Question 1

You are responsible for the audit of the tangible non-current assets of Glub Ltd, a company engaged in the manufacture and supply of soft drinks and other beverages to the retail, catering and leisure industries. From your discussions with the finance director, you find out that a capital expenditure budget is prepared annually.
Departmental managers can authorise capital expenditure up to £5,000, as long as it is within their budget. Board approval is required for amounts above this threshold but the managing director, who is also the major shareholder in the company, does not always adhere to this policy. He often commits the company to acquiring assets without considering how they are to be financed, leaving the finance director to arrange the borrowings.
Capital expenditure proposal forms are required to be completed but this is not always done, particularly when items are required in an emergency, and there is no formal policy in respect of obtaining quotes for major items of expenditure. There is a tangible non-current asset register which is reconciled to the nominal ledger on a monthly basis. No other checking procedures involving the non-current asset register are undertaken.
In July 201X, the company commenced construction of a new packing line. The line was completed in November 201X. Costs recorded in the tangible non-current asset register include materials, own and sub-contract labour, and overheads.
The overheads included are simply the overhead recovery rate used when pricing products and include all overheads, both direct and indirect. The company borrowed money to build the packing line and has included the interest on the loan as part of the construction cost.
(a) Identify four controls which should be in place to control the purchase of tangible fixed assets and explain why they are necessary and the consequences to the company if they are not in place
(b) Identify weaknesses in the system described above and, for each weakness, explain the consequences that could result from it.
(c) In respect of the new packing line what evidence will the auditors need in order to confirm that the expenditure has been correctly include in the financial statements? Comment particularly on the inclusion of overheads and financing costs

Accepted Answer

(a)

Control	Reason	Consequences
Capital expenditure budgets should be agreed by the directors	Capital expenditure should be planned and financing agreed	Unrestricted spending on fixed assets may damage cash flows. Failure to plan financing could result in excess costs
There should be a system of authorisation of individual items of expenditure before commitment	Individual items should be in accordance with budget plans	Unplanned expenditure will reduce effectiveness of planning process. Could result in duplication or waste
Authorisation limits should be established. Major items should be approved by the Board	Managers should be limited as to how much they can commit the organisation to spending	Organisations could be committed to excess or unnecessary expenditure.
All asset purchases should be from approved suppliers	Quality or assets and reliability of delivery times are important	Use of unapproved suppliers may result in assets being bought which are not fit for purpose
All purchases of tangible assets to be recorded in asset register	The asset register should reconcile to the nominal ledger so all assets can be traced and monitored	Failure to record cost , description and location of assets may result in assets being ‘lost’

(b)

Weakness	Consequence
Management override.	• Weak control environment may encourage breaches of the control system. • Assets surplus to requirements/inappropriate assets acquired/assets for personal use.
Lack of proper consultation or appraisal in respect of acquisition of non-current assets.	• Adverse impact on cash flow. • Over-gearing – too much reliance on borrowed money to finance asset purchases
No formal policy in respect of obtaining quotes for major items of expenditure.	Assets may not be acquired on the most favourable terms.
No physical checks between assets and register.	• Assets may not exist/disposals not recorded. • Assets may not be recorded. • Assets which need to be written down may not be identified.

-Weak control environment may encourage breaches of the control system. -Assets surplus to requirements/inappropriate assets acquired/assets for personal use. -Adverse impact on cash flow. -Over-gearing - too much reliance on borrowed money to finance asset purchases (c) -Check expenditure in accordance with approved capital budgets -Check within authority limits -Check purchases of materials to invoices -Check inclusion of labour costs to time sheets and pay rates. Check calculations of overtime. -Check authorisation of materials and labour costs -Review basis of calculation of overhead rate - only direct overheads to be included (exclude general admin o/h, sales and marketing costs, non specific costs e.g. audit fees etc) -Interest on finance to be included only on finance specifically raised for the project. Apportionment of general interest charge is not allowed

Question 2

The external auditor should undertake analytical procedures as part of the planning process in order to identify the risk of a possible misstatement of figures in the financial statements. The results of the analytical procedures conducted on the financial statements of an audit client are listed below.
Select whether the results indicate that cash and bank balances and trade receivables might have been under or overstated.
The results show that, compared to the previous year:
a. Inventory has reduced by 5%, trade payables have increased by 7% and trade receivables have reduced by 10%. Cash and bank balances have reduced by 11%
b. There has been no change in credit control procedures or length of credit given to customers. Sales revenues have increased by 9%. Trade receivables have increased by 15%.

Accepted Answer

a. Understated b. Overstated

Question 3

The audit work requires the verification of cut -off procedures to ensure that all transactions are recorded in the correct accounting period. During the yearend inventory count on 31 March 201X the audit team recorded the following transactions. The last Goods Received Note number was 10672. Which invoices should be recorded in purchases for the year?

