AUDITING
PROFESSIONAL 1 EXAMINATION - APRIL 2009
NOTES:
Section A - You are required to answer Questions 1, 2 and 3.
Section B - You are required to answer any two out of Questions 4, 5, 6 and 7. (If you provide answers to
more than two questions in this section, you must draw a clearly distinguishable line through the answer(s) not
to be marked. Otherwise, only the first answers to hand for these four questions will be marked.)
TIME ALLOWED:
3 hours, plus 10 minutes to read the paper.
INSTRUCTIONS:
During the reading time you may write notes on the examination paper but you may not commence
writing in your answer book.
Marks for each question are shown. The pass mark required is 50% in total over the whole paper.
Start your answer to each question on a new page.
You are reminded that candidates are expected to pay particular attention to their communication skills
and care must be taken regarding the format and literacy of the solutions. The marking system will take
into account the content of the candidates' answers and the extent to which answers are supported with
relevant legislation, case law or examples where appropriate.
List on the cover of each answer booklet, in the space provided, the number of each question(s)
attempted.
The Institute of Certified Public Accountants in Ireland, 17 Harcourt Street, Dublin 2.
THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND
AUDITING
PROFESSIONAL 1 EXAMINATION - APRIL 2009
Time Allowed: 3 hours, plus 10 minutes to read the paper.
Section A - You are required to answer Questions 1, 2 and 3.
Section B - You are required to answer any two out of Questions 4, 5, 6 and 7. (If you provide answers to
more than two questions in this section, you must draw a clearly distinguishable line through the answer(s) not
to be marked. Otherwise, only the first answers to hand for these four questions will be marked.)
1.
SECTION A - Questions 1, 2 and 3 are compulsory.
You are the Audit Senior of WW plc and you are about to audit WW plc.
WW plc is a wholesale distributor of frozen fruit, in business since 1971, which operates out of three
countries; Ireland, France and Belgium. In each country the company has a distribution refrigeration
warehouse. However, the administration, purchasing and accounting functions are centralised in the
company’s headquarters in Ireland. As part of your audit you will carry out a detailed examination of WW plc
and its environment, including the company’s internal controls. Internal control consists of the following
components; (i) the control environment; (ii) the entity’s risk assessment process; (iii) the information
system, including the related processes relevant to financial reporting and communication; (iv) control
activities; and (v) monitoring of controls.
REQUIREMENT:
a)
Explain why it is important for the Auditor to obtain an understanding of the company and its environment
including the company’s internal controls.
(5 marks)
b)
c)
d)
Explain what is meant by the term ‘control environment’ and identify THREE major factors that will be
reflected in the control environment of WW plc.
(7 marks)
List FOUR different control activities.
(4 marks)
For each control activity identified in your answer to c) above, provide ONE specific illustration of a control
you would expect to find in the daily activities of WW plc.
(4 marks)
[Total : 20 marks]
Page 1
2.
You are doing the audit of ETU plc for the year ended 30 June 2009. The company is a publishing
company. The company maintains a tangible non-current assets (fixed assets) register.
The following schedule for tangible non-current assets has been prepared by the client:
Property, Plant, and Equipment
01/07/08 Cost Brought Forward
Additions
Disposals
30/06/09 Cost Carried Forward
Freehold
Property
€
0
675,000
0
675,000
Publishing
Office
Office
Equipment Equipment Furniture
€
€
€
109,210
102,100
83,428
92,242
18,204
5,200
(81,499)
(11,200)
(904)
119,953
109,104
87,724
Total
€
294,738
790,646
(93,603)
991,781
Notes:
(i)
Additions to freehold property consist of a new head office and car park. The company previously
rented premises.
(ii)
(iii)
(iv)
Additions and disposals to publishing equipment comprise two digital printers and four photocopiers
respectively.
The company purchased one server computer and disposed of one server computer during the
period.
Additions and disposals to office furniture comprise miscellaneous items bought, sold and scrapped.
REQUIREMENT:
a)
(i)
Explain why the emphasis in auditing tangible non-current assets is on the current period additions
and disposals rather than on the balances in the account brought forward from the preceding year.
