internal
control “climate” will ensure the need for internal controls is understood and reduce control errors.
PL
Conoy’s internal auditors currently report to the board of Conoy. As previously noted, the lack of
financial and control expertise on the board will mean that external auditor reports and advice will not
necessarily be understood – and the board may rely too much on external auditors
If Conoy reports to an audit committee this will decrease the dependence of the board on the external
auditors. The audit committee can take time to understand the external auditor’s comments, and then
via the non-executive director, ensure that the board take action on those comments.
Appointment of external auditors
SA
M
At present, the board of Conoy appoints the external auditors. This raises issues of independence as the
board may become too familiar with the external auditors and so appoint on this friendship rather than
merit.
If an audit committee is established, then this committee can recommend the appointment of the
external auditors. The committee will have the time and expertise to review the quality of service
provided by the external auditors, removing the independence issue.
Corporate governance requirements – best practice
Conoy does not need to follow corporate governance requirements (the company is not listed).
However, not following those requirements may start to have adverse effects on Conoy. For example,
Conoy’s bank is already concerned about the lack of transparency in reporting.
Establishing an audit committee will show that the board of Conoy is committed to maintaining
appropriate internal systems in the company and providing the standard of reporting expected by large
companies. Obtaining the new bank loan should also be easier as the bank will be satisfied with
financial reporting standards.
Given no non-executives – independent advice to board
Currently Conoy does not have any non-executive directors. This means that the decisions of the
executive directors are not being challenged by other directors independent of the company and with
little or no financial interest in the company.
The appointment of an audit committee with one non-executive director on the board of Conoy will
start to provide some non-executive input to board meetings. While not sufficient in terms of corporate
governance requirements (about equal numbers of executive and non-executive directors are expected)
it does show the board of Conoy is attempting to establish appropriate governance systems.
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1019
AUDIT AND ASSURANCE (F8) – REVISION QUESTION BANK
Advice on risk management
Finally, there are other general areas where Conoy would benefit from an audit committee. For
example, lack of corporate governance structures probably means Conoy does not have a risk
management committee. The audit committee can also provide advice on risk management, helping to
decrease the risk exposure of the company.
Answer 3 SERENA VDW
Corporate governance weakness
1020
(b)
Recommendation
The chairman of Serena VDW Co,
Daniel Brown, is both the chairman and
chief executive. There should be a clear
division of responsibility at the head of
the company and no one individual
should have such unrestricted levels of
decision-making, as this can lead to an
abuse of power.

The roles of chairman and chief executive
should be split and not performed by the
same individual. Daniel Brown should
remain as chief executive, but one of the
non-executive directors (NEDs) should be
appointed as chairman. Corporate
Governance principles would recommend
that the chairman should be an
independent NED.

The board is comprised of four
executives and two NEDs. There
should be an appropriate balance of
executives and NEDs, to ensure that the
board makes the correct objective
decisions, which are in the best interest
of the stakeholders of the company, and
no individual or group of individuals
dominates the board’s decision-making.

At least half of the board should be
comprised of NEDs. Hence Serena VDW
should consider recruiting and appointing
an additional one to two NEDs.

The finance director is the only member
of the board who reviews the financial
statements and budgets. However, the
board as a whole should be presented
with an understandable assessment of
Serena VDW Co’s financial position
and prospects. They should be aware of
the financial implications of any
business decisions made.

The finance director should produce
financial information and budgets and
present this to either the audit committee
or the full board. This will allow all
directors to understand the financial
position of the company and to make
informed business decisions.

The audit committee is comprised of
two NEDs, the chairman and the finance
director. The audit committee is
supposed to be made up of independent
NEDs as opposed to having executive
directors as well. The chairman can, for
smaller companies, sit on the committee
provided that he is an independent
NED, which is not the case for Serena
VDW.

The audit committee must be comprised
of NEDs only; the chairman and finance
director should resign from the
committee. If Serena VDW does appoint
additional NEDs, then they should be
invited to sit on the audit committee as
well.
PL
E

SA
M
(a)
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REVISION QUESTION BANK – AUDIT AND ASSURANCE (F8)
Corporate governance weakness
(b)
Recommendation
The task of appointing and
remunerating the external auditors is
undertaken by the chairman and the
finance director. This should be
performed by the audit committee to
strengthen the independence of the
external auditors. If executive directors
are responsible, the auditors may feel
that if they do not provide an
unmodified audit opinion then they
could be removed.

The audit committee should have primary
responsibility in appointing the auditors
and in setting their remuneration.

In order to reduce costs, Serena VDW
has not established an internal audit
function. The audit committee should
consider the effectiveness of internal
controls and internal audit could
perform this role. Where there is no
internal audit function, the audit
committee is required to annually
consider the need for one.


The remuneration for the directors is set
by the finance director and chairman.
However, no director should be
involved in setting their own
remuneration as this may result in
excessive levels of pay being set.

There should be a fair and transparent
policy in place for setting remuneration
levels. The NEDs should decide on the
remuneration of the executives. The
finance director or chairman should
decide on the pay of the NEDs.

Executive remuneration is comprised of
a salary and annual bonus. However,
the pay should motivate the directors to
focus on the long-term growth of the
business. Annual targets can encourage
short-term strategies rather than
maximising shareholder wealth.

The remuneration of executives should be
restructured to include a significant
proportion aimed at long-term company
performance. Perhaps they could be
granted share options, as this would help
to move the focus to the longer term.

No member of the board of directors has
been subject to re-election by
shareholders for over five years. The
shareholders should review on a regular
basis that the composition of the board
of directors is appropriate, and they do
this by re-electing directors.

The directors should be subject to reelection by the shareholders at regular
intervals not exceeding three years. At
the current year’s AGM it should be
proposed that a number of the directors
are subject to re-election. The remaining
directors could then be subject to reelection next year.
E

Further consideration should be given to
establishing an internal audit function.
Both costs and benefits should be
considered, as it is not sufficient to solely
consider cost savings.
PL
SA
M
(a)
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
1021
AUDIT AND ASSURANCE (F8) – REVISION QUESTION BANK
Answer 4 CLIENT CONFIDENTIALITY
(a)
Corporate governance
Corporate governance is the system by which companies are directed and controlled.
According to the UK Corporate Governance Code the “purpose of corporate governance is to
facilitate effective, entrepreneurial and prudent management that can deliver the long-term
success of the company”.
E
Corporate governance considers the responsibilities of directors, how the board of directors
should be run and structured, the need for good internal controls and the relationship with
external auditors.
It is important for companies to consider good corporate governance principles as often it is
management or those charged with governance who run the company, but the owners are the
shareholders and they are not involved in the running of the business.
PL
For these shareholders their only opportunity to raise concerns is at the annual general
meeting, which only occurs once a year and often attendance is low.
Shareholders need to ensure that their needs are taken into account by management, and that
there is a process in place for them to be informed how the business is operating.
Response to requests

It is not unusual in practice for various bodies to request information from auditors
“informally” because it relieves them of the obligation to obtain the necessary
statutory authorities which may be time consuming or difficult.

Auditors must not disclose information without the consent of the client or unless
the necessary statutory documentation is provided by the person(s) requesting the
information.
SA
M
(b)
1022

Unless the auditor has reason to believe that there is a statutory duty not to inform
the client that an approach has been made, the client should first be approached to
see if consent can be obtained, and to see if the client is aware of the investigations,.
The auditor should ensure that the client is aware of the fact that voluntary
disclosure may work in the client’s favour in the long run, but if the client refuses,
the auditor should inform the client if the auditor has a statutory duty of disclosure.

Auditors should consider taking legal advice in all of the cases described.

Where auditors are made aware of potential actions against the client that may have
an effect on the financial statements, they must consider the effect on the audit
report. If the client is aware of the investigation, auditors will be able to seek audit
evidence to support any necessary provisions or disclosures in the financial
statements.

The auditors should consider whether the suspected fraud relating to the managing
director relates to the company and affects the financial statements and their
assessment of inherent risk.
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
REVISION QUESTION BANK – AUDIT AND ASSURANCE (F8)
Auditors will be in a very difficult situation if they become aware of an action that
may materially affect the financial statements, but where the client is not, and where
auditors are under a statutory duty not to inform the client. This situation will not
be improved by the resignation of auditors as they may be obliged to make a
statement on resignation. This puts auditors in a very difficult position and legal
advice is essential in such circumstances.

