Mock Examination : ACCA Paper F8 Audit and Assurance Session : June 2014 Set by : Mr Neil Han Your Contact Number : I wish to have my script marked by the lecturer and collect the marked script at the SAA-GE Reception Counter email me the marked script to (Please submit your script latest by 9 th May 2014 for marking) SAA GLOBAL EDUCATION CENTRE PTE LTD Company Registration No. 201001206N 111 Somerset Road, TripleOne Somerset #06-01/02 Singapore 238164 Tel: (65) 6733 5731 Fax: (65) 6733 5750 Website: www.saage.edu.sg Email: studentservices@saage.edu.sg
Fundamentals Level Skills Module F8. Audit and Assurance June 2014 MOCK EXAM PAPER Time allowed Reading and planning: Writing: 15 minutes 3 hours ALL FIVE questions are compulsory and MUST be attempted. Lecturer: Neil Han The Association of Chartered Certified Accountants
ALL FIVE questions are compulsory and MUST be attempted 1 Introduction Seeley Co assembles specialized motor vehicles. The company owns four assembly plants to which parts are delivered and assembled into the motor vehicles. The motor vehicles are assembled using a combination of auto and manual production lines. The human workers normally work a standard eight hour day, with regular overtime. There is one shift per day; mass production and around the clock working are not possible due to the specialist nature of the motor vehicles being assembled. Wages system shift workers Shift-workers arrive for work at about 7.00 am and clock in using an electronic identification card. The card is scanned by the time recording system and each production shift-worker s identification number is read from their card by the scanner. The worker is then logged in as being at work. Shift-workers are paid from the time of logging in. The logging in process is not monitored as it is assumed that shift-workers would not work without first logging in on the time recording system. Shift-workers are split into groups of about 25 employees, with each group under the supervision of a shift foreman. Each day, each group of shift-workers is allocated a specific vehicle to manufacture. At least 400 vehicles have to be manufactured each day by each work group. If necessary, overtime is worked to complete the day s quota of vehicles. The shift foreman is not required to monitor the extent of any overtime working although the foreman does ensure workers are not taking unnecessary or prolonged breaks which would automatically increase the amount of overtime worked. Shift-workers log off at the end of each shift by re-scanning their identification card. Payment of wages Details of hours worked each week are sent electronically to the payroll department, where hours worked are allocated by the computerised wages system to each employee s wages records. Staff in the payroll department compare hours worked from the time recording system to the computerised wages system, and enter a code word to confirm the accuracy of transfer. The code word also acts as authorisation to calculate net wages. The code word is the name of a pet cat belonging to the department head and is therefore generally known around the department. Each week the computerised wages system calculates: (i) gross wages, using the standard rate and overtime rates per hour for each employee, (ii) statutory deductions from wages, and (iii) net pay. The list of net pay for each employee is sent over Seeley s internal network to the accounts department. In the accounts department, an accounts clerk ensures that employee bank details are on file. The clerk then authorises and makes payment to those employees using Seeley s online banking systems. Every few weeks the financial accountant reviews the total amount of wages made to ensure that the management accounts are accurate.
Termination of employees Occasionally, employees leave Seeley. When this happens, the personnel department sends an e-mail to the payroll department detailing the employee s termination date and any unclaimed holiday pay. The receipt of the e-mail by the payroll department is not monitored by the personnel department. Salaries system shift managers All shift managers are paid an annual salary; there are no overtime payments. Salaries were increased in July by 3% and an annual bonus of 5% of salary was paid in November. (a) List FOUR control objectives of a wages system. (4 marks) (b) Assuming you are the external auditors of Seeley Co (your audit company is called Premium Audit Co), write a management letter to the directors regarding the shift-workers wages recording and payment systems which: (i) Identifies and explains FOUR weaknesses in that system; (ii) Explains the possible effect of each weakness; (iii) Provides a recommendation to alleviate each weakness. Note: up to two marks will be awarded within this requirement for presentation. (14 marks) (c) List THREE substantive analytical procedures you should perform on the shift managers salary system. For each procedure, state your expectation of the result of that procedure. (6 marks) Fraud During the year a material fraud was uncovered. It involved cash/cheque receipts from customers being diverted into employees personal accounts. In order to cover up the fraud, receipts from subsequent unrelated customers would then be recorded against the earlier outstanding receivable balances and this cycle of fraud would continue. The fraud occurred because two members of staff colluded. One processed cash receipts and prepared the weekly bank reconciliation; the other employee recorded customer receipts in the sales ledger. An unrelated sales ledger clerk was supposed to send out monthly customer statements but this was not performed. The bank reconciliations each had a small unreconciled amount but no-one reviewed the reconciliations after they were prepared. The fraud was only uncovered when the two employees went on holiday at the same time and it was discovered that cash receipts from different customers were being applied to older receivable balances to hide the earlier sums stolen. (d) Identify and explain controls Seeley Co should implement to reduce the risk of fraud occurring again and, for each control, describe how it would mitigate the risk. (6 marks) [Total: 30 marks]
2 (a) Explain each of the FIVE fundamental principles of ACCA s Code of Ethics and Conduct. (5 marks) (b) SSA 570, Going Concern, provides guidance to auditors in respect of ensuring that an entity can continue as a going concern. Explain the actions that an auditor should carry out to try and ascertain whether an entity is a going concern. (5 marks) [Total: 10 marks]