(2 marks)
b)
(ii)
Explain under what circumstances will the emphasis be on the balances brought forward? (1 mark)
•
•
•
•
•
Existence or occurrence (EO);
Completeness (C);
Accuracy, classification and valuation and allocation (ACV);
Rights and obligations (R);
Presentation and disclosure (PD);
Prepare the substantive audit programme of work for the tangible non-current assets section of the balance
sheet, detailing TEN audit procedures that might reasonably be applied by an Auditor to meet the following
specific audit objectives:
in respect of the tangible non-current asset figures to be shown in the balance sheet of ETU plc for the
year ended 30 June 2009. You are not required to consider income statement audit work. For each
procedure mentioned in your programme, where appropriate, you should identify the associated
objective(s).
(15 marks)
Presentation of audit programme.
(2 marks)
[Total : 20 marks]
Page 2
3.
As one of several Senior Auditors at a firm of Certified Public Accountants you are competing to be promoted
to the position of Audit Manager.
Because many of the firm’s clients, including small, family owned businesses, rely on Information
Technology (IT) to record and process business transactions, the Audit Partner wishes to ensure that the
successful candidate has a good understanding of the impact of IT on the audit process.
All candidates have therefore been requested to submit a memorandum to the Audit Partner which
demonstrates an understanding of the following issues:
–
–
–
–
What is meant by audit trail and why it is essential to both management and auditors?
The typical uses of computer audit software.
The problems associated with the use of computer audit software.
The difference between general controls and application controls.
REQUIREMENT:
Write a memorandum to the Audit Partner which:
a)
b)
c)
d)
Defines what is meant by an audit trail and explains why it is essential to both management and auditors.
(5 marks)
Describes and gives an example of FIVE typical uses of computer audit software.
Highlights FOUR problems associated with the use of computer audit software.
Distinguishes between general controls and application controls and give ONE example of each.
Presentation of memorandum.
4.
(5 marks)
(4 marks)
(4 marks)
(2 marks)
[Total : 20 marks]
Section B - You are required to answer any two out of Questions 4, 5, 6 and 7.
You are the Training Officer in a firm of Certified Public Accountants and you are giving an induction course
to a new group of trainee audit staff. Upon questioning the trainees re their knowledge of auditing, a number
of the trainees have stated that they are aware the cornerstone of any audit is the evidence gathered and
evaluated by the Auditor and that reperformance is an example of one of the procedures used by Auditors
to gather evidence. However, they are still a little hazy over the whole concept of audit evidence and the
other auditing procedures used by Auditors to gather audit evidence. You decide to provide them with
explanatory notes on the concept of audit evidence and other procedures used by Auditors to gather audit
evidence and to use for training purposes the accounts of a furniture manufacturing company.
REQUIREMENT:
Prepare notes in any format for the trainee audit staff on your induction course which:
a)
b)
c)
d)
Describes what is meant by auditing procedures and explains why is it important for auditing procedures to
be carefully worded;
(4 marks)
Identifies the factors that determine the persuasiveness of audit evidence and explains how these factors
are related to auditing procedures, sample size, items to select and timing;
(6 marks)
Identifies FOUR procedures as per ISA 500 Audit Evidence (in addition to ‘reperformance’) which the audit
team will use when gathering evidence on the audit of the accounts of the furniture manufacturing company.
(2 marks)
You are also required to give TWO examples of audit evidence that could be obtained from each procedure
identified in your answer to c) above.
(8 marks)
Page 3
[Total : 20 marks]
5.
You are auditing cash at bank for KS plc, an internet based company, for the year ended 30 June 2009. The
company receives the majority of payments from customers by electronic deposit of cash direct to their bank
account from credit card agencies making payments on behalf of customers. Gerry Lyons, the Bookkeeper
for KS plc reconciles the bank account on a monthly basis.
As part of your standard audit procedures, you have prepared a bank letter for forwarding to the client’s
bankers, ABI Bank. However, the Managing Director is reluctant to authorise disclosure to you by the
bankers. In his opinion this is not necessary because all of the company’s bank statements reconciled by
Gerry Lyons, the Bookkeeper, will be given to you for the purpose of your audit.
REQUIREMENT:
a)
Explain why the monthly reconciliation of bank accounts by an independent person is an important internal
control over cash at bank. Which individuals are generally not considered independent for this
responsibility?
(4 marks)
b)
c)
d)
State how KS plc’s bank reconciliation will reflect an electronic deposit of cash received by the bank from
credit card agencies making payments on behalf of customers purchasing products from KS plc’s online
website, but not recorded in KS’s records.
(3 marks)
Explain how bank confirmations differ from positive confirmations of trade receivables (debtors). Distinguish
between them in terms of:
–
–
–
the nature and type of information confirmed in each;
the sample size; and
the appropriate action when the confirmation is not returned after the second request.