Control	Reason	Consequences
Capital expenditure budgets should be agreed by the directors	Capital expenditure should be planned and financing agreed	Unrestricted spending on fixed assets may damage cash flows. Failure to plan financing could result in excess costs
There should be a system of authorisation of individual items of expenditure before commitment	Individual items should be in accordance with budget plans	Unplanned expenditure will reduce effectiveness of planning process. Could result in duplication or waste
Authorisation limits should be established. Major items should be approved by the Board	Managers should be limited as to how much they can commit the organisation to spending	Organisations could be committed to excess or unnecessary expenditure.
All asset purchases should be from approved suppliers	Quality or assets and reliability of delivery times are important	Use of unapproved suppliers may result in assets being bought which are not fit for purpose
All purchases of tangible assets to be recorded in asset register	The asset register should reconcile to the nominal ledger so all assets can be traced and monitored	Failure to record cost , description and location of assets may result in assets being ‘lost’

Accepted Answer

b) 95494, 94496 and 94497

Question 4

Auditors use samples in their audit testing. In which of the following situations is the use of sampling not appropriate
A) When the population is homogenous
B) When all items in the population have an equal chance of being selected
C) When the population is very small and all the items are material
D) When the population consists of a large number of transactions

Accepted Answer

When the population is very small and all the items are material, sampling may not be appropriate as auditors may need to test each item individually.

Question 5

You are auditing Megabuild plc a company which builds large projects mostly overseas. At present it is building a dam in the Philippines, a motorway in South Africa and a holiday village in France.
The audit team has been asked to devise audit procedures for the verification of work in progress balances as part of inventories. From the test below select whether you would include them as valid tests or exclude them as invalid.

Accepted Answer

The answer of You are auditing Megabuild plc a company...

Question 6

State whether the following are true or false in relation to the auditor and fraud
a. It is the auditor's responsibility to follow up possible indicators of fraud uncovered during the course of their audit testing work even if they are not material
b. External auditors must approach their audit testing with an attitude of professional scepticism
c. Management can rely on auditors to detect fraud as this is one of the auditor's duties under ISA 240 'The auditor's responsibilities relating to fraud in an audit of financial statements'
d. Auditor's must consider the effect any fraud which has been uncovered might have on their audit opinion

Accepted Answer

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

Question 7

Two types of computer-assisted audit techniques (CAAT) are test data and audit software.
For each of the procedures listed below, select the type of CAAT which would be used to perform that procedure.
a. Select all sales ledger accounts showing a credit balance for review
b. Input of inventory (stock) issues in excess of balance of inventory (stock) items shown as held on inventory records
c. Select all accounts in receivables (sales) ledger where balance exceeds credit limit

Accepted Answer

The answer of Two types of computer-assisted audit techniques (CAAT)...

Question 8

You are auditing Twinkles Ltd which runs a chain of jewellery shops and you are responsible for the audit of inventory. Counting and indentifying the items of jewellery is not a difficulty but verifying the value of the inventory is a major planning issue. How would you gather sufficient appropriate evidence to validate the value of inventories in this case?

Accepted Answer

The answer of You are auditing Twinkles Ltd which runs...

Question 9

You are the auditor of an engineering firm called Thumpit & Hope Ltd. You are planning for a physical inventory count at the company's warehouse on 31 August 201X. The company assembles domestic appliances, and inventory of finished appliances, unassembled parts and sundry inventories are stored in the warehouse which is adjacent to the company's assembly plant.
The plant will continue to produce goods during the stock count until 5 pm on 31 August 201X. On 30 August 201X, the warehouse staff will deliver the estimated quantities of unassembled parts and sundry inventories which will be required for production for 31 August 201X; however emergency requisitions by the factory will be filled on 31 August. During the inventory count, the warehouse staff will continue to receive parts and sundry inventories, and to despatch finished appliances. Appliances which are completed on 31 August 201X will remain in the assembly plant until after the physical inventory count has been completed.
Describe the procedures which Thumpit & Hope Ltd should establish in order to ensure that all inventory items are counted and that no item is counted twice.

Accepted Answer

The answer of You are the auditor of an engineering...

Question 10

Greenfumb is a company which operates a chain of garden centres specialising in the retailing of high quality garden products and the provision of landscaping services. Following information from one of the employees, it was discovered that the financial controller had used company cheques and bank transfers to pay for goods and services for his own use. Although the amounts involved were immaterial in the context of the financial statements, it transpired that this had been going on for several years.
The managing director is considering whether the company's auditors were negligent. He has requested that your firm undertakes a detailed independent review of Greenfumb's purchase and payments system in order to establish any shortcomings in its policies and procedures, so that they can be rectified.
Required:
(a) Distinguish between the responsibilities of the management and the statutory auditor of a limited company for the prevention and the detection of fraud and outline how these responsibilities are discharged.
(b) Prepare a list of questions in respect of internal control procedures, answers to which would establish whether there are any shortcomings in Greenfumb's purchase and payments system.