Tax authorities normally have powers to ask clients to disclose information
voluntarily. Such voluntary disclosure is often looked on favourably by the tax
authorities and the courts. Tax authorities normally also have statutory powers to
demand information from both clients and auditors. The same is generally true of
environmental and health and safety inspectors.

The power of the police to demand information is sometimes less clear and auditors
and clients should take care to ensure that the appropriate authorities are in place.
Those sections of the police investigating serious frauds usually have more powers
than the general police. It is unlikely that trade union representatives have any
statutory powers to demand information.
(a)
Ethical threats
PL
Answer 5 STARK
E

Mr Son, the engagement partner has been
involved with the client for the last nine years.
This means he may be too familiar with the client
to be able to make objective decisions due to this
long association.
SA
M
There is no ethical rule which stops Mr Son
recommending Zoe for the audit, or letting Zoe
take part in the audit.
However, there may be the impression of lack of
independence as Zoe is related to the engagement
partner. Zoe could be tempted not to identify
errors in case this prejudiced her father’s
relationship with the client.
As long as Mr Far paid a full fee to Stark for the
investment advice, then there is no ethical threat.
This would be a normal commercial transaction
and Mr Far would not gain any benefit.
(b) Mitigation of threat
Mr Son should be rotated from being
engagement partner. He can still contact
the client but should not be in the position
of signing the audit report.
To show complete independence, Zoe
should not be part of the audit team.
However, if Mr Son is no longer the
engagement partner then this removes the
ethical threat and Zoe could be included
in the audit team.
To show independence from the client,
Mr Far could be asked not to use the
services of Stark again unless this is first
agreed with the engagement partner.
However, continued use of client services could
imply a lack of independence especially if Mr
Far is not paying a full fee and therefore
receiving a benefit from the client.
The audit team have been offered a balloon flight
at the end of the audit.
Acceptance of gifts from a client, unless of an
insignificant amount, is not allowed. The fact
that the flight costs less than the yacht expense is
irrelevant, independence could still be impaired.
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
The balloon flight should not be accepted.
Investigation would also be needed to
find out why hospitality was accepted in
previous years.
1023
AUDIT AND ASSURANCE (F8) – REVISION QUESTION BANK
Ethical threats
Mitigation of threat
Agreeing to accept taxation work on the
percentage of the tax saved is essentially
accepting a contingent fee.
The audit firm must confirm that
assistance with taxation work is
acceptable, although the fee must be
based on time and experience for the job,
not the contingent fee.
Representing Stark in court could be seen as an
advocacy threat – that is the audit firm is
promoting the position of the client.
Answer 6 LV FONES
Ethical threat
Managing risk
The audit firm should ascertain whether the
discount is to be offered to staff this year.
This is a familiarity threat. It would need to
be confirmed if this discount is to be offered
to this year’s team as well, as only goods of
an insignificant value are allowed to be
accepted. A discount of 10% may not
appear to be significant, but as these are
luxury mobile phones then this may still be
a significant value.
If it is then the discount should be reviewed
for significance. If it is deemed to be of
significant value then the offer of discount
should be declined.
An audit senior of Jones & Co has been on
secondment as the financial controller of LV
Fones and is currently part of the audit
team.
The firm should clarify exactly what areas
the senior assisted the client on. If he worked
on areas not related to the financial
statements then he may be able to remain in
the audit team.
There is a self-review threat if the senior has
prepared records or schedules that support
the year-end financial statements and he
then audits these same documents.
However, it is likely that he has worked on
some related schedules and therefore he
should be removed from the audit team to
ensure that independence is not threatened.
There is also a familiarity threat. Directors
and senior managers of LV Fones may still
relate to him as being part of the LV Fones
management team.
There is no safeguard that could reduce this
threat to an acceptable level. The senior
should not be a member of the audit team.
The firm should assess if the recurring fees
will exceed 15%. If this is the case then it
might need to consider whether the
appearance of independence will still be met
if the tax and audit work is retained.
The total fee income from LV Fones is 16%
of the total fees for the audit firm. If the fees
for audit and recurring work exceed 15%
then there is a self-interest threat.
1024
(b)
The audit team has in previous years been
offered a staff discount of 10% on
purchasing luxury mobile phones.
SA
M
(a)
PL
Objectivity could be compromised because the
audit firm is seen to take the position that the
client is correct, affecting judgement on the tax
issue.
To remain independent, the audit firm
should decline to represent the client in
court.
E
There will be pressure to gain the highest tax
refund for the client and this could tempt the
audit firm to suggest illegal tax avoidance
schemes.
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
REVISION QUESTION BANK – AUDIT AND ASSURANCE (F8)
Managing risk
The fees for LV Fones include tax and audit
that are assumed to be recurring; however
the secondment fees would not recur each
year.
No further work should be accepted in the
current year from the client, and it might be
advisable to perform external quality control
reviews. It may also become necessary to
consider resigning from either the tax or the
audit engagement.
The partner and the finance director know
each other socially and have holidayed
together. Personal relationships between the
client and members of the audit team can
create a familiarity or self-interest threat.
The personal relationship should be reviewed
in line with Jones’s ethical policies.
Last year’s audit fee is still outstanding.
This amounts to 20% of the total fee and is
likely to be a significant value.
Jones & Co should chase the outstanding
fees.
PL
A self-interest threat can arise if the fees
remain outstanding, as Jones & Co may feel
pressure to agree to certain accounting
adjustments in order to have the previous
year and the current year fee paid.
In addition outstanding fees could be
perceived as a loan to a client, this is strictly
prohibited.
If they remain outstanding, the firm should
discuss with those charged with governance
the reasons for the continued non-payment,
and ideally agree a payment schedule which
will result in the fees being settled before
much more work is performed for the current
year audit.
SA
M
Answer 7 GOOFY I
E
Ethical threat
(a)
Conflict of interest
Safeguards to be adopted to address the conflict of interest of auditing both Goofy and
Mickey:

Both Goofy and Mickey should be notified that NAB & Co would be acting as
auditors for each company and, if necessary, consent obtained.

Advising one or both clients to seek additional independent advice.

The use of separate engagement teams, with different engagement partners and team
members; once an employee has worked on one audit such as Goofy then they
would be prevented from being on the audit of Mickey for a period of time. This
separation of teams is known as building a “Chinese wall”.

Procedures to prevent access to information, for example, strict physical separation
of both teams, confidential and secure data filing.

Clear guidelines for members of each engagement team on issues of security and
confidentiality. These guidelines could be included within the audit engagement
letters.

Potentially the use of confidentiality agreements signed by employees and partners
of the firm.
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
1025
AUDIT AND ASSURANCE (F8) – REVISION QUESTION BANK