(6 marks)
(2 marks)
(2 marks)
State the concern you would have and the action you would take if the Managing Director refused to
authorise disclosure of the information required in the bank letter.
(3 marks)
[Total : 20 marks]
Page 4
6.
Choo plc is a distributor of high end fashion footwear. The company keeps a large inventory of shoe
merchandise and miscellaneous shoe care products in a warehouse in Dublin. Shoes and shoe care
products are distributed from this warehouse to high end shoe shops and department stores throughout
Dublin.
The warehouse is controlled by a Stores Supervisor and his Assistant using a computerised inventory
recording system, to which only these two staff and the Financial Director of the company have access.
Suppliers have online access to the inventory recording system via Choo plc’s internet web site in order to
have real time access to information about the description and quantities of shoe inventory held.
The system identifies each shoe line / shoe care product by a shoe/ shoe care product number, shoe/ shoe
care product description, price and location. It can be updated for quantity movements only and allows for
referencing to goods received notes (receipts into inventory) or goods returned notes (issues out of
inventory). All goods received notes, and goods returned notes are pre-numbered.
The computerised inventory records are not independently checked during the year; therefore the Financial
Director of Choo plc has issued instructions for a year end physical count, which is to take place immediately
after the close of business on the last day of the financial year. You have received a copy of the instructions
for review.
REQUIREMENT:
a)
Give reasons why Choo plc would choose to provide online access of descriptions of shoe merchandise and
on hand quantity levels to suppliers. State the risks associated with making that information available online
and ways in which these risks can be reduced.
(5 marks)
b)
c)
7.
In the verification of the amount of the inventory, one of your concerns will be that slow-moving and “out of
fashion”/obsolete shoe merchandise be identified. Identify FIVE auditing procedures that you can use to
determine whether slow moving or obsolete shoes/shoes merchandise have been included in inventory.
(10 marks)
Identify FIVE procedures and controls that Choo plc need to introduce in order to enable audit reliance to
be placed on the computerised inventory record quantities as a basis for inclusion in the company’s
accounts.
(5 marks)
[ Total : 20 marks]
A firm of Certified Public Accountants has been considering the areas it needs to address in its documented
policies and procedures that it intends to develop further. This is to provide it with reasonable assurance that
the firm and its personnel comply with the professional standards and the applicable regulatory and legal
requirements; and that reports issued by the firm or engagement partners are appropriate in the
circumstances. The firm has four partners, four qualified audit staff, twenty trainee audit staff and four
secretarial/technical staff. The firm has already a number of audit clients across a range of activities and has
recently been approached by a plc company and asked to tender for their audit. Whilst most of the detailed
audit work is carried out by trainee staff, each audit assignment is controlled by an engagement partner and
supervised by a qualified member of the audit staff. If they take on the plc client, the firm are aware they will
have to carry out an engagement quality control review.
On recurring engagements, the engagement partner in charge of the audit reviews with the engagement
team, the permanent audit file, audit programmes and other audit working papers from the prior audit while
planning the current audit to determine their usefulness for the current engagement.
REQUIREMENT:
a)
List the areas to be addressed in the documented polices and procedures in a system of quality control.
(4 marks)
b)
c)
d)
State as per ISA-220 Quality Contol for audits of historical Financial Information what an engagement quality
control review entails.
(6 marks)
List the purposes of audit working papers and explain why each purpose is important.
(6 marks)
Define what is meant by a permanent audit file, and list FOUR types of information typically included.
(4 marks)
END OF PAPER
Page 5
[Total : 20 marks]
SUGGESTED SOLUTIONS
THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND
SOLUTION 1
a)
PROFESSIONAL 1 EXAMINATION - APRIL 2009
ISA 315: Identifying and assessing the risk of material misstatement through understanding the entity and its
environment (para A1) explains:
Obtaining an understanding of the entity and its environment, including the entity’s internal control…..is a
continuous, dynamic process of gathering, updating and analysing information throughout the audit. The
understanding establishes a frame of reference within which the auditor plans the audit and exercises
professional judgement throughout the audit, for example, when:
•
•
•
•
•
•
•
b)
AUDITING
Assessing the riske of material misstatement of the financial statements;
Establishing materiality and evaluating whether the judgement about materiality remains appropriate
as the audit progresses
Considering the appropriateness of the selection and application of accounting policies, and the
adequacy of financial statement disclosures
Identifying areas where special audit considerations may be necessary, for example, related party
transactions, the appropriateness of management’s use of the going concern assumption, or
considering the business purpose of transactions;
Developing expectations for use when performing analytical procedures;
Responding to the assessed risks of material misstatement, including designing and performing further
audit procedures to obtain sufficient appropriate audit evidence; and
Evaluating the sufficiency and appropriateness of audit evidence obtained, such as the appropriateness
of assumptions and of management’s oral and written representations.
