ACCA - AA Audit and Assurance - CBEs - 18-19 - AA - CBE Mock - 1.BPP PDF

11/16/2018 ACCA - AA Audit and Assurance - CBEs - 18-19: AA - CBE Mock - 1
ACCA F8 CBE Mock (1117)

Section A
http://study.bpp.com/mod/scorm/player.php?a=887&currentorg=ACCA%20F8%20CBE%20Mock%20-%20December%2017-5175509336392141… 1/41
Question 1 of 27
The following scenario relates to questions 1-5.
You are an audit senior attending the external audit of Bionic Spirit Co a large
manufacturing company. As part of your responsibilities you are reviewing the company’s
corporate governance and approach to internal controls.
The Board of Bionic Spirit Co is comprised of the following individuals:
Stephen Johnson - Chief Executive

Lucy Fields - Finance Director
Kim Li - Operations Director
Arun Sharma - Sales and Marketing Director
Jennifer Davies - Human Resources Director
Zuzanna Dulnick - Non-Executive Director (NED)
Jason Brown - Non-Executive Director (NED)
The remuneration packages of the Executive Directors are competitive and linked to the
perdivance of the company. The NEDs are paid well for their time at rates that reflect the
expertise that they bring to the company. They receive a fee based on the number of hours
that they spend working for Bionic Spirit Co.
There is an audit committee in place at Bionic Spirit Co which is comprised of the two NEDs
as well as Lucy Fields who, as the only Board member with a background and experience
in finance, chairs the committee. There are also plans to establish a small in-house internal
audit team. Following the recent discovery of a large-scale fraud in accounts payable
department, the first assignment of the newly dived team will be a review of this
department.
Which of the following statements is true in relation to the remuneration of the NEDs
at Bionic Spirit Co?
NEDs should be paid only a nominal fee in accordance with the hours of time spent
working for the company. The high rates paid by Bionic Spirit Co compromise the
independence of the NEDs.
The NEDs at Bionic Spirit Co are appropriately remunerated in accordance with current
corporate governance guidelines.
The remuneration of the NEDs at Bionic Spirit Co is linked neither to the perdivance of
the company, nor of the NEDs themselves and therefore comprises the motivation of the
NEDs.
Remuneration of NEDs should be on a flat rate basis to prevent the NEDs committing so
many hours to the company that their independence is compromised.
0 out of 2
The correct answer is:
The NEDs at Bionic Spirit Co are appropriately remunerated in accordance with

current corporate governance guidelines.
The NEDs at Bionic Spirit Co are appropriately remunerated in accordance with current
corporate governance guidelines.
The rates of NEDs should be set at a rate which is high enough to attract NEDs of sufficient
experience and calibre to be able to carry out the role effectively, not a nominal rate. They
should also be paid in line with the number of hours they have worked for the company, not
at a flat rate which could discourage the NEDs from dedicating much time to the company.
The remuneration of NEDs should not be linked to the perdivance of the company in order
to preserve the independence of the NEDs.
Question 2 of 27

department.
Place the words in the appropriate position to complete the following sentence
regarding the audit committee.
0 out of 2
The correct answers are:
Feedback:
The audit committee at Bionic Spirit Co is currently chaired by Lucy Fields. This
compromises the fundamental principle of objectivity and presents a self-review threat in
relation to the internal controls in the Finance Department.
Question 3 of 27

department.
Which TWO of the following recommendations would you make in relation to

improving the corporate governance at Bionic Spirit Co?
Remove the perdivance based element of the remuneration packages of executive
directors in order to reduce the threat of self-interest.
Appoint additional NEDs to improve the balance of executive and non-executive
directors.
Appoint an NED with a background in finance.
Appoint Stephen Johnson to replace Lucy Fields as chair of the audit committee.
0 out of 2
Appoint additional NEDs to improve the balance of executive and non-executive

directors.
Appoint an NED with a background in finance.
Only two of the seven executive directors are NEDs which is unlikely to be sufficient. The
FRC UK Corporate Governance Code (and many other such codes) recommends that at
least half the board should comprise non-executive directors. More NEDs should therefore
be recruited.
Furthermore, it appears that none of the existing NEDs have a financial background. This
suggests that they do not have the appropriate mix of skills, commitment, experience and
independence to carry out their roles effectively and an NED with such experience should
be appointed.
It would not be appropriate to alter the remuneration of the executive directors as an

element of this should be perdivance linked in order to ensure they are sufficiently
motivated to work in the best interests of the company.
Stephen Johnson should not be appointed as chair of the audit committee. He is the current
Chief Executive and therefore would not be sufficiently independent.
Question 4 of 27

department.
Which of the following would be the primary reason for which Bionic Spirit Co has
decided to establish an internal audit function?
To transfer the responsibility for the protection and detection of fraud from the
management to the internal audit team.
To save the costs of external consultant fees by using the new internal audit function to
carry out much of this work.
To respond to management’s need to assess and improve the internal controls of Bionic
Spirit Co.
To remove the need for a dival external audit of the organisation.
2 out of 2
To respond to management’s need to assess and improve the internal controls of