Ethical threats and how they may be reduced
Ethical threat
How reduced
A familiarity threat arises where an
engagement partner is associated with a client
for a long period of time. NAB & Co’s
partner has been involved in the audit of
Goofy for six years and hence may not
maintain her professional scepticism and
objectivity.
NAB & Co should monitor the relationship
between engagement and client staff, and
should consider rotating engagement partners
when a long association has occurred. In
addition, ACCA’s Code of Ethics and
Conduct recommends that engagement
partners rotate off an audit after seven years
for listed and public interest entities.
E
(b)
Regular monitoring of the application of the above safeguards by a senior individual
in NAB & Co not involved in either audit.
PL
Therefore consideration should be given to
appointing an alternative audit partner in the
near future.
It is unlikely that as a sales manager the son
would be in a position to influence the
financial statements and hence additional
safeguards would not be necessary.
A self-interest threat can arise when an audit
firm has a financial interest in the company.
In this case the partner’s son will receive
shares as part of his remuneration. As the
son is an immediate family member of the
partner then if he holds the shares it will be as
if the partner holds these shares, and this is
prohibited.
In this case as holding shares is prohibited by
ACCA’s Code of Ethics and Conduct then
either the son should refuse the shares or
more likely the engagement partner will need
to be removed from the audit.
Fees based on the outcome or results of work
performed are known as contingent fees and
are prohibited by ACCA’s Code of Ethics and
Conduct. Hence Goofy’s request that 20% of
the external audit fee is based on profit after
tax would represent a contingent fee.
NAB & Co will not be able to accept
contingent fees and should communicate to
Goofy that the external audit fee needs to be
based on the time and level of work
performed.
SA
M
The engagement partner’s son has accepted a
job as a sales manager at Goofy. This could
represent a self-interest/familiarity threat if
the son was involved in the financial
statement process.
Answer 8 MELTON MANUFACTURING
(a)
Prior to accepting
Prior to accepting an audit engagement the firm should consider any issues which might arise
which could threaten compliance with ACCA’s Code of Ethics and Conduct or any local
legislation. If issues arise then their significance must be considered.
The firm should consider whether they are competent to perform the work and whether they
would have appropriate resources available, as well as any specialist skills or knowledge.
The prospective firm must communicate with the outgoing auditor to assess if there are any
ethical or professional reasons why they should not accept appointment.
1026
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
REVISION QUESTION BANK – AUDIT AND ASSURANCE (F8)
The prospective firm must obtain permission from the client to contact the existing auditor; if
this is not given then the engagement should be refused.
The existing auditor must obtain permission from the client to respond, if not given then the
prospective auditor should refuse the engagement.
If given permission to respond, then the existing auditor should reply to the prospective
auditor, who should then carefully review the response for any issues that could affect
acceptance.
E
In addition the audit firm should undertake client screening procedures such as considering
management integrity and assessing whether any conflict of interest with existing clients
would arise.
Further client screening procedures would include assessing the level of audit risk of the
client and whether the expected engagement fee would be sufficient for the level of
anticipated risk.
PL
Letter of engagement

The letter is written on the auditor’s headed paper and is addressed to the directors
of Melton Manufacturing.

It states the directors’ responsibilities for keeping proper accounting records and for
preparing financial statements which show a true and fair view.

The directors must make available to the auditor all the records he may reasonably
require, and provide answers to the auditor’s questions.

The directors’ responsibility for internal control.

The auditor has a duty to report on whether the financial statements show a true and
fair view and comply with any relevant legislation.

The audit is conducted in accordance with International Standards on Auditing
(ISAs).

Oral or written representations by the directors will be asked for concerning various
matters in the financial statements.

The directors are responsible for preventing and detecting irregularities and fraud.
The audit procedures would be designed so there is a reasonable expectation of
detecting material misstatements in the financial statements. However, the audit
should not be relied upon for detecting all irregularities and fraud that may exist.

The auditor may provide additional services.

Fees are based on the time spent by partners and staff and on the levels of skill and
responsibility involved.

The letter ends by saying that it remains effective until it is replaced, and it asks the
directors to agree the terms of the letter in writing.
SA
M
(b)
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
1027
AUDIT AND ASSURANCE (F8) – REVISION QUESTION BANK
Answer 9 BONDI
Arguments against acceptance of nomination
Rapid growth is often accompanied by inadequate accounting systems and weak
internal controls. However, rapid growth is not sufficient reason to decline an audit
although it increases inherent risk.

Rapid growth through aggressive takeovers implies a management philosophy that
is willing to accept risks and this is likely to apply to controls as well. Again this
increases inherent risk.

Failure to take action against employee fraud brought to the directors’ notice by the
auditors is more serious. This fosters a visible culture of unethical behaviour that is
likely to permeate the company and to be shared by other employees. This will
result in a weak control environment.

Introduction of a new computer system must be undertaken very carefully. In
addition, an unnecessarily complicated system is one of the warning signs of fraud.
Such a computer system may be difficult to audit.

Aggression against audit staff is a well-known device for concealment of top
management fraud. There are many documented examples of audit failure through
fear of the audit staff to query management explanations.

The impending public listing means that the company is under pressure to show an
improving performance but also means that the work of the auditor will come under
increasing scrutiny. There are always significant risks in accepting an audit under
such terms.
PL
E

SA
M
(a)
Arguments for accepting nomination
As a larger firm your firm is likely to have the capability of influencing the directors of Bondi
and persuading them of the benefits of a more ethical style of business. This will benefit the
company’s shareholders. If your firm rejects the audit they are likely to appoint a less
competent firm. This will not be in the shareholders’ interest and may discredit the
profession.
(b)
Matters relevant to obtaining knowledge for development of the audit plan
Employee frauds

More information is needed about the alleged employee frauds. In particular the
specific control weaknesses that were exploited and whether any changes have since
been made to the accounting and internal control systems.

The current positions held by the guilty employees and whether they have access to
assets and accounting records. Also, whether they are adequately supervised
especially if a lack of segregation of duties is apparent.
Computer system
1028

Particular attention should be given to the control environment relating to computer
systems and to the evaluation of general (IT) and application controls.

The audit team should include sufficient computer audit specialists.
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
REVISION QUESTION BANK – AUDIT AND ASSURANCE (F8)

Due to the complicated nature of the system, tests of controls could include the use
of test data or other computer assisted audit techniques.
Contracts with manufacturers

An industry specialist may provide evidence regarding the problems encountered by
manufacturers and dealers in confirming compliance with these contracts.

As the incentive schemes may have accounting implications (e.g. discounts and 0%
finance) the commercial substance as well as the legal form of the transactions with
the manufactures must be understood and the impact on the financial statements
assessed.
E
Examine the terms of contracts and the strategies adopted by the company for
securing maximum benefit from them.
Misstatement

As this appears to be a fraud against the government through falsification of
accounting records, the evidence that the falsification of the records is deliberate
and not an accidental consequence of a poorly designed computer system, must be
documented.

The matter must be discussed with management. Management must be asked to:

correct the fictitious records;
make full provision for all taxes including any penalties for which they are
potentially liable; and
SA
M

PL
(c)


make a full disclosure to the taxation authorities.

If management refuse, the audit opinion should be modified if the amount of taxes
not provided for is material (qualified “except for” opinion).

The auditor’s duty of confidentiality prevents the auditor from raising the matter
with the taxation authorities. Therefore, it may be most appropriate to resign from
the audit if management refuses to put a stop to the malpractice. Any written
“statement of circumstances” required on ceasing to hold office could allude to the
matter but would need to be carefully worded, probably with legal advice, to avoid
accusing the directors of fraud and exposing the firm to a charge of defamation (i.e.
causing damage to reputation).
Answer 10 SPECS4YOU CO I
(a)
The purposes of audit working papers

To assist with the planning and performance of the audit.

To assist in the supervision and review of audit work.

To record the audit evidence resulting from the audit work performed to support the
auditor’s opinion.
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
1029
AUDIT AND ASSURANCE (F8) – REVISION QUESTION BANK
Documentation required
Information obtained
Memorandum and articles of
association.
Details of the objectives of Specs4You, its permitted
capital structure and the internal constitution of the
company.
Most recent published financial
statements.
Provide detail on the size of the company, profitability, etc
as well as any unusual factors such as loans due for
repayment.
Most recent management
accounts/budgets/ cash flow
information.
Determine the current status of the company including ongoing profitability, ability to meet budget, etc as well as
identifying any potential going concern problems.
E
(b)
Organisation chart of Spec4You. To identify the key managers and employees in the
company and other people to contact during the audit.
To find out how Specs4You is performing compared to
the industry standards. This will help to highlight any
areas of concern for example, higher than expected cost of
sales, for investigation on the audit.
PL
Industry data on spectacle sales.
To compare the accounting policies of Specs4You and
obtain additional information on industry standards.
Prior year audit file.
To establish what problems were encountered in last
year’s audit, how those problems were resolved and
identify any areas of concern for this year’s audit.
Internet news sites.
To find out whether the company has any significant news
stories, (good or bad) which may affect the audit
approach.
SA
M
Financial statements of similar
entities.
Answer 11 SPECS4YOU CO II
Working paper standards
The audit working paper does not meet the standards normally expected in a working paper because:

The page reference is unclear making it very difficult to either file the working paper in the
audit file or locate the working paper should there be queries on it.

It is not clear what the client year end date is – the year is missing. The working paper could
easily be filed in the wrong year’s audit file.

There is no signature of the person who prepared the working paper. This means it is unclear
who to address queries to regarding the preparation or contents of the working paper.

There is evidence of a reviewer’s signature. However, given that the reviewer did not query
the lack of preparer’s signature or other omissions noted below, the effectiveness of the
review must be put in question.

