Question 1

The Chairman's Report of Pudding plc states that investment property rental forms a major part of revenue. However, a note to the financial statements shows that property rental represents only 1·6% of total revenue for the year. The audit senior is satisfied that the revenue figures are correct. The audit senior has noted that an unmodified audit report should be given as the audit opinion does not extend to the other reports.
Is the audit senior correct?

Accepted Answer

The answer of The Chairman's Report of Pudding plc states...

Question 2

Use the information in the following paragraph to answer question
You are a member of the audit team for the audit of Learnersinnit plc, a private provider of high quality educational services. The team have just completed the interim audit for the current year. You performed the work on the salaries system where you have noted the following issues:
The company currently has over three hundred teaching and office staff, organised into several different departments. The staff are paid on a fixed scale with annual increments agreed by the board. The Salaries Department prepares one month's payroll from the names on the previous payroll, adding or deleting names as instructed by the personnel department. Details of increased pay rates resulting from promotion are also supplied by the Personnel Department. Sometimes, however, the Personnel Department is so busy that they forget to telephone the Salaries Department with details of staff changes or promotions. To correct these oversights, there is sometimes an extra payroll run to prepare additional payments where necessary.
The payroll is prepared by either of the two Salaries Department staff, depending on whoever is available. The payroll calculations are usually checked for accuracy by the other employee in the department, unless one of them is absent through illness or is on holiday.
The Personnel Department manager corrects any payroll errors identified on her own computer, which is part of the same computer network, and then signs the payroll electronically to indicate overall approval. She does not have time to authorise any additional runs which are necessary, however, as these are usually required urgently.
Payments are made to staff by credit transfer directly to their bank accounts. Payments to statutory authorities, pension funds etc of the amounts deducted from employees plus the employers contributions are also paid by credit transfer within the required timescales.
-Draft a formal Management Letter (or Letter of Weaknesses) in respect of the internal control systems of Learnersinnit plc, as outlined above. The structure of the letter should be as follows:
Body of management letter:
-Identification of weaknesses in the existing internal control system
-Potential implications of these weaknesses
-Recommendations for improvement

Accepted Answer

The answer of Use the information in the following paragraph...

Question 3

State whether the following are true or false
Emphasis of matter reports are not a modification of opinion but merely draw attention to some disclosure in the financial statements
Negative assurance is given in all non audit engagements
Failure of auditors to obtain sufficient, appropriate evidence will result in an adverse audit opinion
Compilation assignments require no audit opinion at all

Accepted Answer

The answer of State whether the following are true or...

Question 4

The audit of Bouncy Co is nearly complete and the financial statements and the audit report are due to be signed next week. However, the following additional information has just been presented to the auditor. The company's yearend was 30 September 2X17.
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 R1,750,000 has been affected. The insurers also estimate that the mattresses are now only worth R1,225,000. 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 Bouncy 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.
What actions should the auditors take and what will be the effect on the accounts for the year ended 30 September 2X17?

Accepted Answer

The answer of The audit of Bouncy Co is nearly...

Question 5

State whether the following are true or false
The purpose of a management letter is to provide good audit evidence about the state of the company's finances
A significant deficiency in internal control is one which must be reported to the management or those charged with governance
A Type 2 report is useful when evaluating service providers where a company has outsourced services but it is does not replace independent audit evidence
Auditors may rely on representations made by the directors in identifying related parties as they are often very difficult to identify

Accepted Answer

The answer of State whether the following are true or...

Question 6

Use the information in the following paragraph to answer question
You are a member of the audit team for the audit of Learnersinnit plc, a private provider of high quality educational services. The team have just completed the interim audit for the current year. You performed the work on the salaries system where you have noted the following issues:
The company currently has over three hundred teaching and office staff, organised into several different departments. The staff are paid on a fixed scale with annual increments agreed by the board. The Salaries Department prepares one month's payroll from the names on the previous payroll, adding or deleting names as instructed by the personnel department. Details of increased pay rates resulting from promotion are also supplied by the Personnel Department. Sometimes, however, the Personnel Department is so busy that they forget to telephone the Salaries Department with details of staff changes or promotions. To correct these oversights, there is sometimes an extra payroll run to prepare additional payments where necessary.
The payroll is prepared by either of the two Salaries Department staff, depending on whoever is available. The payroll calculations are usually checked for accuracy by the other employee in the department, unless one of them is absent through illness or is on holiday.
The Personnel Department manager corrects any payroll errors identified on her own computer, which is part of the same computer network, and then signs the payroll electronically to indicate overall approval. She does not have time to authorise any additional runs which are necessary, however, as these are usually required urgently.
Payments are made to staff by credit transfer directly to their bank accounts. Payments to statutory authorities, pension funds etc of the amounts deducted from employees plus the employers contributions are also paid by credit transfer within the required timescales.
-Describe TWO different ways in which fraud could be carried out in the above salaries system.