Bionic Spirit Co.
The primary reason for establishing an internal audit function at Bionic Spirit Co is likely to
relate to the need of management to assess and improve the internal controls of the
company. This is a key reason for any organisation, but the large-scale fraud recently
experienced is likely to have further highlighted this need to management.
While it is true that consultancy fees are likely to be reduced as a result of establishing the
team, it is unlikely that this would be the primary reason for this decision.
It is not true that the existence of an internal audit team would remove the need for the
statutory audit, nor would it transfer the responsibility for the prevention and detection of
fraud from management. The internal audit team will have responsibilities around fraud and
the implementation of controls to prevent and detect it. However, this will only be in the div
of recommendations to management with whom the overall responsibilities in relation to
fraud will still rest.
Question 5 of 27

department.
What type of internal audit does the first planned assignment represent?
Fraud investigation
Compliance audit
Financial audit
Operational audit
0 out of 2
Financial audit
A review of the accounts payable department is a financial audit as its purpose will be to
evaluate the operating effectiveness of key business processes in this department which
relate to the financial statements. It is not a fraud investigation. The fraud has already been
discovered and its extent is now known.
Question 6 of 27
Purple Island Co are a logistics company with three divisions, North, West and Central all of
which are considered to be material. The company has suffered a heavy loss as a result of
a recession in the country in which it operates. The financial statements for the year ended
31 July 20X8 have not yet been finalised.
On 15 August 20X8, Purple Island Co made the decision to close down the North division,
and this decision was announced on 16 August 20X8.
The financial statements of Purple Island Co have been prepared on the going concern
basis, however there are material uncertainties over the going concern of the company if
the economy does not begin to recover as forecast over the next financial year. The
company has disclosed these material uncertainties in the notes to their financial
statements.
Which of the following best describes how you would expect to see the decision to
close the North division reflected in the financial statements of Purple Island Co?
The financial statements would need to be adjusted to reflect this decision; no further
disclosures would be required.
The financial statements would need to be adjusted to reflect this decision along with an
explanatory note to the financial statements.
The financial statements would not need to be adjusted and no disclosures made.
The financial statements would not need to be adjusted, however disclosure of the
decision would need to be made in the notes to the financial statements.
2 out of 2
The financial statements would not need to be adjusted, however disclosure of the
decision would need to be made in the notes to the financial statements.
The decision to close the North division was made after the year end and as such this is a
non-adjusting event as per IAS 10, and no adjustments would need to be made the figures
in the financial statements. However, given that the division is considered to be material to
the company as a whole a disclosure would need to be made in the notes to the accounts
which details the decision to close this division.
Question 7 of 27
statements.
Which of the following audit procedures provides the most relevant evidence as to
whether the decision to close the North division will cause the financial statements
of Purple Island Co to be materially misstated?
Review minutes of board meetings held during the year and directly following the date of
the financial statements.
Request oral representations from management confirming the intention to close the
North division.
Review the basis on which the North division has been valued to ensure this has been
accurately reflected.
Review the provisions in the financial statements for the redundancies that are likely to
occur as a result of the closure.
2 out of 2
Review minutes of board meetings held during the year and directly following the date
of the financial statements.
You would need to review the minutes of board meetings both leading up to, and following
the date of the financial statements in order to verify when the decision to close the North
division was actually made. This written evidence would be more reliable than verbal
confirmation from the management. At present, you believe this decision to have been
made after the year end, however if it is found the decision was made earlier it is possible
that the financial statements will be materially misstated.
The crucial issue for the auditor in this situation is to determine when the decision was
made and therefore when the obligation arises. Other considerations, such as how the
division was valued and the provisions that have been made would be secondary concerns.
These would only be relevant once the auditor has confirmed when the decision to close
the division was made.
Question 8 of 27
statements.
In relation to going concern, which of the following should the auditor communicate
to Purple Island Co?
i. Whether the events or conditions constitute a material uncertainty.

ii. The adequacy of related disclosures.
iii. Remedial action that could be taken by Purple Island Co to improve its ability to
continue as a going concern.
(i) and (ii)

(i), (ii) and (iii)
(ii) only
(iii) only
0 out of 2
(i) Whether the events or conditions constitute a material uncertainty.

