SEMESTER 2 2012-PRACTICE EXAM BAO5524

PROFESSIONAL AUDITING
ATTEMPT ALL QUESTIONS
Part one-Short answer questions
(Chapters 1,,!,",11,1#,1"$
Question 1
Describe the principal agent relationship and how it is used to explain the development of
auditing. (% &ar's$
Question #
What is the purpose of performing analytical procedures at the planning stage of an audit?
Explain in brief. (! &ar's$
Question
Why do auditors want to rely on internal controls wherever possible? Mention four different types
of procedures that an auditor might use when carrying out tests of controls.
(% &ar's$
Question (
Explain the difference between the audit committees responsibilities for the external auditor and
its responsibilities for the internal audit and any relevant regulatory audit functions.
(! &ar's$
Question %
What is a management representation letter? Who prepares it? ist some items that might be
included in it.
(" &ar's$
Question !
!tate what is meant by the term "mandatory peer review. What are the implications of it for the
profession?
(( &ar's$

Question )
ist the purposes of audit documentation #wor$ing papers% and explain why each purpose is
important.

(!
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SEMESTER 2 2012-PRACTICE EXAM BAO5524
PROFESSIONAL AUDITING
(Tota* &ar's +or part one , (- &ar's$
Part two-Case Stu.ies
Question "-Au.it /is'-Chapter 0

&onsider the following independent situations' all of which apply to audits of entities for the year
ending () December *+)),
#i% !lipway imited' a listed company' has been experiencing declining sales over the last *
years. &ost cutting has proved difficult due to the high level of imported machinery used in
!lipways operations and conse-uently margins have been falling. While the ban$ers are
presently happy to continue providing !lipway with loan facilities' they do expect to see
improved results in the next financial report. .rticles about !lipways expected financial
results appearing in recent press reports all had -uite a pessimistic tone.
#ii% Discount /oods imited is a large supermar$et chain with offices in all capital cities
around .ustralia. 0ntil (+ 1une *+)) data processing relating to payroll transactions will
be carried out in each capital city by an independent computer service bureau.
#iii% 2etaway 3ty. imited is a long established firm which has been operating a bouti-ue hotel
in the 4lue Mountains for over *+ years. During this time' it has adopted a conservative
business strategy that has seen it produce ade-uate' though slightly unimpressive'
results. . new &E5 has been appointed to run the firm from ) !eptember *+)). 6e has
already released his plans for renovating the hotel' despite not officially serving as &E5
yet. 7ou have also heard him discuss the implementation of a new mar$eting strategy to
boost occupancy rates.
#iv% .ngora 3ty. imited is a small primary producer speciali8ing in the production of angora
wool. .ngoras recent display at a trade show has seen orders flood in from overseas
buyers. 9he accountant' Michael' has done his best to satisfy the orders as -uic$ly as
possible while maintaining the appropriate #foreign currency% accounting records.
6owever' from some of the -uestions he has been as$ing you' you suspect he is out of
his depth.
#v% :ings 3ty. imited has been manufacturing uniforms for the .ustralian mar$et for the last
;+ years. 9he governments recent tariff reduction policy has placed :ings in direct
competition with cheaper uniforms manufactured overseas. <n a bid to retain mar$et
share' :ings has been selling part of its school uniform range at less than cost. 6owever'
