This question paper must be returned.

Candidates are not permitted to remove any part of it from the examination room.

STUDENTS SURNAME........................................... OTHER NAMES......................................................... STUDENT NUMBER.................................................

MOCK FINAL EXAMINATION SEMESTER 2, 2010 suggested solutions

Unit: Time Allowed: Total Number of Questions: ACCG340 Auditing and Assurance Services 2 hours plus 10 minutes reading time FIVE (5)

Instructions: Answer question 1 on the computer marking sheet provided. Answer questions 2 to 3 in the space provided in this paper (Paper A). Answer questions 4 to 5 in the space provided in Paper B. Answer all questions. All booklets must be returned. Materials permitted: Dictionaries are not permitted. Calculators are not permitted. QUESTION NUMBER 1 Paper A 2 3 4 Paper B TOTAL 5 MARKS AVAILABLE 18 22 24 24 12 100 STUDENTS SCORE

QUESTION 1 (16 Marks) MARK THE CORRECT ANSWER ON THE COMPUTER MARKING SHEET PROVIDED
1: To which assurance engagements does the Framework for Assurance Engagement apply? A: Audits of historical financial information B: Reviews of historical financial information C: Assurance engagements other than audits or reviews of historical financial information *D: All of the above. 2: Which of the following bodies monitors the operation of the Australian Accounting Standards Board? A: Australian Stock Exchange *B: Financial Reporting Council C: Australian Securities and Investments Commission D: Auditing and Assurance Standards Board 3: Which of the following characteristics would most likely increase an auditors concern about the inherent risk of intentional manipulation of the financial report? A: Turnover of senior accounting personnel is low B: Lack of controls over the purchasing function C: The rate of change in the entitys industry is slow *D: Managers are compensated based largely on the profitability 4: Which of the following procedures would an auditor most likely perform to verify management's assertion of completeness? *A: Compare a sample of shipping documents to related sales invoices. B: Observe the client's distribution of payroll cheques. C: Confirm a sample of recorded receivables by direct communication with the debtors. D: Review standard bank confirmations for indications of kiting. 5: Your audit client has a new management incentive scheme in place which includes a bonus calculated on the basis of the increase in net profit over the previous year. The basis of the bonus will remain the same for the next three (3) years. Your client has had a poor year and will not meet its budget or last year's net profit. Which of the following represents an inherent risk? A: Insufficient provisions. *B: Next year's expenses taken up this year. C: Next year's sales incorrectly taken up this year. D: Overstatement of debtors. 6: How does the extent of substantive tests required to constitute sufficient appropriate audit evidence vary with the auditor's assessment of control risk? A: Randomly B: Disproportionately *C: Directly D: Inversely

7: Which of the following statements best expresses the auditors responsibility with respect to events occurring in the subsequent events period? A: The auditor has no responsibility for events occurring in the subsequent period unless these events affect transactions recorded on or before the balance date B: The auditors responsibility is to determine that transactions recorded on or before the balance date actually occurred C: The auditor is fully responsible for events occurring in the subsequent period and should extend all detailed procedures through to the date of the audit report *D: The auditor is responsible for determining that a proper cut-off has been made and for performing a general review of events occurring in the subsequent period 8: Which of the following auditing procedures is ordinarily performed last? A: Reading the minutes of the directors' meetings. B: Confirming accounts payable. *C: Obtaining a management representation letter. D: Testing the purchasing function. 9: Which of the following is not an assurance engagement? A: A review of historical financial information. B: An audit of the effectiveness of internal control. C: A performance audit. *D: A consulting engagement to help an organisation meet its tax obligations. 10: Which of the following is not a main goal of the internal auditing profession? A: Add value to an organisations operations B: Help an organisation accomplish its objectives *C: Provide reliable information to external users D: Improve the effectiveness of risk management of an organisation 11: Which of the following is not a principle of professional conduct as defined by the Code of Professional Conduct? A: Integrity. B: Competence and due care. *C: Reporting. D: Public interest.