3 (a) In agreeing the terms of an audit engagement, the auditor is required to agree the basis on which the audit is to be carried out. This involves establishing whether the preconditions for an audit are present and confirming that there is a common understanding between the auditor and management of the terms of the engagement. Describe the process the auditor should undertake to assess whether the PRECONDITIONS for an audit are present. (3 marks) (b) List FOUR examples of matters the auditor may consider when obtaining an understanding of the entity. (2 marks) (c) Donald Co operates an airline business. The company s year end is 31 Dec 2013. You are the audit senior and your manager has asked you to have a meeting with the client and to identify any relevant audit risks so that the audit plan can be completed. From your meeting you ascertained the following : In order to expand flight network, Donald Co will need to acquire more airplanes; they have placed orders for another six planes at an estimated total cost of $20m and the company is not sure whether these planes will be delivered by the year end. Additionally the company has spent an estimated $15m on refurbishing their existing planes. In order to fund the expansion Donald Co has applied for a loan of $25m. It has yet to hear from the bank as to whether it will lend them the money. The company receives bookings from travel agents as well as via their website. The travel agents are given a 90-day credit period to pay Donald Co, however, due to difficult trading conditions a number of the receivables are struggling to pay. The website was launched in 2010 and has consistently encountered difficulties with customer complaints that tickets have been booked and paid for online but Donald Co has no record of them and hence has sold the seat to another customer. Donald Co used to sell tickets via a large call centre located near to their head office. However, in November they closed it down and made the large workforce redundant. Using the information provided, describe FIVE audit risks and explain the auditor s response to each risk in planning the audit of Donald Co. (10 marks) (d) Explain the components of audit risk and, for each component, state an example of a factor which can result in increased audit risk. (5 marks) [Total : 20 marks]
4. You are the audit manager in the audit firm of Michael & Co. One of your audit clients is AceSports Co, a company specialising in the manufacture and supply of sporting equipment. AceSports have been an audit client for five years and you have been audit manager for the past three years while the audit partner has remained unchanged. You are now planning the audit for the year ending 31 December 2013. Following an initial meeting with the directors of AceSports, you have obtained the following information. (i) AceSports is attempting to obtain a listing on a recognised stock exchange. The directors have established an audit committee, as required by corporate governance regulations, although no further action has been taken in this respect. Information on the listing is not yet public knowledge. (ii) You have been asked to continue to prepare the company's financial statements as in previous years. (iii) As the company's auditors, AceSports would like you and the audit partner to attend an evening reception in a hotel, where AceSports will present their listing arrangements to banks and existing major shareholders. (iv) AceSports has indicated that the fee for taxation services rendered in the year to 31 December 2011 will be paid as soon as the taxation authorities have agreed the company's taxation liability. You have been advising AceSports regarding the legality of certain items as 'allowable' for taxation purposes and the taxation authority is disputing these items. Finally, you have just acquired about 5% of AceSports's share capital as an inheritance on the death of a distant relative. (a) Identify, and explain the relevance of, any factors which may threaten the independence of Michael & Co's audit of AceSports Co's financial statements for the year ending 31 December 2013. Briefly explain how each threat should be managed. (10 marks) (b) Explain the actions that the board of directors of AceSports Co must take in order to meet corporate governance requirements for the listing of AceSports Co. (6 marks) (c) Explain why your audit firm will need to communicate with AceSports Co's audit committee for this and future audits. (4 marks) [Total : 20 marks]
5. The date is 3 December 2013. The audit of Perfect Coil Co is nearly complete and the financial statements and the audit report are due to be signed next week. However, the following additional information on two material events has just been presented to the auditor. The company s year end was 30 September 2013. Event 1 Occurred on 10 October 2013 The springs in a new type of mattress have been found to be defective making the mattress unsafe for use. There have been no sales of this mattress; it was due to be marketed in the next few weeks. The company s insurers estimate that inventory to the value of $750,000 has been affected. The insurers also estimate that the mattresses are now only worth $225,000. No claim can be made against the supplier of springs as this company is in liquidation with no prospect of any amounts being paid to third parties. The insurers will not pay Perfect Coil for the fall in value of the inventory as the company was underinsured. All of this inventory was in the finished goods store at the end of the year and no movements of inventory have been recorded post year-end. Event 2 Occurred on 5 November 2013 Production at the factory was halted for one day when a truck carrying dye used in colouring the fabric on mattresses reversed into a metal pylon, puncturing the vehicle allowing dye to spread across the factory premises and into a local river. The Environmental Agency is currently considering whether the release of dye was in breach of environmental legislation. The company s insurers have not yet commented on the event. (a) For each of the two events above: (i) Explain whether the events are adjusting or non-adjusting according to FRS 10 Events After the Balance Sheet Date. (4 marks) (ii) Explain the auditors responsibility and the audit procedures and actions that should be carried out according to SSA 560 (Revised) Subsequent Events. (12 marks) (b) Describe the audit procedures required in respect of accounting estimates. (4 marks) [Total: 20 marks] End of Question Paper