ACCA. Paper F8. Audit and Assurance December 2014 to June Interim Assessment Answers

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1 ACCA Paper F8 Audit and Assurance December 2014 to June 2015 Interim Assessment Answers To gain maximum benefit, do not refer to these answers until you have completed the interim assessment questions and submitted them for marking.

2 ACCA F8: AUDIT AND ASSURANCE Kaplan Financial Limited, 2014 The text in this material and any others made available by any Kaplan Group company does not amount to advice on a particular matter and should not be taken as such. No reliance should be placed on the content as the basis for any investment or other decision or in connection with any advice given to third parties. Please consult your appropriate professional adviser as necessary. Kaplan Publishing Limited and all other Kaplan group companies expressly disclaim all liability to any person in respect of any losses or other claims, whether direct, indirect, incidental, and consequential or otherwise arising in relation to the use of such materials. All rights reserved. No part of this examination may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without prior permission from Kaplan Publishing. 2 KAPLAN PUBLISHING

3 INTERIM ASSESSMENT ANSWERS SECTION A 1 C 2 A 3 D 4 B 5 C 6 D 7 C 8 C The practitioner, intended user and responsible party. Auditors do not test all of the transactions of a company. Even if they did, some balances are subjective or determined by management s judgement, such as estimates, which means they cannot be verified with absolute accuracy. All audit evidence is not inherently biased e.g. auditor generated or externally generated evidence. The auditor s profit is not a factor in the level of assurance provided. A person cannot be the auditor if they are an employee or director of a company, or where there is an ethical threat which cannot be safeguarded. A member of the ACCA may be an employee of the company and would therefore not be allowed to act as auditor. The auditor has a right to obtain information and explanations required for the audit and to speak at general meetings. In addition, they have a right to obtain books and records of the company and to receive notice of the general meetings. Advocacy and self-interest. Restrictions of the provision of accountancy services to audit clients apply to listed entities. As Sterling is unlisted, neither statement applies. Representing a client in a legal dispute creates an advocacy threat where the auditor would be seen to be taking sides with the client. The auditor should decline the offer. Responsibilities of management and basis of fees would appear in the engagement letter. Materiality and risk assessment would not be considered until after the engagement has been accepted and the audit planning has commenced. KAPLAN PUBLISHING 3

4 ACCA F8: AUDIT AND ASSURANCE 9 B 10 A 11 D 12 A The auditor does not have to test the controls of the client. If the auditor believes it is more efficient to perform a fully substantive audit then controls will not be tested. If the auditor has assessed the control systems and believes they will not be reliable then tests of controls will not be performed as the time could be better spent performing substantive procedures instead. Assertions affecting transactions and events apply to the statement of profit or loss. Rights and obligations is an assertion relevant only to the statement of financial position. Review is not a procedure given in ISA 500. Backups are a general IT control as they apply to the computer environment rather than to a specific application. 4 KAPLAN PUBLISHING

5 INTERIM ASSESSMENT ANSWERS SECTION B 1 FUNDAMENTAL PRINCIPLES AND FRAUD Key answer tips This question requires repetition of knowledge, usually with regard to an International Standard of Auditing or other fundamental auditing principle. As there is no application to a scenario the general marking principle is ½ mark for listing of points of knowledge and ½ for consequent explanations of those points. (a) (b) (c) Independence can be defined as having freedom from situations and relationships where objectivity would be perceived to be impaired by a reasonable and informed third party. The purpose of assurance engagements is to increase the confidence of the intended users; therefore the users need to trust the professional who is providing the assurance. Professional accountants have a responsibility to act in the public interest. In order to be trusted by the public and, in particular the users of assurance reports the assurance provider needs to be and be seen to be independent of their client. Fundamental principles (other than objectivity) Professional behaviour : Members should comply with relevant laws and regulations and should avoid any action that discredits the profession. Professional competence and due care : Members have a continuing duty to maintain professional knowledge and skill at a level required to ensure that a client or employer receives competent professional service based on current developments in practice, legislation and techniques. Members should act diligently and in accordance with applicable technical and professional standards when providing professional services. Integrity : Members should be straightforward and honest in all professional and business relationships. Confidentiality : Members should respect the confidentiality of information acquired as a result of professional and business relationships and should not disclose any such information to third parties without proper and specific authority or unless there is a legal or professional right or duty to disclose. Confidential information acquired as a result of professional and business relationships should not be used for the personal advantage of members or third parties. Responsibilities re. fraud The primary responsibility for the prevention and detection of fraud rests with those charged with governance and management as they are responsible for running the company on a day to day basis in an effective manner. KAPLAN PUBLISHING 5