12: Ethics requires: A: Knowledge of moral principles. B: Skill in applying moral principles. C: The development of virtues within individuals. *D: All of the above. 13: Common law: A: Requires that the auditor guarantee their work. *B: Requires that the auditor performs their work with due care.

C: Requires that the auditor discovers all fraud. D: Requires that the auditor check all transactions. 14: A financial report audit can best be described as: A: An activity whose purpose is to search for fraud *B: A discipline that attests to financial information presented by management C: A professional activity that measures and communicates financial and business data D: A regulatory function that prevents the issuing of improper financial information 15: An auditor who finds that the client has committed an illegal act would be most likely to withdraw from the engagement when the: *A: Illegal act affects the auditor's ability to rely on management representations. B: Illegal act has material financial report implications. C: Illegal act has received widespread publicity. D: Auditor cannot reasonably estimate the effect of the illegal act on the financial report. 16: A procedure that would most likely be used by an auditor in performing tests of controls that involve segregation of functions and that leave no audit trail is: *A: Observation. B: Inspection. C: Reconciliation. D: Re-performance. 17: An auditor concluded that no excessive costs for idle plant were charged to inventory. This conclusion most likely related to the auditor's objective to obtain evidence about the account balance assertion regarding inventory, of: *A: Valuation and allocation. B: Completeness. C: Existence. D: Rights and obligations. 18: The auditor is unable to reach a conclusion as to the reasonableness of management's representations. The auditor will have to consider issuing a(an): A: qualified opinion because of inadequate disclosure. B: qualified opinion because of uncertainty. *C: qualified opinion or an inability to provide an opinion. D: Adverse opinion.

QUESTION 2 (22 marks) 2a (10 marks)

You are conducting the 30/06/08 audit of Bondie Manufacturing which manufactures smallto medium-sized home appliances. This is the first year you are conducting the audit. You have had a preliminary meeting with the finance director, Ms Wilson. Below is an extract of your notes from the meeting: 1. Ms Wilson expects you to get up to speed quickly and has instructed her staff to cooperate fully with you. 2. Over the past several years, the market for domestic home appliances has been favourable and the industry as a whole has been growing steadily. 3. Bondie has always been a follower in the industry and seen as a bit old-fashioned and conservative. 4. Bondie recently switched to a new integrated central accounting system. During the switch, audit trails were not kept intact due to system failures. 5. Bondie has recently appointed a new financial controller. The old controller resigned to take a job in another city. REQUIRED For each item state the impact on inherent risk or control risk, and justify your answer. Item 1. Impact on inherent risk/control risk None Reason No impact on financial report

2.

Decrease

Steadily growing industry reduces the risk of the company facing going-concern problems

3.

Increase/decrease

4.

Increase

A follower in the industry means the company may face the challenges from competing with the leaders in the industry (survival issue); being conservative always reduces the risk of potential misstatement in the financial statements The new system increases the risk of making errors; untrained staff for the new system..lack of audit trail increases the risk of not being able to detect errors

5.

Increase

The new financial controller may need time to be familiar with the new environment and may not be able to detect errors if the errors occur Resignation might indicate accounting problems

2b (12 marks) You have been assigned to perform the tests of controls on the sales system at Ozzy Office Product Supplies (OOPS) as part of the 30 June 20X7 audit. During testing, you noted the following errors: 1. Invoice number 51839, issued on 25 September 20X6, contained incorrect prices. Three paper shredders were charged at $453 instead of $543. The error was discovered when the salesperson complained about not receiving a full commission for the month. 2. No prices were entered on invoice number 56329, issued on 24 January 20X7, resulting in a zero dollar invoice being issued. The error was discovered when accounts receivable staff queried the zero amount appearing on the accounts receivable ledger. 3. Invoice number 59328, issued on 18 March 20X7, matched the customers order. However, the order was only partly filled owing to a lack of stock in the warehouse, with the result that items were included in the invoice that were never delivered. The error was discovered when the customer rang to complain about being overcharged. 4. Invoice number 62875, issued on 29 June 20X7, was not processed through the usual channels. Although the invoice details were correct, certain procedures, such as a formal credit check, were not documented. The invoice was a special order for a complete new office development and amounted to ten times the value of OOPS average invoices. The sale was personally handled by one of the directors and the invoice prepared by her assistant.