Accepted Answer

The answer of Greenfumb is a company which operates a...

Question 11

Identify the role of internal audit in managing risk. Set out what the role of internal audit is in the risk management process

Accepted Answer

The answer of Identify the role of internal audit in...

Question 12

As part of verification techniques in respect of revenues an auditor will inspect sales invoices. The auditor will gain assurance about different assertions depending on the information on the invoice.
In respect of the information below, select the assertion for which that information will provide assurance.
a. Date of the invoice
b. Description of the item sold
c. Monetary amount

Accepted Answer

The answer of As part of verification techniques in respect...

Question 13

The external auditor may seek to place reliance on internal controls in order to restrict substantive testing.
In each of the following circumstances, select whether the external auditor is likely to place reliance or place no reliance on internal controls.
a. A company with an independent internal audit department
b. A family company where the financial director is related to the chief executive
c. A company where a fraud committed by the purchasing manager has been uncovered
State the main ways in which auditors can gather the evidence they need and provide an example of each method

Accepted Answer

The answer of The external auditor may seek to place...

Question 14

State whether the following are true or false in relation to computer assisted audit techniques
a. The use of CAAT's enables auditors to examine large populations of data
b. Auditors use test data to test controls within the client's computer system
c. Modern software makes the use of CAATs cheap and easy to do so audit staff don't need any special training
d. Embedded software can provide continuous monitoring of client data

Accepted Answer

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

Question 15

In recent years there has been an increase in the number of larger companies outsourcing their internal audit function, often to their external auditors.

One of your audit clients is considering establishing a new internal audit function, either by recruiting its own internal auditors or by contracting with your firm for the provision of internal audit services.

Describe the advantages and disadvantages of the external auditors providing an internal audit service to their clients.

Accepted Answer

The answer of In recent years there has been an...

Question 16

In relation to selecting customers in a circularisation of receivables:
(i) explain how you would use monetary unit sampling to select the customers to
circularise
(ii) consider the criteria you would use to select individual customers for circularisation
using judgement
(iii) discuss the advantages and disadvantages of using monetary unit sampling (in (i)
above) as compared with judgement (in (ii) above) to select the customers to circularise. Your answer should consider the reasons why it is undesirable only to use judgement to select the customers for circularisation.

Accepted Answer

The answer of In relation to selecting customers in a...

Question 17

List the main characteristics of good audit evidence.

Accepted Answer

The answer of List the main characteristics of good audit...

Question 18

Which of the following is not a test using sampling?
A) Select every tenth goods received note and match to the purchase invoice
B) Randomly pick a number of disposals of non -current (fixed) assets from the non-current assets register and inspect authorisation for sale documents and sales invoices
C) Select all payables (purchase) ledger balances in excess of £15,000 and reconcile to suppliers statements
D) Test all calculations of wages paid and deductions from payroll in week 31

Accepted Answer

Options A, B, and D involve selecting a subset of data (every tenth note, a random selection of disposals, and all calculations from a specific week, respectively), which are examples of sampling methods. Option C involves examining all items above a certain threshold, which is not sampling but rather a form of 100% examination for a specific criterion.

Question 19

ISA 230 'Audit documentation states:
'The objective of the auditor is to prepare documentation that provides:
(a) A sufficient and appropriate record of the basis for the auditor's report; and
(b) Evidence that the audit was planned and performed in accordance with ISAs (UK and Ireland) and applicable legal and regulatory requirements.'
Briefly indicate what should be included as part of audit documentation and outline the implications for the audit team as to what to include and what to exclude

Accepted Answer

The answer of ISA 230 'Audit documentation states:
'The objective of...

Question 20

Accounting systems have control objectives and control procedures to mitigate the risks that the control objective is not met.
For each of the following, select whether they are a control objective, risk, or control procedure.
a. Organisations sell goods or services to customers with poor credit ratings
b. Goods are purchased only from approved suppliers
c. All purchase invoices must be matched to purchase orders and goods received notes

Accepted Answer

The answer of Accounting systems have control objectives and control...

Invoice no	Supplier	Invoice date	GRN number	Amount
95493	Big Trumpet plc	28 March	10674	£ 3,098.45
95494	Last Post Ltd	31 March	10671	£12,274.20
94495	Bugle Ltd	29 March	10673	£1,567.90
94496	Bangalong Ltd	30 March	10672	£12,786.42
94497	Simbol plc	1 April	10670	£ 456.48
94498	Twangalong Ltd	31 March	10675	£ 998.46

Quiz 2: Unit 11-20

Auditors use samples in their audit testing. In which of the following situations is the use of sampling not appropriate

Identify the role of internal audit in managing risk. Set out what the role of internal audit is in the risk management process

List the main characteristics of good audit evidence.

Which of the following is not a test using sampling?