6 ACCA F8: AUDIT AND ASSURANCE They must place a strong emphasis on fraud prevention and reduce the opportunities for this to take place. This involves a commitment to creating a culture of honesty and ethical behaviour and the implementation and maintenance of strong internal controls. An auditor has a responsibility to obtain reasonable assurance that the financial statements taken as a whole are free from material misstatement, whether caused by fraud or error. In order to satisfy this responsibility an auditor must carefully consider the risk of fraud when planning an audit. This includes assessing and testing systems of internal control to identify opportunities for fraud to take place. In response to this risk assessment the auditor then designs appropriate audit procedures to gather evidence to be able to conclude upon the financial statements. Auditors must always remain professionally sceptical throughout the audit, considering the potential for management override of controls and recognising the fact that audit procedures that are effective for detecting error may not be effective for detecting fraud. Overall the risk of non-detection of fraud is higher than that of detecting error because of the likelihood of sophisticated fraud mechanisms and the inherent limitations of audit procedures. To this end the auditor is considered to have only a secondary responsibility when it comes to detecting fraud. (a) (b) (c) Total Independence Purpose of assurance 1 mark Trust 1 mark ACCA marking scheme Fundamental principles (excluding objectivity) ½ mark for identification and ½ mark for explanation Integrity: straightforward and honest Confidentiality: no disclosure Professional competence: maintain knowledge & skill Professional behaviour: comply with laws & regs Fraud responsibilities: ½ mark for each point identified; ½ mark for each point explained (maximum, 1 mark per point discussed) Primary responsibility Fraud prevention Reasonable assurance Consider fraud Professional scepticism Higher risk of misstatement due to fraud Marks Maximum 2 Maximum 4 Maximum KAPLAN PUBLISHING

7 INTERIM ASSESSMENT ANSWERS 2 MART CO Key answer tips Ethics is a fundamental element of auditing. In questions it is vital that candidates can explain the five principles of the code of conduct. It is also vital that these concepts can be applied to scenarios. In particular, candidates must be able to identify threats to a firm s ethical position and recommend appropriate safeguards. Candidates will receive 1 mark for each ethical threat/issue identified and explained, and 1 mark for each appropriate safeguard recommended. (a) Ethics Ethical issue Being the largest fee generating client there is a risk of fee dependency, which is a self-interest threat to objectivity. The auditor may act with bias for fear of losing such a lucrative client. This could lead to the signing of inappropriate assurance reports. Acting for a client for 20 years increases the risk of familiarity threat to objectivity. If, at any point, the relationship between auditor and client crosses professional boundaries then the objectivity of the auditor must be questioned. The auditor may become too trusting of, and reliant upon, written representations rather than more reliable forms of evidence. Providing additional services increases the risk of self-review threat to objectivity. This occurs when staff of the same firm are reluctant to challenge the outcome of a previous engagement because it could impact adversely on a colleague (e.g. tax planning and audit staff). Mitigation Total fees from Mart should be regularly reviewed to ensure recurring fees remain below acceptable thresholds (15% of total practice income). If fees from Mart exceed these limits one, or more, engagements should be declined. Senior staff should be periodically rotated to bring in new, independent staff. As Mart Co is listed, the audit partner should be rotated after a maximum of seven years, depending on local customs/regulations. Separate teams should be used with separate reporting lines and separate engagement partners. If there is particular concern a second partner review should be performed. KAPLAN PUBLISHING 7