REQURIED For each error, describe one application control that would have either prevented or detected the error, one example of follow up work you would perform in relation to the error and one implication for your substantive testing of accounts receivable.

[Answer in the space provided on the following pages]

Item Preventative or detective control 1.

A price master file should be used. When item descriptions or codes are entered, the computer should automatically insert the correct price on the invoice (P). Prices could be checked manually by a person independent of the invoice preparer (D).

Further work required

Check whether management has taken steps to prevent such an error from recurring. Discuss with accounts receivable staff the frequency of such errors to determine the possibility of material errors existing at year end. Check what steps have been taken to resolve this error.

Substantive testing implications

Check responses received from accounts receivable confirmations (if performed) to gauge the pervasiveness of this error. Check if there are any material effects on collectibility; i.e. if customers have been invoiced a lesser amount they may refuse to pay the difference when it is invoiced, resulting potentially in many small amounts having to be written off.

2.

A field check could be used to make sure all fields are complete (P). Computer should not allow an invoice to be processed for zero value (P). An edit list of zero value invoices could be produced and reviewed by a person independent of invoice preparation (D). Zero value invoices should require electronic approval from a person independent of invoice preparation (P).

Check whether management has taken steps to prevent such an error from recurring. Discuss with accounts receivable staff the frequency of such errors to determine whether material errors might exist at year end. Check what steps have been taken to resolve this error.

Check if there are any material effects on collectibility; i.e. if customers have received a zero value invoice they may refuse to pay the list price once the invoice is adjusted, leading potentially to many small amounts that require writing off. A random sample of debtor accounts could be selected and reviewed to ensure the other zero value invoices do not appear.

3.

If the system cannot deal with part orders, then the order should be held in the warehouse until all goods are available and delivered, prior to an invoice being raised for the items ordered (P). Stock and invoicing functions could be linked so that invoices cannot be raised for items that are not in stock (i.e. if quantity on hand quantity ordered is a negative number, only the number of items on hand should be included in the invoice) (P).

Check whether management has taken steps to prevent such an error from recurring. Discuss with accounts receivable staff the frequency of such errors to determine the possibility of material errors existing at year end. (Significant errors of this type will lead to an overstatement of sales.) Determine whether part of the problem is caused by the link between the invoicing and stock systems; i.e. is it possible to have a negative stock quantity? Check what steps have been taken to resolve this error.

Check responses received from accounts receivable confirmations (if performed) to gauge the pervasiveness of this error. To determine extent of errors in debtors, review year-end inventory listing and see if there are any negative quantities recorded; if this is the case, it would prima facie indicate that items not in stock were being invoiced.

4.

One of the directors has decided to override the controls normally in place around the issuing of invoices. IT controls could be implemented to prevent/detect such an override. However, from a practical point of view, this is unlikely to occur because: the cost of implementing controls would normally outweigh the benefits; too many controls prevent the efficient handling of special transactions such as this one; ultimately, senor executives run the business and have the final say, so the potential for override could never be totally eliminated.

Check how often this type of override occurs. Check whether the other directors are aware that such transactions occur. For all other override situations, determine whether there is a need for further substantive testing (e.g. include in accounts receivable confirmations). Given date and size, check to supporting documentation.

Check response received from year-end accounts receivable confirmations (if performed) and determine whether the debtor has confirmed the debt (due to the size of the invoice, this debtors account would most likely have been included in the sample). If no confirmation is performed, verify this invoice by other means (e.g. subsequent payments; delivery dockets).