(ii) The adequacy of related disclosures.
The auditor should communicate to Purple Island Co:
Whether the events or conditions constitute a material uncertainty.

Whether the use of the going concern assumption is appropriate in the preparation
and presentation of the financial statements.
The adequacy of the related disclosures.
Question 9 of 27
statements.
In order to confirm that the use of going concern and relevant disclosures in the Purple
Island Co’s financial statements are appropriate, you are evaluating managements’ plans
for future action.
Which of the following audit procedures will NOT assist you in achieving this
objective?
Analyse and discuss cash flow, profit and other relevant forecasts with management.
Determine the adequacy of support for the planned disposals of the North division.
Review events leading up to the period end for items affecting the entity's ability to
Analyse and discuss the entity's latest available interim financial statements (or
management accounts).
2 out of 2
Review events leading up to the period end for items affecting the entity's ability to
The events leading up to the period end will div part of the accounts under review and
would therefore be unlikely to be helpful in evaluating the plans management have for
future action. The auditor would be more interested in events following the period end in
meeting this objective.
Question 10 of 27
statements.
As part of your final review, you have carried out a review of the entire annual report of
Purple Island Co. You discover that there is a material inconsistency between the strategy
overview and summary sections and the financial statements themselves.
How would this discovery impact on the auditor’s report?

As the overview and summary do not div part of the financial statements, it has no
bearing on the auditor’s report.
The auditor’s report would be qualified on the basis of a material inconsistency.
The inconsistency would be highlighted in the other indivation section in the report.
The inconsistency would be highlighted in an emphasis of matter paragraph.
2 out of 2
The inconsistency would be highlighted in the other indivation section in the report.
Inconsistencies found within the other indivation that makes up the annual report will be
highlighted in the section of the auditor’s report covering ‘Other Indivation’ which, given the
misstatement, will be placed directly after the basis of opinion section.
Question 11 of 27
You are an audit senior engaged on the external audit of Watermelon, a large registered
charity, which aims to provide support to children suffering from long-term illnesses and
their families.
The majority of the income received is via public donations and legacies and in the div of
sponsorship and donations in respect of events ranging from cake sales to high profile
sporting events and challenges. Collection tins are also regularly placed in locations which
experience heavy footfall, such as at the checkouts in supermarkets as well as held by
volunteers in high streets and at public events.
In addition, the charity has a chain of high-street shops throughout the country in which it
operates. The shops sell both second-hand goods that have been donated to the charity
directly in the shops, as well as their own range of products including gifts, accessories and
clothing. They also have an online presence from which new goods can also be purchased.
There have been problems reported recently relating to the incorrect recording of sales and
goods returned in the accounting system. A further issue was found recently in relation to
payments being made to a supplier of which no one had any knowledge of dealing with.
Which TWO of the following are most likely to be required in terms of the external
audit of Watermelon?
The statutory audit opinion concerning the truth and fairness of the financial statements.
An opinion on whether the charity is operating in accordance with its charitable
purposes.
Assurance that government funding is being appropriately used.
A value for money audit concerning the effectiveness, efficiency and economy of the
charity.
2 out of 2
The statutory audit opinion concerning the truth and fairness of the financial
statements.
An opinion on whether the charity is operating in accordance with its charitable
purposes.
It is most likely that the charity will require the statutory audit opinion concerning the truth
and fairness of the financial statements and an opinion on whether the charity is operating
in accordance with its charitable purposes.
An audit relating to use of government funding is unlikely given the nature of the charity.
There is nothing to suggest that Watermelon receives any funding from the government and
this type of work would be undertaken as a separate assurance engagement.
A value for money audit, while likely to be highly relevant and useful for watermelon, would
not be carried out as part of the external audit. This type of review would be carried out by
the internal auditors.
Question 12 of 27
their families.
As a registered charity, Watermelon will differ significantly from a commercial organisation.
Which of the following statements is NOT true?