8 ACCA F8: AUDIT AND ASSURANCE Ethical issue Self-interest threat to objectivity due to tax planning for both directors and company. The auditor may be tempted to favour one party at the expense of the other to try and boost consultancy fee income. Former employee joining client gives rise to a familiarity threat. Audit staff will know the new FD too informally and may place too much reliance on their representations. There may have been a self-interest threat to objectivity in previous years due to the audit manager manufacturing a career move. It is possible the audit manager has used the audit as a springboard to a more lucrative position with a client and for that reason may have not acted objectively. Mitigation Separate teams with different partners should be used to conduct corporate and private tax planning engagements. The audit may need to be handed over to another department who are unfamiliar with the ex-staff member. If this is not possible a second partner review would be advised. The firm should review previous working files and current planning files affected by the old audit manager s judgements. ACCA marking scheme Marks Threats and mitigation ½ mark for identification, and up to ½ mark for explanation of each threat and up to 1 mark for each practical step to mitigate the threat. Largest fee/self-interest/monitor or decline Long service/familiarity/rotate staff Additional services/self-review/separate teams Tax planning/self-interest/separate teams Former employee/familiarity/another department Career move/self-interest/independent review Maximum 10 Total 10 8 KAPLAN PUBLISHING

9 INTERIM ASSESSMENT ANSWERS 3 BORDER TRAVEL Procedures prior to acceptance Acceptance process Professional clearance: The auditor must communicate with the outgoing auditor to assess if there are any ethical or professional reasons why they should not accept appointment. Permission from the client will be required before contacting the existing auditor. 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. The firm should consider any issues which might arise which could threaten their independence. If ethical issues cannot be safeguarded the appointment cannot be accepted. Relevance Midway will need to understand the reasons behind the resignation particularly given that it was unexpected which could highlight potential professional/ethical issues with the audit engagement. If these issues are unresolved, they could in turn affect Midway. The scenario states that Border Travel would provide a significant source of fee income. This increases the risk of self interest threat; i.e. Midway becoming over-dependent on one client and thus conducting their audit without necessary objectivity. The preparation of financial statements and IT systems review in addition to conducting the audit would create a significant ethical threat. In particular, a self review threat arises because the audit firm will effectively be auditing financial statements they have prepared. The auditor may also be required to make late adjustments to the accounts which increase the risk that they are taking decisions on behalf of the client. In conducting the statutory audit, Midway will also review the IT systems that form part of the financial reporting system. If they have previously performed a review of IT systems and helped to update those systems on a separate engagement then they would be reviewing their own work. KAPLAN PUBLISHING 9

10 ACCA F8: AUDIT AND ASSURANCE Acceptance process The firm should consider any issues which might arise which could threaten compliance with any other fundamental principles in ACCA s Code of Ethics and Conduct or any local legislation. For example, professional competence and due care. A firm must consider whether they have adequate resources to conduct the engagement with appropriate standards of care. The auditor should also perform a preliminary risk assessment. If the engagement is seen as too high risk, the auditor may choose not to accept the engagement. Relevance This is very relevant to Midway who have little experience in the travel sector and therefore are unlikely to understand industry specific risk factors. Midway must also consider if they have the technical competence to advise on the IT systems of Border Travel. Such engagements require significant technical IT expertise, which is not a prerequisite of an audit firm. Midway must identify if they have the staff available in their busy firm to adequately plan, perform and review the audit given their current client commitments. In addition, Midway have no resources available on the South coast and would therefore incur significant travel and subsistence costs performing the audit, a cost that would be pass on to the client. Border Travel wishes to improve their risk assessment procedures and internal control systems. This could indicate that systems are currently ineffective at preventing and detecting fraud and error and would result in a higher level of audit risk. ACCA marking scheme Acceptance Up to 1 mark for description of each step and up to 1 further mark for application to Midway/Border Travel Obtain permission to communicate Professional clearance Resources Professional competence Independence (max 2 marks) Preliminary risk assessment Total Marks Maximum KAPLAN PUBLISHING