(One mark for each point to a maximum of five marks)
The control environment of a company refers to the environment created by the company’s directors and
executives, through their attitude, awareness and actions, regarding the company’s internal controls and
their importance in the company.
(One mark for definition)
Major factors that will be reflected in the control environment of WW Plc are:
•
the manner in which the principles of integrity and ethical values are communicated and enforced within
the company;
•
management’s consideration of the competence levels required for particular jobs and how these
translate into requisite skills and knowledge;
•
attitudes of the board of directors – in particular, the directors’ independence from executives, their
experience and stature, the extent of their involvement in the company, the information they receive,
their scrutiny of the company’s activities, the degree to which they raise and pursue difficult questions
with executives, and their interaction with the entity’s internal and external auditors;
•
the philosophy and operating style of the senior executives, in particular, their approach to taking and
managing business risks, and attitudes towards the accounting function, information processing and
financial reporting;
•
the organisational structure within which the company plans, and seeks to achieve, control and review,
its objectives;
•
how authority and responsibility for operating activities are assigned, and how reporting relationships
and authorization hierarchies are established; and
•
human resource policies and practices relating to, for example recruitment, orientation, training,
evaluation, counseling, promotion, compensation and remedial actions.
(Two marks per factors up to a maximum of six marks)
Page 7
c)
Categories of Control Activity
the daily
Approval and control of documents
Restricting direct access to assets
and records
Procedures for authorising transactions
Segregation of duties
SOLUTION 2
a)
b)
Examples of specific procedures I would expect to find in
activities of WW plc
• Approval by a senior member of the accountancy staff, of a
journal for posting to the company’s nominal ledger.
• Approval of paid overtime sheets by a responsible manager
• Password protection over access to the sales price data
master file.
• Restricting access to the cashier’s department.
• Restricting access to the warehouse.
• Authorisation of purchase orders by a responsible manager.
• Adequate segregation of duties throughout all sales,
administration and accounting departments.
(One mark for each activity (4 marks) and each example (4 marks))
The reason for the emphasis on current period additions in auditing tangible noncurrent assets is that there
is an expectation that tangible noncurrent assets will be kept and maintained on the records for several years.
The assets carried over from the preceding years can be assumed to have been verified in the prior years'
audits.
(One mark for each point to a maximum of 2 marks)
If it cannot be shown through tests of controls and substantive tests of transactions that all disposals have
been recorded, additional testing of the prior balance could be required. A first year audit also necessitates
tests of the beginning balance.
(One mark)
Audit Programme for tangible noncurrent assets
ETU plc
Year ended 30 June 2009
Test
(i)
(ii)
(iii)
(iv)
Ensure balance brought forward in tangible
noncurrent assets account(s) in nominal ledger
agrees to balance in Balance Sheet as at
30 June 2008.
Review reconciliation of tangible noncurrent assets
register to tangible fixed assets account in
nominal ledger and obtain explanations for any
discrepancies.
Review results of tangible noncurrent asset
verification checks carried out internally by
company, as a basis for determining additional
audit work to be carried out.
Select sample of publishing equipment, office
equipment and office furniture items brought
forward, from tangible noncurrent assets register
and carry out physical examination.
Page 8
Planned by ……………………..
Performed by: ………………….
Reviewed by: …………………..
Associated
Primary
Objective(s)
CP
C
CE
E
Working
Paper
Ref.
Test
(v)
(vi)
(vii)
Select sample of categories of tangible noncurrent
assets in existence and check for inclusion in
tangible noncurrent assets register
For items physically examined above, check
condition and whether still in use by the company.
Consider implications on value of tangible
noncurrent assets at Balance Sheet date.
Examine title documents and contracts
(viii) Check bank letter for details of securities,
documents of title and assets in safe-keeping.
(ix)
(x)
(xi)
(xii)
Complete company accounts disclosure check list.
