Paper T8 (INT) Implementing Audit Procedures (International Stream) Monday 14 June Certifi ed Accounting Technician Examination Advanced Level

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1 ertifi ed ccounting Technician Examination dvanced Level Implementing udit Procedures (International Stream) Monday 14 June 2010 Time allowed Reading and planning: Writing: 15 minutes 3 hours This paper is divided into two sections: Section LL TEN questions are compulsory and MUST be attempted Section LL FOUR questions are compulsory and MUST be attempted o NOT open this paper until instructed by the supervisor. uring reading and planning time only the question paper may be annotated. You must NOT write in your answer booklet until instructed by the supervisor. This question paper must not be removed from the examination hall. Paper T8 (INT) The ssociation of hartered ertified ccountants

2 Section LL TEN questions are compulsory and MUST be attempted Please use the space provided on the inside cover of the andidate nswer ooklet to indicate your chosen answer to each multiple choice question. Each question in this section is worth 2 marks. 1 Which of the following is NOT a statutory right of the auditors of a limited liability company? right of access at all times to the company s books and records. right to attend all directors meetings. right to speak at general meetings on any matter that concerns them as auditors. right to attend any general meeting. 2 What is the PRIMRY purpose of an auditor taking action to evaluate and test the internal controls of a limited liability company? To enable the auditor to advise management of the strengths and weaknesses in the internal controls. To enable the auditor to eliminate analytical review procedures. To provide the auditor with the opportunity to reduce substantive procedures. To enable the auditor to restrict substantive procedures to income statement items only. 3 udit risk is the risk that the auditor expresses an inappropriate opinion when the fi nancial statements are materially misstated. Which of the following categories of risk can be controlled by the auditor? ategory of risk: (1) Inherent risk (2) ontrol risk (3) etection risk (4) Sampling risk 1 and 2 only 1, 3 and 4 2, 3 and 4 3 and 4 only 4 Which audit working paper should provide satisfactory evidence that audit resources have been directed towards high risk areas of an audit? Systems narrative notes. Systems fl owcharts. udit attention points brought forward from the previous period. The overall audit strategy documentation. 5 Which of the following should be facilitated by the standardisation of substantive procedure working papers? (1) Meeting of specifi ed audit objectives. (2) ommunicating with the staff of the audit client. (3) elegation of audit work. (4) Review of audit work. 1 and 4 only 1, 3 and 4 2 and 3 only 1, 2, 3 and 4 2

3 6 Which of the following types of internal controls does a small limited liability company normally have MOST difficulty in implementing satisfactorily? uthorisation. Segregation of duties. Performance reviews. Information processing. 7 Which of the following strategies should give an auditor the STRONGEST assurance as to the existence of trade receivables year-end balances in a company with weak internal controls over the sales and trade receivables function? arrying out a positive circularisation of receivable balances in respect of the year-end balances. arrying out a negative circularisation of receivables balances in respect of year-end balances. onfi rming receivables balances by agreeing to sales invoices, authorised delivery notes and valid order. onfi rming receivables balances by verifying subsequent payments after the year end. 8 Which of the following financial indicators ratios on its own, provides the WEKEST evidence of possible working capital problems in a limited liability company? Trade receivables collection period. Quick (acid test) ratio. Gross profi t margin. Trade payables payment period. 9 The auditor s responsibility paragraph in an auditor s report should describe an audit as including which of the following: (1) Reporting on whether the fi nancial statements give a true and fair view. (2) Reading other information contained in the annual report and considering whether it is consistent with the audited fi nancial statements. (3) Evaluating the overall presentation of the fi nancial statements. (4) Evaluating the reasonableness of accounting estimates made by management. 1, 2 and 3 1 and 3 only 2, 3 and 4 3 and 4 only 10 Which of the following statements is TRUE with regard to an emphasis of matter paragraph included in a modified auditor s report? The paragraph should be included before the Opinion paragraph. The paragraph may refer to a matter other than those presented or disclosed in the fi nancial statements that, in the auditor s opinion is relevant to users understanding of the audit. The paragraph should ordinarily refer to the fact that the auditor s opinion is modifi ed in respect of the subject matter. The inclusion of the paragraph should not affect the auditor s opinion on the fi nancial statements. (20 marks) 3 [P.T.O.

4 Section LL FOUR questions are compulsory and MUST be attempted 1 Poppy o produces games consoles from a large factory situated alongside its fi nancial, administration and human resources departments. Felix Petal, Poppy o s fi nancial director was appointed in February 2009 and he immediately took measures to improve the company s control environment as he recognised that most elements of it needed improving. For example, the element of communication and enforcement of integrity and ethical values was particularly weak. Felix then reviewed the control activities within each functional area of the business and introduced changes to help ensure the achievement of control objectives. He is a strong believer in using computer produced exception reports to highlight possible errors or omissions in processing, and changes introduced included the introduction of these reports wherever appropriate. Prior to Felix s appointment, in November 2008, investigations into excessive factory wages payments as reported in the company s annual fi nancial statements, revealed that the fi nancial director at the time had authorised the payment of wages to non-existent factory employees entered onto the company s wages master fi le. The payments were subsequently diverted into the fi nancial director s personal bank account. Whilst he maintained that the unauthorised payments had been caused by a simple error, the fi nancial director was dismissed from his employment with Poppy o on the grounds that he had committed fraud against the company. Poppy o has 124 factory employees including three production supervisors and a factory manager. The factory manager has overall responsibility for all matters concerning the day-to-day operation of the factory. Except for the production supervisors and the factory manager, all factory employees are paid for each hour worked on a weekly basis in arrears. The former are paid on a monthly basis, together with all other employees through the company s monthly payroll. (a) Identify and explain FOUR elements of the control environment of a limited liability company, other than that of the communication and enforcement of integrity and ethical values. (8 marks) (b) efine the term fraud as applied to a limited liability company situation, and state the key distinguishing factor between fraud and error, where an underlying action results in a misstatement of the financial statements of a company. (c) (i) Identify FIVE control activities that should exist to facilitate control over the recruitment of factory employees through to the production of Poppy o s weekly payroll for factory employees. Note: You are not required to identify automated controls built into the company s wages application software. (5 marks) (ii) For each activity identified above, state the control objective. (5 marks) (d) Identify FOUR different computer produced exception reports that could be used by Poppy o s management to facilitate control over the weekly payroll for factory employees. (4 marks) (25 marks) 4