11 INTERIM ASSESSMENT ANSWERS 4 LOPIT Key answer tips This question requires the repetition of basic points of knowledge concerning auditor rights, responsibilities and objectives. As there is no application students should again work on the principle of receiving ½ marks for simple lists of knowledge. To turn these into full marks students must explain their points fully (where relevant). (a) Objectives In accordance with ISA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing, the auditors fundamental objectives are to: (b) Obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error. Express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable reporting framework. Report on the financial statements, and communicate as required by ISA s, in accordance with the auditor s findings. Legal rights of an auditor As an auditor of a limited liability company, the following rights are typically given by legislation: (c) To receive notice of, to attend and be heard at all general meetings. To obtain access at all times to all accounting records. To be informed of any proposal for dismissal, and to take certain actions in that event. To obtain all necessary information and explanations, as required, from a subsidiary and its auditor and, in any other case, to require information to be provided by the parent company. To receive written resolutions of the members. Director s authority and removal process The directors do not generally have the authority in their capacity as directors to dismiss the auditor. The removal of auditors can usually be achieved by a simple majority at a general meeting of the company. There are some safeguards, such as a specified notice period, to prevent the resolution to remove the auditors being sprung on the meeting. The auditors have to submit a statement of the circumstances surrounding their removal. The auditors may then wish to exercise their right to attend and be heard at the AGM in order to make representations directly to the shareholders. KAPLAN PUBLISHING 11

12 ACCA F8: AUDIT AND ASSURANCE (a) (b) (c) Total ACCA marking scheme Marks Objectives Up to 1 mark for each objective 3 Legal rights Up to ½ mark for each right listed 2 Directors authority Up to 1 mark for each point: No authority to dismiss Majority at GM Safeguards Statement of circumstances Speak at GM Maximum KAPLAN PUBLISHING

13 INTERIM ASSESSMENT ANSWERS 5 COLLINS COSMETICS Key answer tips This question is typical of the exam style: there are some marks for simple repetition of knowledge and some for application of knowledge to a scenario. NB The marks for simple repetition are never sufficient to pass the question. You must practice applying basic principles to specific, and often unique, circumstances. For parts (a) and (b) to get a full mark per definition/explanation you must fully explain your points. Lightweight responses (such as brief bullet-pointed lists) will pick up a maximum of ½ mark. Part (c) asks you to apply your knowledge of audit risks to a scenario. Remember what the definition of an audit risk is. You must identify possible sources of misstatement in the financial statements. Each risk that you explain should clearly state how there could be a material error in the financial statements. You then have to consider how this affects the audit approach. The response must relate specifically to the risk explained. For this question you will score ½ mark for identifying each relevant audit risk, ½ mark for explanation of the risk and 1 mark for the impact on the audit approach. Part (d) requires explained points that address the basic concept of the audit risk model. (a) Sufficient appropriate evidence 'Sufficient' means having enough documentary evidence on file to support a reasonable audit opinion. There is no threshold as to how much evidence is sufficient; this is simply a matter of professional judgement. When deciding the quantity of evidence to gather the auditor must consider audit risk: the greater the risk the greater the need for evidence to be able to reach satisfactory conclusions. Materiality also affects the design of audit tests: the lower the materiality threshold the greater the quantity of evidence that will be necessary to be able to conclude upon whether material misstatement (either individually or in aggregate) has occurred. 'Appropriate' breaks down into two qualities: reliable and relevant. To be relevant evidence must fulfil the particular objective of the audit procedure. This includes testing balances to confirm a specific assertion, such as completeness or accuracy, but also testing for overstatement or understatement of particular balances. In order to be sufficient, evidence must be gathered to support the whole range of financial statements assertions. Auditors should always try and gather the most reliable evidence available. In the worst case scenario, if reliable evidence is not available then the auditor may have to issue a disclaimer of opinion. Reliable evidence is considered to have the following characteristics: Independent external evidence Evidence obtained directly by the auditor Documentary evidence Original evidence KAPLAN PUBLISHING 13