Obtain details of the company’s tangible
noncurrent asset budget for the year and enquire
into any material variations from tangible noncurrent
assets acquired.
Review any notes of directors’ meetings and
correspondence files for details of capital
expenditure additions and compare to actual
expenditure. Enquire into any material variations.
Review the costs charged to repairs and
maintenance and rental expenses in the nominal
ledger to identify any costs incorrectly treated as
revenue rather than capital expenditure items and
to confirm costs normally associated with ownership.
Resolve any inconsistencies identified with senior
management of the company.
(xiii) For all of the freehold property ensure that all
expenditure has been properly authorised and
vouch all additions to:
–
authorised purchase invoices, and where
applicable solicitors completion statement
for the purchase of freehold property;
–
goods received notes where applicable;
–
documents of title (e.g., title deeds and land
registry confirmations for the freehold property);
–
entry in tangible noncurrent assets register;
–
entry in nominal ledger.
(xiv) For additions of publishing equipment, office
equipment and furniture select a sample of higher
value additions ensuring proper authorisation of
expenditure and vouch to:
–
authorised purchase invoice;
–
goods received note;
–
entry in tangible noncurrent assets register;
–
entry in nominal ledger.
Associated
Primary
Objective(s)
Working
Paper
Ref.
CE
VR
R
ECR
P
C
C
CVPR
VRP
VRP
(Fifteen marks will be awarded for identifying up to ten of the above procedures and the
associated primary audit objective(s).) Two marks will be awarded for presentation
Page 9
SOLUTION 3
a)
An audit trail is a chain of evidence provided by coding, cross-reference and documentation that connects
account balances and other summary results with original transaction data.
(One mark)
Audit trails are essential to both management and auditors; for example management uses the trail in
responding to inquiries from customers or suppiers concerning account balances and auditors use the trail
in vouching and tracing transactions. In computer information systems the audit trail may exist in electronic
format only and sometimes may be deleted once the transaction has been verified (such as when the personal
identification number (PIN) is read and verified at the initiation of a credit or debit card transaction). Special
audit techniques are required to verify the audit trail, such as the use of embedded audit facitlities that trace
the opeation of controls electronically.
(One mark for each point to a maximum of four marks)
b)
Typical uses of computer audit software
There are numerous examples of how auditors can use computer audit software. These include:
(i)
The selection of exceptional items for testing by the auditor.
Example: the selection of sales invoices raised in excess of €100,000.
(ii)
The recalculation and verification of balances.
Example: totaling the sales subsidiary ledger or inventory file.
(iii) The comparison of data elements in different files for agreement and identification of differences.
Example: the comparison of prices on sales invoices with a master file containing authorised prices.
(iv) The selection of a random sample of representative transactions for testing from a specified population.
Example: the selection of a sample of purchase invoices for audit testing.
(v)
The production of an aged analysis of balances on a specified ledger.
Example: ageing of balances on the trade receivables ledger.
(vi) The identification of trends and possible areas of audit concern.
Example: production of monthly sales analysis and proportion of sales by product type.
(vii) The performance of completeness checks.
Example: carrying out a sequence check on sales invoices to determine completeness of processing.
(viii) The performance of data stratification.
Example: stratification of balances on the trade receivables ledger as a basis for the sample of trade
receivables for confirmation.
(ix) The performance of unreasonableness checks.
Example: identification of employees with weekly overtime paid in excess of 40 hours.
(x)
The performance of rule violation checks.
Example: identification of sales price discount in excess of 10% given to customers.
c)
(Five marks will be awarded for any five functions and examples identified.)
The problems associated with the use of computer audit software
These can be summarised as:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
The initial set-up costs and costs involved in updating can be prohibitive.
The software needs to be tested thoroughly before being used on the ‘live’ data of audit clients.
Audit staff needs to be trained specifically to use the software.
Standard computer audit software may not be compatible for all specified computer applications.
Difficulties are often encountered in obtaining computer time from clients to use the computer audit
software.
Over elaborate computer audit software programmes may take up extensive computer time and
reviewing time.
(Four marks will be awarded for any four problems identified.)
Page 10
d)
General controls are those controls that apply to computer information systems (CIS) as a whole and
examples include contols related to such matters as data centre organisations, hardware and systems
software acquisition and maintenance, and backup and recovery procedures.