The test “objective” is vague – it is not clear what “correct” means for example, it would be
better to state the objective in terms of assertions such as completeness or accuracy.
1030
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
REVISION QUESTION BANK – AUDIT AND ASSURANCE (F8)
The test objective is also stated as an audit assertion. This is not the case as no audit
assertions are actually listed here.

It is not clear how the number for testing was determined. This means it will be very difficult
to determine whether sufficient audit evidence was obtained for this test.

Stating that details of testing can be found on another working paper is insufficient – time will
be wasted finding the working paper, if it has, in fact, been included in the audit working
paper file.

Information on the results of the test is unclear – the working paper should clearly state the
results of the test without bias. The preparer appears to have used personal judgement which
is not appropriate as the opinion should be based on the facts available, not speculation.

The conclusion provided does not appear to be consistent with the results of the test. Five
errors were found therefore it is likely that there are some systems weaknesses.
(a)
PL
Answer 12 BRIDGFORD PRODUCTS
E

Importance of planning
ISA 300 Planning an Audit of Financial Statements requires that “The auditor should plan the
audit work so that the audit will be performed in an effective manner”. It goes on to say that
“planning means developing a general strategy and a detailed approach for the expected
nature, timing and extent of the audit”.
SA
M
Planning will address the appropriate approach to the components of the company,
preliminary risk assessment and materiality assessment. It will include the timing of the audit
work. It will be necessary to agree a timetable with the company of when information will be
available. For example:



the inventory count;
when the full financial statements are available for audit;
when the financial statements are agreed and signed by the directors and the auditor.
The necessary level of skills (both internal and, if necessary, external) will be determined and
staff booked and external experts contracted.
A budget will be prepared which sets the time which should be spent on each aspect of the
audit and the completion dates of each part of the audit.
During the audit, progress will be compared with the audit plan. Any adverse (and
favourable) variances against the plan will be investigated, and the plan amended if it is
considered appropriate.
The requirement to plan an audit ensures senior audit staff have considered the work which is
required to complete the audit, and the timing of that work so that it fits in with the dates
information is available from the company and the review and planned completion dates.
By having a plan, the auditor will take a more considered and efficient approach to the audit,
which will improve the quality of the audit, and thus both minimise the time spent on the
audit and the overall audit risk.
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
1031
AUDIT AND ASSURANCE (F8) – REVISION QUESTION BANK
(b)
Audit risks and responses
(i)
Sales and profits
Audit risk: The company’s sales for 10 months are $130 million, which given an annualised
sales of $156 million, is a 41.8% increase over the previous years. The annualised profit
before tax is $4.8 million, compared with $8 million last year, which is a fall of 40%. It
appears the company is increasing sales at the expense of profits.
(ii)
New computerised inventory system
E
Audit response: During the audit a detailed breakdown of sales and expenses will be
obtained, discussed with management and tested in order to understand the increases in both
sales and expenses.
PL
Audit risk: Relying only on the new inventory control system to determine the value of yearend inventory may result in a misstatement of the inventory balance that would be detected
only by inventory count.
Audit response: Audit work will have to be carried out on the new computerised inventory
control system. Computer audit specialists within the audit firm will probably have to be
used. It may be appropriate to carry out this work before the year end, so that any problems
with the system can be highlighted and either overcome or allowed for at the year end.
SA
M
Since the company intends not to carry out an inventory count at the year end, the auditor will
have to place considerable reliance on the accuracy of the inventory quantities reported by the
inventory control system. He will need to review and test the new system, check the
changeover and determine from the company how frequently they count the inventory, the
proportion of the inventory counted at each inventory count, and the checks they make to the
inventory quantities on the computerised system and the frequency and size of errors.
This work will have to be concluded before the year end, as, if differences are frequent, it may
be necessary to carry out a full inventory count at the year end.
(iii)
Product reliability
Reliability problems with the company’s products could result in the following:



certain inventory being unsaleable, and thus worth less than cost;
legal claims against the company; and
customers not paying for the products.
The audit risks with these problems include:
1032

The difficulty in estimating the costs (i.e. the costs of defending legal claims and
damages which may have to be paid, and the cost of the bad debts).

The risk that there may be more claims and bad debts, which relate to the year under
review, but may not become apparent until after the auditor’s report is signed.

The value of the faulty inventory held at the year end. The selling price of
inventory sold between the year end and the audit will have to be checked to ensure
it is valued at the lower of cost and net realisable value.
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
REVISION QUESTION BANK – AUDIT AND ASSURANCE (F8)
Audit responses: Further details will have to be obtained about any legal claims against the
company and customers refusing to pay their outstanding balances. Information can be
obtained for this by inspecting correspondence with customers and discussing the matter with
the company’s staff.
(iv)
Extended credit
Audit risks: The large increase in receivables age has caused a very large increase in
receivables, from $14.7 million (110/12  1.6) at 30 June 2013 to an estimated $53.3 million (156
(i)
/12  4.1) at 30 June 2014.
E
The increase in the credit period and sales to new customers will result in the following audit
risks:
New customers may be low quality and tend to have a higher risk than existing
ones, thus increasing the risk of bad debts

Increasing the credit period tends to attract customers who are a poor credit risk.

A potential bad debt may not become apparent until after the credit period is being
exceeded.
PL

In addition, the actual age of receivables is 1.1 months in excess of the current credit limit (of
three months) compared with 0.6 months over the credit limit in the previous year. This
indicates there may be problems with collection of receivables from customers and thus an
increase in bad debts.
SA
M
Audit response: The financing of the increase may have come from increased borrowings
which need to be verified. More audit effort and more time after the year end is required to
conclude adequately on recoverability.
(v)
Staff dismissals
Audit risks: The effect of there being no chief financial officer between 15 January and the
year end may mean that financial records and controls may not be as effective as in previous
years. If the chief financial officer prepared the annual draft financial statements in previous
years, does the chief accountant have the skills and experience to prepare this year’s financial
statements?
In addition the consequences of the company being without a purchasing manager from 15
January until the new purchasing manager was appointed must be considered. There is the
risk that controls during this period will not have operated well, thus increasing the risk of a
fraud.
Audit responses: The reasons for the dismissal of the chief financial officer and purchasing
manager will have to be ascertained. Were they carrying out a fraud? If this was happening,
what are the financial consequences? Is it possible for this type of fraud to recur? Could the
audit firm be liable for not detecting these events? The assessment of inherent risk may be
increased in any areas under their control.
If the dismissed employees are claiming compensation for unfair dismissal and compensation
from the company, the likely outcome from these claims would have to be investigated and an
appropriate provision included in the financial statements.
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
1033
AUDIT AND ASSURANCE (F8) – REVISION QUESTION BANK
Answer 13 EUKARE CHARITY
(a)
Audit risk
Audit risk is the risk that an auditor gives an inappropriate opinion on the financial statements
being audited. It comprises three elements:

Control risk – the risk that a material error could occur in an assertion that could be
material, individually or when aggregated with other misstatements, will not be
prevented or detected on a timely basis by the company’s internal control systems.

