F8 Audit & Assurance

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Paper F8 (SGP)
Audit and Assurance

Time allowed
Reading and Planning                         15 minutes
Writing                                      3 hours
ALL FIVE questions are compulsory and MUST be attempted

     Prepared by:              Mr Yeo Hong Ann

                                          Source: BPP & Others

Paper F8 Mock Exam Questions                         Page 1 of 8
Question 1

Your firm has audited Eastly Ltd for a number of years. Eastly Ltd is a company that has retail
outlets in six major cities. Eastly’s year end is 31 March 2008. You have been asked to audit the
non current assets section of the financial statements.

Each outlet is owned by Eastly and each has a network of home delivery vehicles attached to it
so that customers may shop in store or on line from their local branch. The company also owns a
head office building. Both the retail premises and the head office building are subject to annual
revaluations. Values have tended to fluctuate. In particular, premises in the central locations such
as Eastly’s tend to be affected by ‘out of town’ developments. An out of town development was
completed in Cidney, a city where Eastly owns a city centre retail property during the year. Eastly
also disposed of a property during the year to enable it to move premises to a new retail
development in Malbourn city centre. The new premises are leased from the developer.

Eastly has a computerised fixed assets register. The purchase ledger identifies capital purchases
and updates the fixed asset register automatically. The fixed asset register is set up to
automatically calculate depreciation from month of purchase at pre-set limits which can be
overridden by the Finance Director to make sure the depreciation policy is appropriate. The FD
also manually updates values on premises and adjusts the related depreciation manually too. The
computer programme will not adjust such amendments without authority from a second director.
Each has an individual secret password in order to make such authorisation.

You have been given the following schedule of assets by the accountant:

                                 Land and        Fixtures and      Vehicles        Total
                                 Buildings           fittings
                                  $’000s             $’000s         $’000s         $’000s
At 31 March 2007                   24,532             731              512          25,775
Additions                            1,755              97                -          1,852
Disposals                           (1,502)              (6)              -         (1,508)
Revaluations                           735                -               -             735
                                  ------------      ---------       ----------    ------------
At 31 March 2008                    25,520            822              512          26,854
                                  ------------      ---------       ----------    ------------

Accumulated depreciation
At 31 March 2007                    7,360              549             413            8,322
Disposals                               (82)            (5)               -             (87)
Charge for the year                     468            191              51              710
                                  ------------       ---------       ---------     ------------
At 31 March 2008                    7,746              735             464            8,210
                                  ------------       ---------       ---------      -----------

Net book value
31 March 2008                        17,774            87                48         17,909
31 March 2007                        17,172           182                99         17,453

Paper F8 Mock Exam Questions                                                             Page 2 of 8

(a) List the audit procedures you should perform to confirm the assertions of valuation
    and completeness for depreciation in the financial statements of Eastley Ltd. For each
    procedure, explain the purpose of that procedure. Your answer should include
    reference to computer assisted audit techniques (CAATs) where relevant. (8 marks)

(b) List the audit procedures (excluding those in respect of depreciation noted above) you
    should perform to confirm the assertions of completeness, valuation and accuracy of
    the fixed assets balance in Eastley Ltd’s financial statements. For each procedure,
    explain the purpose of that procedure. Your answer should include reference to
    CAATs where relevant. (16 marks)

(c) Discuss the factors you should consider when relying on the work of an expert.
    (6 marks)

                                                                          (Total: 30 marks)

Paper F8 Mock Exam Questions                                                   Page 3 of 8
Question 2

(a) SSA 210 Terms of Audit Engagements explains the content and use of
    engagement letters.


   List six items that could be included in an engagement letter.
                                                                              (3 marks)

(b) SSA 530 Audit sampling and other means of testing states that ‘in determining
    the sample size, the auditor should consider whether sampling risk is reduced to an
    acceptably low level.’


   List six factors that influence sample sizes for tests of details. (3 marks)

(c) Auditors report on whether financial statements contain material misstatements.


   Define materiality and explain its impact on an audit. (4 marks)

                                                                      (Total: 10 marks)

Paper F8 Mock Exam Questions                                                 Page 4 of 8
Question 3

Reuse Co
Reuse Co is a recycling company with a year end of 31 August. It has suffered a series
of floods in the last year. The company manufactures recycled cardboard to order in its
own premises. Reuse Co keeps raw board and finished goods of recycled board in its
stores. It is three months since their year-end, and your annual audit is nearly complete.
The following events have just come to your attention:

(a) You arrived at the client this morning to discover that heavy rain overnight has
    flooded the stores and part of the factory.

