AUDITING 1 TRIAL QUESTIONS FOR DECEMBER 2014 EXAMS.
NOTE: THERE WILL BE ONE CASE STUDY QUESTION AND THREE OTHER
QUESTIONS TO BE ANSWERED OUT OF THE QUESTIONS BELOW. A TOTAL OF
4 SETS OF QUESTIONS AND YOU WILL BE REQUIRED TO ANSWER ALL.
QUESTION 1
(a) Explain what is meant by ‘corporate governance’ and state any two importance of it. (3
marks)
Goofy Co’s year end is 31 December, which is traditionally a busy time for NAB & Co. Goofy
Co currently has an internal audit department of five employees but they have struggled to
undertake the variety and extent of work required by the company, hence Goofy Co is
considering whether to recruit to expand the department or to outsource the internal audit
department. If outsourced, Goofy Co would require a team to undertake monthly visits to test
controls at the various shops across the country, and to perform ad hoc operational reviews at
shops and head office.
Goofy Co is considering using NAB & Co to provide the internal audit services as well as
remain as external auditors.
Required:
(b) Discuss the advantages and disadvantages to both Goofy Co and NAB & Co of outsourcing
their internal audit department. (10 marks)
(c) 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:
From the information in (c) explain any THREE 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)
(d) Explain the factors that should be considered by an external auditor before reliance can be
placed on the work performed by a company’s internal audit department. (4 marks)
QUESTION 2
You are the audit manager of Currant & Co and you are planning the audit of Orange Financials
Co (Orange), who specialise in the provision of loans and financial advice to individuals and
companies. Currant & Co has audited Orange for many years.
The directors are planning to list Orange on a stock exchange within the next few months and
have asked if the engagement partner can attend the meetings with potential investors. In
addition, as the finance director of Orange is likely to be quite busy with the listing, he has asked
if Currant & Co can produce the financial statements for the current year.
During the year, the assistant finance director of Orange left and joined Currant & Co as a
partner. It has been suggested that due to his familiarity with Orange, he should be appointed to
provide an independent partner review for the audit.
Once Orange obtains its stock exchange listing it will require several assignments to be
undertaken, for example, obtaining advice about corporate governance best practice. Currant &
Co is very keen to be appointed to these engagements, however, Orange has implied that in order
to gain this work Currant & Co needs to complete the external audit quickly and with minimal
questions/issues.
The finance director has informed you that once the stock exchange listing has been completed,
he would like the engagement team to attend a weekend away at a luxury hotel with his team, as
a thank you for all their hard work.
In addition, he has offered a senior member of the engagement team a short-term loan at a
significantly reduced interest rate.
Required:
(a) (i) Explain FIVE ethical threats which may affect the independence of Currant & Co’s audit
of Orange Financials Co; and
(ii) For each threat explain how it might be reduced to an acceptable level. (10 marks)
(b) Orange is aware that subsequent to the stock exchange listing it will need to establish an audit
committee and has asked for some advice in relation to this.
Required:
Explain three benefits to Orange of establishing an audit committee. (6 marks)
(c) (i) Define a ‘test of control’ and a ‘substantive procedure’; (4 marks)
QUESTION 3
Saxophone Enterprises Co (Saxophone) has been trading for 15 years selling insurance and has
recently become a listed company. In accordance with corporate governance principles
Saxophone maintains a small internal audit department. The directors feel that the team needs
to increase in size and specialist skills are required, but they are unsure whether to recruit more
internal auditors, or to outsource the whole function to their external auditors, Cello & Co.
Saxophone is required to comply with corporate governance principles in order to maintain its
listed status; hence the finance director has undertaken a review of whether or not the company
complies.
Bill Bassoon is the chairman of Saxophone, until last year he was the chief executive. Bill is
unsure if Saxophone needs more non-executive directors as there are currently three nonexecutive directors out of the eight board members. He is considering appointing one of his
close friends, who is a retired chief executive of a manufacturing company, as a non-executive
director.