Question 3 (24 marks) 3a (9 marks) In auditing payroll expense, the audit assistant has: select a sample of individual pays from the monthly payroll listings of May and June; vouched the pay rates used to related industrial awards; checked the calculations of each pay; traced any annual, sick and other leave to authorised forms; and agreed the balance of the payroll listings for May and June to the general ledger. Required: (i) Indicate which audit assertion each procedure is primarily directed towards (5 marks). Procedures
select a sample of individual pays from the monthly payroll listings of May and June; vouched the pay rates used to related industrial awards; checked the calculations of each pay; traced any annual, sick and other leave to authorised forms; agreed the balance of the payroll listings for May and June to the general ledger. Occurrence Accuracy No assertion Accuracy

Assertion

Accuracy

(ii) Indicate two assertions you believe the audit assistant should perform further testing on (2 marks) (iii) For each of the assertions identified in (ii), name one (1) additional procedure that could be used to gather sufficient appropriate audit evidence (2 marks). (ii) Assertions
Occurrence or completeness or valuation and allocation

(iii) Additional procedures

Prepare a schedule of monthly payrolls and obtain explanations for any unusual fluctuations. Compare number of employees on the payroll from month to month and obtain explanations for significant fluctuations.

Accuracy

Work performed on individual pays needs to be extended to the other 10 months of the year.

3b (15 marks) Your firm is the external auditor of Assumption Ltd, and the following timelines apply: Balance date: 30 June 2008 Directors declaration and audit report signed: 25 August 2008 Financial report and audit report mailed to shareholders: 2 September 2008 Consider each of the following independent and material situations which have come to your attention: a) On 15 July 2008 the auditor discovered that a debtor of Assumption Ltd went bankrupt on 5 July 2008. The most recent sale had taken place on 15 November 2007 and no cash receipts had been received since that date. Assumption Ltd owns a mineral exploration license in West Australia. As 30 June this license was valued by an independent expert at $35 million, which is reflected in the financial report. On 22 August, Assumption Ltd receives a notice that a claim is being lodged under the Native Titles Act for land that includes that subject to the exploration license. If the claim is successful, the exploration license will be worthless. The same facts apply as in (b), but Assumption Ltd receives the notice on 28 August 2008. On 20 August 2008, Assumption Ltd received a notice that one of its customers was taking legal action in relation to a disputed warranty claim. The customer purchased the goods in May 2008, and first informed Assumption Ltd of problems with the goods on 20 June 2008. On 10 July 2008, Assumption Ltd announced that it would be offering a rights issue to its shareholders. The offer will open on 15 September 2008 and close on 15 December 2008.

b)

c) d)

e)

Required: For each of the above events or transactions, indicate the action required in the financial report (5marks), and provide one (1) additional procedure you would perform in relation to each of the events to ensure that the above information was correct (10marks).
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Case a
Adjust

Action required (1 mark each)

Additional procedure (2 marks each)

Confirm the date of bankruptcy was in fact before the date of the audit report. If the bankruptcy occurred after the date of the audit report, no action would be required.

b
Disclose Confirm with management, examine the notice received, the date on which the notice received

No action

Confirm with management, examine the notice received, the date on which the notice received

Adjust

Check correspondence to/from customers solicitors regarding the legal action. Check likelihood of customer winning the case and obtain estimates of likely costs (if available). Check whether the client has an insurance policy covering such events and determine whether a contingent asset exists.

e
Disclose

Check there is nothing to indicate the rights issue is related to the 30 June 20X3 year end.

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This question paper must be returned. Candidates are not permitted to remove any part of it from the examination room.

STUDENTS SURNAME........................................... OTHER NAMES......................................................... STUDENT NUMBER.................................................