overall profit figures remain buoyant.
#vi% Micro 3ty. imiteds best selling product line is the M; = a >no frills microwave oven
designed for domestic use. 5ver the last * months' warranty claims on the M; have
trebled from ).?@ to ;.?@ of sales. 9he problem appears to relate to the glass turntable'
which shatters if the oven is constantly used. 9he average cost of repair has risen by *+@
to A*++ per claim.
/equire.1
/or each of the above independent situations' explain how the specific component#s% of audit ris$
are affected. (1- &ar's$
SEMESTER 2 2012-PRACTICE EXAM BAO5524
PROFESSIONAL AUDITING
Question 0-Su2sequent e3ents-Chapter 1"
&onsider each of the following independent and material situations. <n each case,
the balance date is () 5ctober *+)).
the fieldwor$ was completed on ? December *+)).
the financial report and audit report were signed on )* December *+)).
the financial report and audit report were mailed to the members on *+ December *+)).
). 7our client' 5utbac$ Mining' owns a mineral exploration licence in &entral .ustralia. .t ()
5ctober this licence was valued by an independent expert at A?+'+++'+++. 9his valuation is
reflected in the financial report. 5n B December 5utbac$ Mining received notice that a claim
was being lodged under the Cative 9itles .ct for land which was included under the
exploration licence. <f the claim is successful the exploration licence will be worthless.
*. 7our client' 4ird 3ty imited' derives approximately )+@ of revenues from selling aviary
supplies to city=based bird breeders. . draft copy of a government report' lea$ed to the press
and reported in the media on )) Covember' recommends that strict limits be placed on the
number of birds that are allowed to be $ept in suburban areas. 4ird 3ty imited estimates that
if the recommendations are enacted' about D+@ of its customers will have to cut their floc$s
by ?+@ or more. 9his would affect not only future sales but also their ability to pay existing
debts. Co further information' other than the draft report' is available as at )* December.
(. 7our client' 2em 3ty imited' made an out of court settlement on ) December *+)) of
A(++'+++. 9he settlement related to a litigation case dating bac$ ; years. . provision of
A)?+'+++ was recorded in the () 5ctober *+)) financial report.
;. 5n ); December *+))' you discover that a debtor of your client' 2alaxy td' was placed in
provisional li-uidation on B December. 9he debtor owed AE++'+++ as at () 5ctoberF a
specific provision of A(++'+++ of this amount was made at this date. 5n very preliminary
information' the li$ely payout to unsecured creditors is 8ero.
?. . flood occurred in the warehouse of your client !uper !pring td on * Covember *+)).
<nventory valued at A*m was destroyed. 9he directors believe only half of this value will be
recovered from the insurers.
/equire.1
/or each of the above events #)% to #?%' state the appropriate action #.% to #D% that the auditor
would re-uire in order to issue an un-ualified opinion for the situation. 1ustify your response.
9he alternative actions are as follows,
#.% &lient to adGust the () 5ctober *+)) financial report.
#4% &lient to disclose the information in the notes to the () 5ctober *+)) financial report.
#&% &lient to recall the () 5ctober *+)) financial report for revision.
#D% Co action is re-uired. ( &ar's ea4h ,1% &ar's$
P*ease present 5our answer in the +o**owin6 +or&at in 5our answer 2oo'*et
E3ent Appropriate A4tion /eason7/easons
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SEMESTER 2 2012-PRACTICE EXAM BAO5524
PROFESSIONAL AUDITING