14 ACCA F8: AUDIT AND ASSURANCE (b) (c) Meanings Inherent risk is the susceptibility of a balance or class of transactions to material misstatement before consideration of controls. Control risk is the risk that the client s internal control system may fail to prevent and/or detect errors and omissions in financial reporting systems that could then pass into the financial statements. Detection risk is the risk that the auditor s substantive procedures fail to detect material misstatement in the financial statements. Detection risk is likely to increase as sample sizes are reduced. Also, detection risk can be reduced by increasing the experience and general quality of the audit team. Audit risks Audit risk Going concern disclosure Declining profits suggest the company s future may be in doubt. The company have also lost a significant member of staff, which could have implications for the long-term health of the business. If there are doubts surrounding the ability of the company to continue as a going concern, disclosure should be made of the issues. There is a risk that the disclosure relating to going concern is inadequate. Risk of manipulation Declining profits, combined with a desire to achieve a listing and the new performance based incentive scheme, will increase the pressure to overstate the profits of the company. This could lead to fraudulent misstatement in the financial statements. Audit approach Forecasts should be examined to assess reasonableness and to see if the company is forecasting improvement in cash flow. Correspondence with the bank should be examined to identify any disputes which may affect the ability to obtain finance if needed. Enquiries should be made of the directors to assess their plans for the future. The audit will need to be conducted with a high level of professional scepticism. The ability to scrutinise uncertainties and misstatements with necessary scepticism usually requires reasonable levels of experience. Therefore it appears appropriate to use reasonably senior audit staff for this engagement. Such staff will also have the confidence to challenge management over such issues. More attention will be paid to estimates within the financial statements which would be more susceptible to manipulation. 14 KAPLAN PUBLISHING

15 INTERIM ASSESSMENT ANSWERS Audit risk Inventory valuation The incentive scheme may lead to overproduction, which may lead to inventory that cannot be sold and has an NRV lower than cost. There is a risk that inventory is overvalued in the statement of financial position. The poor performance of the business also indicates that Collins are finding it difficult to compete, which may further indicate that inventories cannot be sold and are therefore overvalued. Products are made for specific customers. If Collins loses any customers the items produced for them may be unsalable to anyone else. Inventory is at high risk of overvaluation if this inventory is not written off. Multiple manufacturing sites Multiple locations make internal controls more complex and difficult to implement effectively. In particular, given their manufacturing status, there is increased risk of poor controls over stock quantification There is a risk that inventory is misstated as a result. This is particularly the case when there are significant changes at boardroom level. Audit approach Experienced staff should be allocated to the audit of inventory balances. Importantly, write downs require significant management estimates and judgements. It is difficult to gather reliable evidence when such judgement exists so it will be necessary to understand the system that management adopts and to test any controls that are implemented. The audit team will also need to plan to obtain written representations from management regarding the level of write down. The audit team will need to sample test year-end inventories to ensure that they are selling after the year-end (at a price greater than cost). Given the risk surrounding this area a non-statistical approach, focussing on the most significant, material inventories may be appropriate. It will be vital (this year in particular) for the audit team to visit all five of the manufacturing sites to observe counting procedures and perform test counts. If this is successful there will be a significantly reduced need for extensive substantive procedures on inventory balances at the final audit. If attendance at all five is not possible then a greater substantive approach will be necessary. KAPLAN PUBLISHING 15

16 ACCA F8: AUDIT AND ASSURANCE Audit risk Control risk Recent board changes are likely to result in the control systems being, at least, temporarily weakened. This will be heightened by the FD s move to part time status. There is a higher risk of misstatement in the financial statements as poor controls mean misstatements are unlikely to be detected and corrected on a timely basis. Family owned status In a privately-owned family company, directors may be treating personal expenditure as business expenditure. This could result in understatement of directors emoluments. Machinery Machinery has been upgraded at two of the manufacturing sites. The cost of this upgrade may be incorrectly treated in the financial statements. If it is of a capital nature it should be included within assets or expensed as repairs. This would result in misstated of assets and profit. Credit terms Collins has extended its credit terms from 30 to 90 days. There is an increased risk as balances outstanding become older, that they may become irrecoverable. This could result in overstatement of receivables if adequate allowance is not made. Audit approach The audit team will need to revisit all their systems notes and update them to reflect any changes in internal controls. These systems (and the controls) will then need to be tested to help design further audit procedures. It is therefore likely that a significant interim audit is appropriate this year. This is particularly important given the increased fraud risk due to poor performance, performance targets and desire to float the company. In all likelihood, risks are going to be perceived as high and for that reason a fully substantive approach appears likely this year. The audit team should substantively test expenditure by inspecting invoices for the name of the company rather than the names of the directors to ensure the expenditure pertains to the entity (occurrence). Inspect 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. Inspect after date cash received to identify if customers have paid post year end. Discuss any old, unpaid debts with management and agree to the allowance. For any old debts not included in the allowance, enquire of management why and discuss the need for allowance to be made. 16 KAPLAN PUBLISHING