Detection risk – the risk that the auditors’ procedures will not detect a misstatement
that exists in an assertion that could be material, individually or when aggregated
with other misstatements.
PL
E
Inherent risk – the susceptibility of an assertion to a misstatement that could be
material individually or when aggregated with misstatements, assuming that there
are no related controls. The risk of such misstatement is greater for some assertions
and related classes of transactions, account balances, and disclosures than for others.
Inherent risks in charity
Area of inherent risk
Effect on audit approach
Income is from voluntary donations only.
There is a risk that donations will fall,
especially where donors’ own income is
limited by the “credit crunch” etc.
It is difficult to estimate that income in the
future will be sufficient to meet the
expenditure of the charity.
SA
M
(b)

1034
Audit of the going concern concept (as in
ensuring that the charity can still operate)
will therefore be quite difficult.
Completeness of income – where there
are no controls to ensure income is
complete for example sales invoices are
not raised to obtain donations and
donations could be stolen by staff.
Audit tests are unlikely to be effective to
meet the assertion of completeness. The
audit opinion may need to be modified to
explain the lack of evidence stating that
completeness of income cannot be
confirmed.
Funds can only be spent in accordance
with the aims of the charity. There is a
risk that funds are spent outside the aims
of the charity.
Careful review of expenditure will be
necessary to ensure that expenditure is not
ultra vires the objectives of the charity.
Taxation rules relevant to charities.
There is a risk that the rules will be
broken due to lack of correct analysis of
income/expenditure.
The auditor will need to ensure that staff
familiar with the taxation rules affecting the
charity are on the audit team.
The auditor will need to review the
constitution of the EuKaRe charity carefully
in this respect.
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
REVISION QUESTION BANK – AUDIT AND ASSURANCE (F8)
Effect on audit approach
Requirement to report expenditure in
accordance with the constitution –
administration expenditure can be no
more than 10% of total income. Risks
here include income being overstated to
allow expenditure to be overstated.
The trustees may attempt to hide “excessive”
expenditure on administration under other
expense headings.
Donations to charity for specific
activities for example provision of sports
equipment. There is a risk that donations
are not spent in accordance with donors’
instructions.
Documentation for any donation will need to
be obtained and then expenditure agreed to
the terms of the documentation. Any
discrepancies will have to be reported to
management.
E
Weak control environment
As the auditor has to report on the accuracy
of income and expenditure then audit
procedures must focus on the accuracy of
recording of expenditure.
PL
(c)
Area of inherent risk
Lack of segregation of duties/responsibilities
There is normally a limited number of staff working in the charity meaning that a full system
of internal control including segregation of duties cannot be implemented. Staff are likely to
be unclear as to their exact responsibilities as they are not formal “employees” and are not
part of the formal authority structure in the charity.
Volunteer staff
SA
M
Many staff are volunteers and so will only work at the charity on an occasional basis.
Controls will be performed by different staff on different days making the system unreliable.
Lack of qualified staff (human resource issues)
Selection of staff is limited – people tend to volunteer for work when they have time – and so
they are unlikely to have professional qualifications or experience to implement or maintain
good control systems.
No internal audit department (lack of organisational structure)
Any control system will not be monitored effectively, mainly due to the lack of any internal
audit department. The charity will not have the funds or experience to establish internal audit.
Attitude of the trustees
It is not clear how the charity’s trustees view risk. However, where trustees are not
professionally trained or have little time to devote to the charity, then there may be an
impression that controls are not important. The overall control environment may therefore be
weak as other charity workers do not see the importance of maintaining good controls.
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
1035
AUDIT AND ASSURANCE (F8) – REVISION QUESTION BANK
Answer 14 REDSMITH
(a)
Preconditions for an audit
Tutorial note: ISA 210 Agreeing the Terms of Audit Engagements provides guidance to
auditors on the steps they should take in accepting a new audit or continuing on an existing
audit engagement. It sets out a number of processes that the auditor should perform
including agreeing whether the preconditions are present, agreement of audit terms in an
engagement letter, recurring audits and changes in engagement terms.
E
To assess whether the preconditions for an audit are present the auditor must determine
whether the financial reporting framework to be applied in the preparation of the financial
statements is acceptable. In considering this the auditor should assess the nature of the entity,
the nature and purpose of the financial statements and whether law or regulations prescribes
the applicable reporting framework.
PL
In addition the auditor must obtain management’s agreement that it acknowledges and
understands its responsibility for the following:
Preparation of the financial statements in accordance with the applicable financial
reporting framework (including, where relevant, their fair presentation);

Such internal control as management determines is necessary to enable the
preparation of financial statements that are free from material misstatement,
whether due to fraud or error; and

Providing the auditor with access to all relevant information for the preparation of
the financial statements, any additional information that the auditor may request
from management and unrestricted access to persons within the entity from whom
the auditor determines it necessary to obtain audit evidence.
SA
M

If the preconditions for an audit are not present, the auditor should discuss the matter with
management. Unless required by law or regulation to do so, the auditor must not accept the
proposed audit engagement in the following circumstances:
(b)

If the auditor has determined that the financial reporting framework to be applied in
the preparation of the financial statements is unacceptable; or

If management agreement of their responsibilities has not been obtained.
Matters to consider in obtaining an understanding of the entity











The market and its competition.
Legislation and regulation.
Regulatory framework.
Ownership of the entity.
Nature of products/services and markets.
Location of production facilities and factories.
Key customers and suppliers.
Capital investment activities.
Accounting policies and industry specific guidance.
Financing structure.
Significant changes in the entity on prior years.
Tutorial note: Only FOUR were required for 2 marks.
1036
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
REVISION QUESTION BANK – AUDIT AND ASSURANCE (F8)
Audit planning
(i)
Ratios to assist in planning
2014
Gross margin
Operating margin
Inventory days
Receivable days
Payable days
Current ratio
Quick ratio
(ii)
12
/23
/23
2·1
/11 × 365
4·5
/23 × 365
1·6
/11 × 365
6·6
/2·5
(6·6 – 2·1)/2·5
4·5
2013
52·2%
19·6%
70 days
71 days
53 days
2·6
1·8
Audit risk
8
/18
/18
1·6
/10 × 365
3·0
/18 × 365
1·2
/10 × 365
6·9
/1·2
(6·9 – 1·6)/1·2
4
44·4%
22·2%
58 days
61 days
44 days
5·8
4·4
E
(c)
Response to risk
Throughout the audit the team will need to be
alert to this risk. They will need to carefully
review judgemental decisions and compare
treatment against prior years.
A generous sales-related bonus scheme has
been introduced in the year, this may lead to
sales cut-off errors with employees aiming to
maximise their current year bonus.
Increased sales cut-off testing will be
performed along with a review of post yearend sales returns as they may indicate cut-off
errors.
Revenue has grown by 28% in the year;
however, cost of sales has only increased by
10%. This increase in sales may be due to the
bonus scheme and the advertising however,
this does not explain the increase in gross
margin. There is a risk that sales may be
overstated.
During the audit a detailed breakdown of
sales will be obtained, discussed with
management and tested in order to
understand the sales increase.
Gross margin has increased from 44·4% to
52·2%. Operating margin has decreased from
22·2% to 19·6%. This movement in gross
margin is significant and there is a risk that
costs may have been omitted or included in
operating expenses rather than cost of sales.
There has been a significant increase in
operating expenses which may be due to the
bonus and the advertising campaign but could
be related to the misclassification of costs.
The classification of costs between cost of
sales and operating expenses will be
compared with the prior year to ensure
consistency.
SA
M
PL
Management was disappointed with 2013
results and hence undertook strategies to
improve the 2014 trading results. There is a
risk that management might feel under
pressure to manipulate the results through the
judgements taken or through the use of
provisions.
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
1037
AUDIT AND ASSURANCE (F8) – REVISION QUESTION BANK
Audit risk
Response to risk
The finance director has made a change to the
inventory valuation in the year with
additional overheads being included. In
addition inventory days have increased from
58 to 70 days. There is a risk that inventory
is overvalued.
The change in the inventory policy will be
discussed with management and a review of
the additional overheads included performed
to ensure that these are of a production
nature.
Receivable days have increased from 61 to 71
days and management have extended the
credit period given to customers. This leads
to an increased risk of recoverability of
receivables.
Extended post year-end cash receipts testing
and a review of the aged receivables ledger
to be performed to assess valuation.
The current and quick ratios have decreased
from 5·8 to 2·6 and 4·4 to 1·8 respectively.
In addition the cash balances have decreased
significantly over the year. Although all
ratios are above the minimum levels, this is
still a significant decrease and along with the
increase of sales could be evidence of
overtrading which could result in going
concern difficulties.
Detailed going concern testing to be
performed during the audit and discussed
with management to ensure that the going
concern basis is reasonable.
E
PL
SA
M
Answer 15 ABRAHAMS
Detailed cost and net realisable value testing
to be performed and the aged inventory
report to be reviewed to assess whether
inventory requires writing down.
(a)
Components of audit risk
Tutorial note: The requirement to this part is general. The scenario of Abrahams is only
relevant from part (b) which starts “Using the information provided ...”.
Inherent risk
The susceptibility of an assertion about a class of transaction, account balance or disclosure to
a misstatement that could be material, either individually or when aggregated with other
misstatements, before consideration of any related controls. Inherent risk is affected by the
nature of an entity. Factors which can result in an increase include:









1038
Changes in the industry it operates in.
Operations that are subject to a high degree of regulation.
Going concern and liquidity issues including loss of significant customers.
Developing or offering new products or services or moving into new lines of business.
Expanding into new locations.
Application of new accounting standards.
Accounting measurements that involve complex processes.
Events or transactions that involve significant accounting estimates.
Pending litigation and contingent liabilities.
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
REVISION QUESTION BANK – AUDIT AND ASSURANCE (F8)
Control risk
The risk that a misstatement that could occur in an assertion about a class of transaction,
account balance or disclosure and that could be material, either individually or when
aggregated with other misstatements, will not be prevented, or detected and corrected, on a
timely basis by the entity’s internal control. Factors that can result in an increase in control
risk include:
Lack of personnel with appropriate accounting and financial reporting skills.
Changes in key personnel including departure of key management.
Deficiencies in internal control, especially those not addressed by management.
Changes in the information technology (IT) environment.
Installation of significant new IT systems related to financial reporting.
E





Detection risk






PL
The risk that the procedures performed by the auditor to reduce audit risk to an acceptably
low level will not detect a misstatement that exists and that could be material, either
individually or when aggregated with other misstatements. Detection risk is affected by
sampling and non-sampling risk. Factors which can result in an increase include:
Inadequate planning.
Inappropriate assignment of personnel to the engagement team.
Failing to apply professional scepticism.
Inadequate supervision and review of the audit work performed.
Incorrect sampling techniques performed.
Incorrect sample sizes.
Tutorial note: Only one example for each component of risk was required for full marks.
Audit risks and responses
SA
M
(b)
Audit risk
Audit response
The finance director is planning to capitalise,
as an asset, the full $2·2 million of
development expenditure incurred.
However, in order to do this all the criteria of
IAS 38 Intangible Assets must be met.
A breakdown of the development expenditure
should be reviewed and tested in detail to
ensure that only projects which meet the
capitalisation criteria are included as an
intangible asset, with the balance being
expensed.
Some projects may not reach final
development stage and hence should be
expensed rather than capitalised. The risk of
overstating intangible assets is increased due
to the loan covenant requirements to maintain
a minimum level of assets.
The inventory valuation method used is
standard costing. This is acceptable under
IAS 2 Inventories if standard cost is a close
approximation to actual cost.
Abrahams has not updated the standard costs
from when the product was first developed
and hence there is a risk that the standard
costs could be out of date, resulting in over or
undervalued inventory.
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
The standard costs used for the inventory
valuation should be tested in detail and
compared to actual cost. If there are
significant variations this should be discussed
with management, to ensure that the
valuation is appropriate.
1039
AUDIT AND ASSURANCE (F8) – REVISION QUESTION BANK
Audit response
The work in progress balance at the year end
is likely to be material; however there is a
risk that due to the nature of the production
process the audit team may not be
sufficiently qualified to assess the quantity
and value of work in progress leading to
misstated work in progress.
Consideration should be given to whether an
independent expert is required to value the
work in progress. If so this will need to be
arranged with consent from management and
in time for the year-end count.
Over one-third of the warehouses of
Abrahams belong to third parties. Sufficient
and appropriate evidence will need to be
obtained to confirm the quantities of
inventory held in these locations in order to
verify completeness and existence.
Additional procedures will be required to
ensure that inventory quantities have been
confirmed for both third party and company
owned locations.
In September Abrahams introduced a new
accounting system. This is a critical system
for the accounts preparation and if there were
any errors that occurred during the
changeover process, these could affect the
final amounts in the trial balance.
The new system will need to be documented
in full and testing should be performed over
the transfer of data from the old to the new
system.
The new accounting system is bespoke and
the IT manager who developed it has left the
company already and his replacement is not
due to start until just before the year end.
The accounting personnel who are using the
system may have encountered problems and
without the IT manager’s support, errors
could be occurring in the system due to a lack
of knowledge and experience. This could
result in significant errors arising in the
financial statements.
This issue should be discussed with the
finance director to understand how he is
addressing this risk of misstatement. In
addition, the team should remain alert
throughout the audit for evidence of such
errors.
Significant finance has been obtained in the
year, $1 million of equity finance and $2·5
million of long-term loans. This finance
needs to be accounted for correctly, with
adequate disclosure made. The equity
finance needs to be allocated correctly
between share capital and share premium,
and the loan should be presented as a noncurrent liability.
Check that the split of the equity finance is
correct and that total financing proceeds of
$3·5 million were received. In addition, the
disclosures for this finance should be
reviewed in detail to ensure compliance with
relevant accounting standards.
The loan has a number of covenants attached
to it. If these are breached then the loan
would be instantly repayable and would be
classified as a current liability. This could
result in the company being in a net current
liability position. If the company did not
have sufficient cash flow to meet this loan
repayment then there could be going concern
implications.
Review the covenant calculations prepared
by Abrahams and identify whether any
defaults have occurred; if so then determine
the effect on the company.
SA
M
PL
E
Audit risk
1040
The team should maintain their professional
scepticism and be alert to the risk that assets
have been overstated to ensure compliance
with covenants.
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
REVISION QUESTION BANK – AUDIT AND ASSURANCE (F8)
The land and buildings are to be revalued at
the year end; it is likely that the revaluation
surplus/deficit will be material. The
revaluation needs to be carried out and
recorded in accordance with IAS 16
Property, Plant and Equipment; otherwise
non-current assets may be incorrectly valued.
Review the reasonableness of the valuation
and recalculate the revaluation surplus/deficit
to ensure that land and buildings are correctly
valued.
The reporting timetable for Abrahams is
likely to be reduced. The previous timetable
was already quite short and any further
reductions will increase detection risk and
place additional pressure on the team in
obtaining sufficient and appropriate evidence.
The timetable should be confirmed with the
finance director. If it is to be reduced then
consideration should be given to performing
an interim audit in late December or early
January, this would then reduce the pressure
on the final audit.
PL
Substantive procedures
E
Audit response
(i)
Inventory held at third party warehouses

Send a letter requesting direct confirmation of inventory balances held at year end
from the third party warehouse providers used by Abrahams regarding quantities
and condition.

Attend the inventory count (if one is to be performed) at the third party warehouses
to review the controls in operation to ensure the completeness and existence of
inventory.

Inspect any reports produced by the auditors of the warehouses in relation to the
adequacy of controls over inventory.

Inspect any documentation in respect of third party inventory.
(ii)
Use of standard costs for inventory valuation

Discuss with management the basis of the standard costs applied to the inventory
valuation, and how often these are reviewed and updated.

Review the level of variances between standard and actual costs and discuss with
management how these are treated.

Obtain a breakdown of the standard costs and agree a sample of these costs to actual
invoices or wage records to assess their reasonableness.
SA
M
(c)
Audit risk
Answer 16 DONALD
Audit risk
Audit response
Donald has ordered six planes which may not
have been received by the year end. Only assets
which physically exist at the year end should be
included in property, plant and equipment.
Discuss with management whether the planes
have arrived. If so then physically verify a
sample to ensure existence.
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
1041
AUDIT AND ASSURANCE (F8) – REVISION QUESTION BANK
Audit risk
Audit response
The existing planes have been refurbished at a
cost of $15m. This expenditure needs to be
reviewed to assess whether it is of a capital nature
and should be included within assets or expensed
as repairs.
Review a breakdown of the costs and agree to
invoices to assess the nature of the expenditure
and if capital agree to inclusion within the asset
register and if repairs agree to the income
statement.
Donald has applied for a loan of $25m. It has not
received this loan yet, but it has already ordered
the planes and if it does not receive the money in
time then it may struggle to pay for the planes
ordered and this could result in going concern
difficulties.
Discuss with management the status of the loan
application and if still outstanding whether any
other banks have been approached for the loan.
The travel agents who sell tickets on behalf of the
airline are struggling to pay their outstanding
balances to Donald.
This could result in an
increase in irrecoverable debts and receivables
being overvalued.
Extended post year-end cash receipts testing and a
review of the aged receivables ledger to be
performed to assess valuation.
PL
E
Perform a detailed going concern review.
An allowance for receivables to be discussed with
management.
Donald’s website has encountered difficulties Extended controls testing to be performed over
with recording sales, this could lead to errors in the sales cycle to assess the extent of the errors.
Detailed testing to be performed over
relation to completeness of income.
completeness of income.
Review the cut-off of customer refunds around
the year end to ensure that sales are complete and
accurate.
SA
M
Due to the website errors tickets have been sold
twice, therefore some customers will require
refunds. At the year end there is a risk that the
tickets to be refunded have not been removed
from sales.
Donald is closing its call centre and making the Discuss with management the status of the
workforce redundant; as it has announced this to redundancy programme and review and
the staff then under IAS 37 Provisions, recalculate the redundancy provision.
Contingent Liabilities and Contingent Assets a
redundancy provision will be required for any
staff not yet paid at the year end.
Tutorial note: Only five audit risks and responses were required.
Answer 17 INTERNAL CONTROL
(a)
1042
Understanding internal control

ISA 315 requires the auditor to understand internal control by considering the
design and implementation of relevant controls to assess the potential risk of
material misstatements.