Question 1--Au.it Opinions 8Chapter )
7ou are an audit partner finali8ing your (+ 1une *+)) audits. 9he following material and
independent matters have come to your attention,
1) 9anner td is the defendant in a litigation case' of which the outcome is highly uncertain. <f
the case is settled in favour of the plaintiff' 9anner will be re-uired to pay a substantial
amount of cash' possibly re-uiring the sale of certain non=current assets. 9he litigation
and possible effects have been properly disclosed in Cote *E to the financial statements.
2) 4ishop 9rust is a reporting entity. Ms /ord' the finance director' refuses to adopt ..!4
)*; Related Party Disclosures on the grounds that it "re-uires information to be disclosed
to the public that should remain $nown only to the parties concerned. 7ou are satisfied
that current financial statements are materially correct in all regards' apart from the non=
compliance with ..!4 )*;.
3) 9el$en td is the parent entity of the 9el$en 2roup' a reporting entity. 7our firm did not act
as auditor of either 9elfast td or 9eldane td' the entities controlled by 9el$en. 7ou were
unable to obtain the auditors report for 9elfast' although you do have a copy of the final
draft auditors report' and the other auditors verbal assurance that an un-ualified
auditors report was issued. <n addition' despite receiving a copy of the audited report for
9eldane' you do not believe that the financial statements would be suitable for
consolidation with the other entities in the group. 9his is because 9eldane operates in
.fghanistan' which has a vastly different accounting framewor$ from that used in
.ustralia. 7ou have been able to -uantify the financial effect of the re-uired adGustments
on the financial statements of the 9el$en 2roup. 6owever' management has refused to
ma$e the adGustments and has consolidated the existing version of 9eldanes financial
statements.
4) During the year' 2illard td has changed its method of accounting for long=term
construction contracts. <t properly reflected the effects of the change in the current years
financial statements and restated the previous years statements. 7ou are satisfied with
the entitys Gustification for ma$ing the change. 9he change is discussed in Cote *; to the
financial statements.
5) 5ne month before the reporting date' 5livio td had its computer system and bac$ups
sabotaged by a disgruntled ex=employee. Management has done its best to reconstruct
the accounting records over the past couple of months but this has been increasingly
difficult because so much time is ta$en up $eeping the day to day operations of the
company. Management prepared the year=end financial statements from the few
accounting records remaining. 7ou have serious doubts as to the accuracy of these
figures and have been unable to verify any of the material balances.
/equire.1
/or each of the above circumstances #)% to #?%' identify the audit opinion you would issue and
provide the reasoning why.
( &ar's ea4h , 1% &ar's$
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SEMESTER 2 2012-PRACTICE EXAM BAO5524
PROFESSIONAL AUDITING
Question 11 8Chapter 11
Corthcote 3ty td is a construction company #building houses' offices and hotels% employing a
large number of wor$ers on various construction sites. 9he internal audit department of Corthcote
3ty td is currently reviewing cash wages systems within the company.
9he following information is available concerning the wages systems,
#i% 6ours wor$ed are recorded using a cloc$ing inHout system. 5n arriving for wor$ and at the end
of each days wor$' each wor$er enters their uni-ue employee number on a $eypad.
#ii% Wor$ers on each site are controlled by a foreman. 9he foreman has a record of all employee
numbers and can issue temporary numbers for new employees.
#iii% .ny overtime is calculated by the computerised wages system and added to the standard
pay.
#iv% 9he two staff in the wages department ma$e amendments to the computerised wages system
in respect of employee holidays' illness' as well as setting up and maintaining all employee
records.
#v% 9he computerised wages system calculates deductions from gross pay' such as employee
taxes' and net pay. /inally a list of net cash payments for each employee is produced.
#vi% &ash is delivered to the wages office by secure courier.
#vii% 9he two staff place cash into wages pac$ets for each employee along with a handwritten
note of gross pay'deductions and net pay. 9he pac$ets are given to the foreman for distribution to
the individual employees.
/equire.1
a% <dentify and explain wea$nesses in Corthcote 3ty tds system of internal control over the
wages system that could lead to mis=statements in the financial statements.
b% /or each wea$ness' suggest an internal control to overcome that wea$ness.
(1- &ar's$
SEMESTER 2 2012-PRACTICE EXAM BAO5524
PROFESSIONAL AUDITING
Question 1#
Part one- Chapter ( &ar's$
/or each of the situations described below' identify whether the situation involves a violation of
the ethical standards of the profession' and if so' indicate which principle would be violated. <n
each situation' the named person is a chartered accountant wor$ing in public practice.
#)% Due to the death of its financial controller' an audit client had its external auditor'
2emma 1ones' perform the controllers Gob for a month until a replacement was
found.
#*% 9he audit engagement partner of 4C3 6oldings' 4rad ee' is a regular golf partner
of the firms &E5.
#(% :evin 3aul discloses confidential information about a client to its successor
auditor.
#;% .n audit client is unhappy with the level of audit fees its paying' believing they are
too high for the time ta$en and services rendered. <t tells its auditor' Michael Cg'
that he needs to re=tender for the audit' -uoting a substantially lower fee' if he
wishes to retain the audit.
Part two- Chapter % () &ar's$
Extragrow td was a successful fertiliser company operating in Cew !outh Wales. 9he company
had large inventories of fertiliser held in different locations throughout that state and Iueensland.
9he annual audit for (+ 1une *++D was completed by Detmold /orster' a firm of chartered
accountants. <t signed the auditors report on *? .ugust *++D.Manuremate td made a
successful ta$eover offer of Extragrow during !eptember *++D.6owever' when the financial staff
of Manuremate loo$ed at the financial statements of Extragrow' they found that inventory was
substantially overvalued. 9his resulted in Manuremate having offered a higher value for the
company than it would have otherwise.Manuremate too$ court action against Detmold /orster for
the losses it had incurred due to this overstatement.
<n the subse-uent court case' it was found that inventory had been overvalued because Detmold
/orster relied on managements representations about the value. <t appeared that a large amount
of the inventory was worthless because it contained some damaging weeds. 9he review of the
auditors wor$ing papers also discovered that its staff had not attended the stoc$ count in
Iueensland' because the maGority of the stoc$ was in Cew !outh Wales. /rom the wor$ing
papers' it was discovered that ;+@ of the stoc$ was held in Iueensland.
/equire.1
Discuss with reference to cases and legislation #where appropriate%,
#a% Whether Detmold /orster was negligent in the conduct of the audit
#b% Whether Manuremate would win their case
-EN9 O: E;AM-