The risks surrounding cash are likely to be higher for Watermelon than they would be in
many other types of organisation.
Unlike commercial organisations, the key objective of Watermelon will not be to make a
profit and there will be no shareholders, therefore external audits will be undertaken on a
voluntary basis.
The purpose for which an external audit is undertaken at Watermelon is likely to differ
from that for which an external audit of a commercial company is undertaken.
Effective controls may be harder to implement at Watermelon as the company is likely to
employ a large number of volunteers in addition to paid employees.
2 out of 2
Unlike commercial organisations, the key objective of Watermelon will not be to make
a profit and there will be no shareholders, therefore external audits will be undertaken
on a voluntary basis.
It is true that Watermelon will have different objectives to a commercial organisation and will
not be owned by shareholders, but it is not necessarily true that the external audit will be
only voluntarily undertaken. Many charities are required to prepare financial statements
which are independently audited and the scenario suggests that Watermelon is a large
charity which could well be bound by this requirement.
Question 13 of 27
their families.
In order to attempt to address the risk related to the incorrect recording of transactions, the
organisation has established the following controls.
Which TWO of these would be helpful in managing this risk?

Sales and credit notes to be authorised by appropriate individuals.
Maintenance of a sales ledger control account by an individual other than the sales
ledger clerk.
Sales ledger control account and the sales ledger account balances to be reconciled on
a regular basis.
Sales invoices to be re-cast before goods are despatched.
0 out of 2
Maintenance of a sales ledger control account by an individual other than the sales
ledger clerk.
Sales ledger control account and the sales ledger account balances to be reconciled
on a regular basis.
The maintenance of the control account by a separate member of staff and the regular
reconciliations would both be effective in helping to manage this risk. The authorisation of
the sales and credit notes would simply authorise the transactions, it would have no impact
on the accuracy with which it is recorded. Re-casting the sales invoice is not relevant to the
issues which have been raised over the recording of indivation in the accounting system.
Question 14 of 27
their families.
Which of the following procedures carried out by the external auditor would BEST
confirm the EXISTENCE of liabilities in the accounting system?
Obtain a listing of trade payables and agree the total to the general ledger by casting
and cross-casting.
Vouch selected amounts from the trade payables listing and accruals listing to
supporting documentation, such as purchase orders and suppliers' invoices.
Obtain selected suppliers' statements and reconcile these to the relevant suppliers'
accounts.
Compare the amounts owed to a sample of individual suppliers in the trade payables
listing with amounts owed to these suppliers in the previous year.
1 out of 1
Vouch selected amounts from the trade payables listing and accruals listing to
supporting documentation, such as purchase orders and supplier invoices.
Existence is best confirmed by checking the records back to the original supporting
documentation for the suppliers
Question 15 of 27
their families.
Which of the following controls would be the most effective in ensuring the
ACCURACY of cash donations received by Watermelon?
Numerical sequencing of collection tins.
Tamperproof sealing of collection tins so that any opening prior to recording cash is
evident.
Regular collection and recording of proceeds from collecting boxes.
Dual control over the counting and recording of cash.
2 out of 2
Dual control over the counting and recording of cash.
Dual controls over the counting and recording of cash would be the most effective control
over the accuracy of the cash recorded. The other controls are more effective in ensuring
the completeness of cash received.
Section B
Question 16 of 27
Banjo Foods Co is a company which compile food ingredients in order to produce meal kits
which allow individuals to cook meals from scratch. Banjo Foods Co creates recipes and
purchases the ingredients to be used in the recipe from wholesale suppliers. They then
package the various ingredients together along with instructions for making the meal into a
single box. The main customers of Banjo Foods Co are small retail chains and health food
stores who sell the kits on to the final consumers. Banjo Foods Co does not produce any of
the ingredients in-house and all components for its products are bought in.
The perishable nature of the inventory held by Banjo Foods Co means that they employ a
perpetual approach to inventory counts and carry this out on a monthly continuous basis.
The inventory system is updated as and when errors are identified as part of these counts.
When Banjo Foods Co was established, eight years ago, the concept they offered was new
and original. However, in recent years a number of competitors have set up in this market,
some of which supply retailers following a similar business model to Banjo Foods Co.
However, many new companies sell direct to customers often via subscriptions. This trend
has impacted on the demand for store purchased meal kits and revenue of Banjo Foods Co
appears to be suffering as a result.
Banjo Foods Co has had a difficult and disappointing year as a result of this influx of
competitors, however management are confident that the company is experiencing a short
term drop only and assure you that the current position is not representative. The company
believes that they have suffered primarily due to the rise in the online subscription based
companies, however they are confident that customers will return to the shop purchased
kits offered by Banjo Food Co when they tire of paying the high mark-up for the same meal
kits week after week. They claim to have discussed the issue at length with their regular
customers who agree that the current trend will be short-lived and are planning to place
higher orders in the coming financial year. Banjo Foods Co are therefore certain that
revenue will significantly increase. The sales team have presented an order book which
indicates that a lot of people are interested in Banjo Food Co’s products, but there are no
confirmed orders in this book.
Receivables are presently very high and receivables days has increased significantly over
the year. Your work so far has indicated that a number of the receivables balances are very
old, however the management assure you that many of these are long standing customers
of Banjo Foods Co who frequently pay late and they are sure that they will pay.
The payables days has increased from 48 days to 81 days and several of the main
suppliers have threatened to place the Banjo Foods Co account on hold until payment is
made.
The level of debt held by Banjo Foods Co has increased steadily over the year and the
bank overdraft is currently approaching its limit. However, management have assured you
that they have spoken to the bank on the telephone who have said that they are minded to
increase the loan facility of the company. This will allow the accounts with the suppliers to
be settled.
The finance department is current experiencing a staff shortage however Banjo Foods Co is
hoping to recruit additional staff later in the new year when the outstanding balances from
customers have been received.
Required
(a) Explain what you understand by the term ‘professional scepticism’ and how this relates
to the work of the auditor in carrying out the external audit of Banjo Foods Co. (4 marks)
Profesional scepticism: the auditors should not relly on what the managers and the
directors are saing thay should maintain theire scepticism at all time and obtain proof and
sufficient appropriate audit evidence that the Financial Statements are free from material
mistatement due to fraud or error and that they express a true and fair view.
In our scenario for example, we cant rely on the fact that the managers are saying that
they are confident that the old receivables are going to be recovered. If they cant prove
that this has been recovered after the year end we should provide for it as an
irrecoverable debt. Or in relation with the bank overdraft, the auditors have to remain
scepticalabout the fact that the bank confirmed by phone that they are going to increase
the draft, we neen more evidence than just that, we need sufficint appropriate evidence.
0 out of 4
This question has not yet been scored.
Professional scepticism is 'an attitude that includes a questioning mind, being alert to
conditions which may indicate possible misstatement due to error or fraud, and a critical
assessment of audit evidence'.
Professional scepticism will need to be maintained throughout the audit of Banjo Foods Co
particularly in light of the question over the going concern of the company. The claims of
management do not appear to be consistent with the financial statements and the audit
evidence with which you have been presented so far. It is will be important for the auditor
not to be drawn by the claims of management and obtain sufficient appropriate audit
evidence to back up these claims.
Professional scepticism is will also need to be applied to the critical assessment of audit
evidence. This includes questioning contradictory audit evidence and the reliability of
documents and responses from management and those charged with governance.  
Question 17 of 27
made.
be settled.
(b) Describe SEVEN audit risks, and explain the auditor's response to each risk, in planning
the audit of Banjo Co.
Note: Prepare your answer using two columns headed Audit risk and Auditor's response
respectively. (14 marks)
AUDIT RISK AUDITOR'S RESPONSE
Overstatement of Auditors have to investigate this further. Check the
receivables bord minutes to make sure that there are no
reasons for the delayed payments, also review
- The receivables are very corrspondence with customers to make sure that
high they received statements and that they are aware
about the O/S amounts.
As some of the receivables balances are very old, it