As an objective of internal control is to prevent, detect and correct material errors, if
controls are poorly designed or are not implemented, there is potentially a greater
risk of material misstatement in the financial statements.

The auditor must then consider whether the risks are of the type and magnitude that
could result in a material misstatement of the financial statements.
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
REVISION QUESTION BANK – AUDIT AND ASSURANCE (F8)

Use of questionnaires
As well as flowcharting systems and compiling narrative notes, auditors will use
questionnaires (e.g. ICQs – internal control questionnaires – and ICEQs – internal
control evaluation questionnaires) as a framework for understanding the design of
internal controls.

ICQs comprise a series of questions for each control cycle (e.g. sales, purchases,
wages) that are designed to identify if particular internal controls exist (and if they
do not, then a possible area of weakness) for example:
E


Is the customer credit limit checked before an order is accepted?

Are goods received agreed to the authorised purchase order?


PL
(b)
Professional judgement has to be used to identify those controls that relate to the
entity’s objective of preparing financial statements that give a true and fair view and
the management of risk that may result in a material misstatement in the financial
statements.
Is the price charged by the supplier on the purchase invoice agreed to an
authorised price list?
Is each amendment to the standing payroll database reviewed to original
input and authorisation and approved by an independent official?
Questions are framed such that a “No” answer indicates a weakness and would
highlight potential problems in segregation of duties, controls or management
supervision.

ICEQs go further than ICQs in that they are designed to assess whether errors or
fraud are possible. The questions asked are more open and principles-based than
the closed form (rules-based) of ICQs. They are also closely related with control
objectives, for example:
SA
M


How does the client ensure that goods are only sent to customers who can
pay?

How does the client ensure that goods are only accepted if the correct
ordering procedures have been followed?

How does the client ensure that payments are only made for goods and
services received and required by the company?

How does the client ensure that amendments to the standing payroll data
are relevant and accurate?

The questions in an ICEQ can be concentrated (targeted) on the possibility of error
and fraud in each cycle and therefore specifically designed to cover such
possibilities, reducing the number of questions needed to be asked and increasing
their relevance.

Each question can relate to more than one client as they are open and each client
may have different relevant controls that meet the question requirement.
Alternatively, an ICEQ can be specifically tailored to each client.
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
1043
AUDIT AND ASSURANCE (F8) – REVISION QUESTION BANK

The answers will describe the nature and extent of the controls in operation. The
auditor can then assess the control design and whether or not to rely on them (i.e.
they can form the basis of the control testing programme).
Answer 18 BESTWOOD ENGINEERING
(a)
Purchase and receipt of goods
Tutorial note: The question specifically refers to controls to be exercised in the purchasing
department.
E
For all goods ordered, there should be a purchase requisition from a user department. The
purchasing department should not be permitted to raise purchase requisitions as this would
create a weakness in the division of duties.
PL
The purchasing department should check the purchase requisition is for goods the user
department is authorised to buy or consume. If the value of the order is substantial, the
purchasing department should ensure there is a need for such a large order by checking
current inventory levels and future orders to determine whether so large a quantity or value is
required.
The purchase requisition should use a standard form and be signed by an authorised signatory.
The purchasing department should order the goods from an authorised vendor. Where there is
a choice of vendor or a new vendor is required, the purchasing department should obtain the
product from the vendor who provides the product or service at the best price, quality and
delivery.
SA
M
The purchasing department should raise the purchase order which should be signed by the
purchasing manager. For large value purchases, a director may be required to sign the
purchase order. The purchase order should be sent to the vendor, the goods received
department, the user department and the accounts department.
The purchasing department should ensure the goods are received on time. This may require
them to contact the vendor a week before the expected delivery date to ensure they are
received on time, and allow action to be taken if the delivery date is later than specified on the
purchase order.
When the goods are received the purchasing department should receive a copy of the goods
received note (GRN) from the goods received department. They should record the goods
received against the order.
The purchasing department may be part of the system which authorises purchase invoices.
They should check the goods on the invoice are consistent with the purchase order/GRN and
the price per unit is correct.
The purchasing department should be informed about short deliveries (i.e. the quantity of
goods received is less than on the purchase order or advice note) and when there are quality
problems. From this information, they can contact the vendor so that corrective action is
taken. Also, such details may be helpful in determining whether the vendor should be used
for future orders
The purchasing department should be informed of situations when goods or services are
received but no purchase order has been raised. With this information, the purchasing
department should contact the “offending” department and ensure that in future a purchase
order is raised for all the goods they order.
1044
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
REVISION QUESTION BANK – AUDIT AND ASSURANCE (F8)
(b)
Authorisation of purchase invoices
Tutorial note: The question calls for control procedures in the accounts department before
the purchase invoice is processed.
The accounts department will receive the purchase invoice, which they should record in a
register.
The expense code will be entered on the invoice (for posting to the general ledger).
E
The accounts department will either match the purchase invoice to the goods received note
and delivery note or ask the goods received department to check and authorise the purchase
invoice.
The purchasing department will be asked to confirm the goods are as described on the
purchase order and the price per unit is correct.
The user department may be asked to authorise the purchase invoice.
PL
An appropriate responsible official will be asked to finally approve the purchase invoice.
Provided these checks are satisfactory, the accounts department should input the invoice
details into the computer which will post it to the accounts payable ledger and the general
ledger.
An independent person should check monthly supplier statements against the balances on the
accounts payable ledger. Differences between these two balances should be investigated for
correction of possible error or omission.
(c)
Controls over purchase of services
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Procedures over receiving services are inherently different to those over receiving goods.
For some types of service there may be no system for raising purchase orders (e.g. electricity,
gas, water and telephone charges). However there should be a system for reviewing these
costs, by comparing them with the previous year (or period), with budget and with amounts
charged by alternative vendors. In this way, the company can ensure these services are
received at the most economical cost.
For receipt of all other services, before the service is obtained, a purchase requisition could be
raised by the user department, and the purchasing department should raise a purchase order.
In emergency situations, it may be acceptable to raise a purchase requisition and order after
the service has been received (e.g. the repair of a vehicle which has broken down).
There should be a system whereby action is taken when no purchase order has been raised for
a service which has been received.
The major controls over validity and cost of services (e.g. advertising, training, etc) will be
monitoring and control over cost:

Budgets set for major activities, suitably analysed;

Monitoring of actual cost against budget;

Informing cost centres of charges allocated to them from incoming invoices;

Cost centre approval of invoices;

Management review of performance including efficiency and effectiveness of the
services received.
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1045
AUDIT AND ASSURANCE (F8) – REVISION QUESTION BANK
Answer 19 MISTIREAD I
(b)
Engagement letter
Discuss the matter again with the directors in an attempt to reach a suitable
compromise.

Remind the directors that statutory audits require the directors to make all the
necessary information and explanations available to the auditor.

Explain that lack of information on the website will result in a limitation in scope of
the audit work.

Further explain that because the lack of evidence appears to relate to a material
amount that the auditor’s report will have to be modified with an “except for”
qualification due to the lack of information and the possibility of misstatement of
non-current assets.