17 INTERIM ASSESSMENT ANSWERS (d) High inherent risk If inherent risk is high the auditor has to consider how effectively the client s systems of internal control prevent and detect misstatement. If the control systems are considered strong there is a lower risk of material misstatement in the financial statements and the auditor may be able to reduce substantive testing. However, if the control environment is considered insufficient to prevent and detect material misstatement then detection risk will need to be lowered The following strategies could be used: Increased volume of substantive testing at the final audit stage (e.g. by selecting larger samples) Less biased sample selection (i.e. by using statistical sampling) Using a more experienced audit team Increasing the frequency of senior management review procedures and by using a second partner to review working papers. (a) (b) (c) (d) Total ACCA marking scheme Marks Sufficient appropriate evidence: ½ mark for each point identified; ½ mark for each point explained (maximum, 1 mark per point discussed) sufficient = enough consider risk materiality appropriate = relevant, reliable objective of procedure disclaimer of opinion characteristics of reliable evidence Maximum 4 Definitions: Up to 1 mark for each definition Maximum 3 Audit risks: ½ mark for each point identified; ½ mark for each point explained; 1 mark for each appropriate audit procedure/affect on audit approach Declining profits/going concern Listing/fraudulent misstatement Incentive scheme/overstatement of inventory Bespoke products/overstatement of inventory Multiple sites/weak controls Board changes/weak control environment Family owned/disclosures Machinery upgrade/capitalisation Credit terms/bad debts Maximum 10 High inherent risk: Up to 1 mark for each point. ½ mark for each method of reducing detection risk Effective control systems Lower detection risk Maximum 3 20 KAPLAN PUBLISHING 17

18 ACCA F8: AUDIT AND ASSURANCE 6 VOYAGER Key answer tips It is vitally important to plan your time effectively. After your reading time is over you have 1.8 minutes per mark. Mark sure you allocate your time against each requirement and do not overrun. Following this it is vital to plan your answer so that you structure it effectively to answer the requirement and so that you know how many points to write. For part (a) you are asked to identify and explain deficiencies described a scenario. This requires application skills so is worth 1 mark per item. Notice that you are then asked to explain the implication of each deficiency and make a recommendation for each deficiency. You will receive 1 mark for each explanation and 1 for each recommendation. In part (b), you are required to perform a similar task, but this time identifying and explaining strengths and with the added requirement of describing tests of control. The examiner has made comments relating to previous exams that this style of question is often not answered well. To score well your answer must clearly state how you would test the control (the procedure or policy) that you identified in part (i). If all the elements of the question are linked a table format (like the one below) is appropriate. In both cases, do not provide more than the required number of deficiencies/strengths as this will waste time. (a) Sales and receivables Deficiency Implication Recommendation Order forms are not sequentially pre-numbered. Orders may not be fulfilled, damaging Voyager s reputation and affecting their ability to generate sales in the future. All order forms should be sequentially pre-numbered. Mr Jones should file one copy of the order form in numerical sequence and pass the other to the warehouse. A sequence check must be carried out on a weekly basis to ensure there are no breaks in the sequence. This sequence check must be evidenced by a signature. 18 KAPLAN PUBLISHING

19 INTERIM ASSESSMENT ANSWERS Deficiency Implication Recommendation Orders are processed without authorisation or without performing a credit check on customers. Nobody matches the GDN to the original order prior to despatch and no-one signs the GDN to confirm that the correct quantity of goods has been despatched. Nobody checks that all orders have been despatched. There are no procedures to ensure the completeness and accuracy of sales invoices. Goods may be supplied to customers with a poor credit rating. This increases the risk of bad debts and financial losses for Voyager. (NB: credit will also be given for increased fraud risk and risk that goods are not available to be able to satisfy orders in a timely fashion). Incorrect goods may be despatched. Sending too few items could lead to a loss of customer goodwill. Sending too many items could lead to incorrect invoices and lost revenue. Unfulfilled orders could lead to customer complaints and a loss of customers. The company could suffer financial loss if invoices are not raised or are prepared inaccurately as customers will not pay if an invoice has not been received. Customers querying incorrect invoices will cause a delay in payment being received. All new customers should undergo a credit reference check before being accepted as new customers. Credit limits should be set for all customers and Mr Jones, the executive director and the sales rep should meet to identify those customers close to or exceeding their limits every month to avoid selling goods on credit to risky customers. All orders over a certain limit should be authorised by the executive director and confirmed with clients prior to processing. Before orders are despatched by courier, the factory supervisor should check the quantity and quality of goods to the despatch note and compare this to the original order. The supervisor should then sign the despatch note to confirm this check has taken place. Mr Jones should keep a copy of all orders and match them to GDNs. At the end of each week he should check unmatched orders and enquire why a GDN has not been raised. All GDNs should be matched to the invoice and filed together. At the end of each week Mr Jones should perform a review of uninvoiced GDNs to ensure all despatches have been invoiced. The customer order file should be reviewed periodically by Mrs Singh, who should confirm that the order, GDN and invoice details all match. KAPLAN PUBLISHING 19