(b) The finance director has told you that the payout for the insurance claim in relation to
    the flood which occurred in June 2008 has just arrived in the finance department.


(a) In respect of this morning’s flood:

   (i)      State the additional audit procedures you will carry out. (4 marks)

   (ii)     Explain whether the financial statements require amendment. (4 marks)

(b) In respect of the insurance payout:

   (i)      State the additional audit procedures you will carry out. (2 marks)

   (ii)     Explain whether the financial statements require amendment. (2 marks)

(c) SSA 560 Subsequent events provides guidance on the responsibilities of auditors
    regarding subsequent events. Outline the responsibilities of auditors for facts
    discovered up to the date of the auditor's report, facts discovered after the date of
    the auditor's report but before the accounts are issued and for facts discovered after
    the financial statements have been issued. (8 marks)

                                                                         (Total: 20 marks)

Paper F8 Mock Exam Questions                                                     Page 5 of 8
Question 4
(a)   Explain how a report to management on internal control weaknesses written
      by internal auditors would differ from the external auditors' report. (10 marks)

(b)   In March 20x9 your firm was appointed as auditors to Obama Co, a company
      operating three large call centres within close proximity of each other. The
      company is long established, has an excellent control environment and a good
      system of internal controls.

      The directors of Obama Co have decided to update the company’s old computer-
      based accounting system with a more efficient system, incorporating superior
      application controls over the input and processing of data. Consequently, several
      accounts department employees will be made redundant whilst the tasks of other
      employees will change.


      List and describe FIVE categories of Application Controls over the input and
      processing of data, which should be incorporated in the new computer-based
      accounting system of Obama Co. For each Application Control listed provide an
      example of its use. (10 marks)

                                                                (Total = 20 marks)

Paper F8 Mock Exam Questions                                                  Page 6 of 8
Question 5
Creation Co is a listed construction company with an annual revenue of $350 million and
its draft income statement shows an operating profit for the year ended 31 December
20X8 of $40 million. This is the first audit by the audit firm. Enquiry of the previous
auditor revealed no reasons for concern. On completing audit work at the company's
premises, the audit senior drafts a memo, extracts from which are reproduced below.

(a) Inventory valuation

Inventories include $7 million, at cost, for scrap rubber from used car tyres. This material
is widely used as a road surface in other countries. Contracts for road building with this
country's Highways Agency, the state authority for road construction, do not currently
permit the use of this material. However, the matter was known to be under review and,
on being offered a special purchase of this material, Creation speculated on a
favourable outcome of this review and purchased the material. In February 20X9, shortly
before the financial statements were approved by the directors, the Highways Agency
reported that it would not, currently, accept the use of this material. If used on non-
Highways Agency contracts the material's net realisable value would not exceed $2
million. The finance director maintains that the issue of the Highways Agency report was
a non-adjusting post balance sheet event. The write down of the inventory should,
therefore, be reflected in the next period's financial statements.                (6 marks)

(b) Depreciation

In 20X4 the company purchased two computer controlled earth movers at a cost of
$2,500,000 each and a further two at the same price in 20X5. Depreciation has been
provided at 10% straight line, the same basis as it previously depreciated conventional
earth movers. This year, 20X8, the company has decided that improvements in
technology made it worthwhile scrapping their first two computer controlled earth movers
and replacing them with the latest model at a cost of $4,000,000 each. The company's
chief engineer tells you that technology is developing so rapidly it appears likely they will
continue to replace these machines every five years. In spite of this the finance director
claims that the depreciation rate of 10% is in line with the industry standard and reflects
the physical life of the machines. He argues that continued improvements in technology
cannot be foreseen and that there is no justification for increasing depreciation to 20%
because of the possibility of technological obsolescence.                         (7 marks)

(c) Contingent liability

The company is being sued for $50 million by the Highways Agency for defective work
on a recently completed road. The company maintains that it met the Highways
Agency's specification and it is the Agency's engineers who are at fault in drawing up the
specification. Creation maintains that it has no case to answer, that the possibility of loss
is remote and that the claim need not be disclosed as a contingent liability. An
investigative journalist has recently published an article suggesting that other roads
constructed by the company exhibit similar faults. The managing director has admitted
that the company's road building techniques are under investigation by the Highways
Agency. If the company were to lose the case its future going concern would be
threatened.                                                                       (7 marks)

Paper F8 Mock Exam Questions                                                     Page 7 of 8

Explain the effect of each matter

(i) on the financial statements; and

(ii) if the company were to refuse to amend the financial statements, on the
     auditor's report. Your answer should consider materiality where appropriate.

                                                            (Total = 20 marks)

Paper F8 Mock Exam Questions                                             Page 8 of 8

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