could be the case that some of them are
irrecoverable and they have to be written off.
Risk of understatement
of the Provisions in the Inspect the bank statements after the Y/E to see if
Financial Statements
any payments have beem made and if nor, request
the managers to provide for the irrecoverable
debts.
As payables days have Inspect the statements from th suppliers to confirm
gone up, almost dobled, the closing balances at the Y/E.
there is a going concern
risk, it could be the case Inspect correspondene with suppliers.
that the company might not
settle the debts as they fall Check bank payments after the Y/E to see if the
due. sittuation has improved.
Inspect any corecpondence from the bank,
There is a risk of confirming the balane and also confirming that the
overtrading, as the overdraft is going to be increased.
overdraft has almost reach
its limit and the company Check cashflows and budgets.
might be at risk of not being
able to pay its suppliers Inspect bord minutes for any aditional indivation
and this could end up in that might bring new indivation in the streem.
supplies being stopped.
There is a shortage of staff

in th finacial
Increse sustantive procedures to make sure that
department: inherent risk,
they get enough evidence that there is no material
due to the fact that there
mistatement due any other inherent risk.
are not qualified peope that
could overtake the tasks
The management might try to manipulate the
There is a risk of the
figures to show a higher figure under REVENUE as
revenue being
they need the bank to increse the overdraft going
overstated
forward.
0 out of 14
Audit Risk Auditors Response