20 ACCA F8: AUDIT AND ASSURANCE Deficiency Implication Recommendation GDNs are not retained on file. A sales day book is not maintained. In the event of customer query, there is no documentation to confirm the quantities of goods despatched to support the value of the invoice raised. This can cause a loss of customer goodwill. Invoice posting errors are likely to go undetected and could result in loss of revenue (e.g. if amounts are understated by a transposition error or the invoice is omitted). A copy of the GDN should be retained in the warehouse (where there is more filing space) in numerical order. Mr Jones should record the despatch note number on each invoice so that, in the event of query, the warehouse copy can be found. Mr Jones should use the SDB facility and post the daily total sales to the sales ledger and sales ledger control account. Mrs Singh should review a sample of daily postings in comparison to original invoices and a sample of daily totals in comparison to the ledgers to ensure that accurate entries are being made into the system. (b) Purchases and wages Strength Amendments to payables master files can only be performed by the director. This prevents unauthorised amendments to the master file, e.g. the setting up of a fake supplier. The masterfile data is reviewed by the director periodically to ensure that it has not been amended. This ensures that unauthorised amendments are identified and resolved on a timely basis. Mr Jones performs supplier statement reconciliations and prepares cheques (Mrs Singh is the wages and purchases clerk). Segregation of duties prevents fraud and error. Test of control The auditor should try to access the payables master file using the credentials of someone other than the director to ensure access is not granted. Inspect the masterfile printout and for a sample of amendments ask the director to explain the reason for the amendment. Observe the process of performing supplier reconciliations ensuring that it is performed by Mr Jones. Alternatively, inspect a sample of supplier reconciliations for evidence of Mr Jones signature confirming that it was performed by him. 20 KAPLAN PUBLISHING

21 INTERIM ASSESSMENT ANSWERS Strength Supplier statements (and the consequent reconciliations) are retained on file. This creates an audit trail to confirm the completeness and accuracy of payables balances at the year-end. The director scrutinises the cheques before signing them and checks them back to the authorised list of suppliers. This prevents payments being made to false suppliers or for incorrect amounts and ensures that full credit terms are taken advantage of. Expense claims are always supported by receipts and all claims are authorised by the director. This prevents fraudulent claims being processed. Test of control Inspect the file of reconciliations to ensure they are being performed and retained. Observe the process of raising cheques ensuring that Mr Jones attaches the payables ledger to the cheques and the director reviews this. For a sample of payments made to suppliers during the year, compare to the authorised list of suppliers to ensure that only valid suppliers are being paid. For a sample of expense payments recorded on the payroll system, inspect the related receipts and supporting documents signed by the director to authorise the payment as a valid business expense. (a) (b) Total ACCA marking scheme Marks Sales system: 1 mark for each implication, 1 mark for each appropriate recommendation. Max 2 marks per deficiency No authorisation/credit check for orders GDN not agreed to order or signed as correct No check orders dispatched Completeness of invoices GDNS not retained Sales day book not maintained Maximum 8 Purchases and wages system: 1 mark for each strength, 1 mark for each appropriate test of control Max 2 marks per strength Access to masterfile Masterfile data review Segregation of duties Supplier statements Director review before signing cheques Expense claims Maximum KAPLAN PUBLISHING 21

22 ACCA F8: AUDIT AND ASSURANCE 22 KAPLAN PUBLISHING