BSc (Hons) Accounting with Finance Cohort: BACF/13/FT/Aug & BACF/13/PT Jan & BACF/12B/FT Examinations for 2014 2015 Semester I / 2014 Semester II MODULE: ADVANCED AUDITING MODULE CODE: ACCF 2113 Duration: 2 ½ Hours Instructions to Candidates: 1. This question paper consists of Section A and Section B. 2. Section A is Compulsory. 3. Answer any two questions from Section B. 4. Always start a new question on a fresh page. 5. All workings must be shown. 6. Total Marks: 100. This Question Paper is printed on BOTH SIDES. This Question Paper Contains 4 questions and 6 pages. Page 1 of 6
SECTION A: COMPULSORY QUESTION 1: (40 MARKS) PART A: (10 MARKS) The following are audit procedures from different transaction cycles: a. Examine duplicate copy of shipping documents for evidence that quantities were verified before shipment. b. Select a sample of payroll checks and agree hours to employee time records. c. Use audit software to cast and cross-cast the sales journal and trace the balance to the general ledger. d. Examine voucher packages and related vendor invoices for evidence of approval of account classification. e. Trace a sample of shipping documents to entry in the sales journal. Required: (i) For each audit procedure, identify whether it is a test of control or a substantive test of transaction, (ii) For each audit procedure, identify the transaction-related audit objective being satisfied. PART B: (10 MARKS) Briefly describe the four phases of the audit process. Page 2 of 6
PART C: (20 MARKS) Items 1 to 5 below are selected questions of the type generally found in internal control questionnaires used by auditors to obtain an understanding of internal control in the sales and collection cycle. In using the questionnaire for a client, a Yes response to a question indicates a possible internal control and whereas a No indicates a potential deficiency. The following internal controls for the acquisition and payment cycle were selected from a standard internal control questionnaire. 1. Are customers orders evaluated for credit approval by someone independent on sales? 2. Are unit prices obtained from a pre-approved and restricted masterfile of unit prices? 3. Is the numerical sequence of bills of lading accounted for to identify duplicates or missing documents? 4. Are sales invoices an amount independently verifies for correctness? 5. Are entries in the sales journal timely recorded in the accounts receivable masterfile? Required: (i) For each of the preceeding question, state the transaction-related audit objectives being fulfilled if the control is in effect. (ii) For each control, list a test of control to test its effectiveness. (iii) For each of the preceeding question identify the nature of the potential financial misstatements. (iv) For each of the potential financial misstatements in part (iii), list a substantive audit procedure to determine whether a material misstatement exists. Page 3 of 6
SECTION B: ANSWER ANY TWO QUESTIONS QUESTION 2: (30 MARKS) PART A: (20 MARKS) (i) What is meant by independence of mind and independence in appearance? (6 marks) (ii) Why may having senior personnel on an audit engagement over a long period of time create self-interest and familiarity threats? List two possible safeguards. (8 marks) (iii) For the following scenario, briefly indicate whether or not independence-related requirements in the Code of Ethics are being violated? Adrien Reynolds now works as a junior member of the accounting team at Swiss Precision Tooling, a listed manufacturing company. Three months ago, he worked as a staff auditor for Crowther& Sutherland, a local audit firm, where he worked on the Swiss Precision Tooling audit team. Crowther& Sutherland is still the auditor for Swiss Precision Tooling. (6 marks) PART B: (10 MARKS) With respect to the Audit Quality Framework, how does positive audit firm culture along with experts skills and qualities of both the audit partner and the engagement team affect audit quality? Page 4 of 6
QUESTION 3: (30 MARKS) PART A: (20 MARKS) (i) Explain what is meant by an emphasis of matter paragraph and other matter paragraph. Provide two examples of each. (12 marks) (ii) For each of the following independent situations, indicate the reason for and the type of financial statement audit report that you would issue, assuming that each item is significant. (8 marks) a. The accounting records for cash sales of your client Temptation Company are not adequate for audit purposes and you have been unable to obtain reasonable assurance that all cash sales have been properly recorded. The possible effects on the financial statements are material but not pervasive. b. Upon review of the recent history of the lives of specialized automobiles, Gas Link Technology Limited justifiably change the service lives for depreciation purposes on its auto from 5 years to 3 years. This change resulted in a material amount of additional depreciation expenses. PART B: (10 MARKS) Murphy and Johnson is a manufacturer of small motors for lawnmowers and tractors. The components of its financial statements are:- Net income before operations Rs 21 million Total assets Rs 550 million Total revenues Rs 775 million During the course of the audit, Murphy and Johnson s auditing firm detected two misstatements that aggregated to an overstatement of net income of Rs 1.25 million. Risk of material misstatements may be assumed to be low. Tolerable misstatement is set at 50% of planning materiality. Page 5 of 6
Required: (i) Determine planning materiality and tolerable misstatment. (ii) Evaluate the audit findings. QUESTION 4: (30 MARKS) (i) Weak accounting practices and poor management style are two red flags that indicate the potential for financial statement fraud. List five weak accounting practices and three poor management style. (8 marks) (ii) What are the five major areas that the Committee for Sponsoring Organization (COSO) identified as being most open to financial statement fraud? (10 marks) (iii) An effective corporate governance structure is an effective control for combating financial statement fraud. Briefly explain what is meant by an effective corporate governance structure. (7 marks) (iv) What role does the external auditor play in fighting fraud? Is the role primarily proactive or reactive? ***END OF QUESTION PAPER*** Page 6 of 6