Management have experienced a ‘difficult The auditor will need to maintain
and disappointing year’ yet claim to be professional scepticism throughout
confident that the business will be turned the audit and remain alert to the
around and so are under pressure to potential for misstatement.
improve. There is therefore a greater risk The auditor will need to carefully
that management will take a more evaluate any assumptions made by
optimistic approach towards accounting management when auditing any
estimates and in order to manipulate the accounting estimates.
financial statements. Ratio and variance analysis should
also be carried out on the current
balances with prior years.
The high level of overdraft with the bank Obtain letter from the bank confirming
along with the increase in both that the bank loan will be increased.
receivables Determine if this will be sufficient to
and payables days indicates potential deal with the current cash flow problem
liquidity problems which cast doubts and allow the suppliers to be paid.
over the going concern of Banjo Foods Discuss with management the proposals
Co. for the increase of income in order to
ensure the cost of this finance can be
covered and the ongoing costs of the
company met.
The debt of the company has been rising Loan documentation should be obtained
over the year which will have created in order to confirm interest rates. The
additional finance costs for Banjo Foods finance costs should be recalculated and
Co. There is a risk that these costs have confirmed to the cash book and bank
been omitted in the financial statements statements.
causing profits to be overstated.
The increase in the number of competitors Discuss with management their reasons for
producing similar meal kits to Banjo believing the fall in demand is only temporary
Foods and obtain any evidence they have to back
Co along with the apparent shift in the up their claims that Banjo Foods Co will
industry towards subscription based sales recover from the recent fall in sales.
direct to the final consumers is troubling. Review the order book for current year to
The apparent falling demand is backed up determine what orders have been placed
by the reduction in the number of orders so far and analyse how this compares to
coming in and the fall in revenue again forecast figures and Banjo Foods Co’s
indicating possible concerns over the claim that next year will see a rise in sales.
going concern of Banjo Foods Co. Review management accounts for the
current year and compare to budget to
determine if the situation has improved
The high level of receivables and the age Review historical accounts for clients with
of those debts indicate a possible aged large outstanding balances to determine if
receivables problem indicating that some management’s claim that they always pay
of this debt should perhaps have been late can be backed up.
written off causing profit to be overstated. Carry out a review of the aged receivables
ledger to assess the need for any write-offs
or allowance.
Discuss with management the procedures
for irrecoverable debt write offs and
determine if this has been effectively employed.
Determine if a suitable allowance has been
made for doubtful debts.
Much of the inventory comprises of Discuss inventory write off procedures with
perishable food based products. management
Therefore, there is the risk of obsolete Determine if the inventory has been recorded
inventory with food which is close to, in the accounts at the right level
or has passed, its best before date. Attend the inventory count to observe how
Inclusion of obsolete inventory in the stock is checked and recorded for
accounts could mean that inventory obsolescence. Sample check a number of
and profit figures are overstated in the items to confirm accuracy and completeness
financial statements. of inventory.
Inventory counts are carried out on a The inventory process should be discussed
perpetual basis and it does not appear with management to determine whether or
that the inventory is counted in full at not all inventory is counted at least once a year.
any time. If this is not carried out at least The instructions for the inventory count
annually the risk of material should be obtained and reviewed.
misstatements The internal controls surrounding the inventory
in relation to the completeness, existence count and recording processes should be
and valuation of inventory will be assessed to determine the reliability of the
increased. inventory records.
Staff shortage in the finance department Overworked staff presents an inherent risk of
will mean that the existing staff are misstatement and as such both the sample
overworked, therefore the risk of errors sizes
and the numbers of substantive procedures
which could lead to misstatements in the carried out in relation to the financial records
financial statements is increased. of Banjo Foods Co will need to be increased.
Note: only seven risks and responses were required.
Question 18 of 27
made.
be settled.
(c) During a conversation with the chief executive of Banjo Foods Co, he stated that if the
bank refuses to extend the overdraft as promised, he will personally inject the necessary
finance into the company in order to tide it over until the outstanding payments from
customers are received.
Evaluate the reliability of this evidence, and any further work you would carry out in respect
of this claim. (6 marks)  
Review bord minutes to see if the mater has been discused with the bord and if the
injection of finance has been discused.
This have to be confirmed in a management representation letter, profesional sceptocism
has to be maintained at all time and sufficient appropriate evidence has to be collected to
prove that the Financial Statements show a fair and true view.
It could be the case that the chief executive might have to prove that he has the money for
the injection.
0 out of 6
The conversation with the Chief Executive is poor audit evidence. It was given to you
verbally and could easily be retracted. The Chief Executive could claim that you have
misunderstood and this was not what he meant at all.
In order to be able to place more reliance on this claim, you would need to request the
Chief Executive provides you with a written representation which documents his intention to
inject further cash into the business. The written representation should take the div of a
letter and be addressed to you, the external auditor. This document would have more
bearing than the oral representation, however, it is still not a guarantee as the personal
finances and situation of the Chief Executive could change giving him fair reason to not
inject the cash as planned.
However, the purpose of a management written representation is to support other audit