The finance director, Jessie Oboe, decides on the amount of remuneration each director
is paid. Currently all remuneration is in the form of an annual bonus based on profits. Jessie is
considering setting up an audit committee, but has not undertaken this task yet as she is very
busy. A new sales director was appointed nine months ago. He has yet to undertake his board
training as this is normally provided by the chief executive and this role is currently vacant.
There are a large number of shareholders and therefore the directors believe that it is impractical
and too costly to hold an annual general meeting of shareholders. Instead, the board has
suggested sending out the financial statements and any voting resolutions by email; shareholders
can then vote on the resolutions via email.
Required:
(a) Explain the advantages and disadvantages for each of Saxophone Enterprises Co AND
Cello & Co of outsourcing the internal audit department.
Note: The total marks will be split as follows:
Saxophone Enterprises Co (8 marks)
Cello & Co (2 marks) (10 marks)
(b) In respect of the corporate governance of Saxophone Enterprises Co:
(i) Identify and explain FIVE corporate governance weaknesses; and
(ii) Provide a recommendation to address each weakness.
Note: The total marks will be split equally between each part. (10 marks)
QUESTION 4
(a)ISA 315 Identifying and Assessing the Risks of Material Misstatement through Understanding
the Entity and Its Environment requires auditors to understand the entity’s internal control. An
entity’s internal control is made up of several components.
Required:
State the FIVE elements of an entity’s internal control and give a brief explanation of each
elements.
(10 marks)
(b) Identify and explain THREE financial statement assertions relevant to account balances at
the year end; (3 marks)
(c) List and explain the purpose of THREE items that should be included on every working paper
prepared by the audit team. (3 marks)
QUESTION 5
a.
b.
c.
d.
State the definition of audit as per the Auditing Practices Board (APB)
2 marks
Outline the primary objective and any THREE secondary objectives of audit. 5 marks
Distinguish between interim audit and final audit. 4 marks
For a client to be successful in an action against the auditor under tort to a client, he must
satisfy the court in certain three areas that. List them. 6 marks
QUESTION 6
(a) Auditors are required to document their understanding of the client’s internal controls. There
are various options available for recording the internal control system. Two of these options are
narrative notes and internal control questionnaires.
Required:
i.
State the purpose of narrative notes and internal control evaluation questionnaires
(ICEQs)
ii.
State one advantage and one disadvantage to the auditor of narrative notes and
internal control questionnaires as methods for documenting the system. (6 marks)
(b) In order for auditors to operate effectively and to provide an opinion on an entity’s financial
statements, they are given certain rights.
Required:
State FOUR rights of an auditor, excluding those related to resignation and removal. (2marks)
(c) List FOUR examples of matters the auditor may consider when obtaining an understanding of
the entity. (2 marks)
QUESTION 7
(a) (i) Describe FIVE types of procedures for obtaining audit evidence; (5 marks)
(b) In order for auditors to operate effectively and to provide an opinion on an entity’s financial
statements, they are given certain rights.
Required:
State FIVE rights of an auditor, excluding those related to resignation and removal. (5 marks)
(c) Identify and explain each of the FIVE fundamental principles contained within ACCA’s
Code of Ethics and Conduct. (5 marks)
QUESTION 8
(a) ISA 300 Planning an Audit of Financial Statements provides guidance to assist auditors in
planning an audit.
Required:
List any five benefits of audit planning. (5 marks)
(b) ISA 230 Audit Documentation deals with the auditor’s responsibility to prepare audit
documentation for an audit of financial statements.
Required:
State FIVE benefits of documenting audit work. (5 marks)
(c) Define the ‘three Es’ of a value for money audit. (3 marks)
QUESTION 9
(a) Explain the concept of TRUE and FAIR presentation. (4 marks)
(b) ISA 315 (Redrafted) Identifying and Assessing the Risks of Material Misstatement Through
Understanding the Entity and Its Environment requires auditors to obtain an understanding of the entity
and its environment, including its internal control.
Required:
Explain why obtaining an understanding of the entity and its environment is important for the auditor. (4
marks)
(c) Contrast the role of internal and external auditors. (4 marks)
QUESTION 10
(a)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.
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) Explain the purpose of a value for money audit. (4 marks)