5 2 aisy o trades as a golf club operator and owns six golf clubs spread throughout the country. Use of each club s facilities is restricted to members only, who all pay an annual membership fee; and all of the company s clubs are open for business 360 days each year. The company earns the vast majority of its income from membership fees, green fees (payable for each round of golf played), tournament fees, the hire of golf clubs and golf buggies and the hire of driving range facilities to members. dditionally each club has a golf shop selling a wide range of golf clothing and equipment, a refreshment bar and a café selling drinks and snacks. Each revenue stream by club is shown separately in the company s accounting records but all revenues are consolidated, and reported as a single fi gure in the company s annual fi nancial statements. Normally, there is some correlation between specifi c annual income streams in that when a given income stream is relatively high or low then one or more of the other streams follows the same trend. ue to a very competitive market, all prices charged by all of the company s clubs have remained unchanged since July Similarly, the company has always had a policy of allowing members to join and also to leave part-way through the year and therefore pay proportionate annual membership fees. In pril 2010 your fi rm accepted instructions from aisy o to audit its fi nancial statements for the year ending 31 ugust Prior to accepting these instructions, your fi rm obtained an understanding of various aspects of the company and its environment, including its business operations. Further enquiries revealed that aisy o s previous auditors were a very reputable fi rm who had held the appointment since 1996 and who wanted to retain it. Enquiries also revealed that the company appointed a new managing director Jed Thorn, in January Jed is recognised as being very entrepreneurial and assertive with extremely ambitious plans to expand the company s club ownership over the next three years; relying on support from the company s bank to fi nance any acquisitions from existing operators. Prior to acceptance of the instructions from aisy o your fi rm communicated with the company s previous auditors and subsequently issued an engagement letter to the company. (a) Identify and explain FOUR matters that your firm may have considered when obtaining an understanding of the business operations of aisy o. (8 marks) (b) (i) Explain why it was necessary for your firm to communicate with aisy o s previous auditors before accepting the audit appointment. (2 marks) (ii) State why your firm issued an engagement letter to aisy o as part of its engagement procedures. (c) Outline any concerns your firm may have with regard to Jed Thorn s appointment as the managing director of aisy o and also the timing of the decision to change the company s auditors. (d) (i) Explain why your firm would plan to rely on analytical procedures to provide assurance as to the completeness of the income figure reported in aisy o s financial statements for the year ending 31 ugust (ii) Provide SIX examples of income stream relationships that could be used as a basis for comparing for audit purposes, aisy o s various income streams at each club for the 2010 financial year-end, to those of the previous year. (6 marks) (25 marks) 5 [P.T.O.

6 3 Your fi rm is about to commence the audit of the fi nancial statements of uttercup o, a company that produces cakes and pastries for sale throughout its various retail outlets. s part of a training exercise and also in preparation for the forthcoming audit you have been asked to make presentations to your colleagues on: (i) The need to consider the materiality of errors. (ii) The likely issues arising when auditing trade payables and accruals as reported in the fi nancial statements of uttercup o. In readiness for your presentation: (a) State the matters that your firm should consider in determining whether an error, detected when carrying out substantive procedures during the audit of uttercup o, is material. (5 marks) (b) Explain the matters that your firm should consider in determining whether an error, detected when carrying out tests of control during the audit of uttercup o, is material. (4 marks) (c) escribe FOUR procedures that your firm should carry out to obtain assurance that trade payables and accruals are not understated in uttercup o s financial statements. (6 marks) (15 marks) 4 Lily o imports electrical goods from abroad and distributes them to various wholesale companies. It has a large number of head offi ce employees including an internal audit department that services the head offi ce and also the various storage and distribution depots located around the country. Lily o owns its head offi ce premises and all of its depots. The internal audit manager reports to the company s fi nancial director who has ultimate responsibility for the effective and effi cient operation of the internal audit department. t a recent meeting between Lily o s chairman and representatives of the company s auditors, the chairman enquired as to why they could not place more reliance on the work carried out by the internal audit department when carrying out their own external audit procedures. In their response the auditors made reference, amongst other matters, to an experienced auditor and independence of the internal audit function. (a) efine the term internal auditing. (2 marks) (b) Identify and explain THREE matters about which the internal audit manager should have a reasonable understanding, if she is to meet the recognised criteria of being an experienced auditor. (6 marks) (c) Explain why it is important for an internal audit function to be independent and state why Lily o s financial director should not have responsibility for the effective and efficient operation of the company s internal audit department. (7 marks) (15 marks) End of Question Paper 6