Finally note that auditor may have to decline to continue to act for MistiRead unless
suitable terms of engagement can be agreed.
E

PL
(a)
Concept of materiality
Financial statements are materially misstated when they contain errors or irregularities whose
effect, individually or in the aggregate, is important enough to prevent the statements from
being fairly presented. In this context, misstatements may result from misapplication of
applicable accounting standards, departures from fact, or omissions of necessary information.
SA
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ISA 320, Materiality in Planning and Performing an Audit, requires auditors to consider
materiality when determining the nature, timing and extent of audit procedures. In
complying with this requirement ISA 320 recommends that auditors make preliminary
judgements about materiality levels in planning the audit at the following levels:

the financial statement level, because the auditors’ opinion on fair presentation
extends to the financial statements taken as a whole;

the account balance (assertion) level, because the auditors verify account balances in
reaching an overall conclusion that the financial statements are fairly presented;

cumulative impact of aggregated undetected immaterial misstatements exceeding
the materiality level (performance materiality).
The overall level of materiality and the nature of account balances enable auditors to
determine which account balances to audit and how to evaluate the effects of misstatements
in financial information as a whole. Materiality at the account balance level assists auditors
in determining what items in a balance (or transactions class) to audit and what audit
procedures to undertake (e.g. whether to use sampling or analytical procedures). Performance
materiality determines a level of materiality above which all items should be tested.
Overall financial statement level
There may be more than one level of materiality relating to the financial statements. For the
statement of comprehensive income, materiality could be related to revenue or to profit
(usually before tax). For the statement of financial position, materiality could be based on
shareholders’ equity, assets or liability class totals.
1046
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REVISION QUESTION BANK – AUDIT AND ASSURANCE (F8)
In making a preliminary judgement about materiality, auditors initially determine the
aggregate level of materiality for each financial statement. For example, it may be estimated
that errors totalling $100,000 for the statement of comprehensive income and $200,000 for
the statement of financial position would be material. For planning purposes, the auditors
should use the smallest aggregate level of misstatement considered to be material to any one
of the financial statements. This decision rule is appropriate because the financial statements
are interrelated and many audit procedures pertain to more than one statement. For instance,
the audit procedure to determine whether year-end credit sales are recorded in the proper
period provides evidence about both accounts receivable (statement of financial position) and
sales (statement of comprehensive income).
an amount equal to or greater than 10% of the base is presumed to be material;
an amount equal to or less than 5% of the base may be presumed not to be material;
to determine whether an amount between 5% and 10% is material is a matter of
judgement.
PL



E
ISA 320 offers no guidance for determining this relationship but, where an item has an effect
on profit, widely used parameters are:
Other commonly used bases, and materiality thresholds expressed as a percentage of that
base, are as follows.
Base
Sales
Net profit
Total assets
Equity (net assets)
Materiality threshold (%)
½ - 1%
5 - 10%
½ - 1%
1 - 2%
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Qualitative considerations
The emphasis in planning materiality is on quantitative considerations. ISA 320
acknowledges that in designing the audit plan, the auditor establishes an acceptable
materiality level so as to detect quantitatively material misstatements. Since the errors are
not yet known, their qualitative effect can be considered only during the testing phase of the
audit, as evidence becomes available.
Qualitative considerations relate to the causes of misstatements or to misstatements that do
not have a quantifiable effect. A misstatement that is quantitatively immaterial may be
qualitatively material. This may occur, for instance, when the misstatement is attributable to
an irregularity or an illegal act by the entity. Discovery of either occurrence might cause the
auditors to conclude there is a significant risk of additional similar misstatements. Although
it is suggested that the auditors should be alert for misstatements that could be qualitatively
material, it is ordinarily not practical to design procedures to detect them – hence the
importance of fully understanding the entity and its environment (including the economic
decisions of users) and the use of professional judgement and scepticism.
Account balance/class of transactions level
Account balance materiality is the minimum misstatement that can exist in an account
balance for it to be considered materially misstated. In making judgements about materiality
at the account balance level, the auditors must consider the relationship between it and
financial statement materiality. This consideration should lead the auditors to plan the audit
to detect misstatements that may be immaterial individually but that may be material to the
financial statements taken as a whole when aggregated with misstatements in other account
balances.
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1047
AUDIT AND ASSURANCE (F8) – REVISION QUESTION BANK
When the auditors’ preliminary judgements about financial statement materiality are
quantified, a preliminary estimate of materiality for each account may be obtained by
allocating financial statement materiality to the individual accounts. The allocation may be
made to both statement of financial position and statement of comprehensive income
accounts.
Performance materiality
The determination of performance materiality is not a simple mechanical calculation, but
draws upon the auditor’s past experience, the use of professional judgement and the
expectation of misstatements within the current period.
E
It may be the overall financial statement materiality, the individual materiality for specific
classes of transactions, balances and disclosures that are key to the users or a separate lower
level calculated to take into account the possibility of undetected material misstatements.
Answer 20 DOCUMENTATION AND MATERIALITY
PL
Documenting audit work

Provides evidence of the auditor’s basis for a conclusion about the achievement of
the overall objective of the audit.

Provides evidence that the audit was planned and performed in accordance with
ISAs and applicable legal and regulatory requirements.

Assists the engagement team to plan and perform the audit.

Assists members of the engagement team responsible for supervision to direct,
supervise and review the audit work.
SA
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(a)
(b)

Enables the engagement team to be accountable for its work.

Retains a record of matters of continuing significance to future audits.
Materiality
Materiality is defined as “misstatements, including omissions, are considered to be material if
they, individually or in the aggregate, could reasonably be expected to influence the economic
decisions of users taken on the basis of the financial statements”.
In assessing the level of materiality there are a number of areas that should be considered.
Firstly the auditor must consider both the amount (quantity) and the nature (quality) of any
misstatements, or a combination of both. The quantity of the misstatement refers to the
relative size of it and the quality refers to an amount that might be low in value but due to its
prominence could influence the user’s decision (e.g. directors’ transactions).
In assessing materiality the auditor must consider that a number of errors each with a low
value may when aggregated amount to a material misstatement.
The assessment of what is material is ultimately a matter of the auditors’ professional
judgement, and it is affected by the auditor’s perception of the financial information needs of
users of the financial statements.
1048
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REVISION QUESTION BANK – AUDIT AND ASSURANCE (F8)
In calculating materiality the auditor should also consider setting the performance materiality
level. This is the amount set by the auditor, it is below materiality, and is used for particular
transactions, account balances and disclosures.
As per ISA 320 materiality is often calculated using benchmarks such as 5% of profit before
tax or 1% of gross revenue. These values are useful as a starting point for assessing
materiality.
Answer 21 TYE
Valuation of aviation inventory
Review GAAP to ensure that there are no exceptions for aviation fuel or inventory
held for emergency purposes which would suggest a market valuation should be
used.

Calculate the difference in valuation. The error in inventory valuation is $105 *
6,000 barrels or $630k, which is a material amount compared to profit.

Review prior year working papers to determine whether a similar situation occurred
last year and ascertain the outcome at that stage.

Discuss the matter with the directors to obtain reasons why they believe that market
value should be used for the inventory this year.

Warn the directors that in your opinion, aviation fuel should be valued at the lower
of cost or net realisable value (that is $15/barrel) and that using market value will
result in a modification to the audit report.

If the directors now amend the financial statements to show inventory valued at
cost, then consider mentioning the issue in the weakness letter and do not modify
the audit report in respect of this matter.

If the directors will not amend the financial statements, quantify the effect of the
disagreement in the valuation method – the sum of $630,000 is material to the
financial statements as Tye’s loss is decreased from a small loss to a loss of
$130,000 although net assets decrease by only about 0·3%.

Obtain written representations from the directors of Tye confirming that market
value is to be used for the emergency inventory of aviation fuel.

If the directors will not amend the financial statements, draft the relevant sections of
the audit report, showing a qualification on the grounds of disagreement with the
accounting policy for valuation of inventory.
PL
E

SA
M
(a)
(b)
Audit procedures and actions
(i)
External auditor responsibilities regarding detection of fraud
Overall responsibility of auditor
The external auditor is primarily responsible for the audit opinion on the financial statements
following the international auditing standards (ISAs). ISA 240 The Auditor’s Responsibilities
Relating to Fraud in an Audit of Financial Statements is relevant to audit work regarding
fraud.
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1049
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This ACCA Revision Question Bank has been reviewed
by ACCA's examining team and includes:
The most recent ACCA examinations with suggested answers
t
Past examination questions, updated where relevant
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Model answers and suggested solutions
t
Tutorial notes
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PL
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