Accepted Answer

The answer of Use the information in the following paragraph...

Question 7

The audit team at Harmonium Ltd, a manufacturer of toys and games, have noted several points which they have brought to the attention of you, the audit partner. These include
-Harmonium's product range hasn't changed in five years and newer products are appearing in the market in direct competition
-The management of Harmonium have not replaced their Head of Marketing who has left the company to join a competitor
-The bank has refused to increase Harmonium's overdraft and turned down an application for as loan for new equipment
-Orders from two key customers have declined steadily over the year and turnover volume is dropping. The directors point out that revenues are equivalent to those of the previous year but the auditors point out that this is due to price rises not to volumes of goods sold
-The audit team reviewed the future budgets and cash flows of Harmonium prepared by the directors and stated that, whilst some of the assumptions were optimistic the projections were not completely unreasonable
There are no other points which give any indication that the financial statements are incorrectly stated and the audit process was satisfactory.
You have to decide whether any of these issues affect your audit opinion for the year and which course of action is the most appropriate
a) The company is likely to be in trouble so issue a qualified auditors' report on the financial statements on the basis that it is not a going concern
b) None of these points are of significance to the financial report for the current year and it is not for the auditors to tell the directors what to do so no action is required
c) None of these points are of significance to the financial report for the current financial year. However they indicate a worrying trend which it might be appropriate to discuss with the directors after the audit is finalised.
d) The audit team should go back to the company and try to discover further evidence that the company is not a going concern so the audit report can be modified

Accepted Answer

The answer of The audit team at Harmonium Ltd, a...

Question 8

The auditing profession is facing unique technical challenges. These can be summarised briefly as:
-The rise of Internet based retailers and service providers with diversified international operations.
-The siting of key aspects of Internet based retailing operations in low tax jurisdictions using transfer pricing to move funds out of high tax areas into low tax jurisdictions or by carrying out actual trade in one country and invoicing from another, low tax, one - thus claiming that they are actually trading from the low tax jurisdiction even though all they have there is an office and computer invoicing system.
-The increasing use of blockchain and cryptocurrencies, principally Bitcoin.
-The question of going concern relating to high technology businesses developing specialised software applications.
Required:
a) How are these types of development likely to affect the auditing profession of the future?
b) How will this affect the skills required of individual auditors?

Accepted Answer

The answer of The auditing profession is facing unique technical...

Question 9

Sniffit & Koff plc is an established pharmaceutical company that has for many years generated 90% of its revenue through the sale of two specific cold and flu remedies. Sniffit & Koff plc has lately seen a real growth in the level of competition that it faces in its market and demand for its products has significantly declined. To make matters worse, in the past the company has not invested sufficiently in new product development and so has been trying to remedy this by recruiting suitably trained scientific staff, but this has proved more difficult than anticipated.
In addition to recruiting staff the company also needed to invest R12m in plant and machinery. The company wanted to borrow this sum but was unable to agree suitable terms with the bank; therefore it used its overdraft facility, which carried a higher interest rate.
Consequently, some of Sniffit & Koff's suppliers have been paid much later than usual and
hence some of them have withdrawn credit terms meaning the company must pay cash on delivery. As a result of the above the company's overdraft balance has grown substantially.
The directors have produced a cash flow forecast and this shows a significantly worsening position over the coming 12 months.
The directors have informed you that the bank overdraft facility is due for renewal next month, but they are confident that it will be renewed. They also strongly believe that the new products which are being developed will be ready to market soon and hence trading levels will improve and therefore that the company is a going concern. Therefore they do not intend to make any disclosures in the accounts regarding going concern.
Identify any potential indicators that the company is not a going concern and outline the procedures the auditors should carry out in this situation.

Accepted Answer

The answer of Sniffit & Koff plc is an established...

Question 10

Demand for increased regulation of the audit profession has come from audit firms themselves, particularly medium sized firms that find it difficult to secure audit contracts for public limited companies (PLCs) given the predominance of the 'Big Four' firms. One medium sized firm has written to the House of Lords inquiry asking for a cap on the number of big audit contracts any one firm can have.
Set out in not more than 500 words the effect of increased regulation to compel Big 4 audit firms to give up large multinational audits.

Accepted Answer

The answer of Demand for increased regulation of the audit...

Quiz 3: Unit 21-32