evidence and as such is unlikely be of much use by itself.
If the written representation claims that this short-term cash injection will be sufficient to
turnaround the business around, yet all other audit evidence points to a failing business,
this is unlikely to be sufficient to convince the auditor that the company is a going concern.
If the auditor concludes that written representation is not reliable, the auditor shall take
appropriate actions, including determining the impact on the auditor's report.
Question 19 of 27
made.
be settled.
(d) Explain the various scenarios that could arise in relation to the assessment of going
concern of Banjo Foods Co and impact on each of these scenarios on the audit report. (6
marks)
(Total = 30 marks)
If the accounts are being prepared on the Going Concearn basis, and the auditors believe
that than the report doesnt have to be modified as the Financial statements show a true
and fair view.
If there is a material uncertanty about the going concearn and we think that disclosure
is adequate than we modify the report but we don't have to modify the opinion we include
a PARAGRAPH and refference the note.
If we think that the disclosure is not adequate or that we should have prepared the
accounts on a BREAK UP basis, then we need to modify the oppinion.
By modifeing the oppinion we agree that for example the receivables are material but not
pervasive, then a qualified opinion is being issued saying "except for the matter ...
Financial Statements show a true and fair view
0 out of 6
The going concern of Banjo Foods Co. is currently questionable. The management of the
company are insistent that the company is a going concern, however the evidence obtained
so far indicate that this may not be the case and further audit work is necessary.
The financial statements of Banjo Foods Co have been prepared on the basis that it is a
going concern and no material uncertainties around this have been disclosed.
One of the three following situations will therefore arise based on the findings of the
additional audit work carried out.
1. It will be found that there are no material uncertainties regarding the going concern of
Banjo Foods Co. The financial statements will therefore be considered to be free from
material misstatement and an unmodified report will be issued.
2. Alternatively, the audit findings will indicate that, while it was appropriate for the
company to prepare the financial statements on the going concern basis there are
material uncertainty surrounding the going concern of Banjo Foods Co which have not
been disclosed in the financial statements. In this instance, a qualified or adverse
opinion will be given depending on the magnitude of the uncertainties.
3. Finally, it could be found that Banjo Foods Co is definitely not a going concern and the
basis on which the accounts have been prepared is inappropriate. In this case, the
auditor will modify the auditor’s report by issuing an adverse opinion.
Question 20 of 27
Arrowblaze Co is a manufacturing company with a large number of commercial customers

ranging from large national chains to smaller independent retailers. You are an audit senior
observing and recording the sales system during the external audit of Arrowblaze Co.
Arrowblaze Co has a small sales team headed up by chief salesperson Dan Smyth. Each
customer is allocated to a specific member of the sales team who is responsible for liaising
with, and taking orders from, that customer. Allocations are made based primarily on the
geographic location of the customer. When orders are taken by a member of the sales
team, the order is recorded on a two-part document, one of which is sent to production and
the other is kept in an outstanding orders tray in the sales office until the order is fulfilled.
When the order is fulfilled, production send a goods outward note to the customer with the
order and send a copy to Dan. Dan then files the order in an orders fulfilled file and passes
the second copy of the order to Amy Brown in the finance team who has responsibilities for
managing both the sales ledger and credit control at Arrowblaze Co.
Amy uses the orders that Dan has provided to generate invoices which she then prints and
sends directly to the customers. As well as details of the order, the invoices detail the terms
of credit and when payment is due. Amy raises invoices on the basis of the orders sent to
her and enters the details on the sales ledger and daybook. There have been issues with
the printer in the finance department recently and this meant that, while you were in
attendance, the last print run of invoices had to be made twice following a spoilt print run.
Amy placed all spoilt invoices in the recycling bin to comply with the waste and
sustainability targets in place throughout Arrowblaze Co.
Customers have the option of making payment to Arrowblaze Co in a number of ways