MOCK FINAL EXAMINATION SEMESTER 2, 2010 PAPER B

Unit: Time Allowed: Total Number of Questions: ACCG340 Auditing and Assurance Services 2 hours plus 10 minutes reading time FIVE (5)

Instructions: Answer question 1 on the computer marking sheet provided. Answer questions 2 to 3 in the space provided in this paper (Paper A). Answer questions 4 to 5 in the space provided in Paper B. Answer all questions. All booklets must be returned. Materials permitted: Dictionaries are not permitted. Calculators are not permitted. QUESTION NUMBER 1 Paper A 2 3 4 Paper B TOTAL 5 MARKS AVAILABLE 18 22 24 16 20 100 STUDENTS SCORE

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Question 4 (16 Marks) 4a (6 Marks) You are a member of CPA Australia and are in partnership in an accounting practice in Ryde. Your brother has established a new business that builds and sells small planes. Your brother has asked you to be a director of his company to ensure his accountants produce reliable information. He has offered you the audit of his companys accounts and will give you shares in his business in return for your audit and other services. Required: Identify three key ethical considerations you face and explain what concerns, if any, you may have about accepting the above offer. (6 Marks)

Any of the following is worth 2 marks each

1. Cannot be a director of the firm and undertake the audit- this would create a conflict of interest. 2. Cannot audit the immediate family members business familiarity threat 3. Cannot accept shares as payment for the audit fee may increase profit to increase share price and fee.- self interest threat 4. Audit and other services may cause a problem if NAS impairs independence self review threat 5.Need to promote the businesss point of view may compromise auditors objectivity- Advocacy threat

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4b (8 Marks) You have explained your situation to your brother and it was agreed that your only involvement will be to have one of your partners provide assurance services and sign the Audit Report. A year later your brother tells you that he is about to sell his business for an amount equal to the net assets as shown in the latest audited accounts. Accounts receivable are the major asset and include a significant amount for the sale of two aircraft to your mother and father. Unfortunately your mother and father destroyed their planes when they collided while trying to take off at the same time. Your parents have had to sell their home to pay for the damages done to the airport. They have no other funds to pay for the planes. The Audit Partner (in your firm) didnt confirm the debt owing by your parents. After relying on the audited financial report, the people who bought your brothers business are now suing your firm to recover their losses. Required:
Briefly explain whether your firm should be liable with reference to relevant cases. (8 Marks) Any 8 of the 10 . Too be Liable the plaintiff will need to prove all four conditions for negligence: 1. There was a duty of care owed. (1 mark) In this instance the people who invested in the business would be suing as third parties and as such have no contract under which they can claim for losses. (1 mark) To be liable to third parties need to establish reasonable forseeability and proximity(1 mark) Caparo/AGC/Columbia/Esanda (any two =1 mark) Unlikely to succeed without a Privity letter (1 mark) 2.The duty of care was breached (1mark) The auditor failed to confirm the accounts receivable as required by audit standards therefore there is a breach of the duty of care (1mark) 3. A loss was incurred (1 mark) 4. A causal relationship existed between the breach of duty and the loss suffered (1 mark) Hard to prove since the investor would have relied on information other than the financial statements. (1 mark) Conclusion: not likely to be liable (1 mark)

4c (2 Marks)
Jeff Smith is an audit partner with J Smith & Co and has been found to be negligent in his duties as auditor by failing to keep adequate documentation as evidenced by his poor working papers. Provide two (2) sanctions that may be imposed by the professional accounting bodies? (2 marks)
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Sanctions (1 mark each)

(i) One mark each for any of the following: Exclusion from membership OR Suspension of membership OR Disbarment from practice OR Fine OR Being reprimanded OR Having to pay all of the costs of investigation

(ii) See above

QUESTION 5 (20 marks) 5a (12 marks)

The following are independent situations relating to the year ended 30 June 2008. Assume all entities are reporting entities and that all situations are material. For each situation, (i) describe one additional procedure you would perform prior to issuing your audit report (3 marks); (ii) Assuming the matters remain unsolved, recommend and justify an audit opinion for each of the entity for the year ended 30 June 2008 (9 marks). a) The depreciation rates used by Langer Ltd have not changed for the past three years. Given recent technologies in the industry in which Langer operates, you are convinced the useful lives of Langers assets need to be adjusted downwards. The directors refuse to make this change despite that you have explained this places them in breach of impairment tests contained in approved accounting standards.