(One mark each for explanation and example)
Application controls are those controls that apply to the processing of specific types of transactions such as
invoicing customers, paying suppliers and preparing payroll. Whether they are in a computerised or a manual
environment, application controls may be further classified into the following categories:
•
•
•
Proper authorisation
Documents and records
Independent checks
An example of an application control is a programmed control that verifies that all time cards submitted are
for valid employee ID numbers included in the employee master file.
(One mark each for explanation and example)
(Memorandum presentation 2 marks)
SOLUTION 4
a)
Auditing procedures are methods and techniques used by the auditors to accumulate audit evidence. Each
procedure has a particular advantage for obtaining evidence for an assertion. In selecting a procedure,
auditors must take care to balance the potential effectiveness of the procedure in meeting specific objectives
against the cost of performing the procedure. Because audit procedures are the methods and techniques to
be followed in obtaining evidence, they must be worded carefully to make sure the methods and techniques
are clear.
(One mark for each point to a maximum of four marks)
b)
ISA 500 states that: “The auditor should obtain sufficient appropriate audit evidence to be able to draw
reasonable conclusions on which to base the audit opinion”. The two determinants of the persuasiveness of
evidence are “sufficient” and “appropriate”. Appropriate (relevant and reliable) refers to the degree to which
evidence can be considered believable or worthy of trust. Appropriate relates to the auditing procedures
selected, including the timing of when those procedures are performed. Sufficiency refers to the quantity of
evidence and it is related to sample size and items to select.
(One mark for each point to a maximum of six marks)
c)
The following procedures will be used by the audit team when gathering evidence on the audit of the accounts
of the toy manufacturing company:-
(i)
(ii)
Inspection of documents
Examples:
–
examining a recent payroll to check authorisation;
–
examining a sample of purchase invoices to determine whether the goods or services received
are reasonable of the type normally used by a furniture manufacturing company;
–
read the minutes of the board of directors meeting and summarise all information that is
pertinent to the financial statements in the audit file;
–
trace a sample of sales transactions from the sales journal to sales invoices, and compare
customer name, date, and the total value of the sale;
–
vouch a sample of recorded purchase transactions to suppliers’ invoices and good received
notes.
Inspection of assets
Example:
–
inspecting a furniture-molding machine to verify existence;
–
count a sample of 50 inventory items and compare quantity and description to furniture
manufacturing company’s counts.
Page 11
(iii)
(iv)
(v)
(vi)
Observation
Examples:
–
observing the year end inventory count by employees;
–
observing the cashier pay petty cash to an employee;
observing furniture being dispatched to customers.
–
Inquiry and Confirmation
Examples:
–
sending a bank letter to the bank of the furniture manufacturing company and receiving
confirmations from the bank as requested;
–
performing a trade receivables circularisation and receiving appropriate confirmations from the
customers of the furniture manufacturing company;
–
requesting and receiving information from the directors of the company as to whether there is
any obsolete inventory on hand at the balance sheet date;
–
requesting and receiving information from the lawyers of the company concerning the probable
outcome of litigation.
Analytical Procedures
Examples:
–
calculating the liquidity ratio of the company when evaluating the status of the company as a
going concern;
–
comparing sales figures achieved to those budgeted as a means of assisting in the verification
of the completeness of the sales figures;
–
comparing the bad debt and sales figures to those in the previous year to facilitate verification of
the bad debt provision in the company’s accounts;
–
Compute the inventory turnover ratios and compare with those of previous years as a test of
inventory obsolescence.
Recalculation
Examples:
–
recompute the unit sales price times the number of units of furniture for a sample of sales
invoices and compare the totals with the calculations;
–
total the sales journal for a one month period and compare all totals with the nominal ledger.
(Ten marks will be awarded for any two appropriate examples (eight marks) given for four procedures
(two marks).)
SOLUTION 5
a)
The monthly reconciliation of bank accounts by an independent person is an important internal control over
cash balances because it provides an opportunity for an internal verification of the cash receipts and cash
deposit transactions, investigation of reconciling items on the bank reconciliation, and the verification of the
ending cash balance. [One mark] Anyone responsible for the following duties would not be considered
independent for the purposes of preparing monthly bank reconciliations:
b)
Issuance of cheques
Receipt and deposit of cash
Other handling of cash
Record keeping
(One mark for each point to a maximum of four marks)
The company’s bank reconciliation should include an adjustment for this transaction, which would increase
the book balance of cash and decrease trade receivables from credit card agencies.
(Three marks for correct accounting treatment)
Page 12
c)
Bank confirmations differ from positive confirmations of trade receivables in that bank confirmations request
several specific items of information, namely:
(i)
Full titles of all accounts in all currencies together with the account numbers and balances thereon
including nil balances, held at 30 June 2009. Confirmation of these details would be sought on any
account to which the company had title (including accounts held jointly or in a trade name).
(ii)
Full titles and dates of closures of all accounts closed during the period between 1 July 2008 and 30
June 2009.
(iii) Details of any interest or charges accrued but not charged or credited at 30 June 2009.
(iv) The amount of interest charged during the period 1 July 2008 to 30 June 2009 if not already disclosed
in the company’s bank statements.
(v)
Particulars of any written acknowledgement of set-off, comprising date, type of document and
accounts covered.
(vi) Details of overdraft and loans repayable on demand, other loans and other facilities.
(vii) Details of any known company assets held as security, whether by a formal charge or informal
charge.
(viii) Details of other company assets held, including share certificates, documents of title and deed boxes.
(ix) Details of any known contingent liabilities of the company at 30 June 2009.
(x)
A list of banks, other branches of the same bank or associated companies where a relationship with
KS plc had been established during the period between 1 July 2008 and 30 June 2009.
(xi) Details of any personal guarantees or personal assets of the directors of KS plc, held by the bank in
connection with loans or facilities offered by the bank to the company.
(One mark for each point to a maximum of four marks)
Positive confirmations of trade receivables request of the customer to confirm an account balance stated on
the confirmation form or designate a different amount with an explanation. The auditor anticipates few
exceptions to trades receivables confirmations, whereas with bank confirmations he expects differences that
the client must reconcile. Bank confirmations should be requested for all bank accounts, but positive
confirmations of trade receivables are normally requested only for a sample of accounts. If bank confirmations
are not returned, they must be pursued until the auditor is satisfied as to what the requested information is.
When no response has been received after the second (or third) positive confirmation request to a customer,
auditors should perform alternative procedures. The two main alternative procedures are examining
subsequent collections and vouching unpaid invoices and supporting documentation comprising customer
balances.
(One mark for each point to a maximum of four marks)
d)
The reason why more importance is placed on bank confirmations than trade receivables confirmations is that
cash, being the most liquid of assets, must be more closely controlled than trade receivables. In addition, other
information–such as liabilities to the bank must be known for purposes of the financial statements. Finally,
there are usually only a few bank accounts and most bank accounts have a large volume of transactions
during the year.
(One mark for each point to a maximum of two marks)
I would be extremely concerned if the managing director of the company refused to authorise disclosure of
the information requested in the bank letter.
I would explain that the letter comprised routine enquiries with regard to the affairs of the company and ensure
that the managing director was fully aware of its contents.
e)
If I was not satisfied with the reasons given for the lack of co-operation by the managing director (it is unlikely
that there could be any justifiable reason for non-co-operation), then I would have to consider the possibility
of fraud and review my audit procedures accordingly.
In the event of non-co-operation the scope of my audit work would be limited and consequently this would be
reflected in my report, on the truth and fairness of the accounts, to the members of the company. I would issue
either a disclaimer of opinion or a qualified opinion. [One mark for each point to a maximum of three marks]
Page 13
SOLUTION 6
a)
Companies provide online access to descriptions of inventory products and on-hand quantity levels to key
inventory suppliers because this information helps the suppliers work with management to monitor the flow
(One mark)
of inventory items.
There are risks associated with providing this information, howeverthere is a risk that sensitive proprietary
information may be made available to unauthorised users. The use of the Internet and other e - c o m m e r c e
applications may also lead to financial reporting risks if access to inventory databases and systems is not
adequately controlled.
(One mark for each risk to a maximum of two marks)
The risks of providing online access to inventory information can be reduced by the use of authentication or
identify verification of suppliers, firewalls, encryption and other IT management controls.
(One mark for each control to a maximum of two marks)
b)
c)
Auditing procedures to determine whether slow-moving or obsolete items have been included in inventory are:
(i)
Obtain a sufficient understanding of the shoe business to aid in recognizing inventory that is no longer
useful in Choo plc's business.
(ii)
Review the perpetual records for slow-moving items.
(iii) Discuss the quality of the inventory with management.
(iv) Ask questions of management and sales personnel about the extent of the sale or nonsale of particular
shoe lines.
(v)
Make observations during the physical inventory for signs of deterioration or obsolescence, inventory
in unusual locations, and unusual amounts of dust on the inventory.