One additional audit procedure

Obtain financial reports of other entities in Langers industry to determine whether in fact some entities depreciate similar assets over similar time frames to Langer. Examine carefully any evidence that the directors can supply you with to support their view. Check whether, despite the technological changes, Langer could in fact obtain the estimated use from the assets, even though they have been superseded.

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Audit opinion
Qualified or adverse if the effect is extreme

Justification
There is a disagreement with management regarding the application of an accounting standard.

b)

You have received the draft annual report from Hayden Club Limited. On reading the Year in Review you note the club chairman states that revenues increased by 160%. On checking the accuracy of this information you note that revenues have actually fallen by 20%. The club refuses to change anything in the annual report for fear of missing printing deadlines.

One additional audit procedure

Discuss the difference in the percentage with directors. Emphasise that the change required is minor and should not unduly delay printing of the annual report. Also point out that if the figure is not changed, the audit report will have to be modified, resulting in the very problem the club is trying to avoid.

Audit opinion
An unqualified report with an emphasis of matter

Justification
There is no error in the financial report; however, there is an error in the other information included with the financial report.

c)

The audit of Waugh Limited was extremely difficult this year as the client did not keep appropriate books and records. The accounting department was chronically understaffed, so transactions were not promptly entered and reconciliations not performed. A temporary accountant was employed to help sort out the mess but was unable even to reconcile the bank account at year-end. You are not satisfied that all transactions that occurred during the year are reflected in the financial report.

One additional audit procedure

Continue to apply alternative audit procedures to year-end balances in an attempt to verify them, e.g. subsequent payments for accounts receivable. Consider whether there is any way in which unknown balances could be reasonably estimated. 15

 Review final audit evidence obtained and determine whether enough evidence has been obtained on perhaps some of the material balances. Discuss with client whether audit deadline can be extended, thereby providing more time to get their financial records in order.

Audit opinion
A disclaimer of opinion

Justification
There is a limitation on the scope of the audit, as there is insufficient evidence on which to base the audit opinion. No year-end balances can be verified (not even the bank account could be reconciled), so it is reasonable to assume that the possible effects of the adjustments are so pervasive that the financial report as a whole is potentially misleading.

5b (8 marks) You have been requested by the directors of Hotscores Ltd to review the forecast information for the next three years based on progressively larger increases in sales. The forecasted information will be released together with your opinion.

Required (i) Discuss the level of assurance that you can provide on this type of engagement (4 marks)

Prospective information, by definition, is based on events or conditions that have not and may not occur (1 mark). As a result it is only possible to achieve a moderate (limited) level (2 marks) of assurance in relation to these assumptions (refer to AUS 804 and AGS 1062). This will be expressed as a statement of negative assurance (i.e. that nothing has come to your attention that suggests the prospective information is not reasonable). (Although this is not outlined in the text, ASIC Policy Statement 170 also suggests negative assurance in relation to best-estimate assumptions and no assurance in relation to hypothetical assumptions.) (1 mark)

(ii)

Provide two audit procedures you would consider to perform in relation to your review of the forecast information (4 marks).
Any two of the following, whether (AUS 804.02): Best-estimate assumptions made by management in arriving at the forecasts are reasonable (e.g. level of demand and selling prices), Financial information has been properly prepared on the basis of those assumptions, Prospective information has been properly presented and all material assumptions are adequately disclosed (e.g. assumptions about yearly increased in sales volumes), and The forecast has been prepared on a basis consistent with historical data, using appropriate accounting principles.

END OF EXAMINATION
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