(vi) Be aware of inventory that is tagged obsolete, spoiled, or damaged, or is set aside because it is obsolete
or damaged.
(vii) Examine obsolescence reports, scrap sales, and other records in subsequent periods that may indicate
the existence of inventory that should have been excluded from the physical inventory or included at a
reduced cost.
(viii) Analyse inventory holdings relative to recent or future budgeted turnover to identiify excessive holdings.
This analysis can often be performed with the use computer audit software.
(ix) Review sales after the balance sheet date.
(Two marks for each procedure to a maximum of ten marks)
In order to enable audit reliance on the computerised inventory record quantities, I would recommend that the
following procedures and controls be introduced:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
authorised staff be formally trained to update the inventory record quantities each time there is a
movement in inventory;
systems to ensure that inventory records are accurate at all times, these systems will include continuous
inventory counts on a test basis throughout the year. In normal circumstances the programme of
counts will cover all inventories at least once during the year;
continuous inventory counts to be properly supervised and subject to comprehensive written
instructions;
adequate provisions for identifying slow moving and obsolete inventory during the year;
immediate investigation of material differences between inventory records and physical inventory
quantities with records being updated as appropriate;
regular unscheduled visits to the warehouse by a responsible official of the company, to monitor daily
activity and ensure that shoe/shoe merchandise inventory procedures are carried out in accordance
with formal instructions.
(One mark for each procedure/control to a maximum of five marks)
Page 14
SOLUTION 7
a)
b)
c)
The system of quality control is required to include documented polices and procedures addressing:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
leadership responsibilities for quality within the firm;
ethical requirements;
acceptance and continuance of client relationships and specific engagements;
human resources;
engagement performance;
engagement quality control review;
monitoring.
(One mark for area to a maximum of four marks)
Engagement quality control review
Such reviews are required for all fiancial statement audits of listed entities. The firm is also required to set out
criteria against which other audit, assurance and related service engagements should be evaluated to
determin whether they should be subject to engagement quality control reviews. An engagement quality
control review includes an objective evaluation of the engagement team’s evaluation of independence,
significant risks identified and responses, the significant judgements made by the engagement team,
appropriateness of consultations, the significance of misstatements identified, matters to be communicated
to management, those charged with governance and other parties, whether working papers reflect the work
performed and conclusions reached, and the appropriateness of the report. The review involves discussion
with the engagement partner, a review of the financial statements or other subject matter of the report. The
actual extent and depth of review depend on the complexity and risk of engagement as well as the experience
of the engagement team.
(Two marks for each point to a maximum of six marks)
The purposes of audit working papers are as follows:
(i)
(ii)
(iii)
(iv)
To provide a basis for planning the audit in accordance with the auditing standards. The auditor may
use reference information from the previous year in order to plan this year's audit, such as mthe
evaluation of internal control, the time budget, etc.
To provide a record of the evidence accumulated and the results of the tests. This is the primary
means of documenting that an adequate audit was performed.
To provide data for deciding the proper type of audit report. Data are used in determining the scope of
the audit and the fairness with which the financial statements are stated.
To provide a basis for review by supervisors and partners. These individuals use the audit working
papers to evaluate whether sufficient competent evidence was accumulated to justify the audit report.
Audit documentation are used for several purposes, both during the audit and after the audit is
completed. One of the uses is the review by more experienced personnel. Working papers serve to
monitor the progress the audit, especially where responsibility for separate tasks is allocated to
different staff members. A second is to provide a guide to the planning and performance of audits in
subsequent years. A third is to demonstrate that the evidence is sufficient and appropriate to support
the audit opinion
(Two marks for each purpose to a maximum of six marks)
Page 15
d)
The permanent file contains data of an historical and continuing nature pertinent to the current audit.
(Two marks)
Examples of items included in the file are:
(i)
(ii)
(iii)
(iv)
Extracts or copies of the memorandum and articles of association
Copies of important long-term operating agreements or contracts
Analysis of accounts that are important to the audit each year
A descripton of the entity’s accounting and internal control systems:
(v)
Results of previous years' analytical procedures, including ratios and percentage analysis of trend
statement for various items.
Information relevant to audit planning, such as the master copy of the audit programme, information
on accounts or locations tested on a rotation basis.
(Half mark for each example to a maximum of two marks)
(vi)
a.
b.
flowcharts
internal control questionnaires
Page 16