including direct bank transfer, credit card payments and cheques. While the larger
customers tend to manage their accounts directly and make regular payments on account
direct to the bank account at Arrowblaze Co, a number of the small independent retailers
still chose to settle their account via cheques which are sent to Arrowblaze Co. in the post.
Post is opened by Julian Sampson, the receptionist at Arrowblaze Co. Amy attends the post
opening with Julian on a daily basis and receipts are listed for any cheque payments as
each item of mail is opened. Amy then lodges the cheques in the safe while she posts the
receipts to the sales and cash ledgers. Julian takes the cheques to the bank every Friday
during his lunch break.
Every month, Amy carries out a review of the ledger and telephones customers who have
debts outstanding in order to chase the payment. She will also make any updates required
to customer records, for example this month a customer indived her during the phone call
that they had recently moved premises. Amy then updates the Masterfile as necessary
following the phone call. Any debt which has been on the ledger for more than one year will
be written off as part of Amy’s monthly review of the ledger.
The staff involved in this process at Arrowblaze Co are very happy with the system and are
intent on keeping the controls that are in place.
Required
(a) List four inherent limitations of any internal control system. (2 marks)
ARROWBLAZE IS A MANUFACTURING COMPANY there is a risk of faulty products

being produced
Inventory in
No Segragation of duties, Amy is issuing the invoices and posting them into sistem then
she also reconciles the accounts and posting the paiments.
Chque paiments sent via post - there is a high risk of the envelope to be lost and never
delivered.
The issue with the printer might result in sales invoices being posted twice.
Amy has acces to customers record and has the power of changing the records. She
could create fake suppliers and pay herself instead if this is not verified
0 out of 2
Inherent limitations of internal control systems include:
The costs of control not outweighing their benefits (that is, controls being too
expensive to implement)
The potential for humans to make errors and therefore compromise the system
The possibility of employees colluding to circumvent the system
The possibility of management overriding or by-passing the system
The fact that the system is designed to deal with routine transactions and may fail in
the event of an unusual transaction
Note. Only four limitations were required.
Question 21 of 27


(b)
i. Identify and explain FOUR deficiencies in Arrowblaze Co’s system of internal control
over revenue and receivables
ii. For each deficiency, suggest an internal control to overcome that deficiency.
Note. Prepare your answer using two columns headed Control deficiency and Control
recommendation. (8 marks)
DEFICIENCIES INTERNAL CONTROL

Lack of segregation of duties as one Another person should be employed and if
person is managing both sales ledger and this is not possible then a manager should
credit control review her work.
The money received by cheques are being
taken to the bank by a staff member over
lunch break on a Friday
She should send an statement at least each
Amy is doing a review of the ledgers by month or as often as possible on top of
phone in order to chase the payments making the phone calls.
There should be a password in place for

Amy can update customers records
such changes and only processed once she
without approval
gets approval for a manager.
0 out of 8
(i) Control deficiency (ii) Control recommendation

There is no segregation of duties Segregation of duties can be a problem
between invoicing and receipts and in smaller companies with few staff,
credit control as Amy Brown carries such as Arrowblaze Co appears to be.
out all these roles. This means that if However, it is probable that there is at
she makes a mistake, it is unlikely to least one other member of staff in the
be picked up by someone else later accounts department, with responsibilities
on in the system. It also gives her greater in regard to the purchase ledger. It might
scope to carry out a fraud on sales be possible to split the roles so that each
receipts. deals with half of each system. In addition,
adding more authorisation to the system
(see below) will alleviate the problems
caused by lack of segregation of duties.
The current level of customers' balances Dan and other members of the sales team
are not checked before an order is should have access to the sales ledger and
accepted. Hence customers may breach authorised credit limits so that they only
their credit limits and debts may not be accept orders for customers operating
recovered. within their credit limits.
Invoices are not matched directly with Dan should pass the goods outwards note
goods outwards notes, so that it is possible to Amy matched to the order so that she
mistakes will be made on invoices if the can ensure that she is invoicing for the
order was only partially fulfilled or there correct quantity of goods.
was a problem with an item in production.
The goods outwards notes are not signed Delivery drivers should obtain a signature
by customers. A customer signature should in relation to goods and return signed
be obtained on delivery of goods as proof goods outwards notes to a file in the
of receipt. despatch department.
Monthly statements of debt are not prepared Amy should prepare monthly statements
and sent out to customers; instead Amy rings (it is likely the computer package contains
customers when balances are not paid. This this function) and send them out to
means that it is easier for customers to neglect customers to remind them of their
to pay in a timely fashion. It might also make indebtedness and encourage them to pay
it easier for disputes to arise about the level in a timely fashion.
of customers’ indebtedness.
Amy does not obtain authorisation before The writing off of irrecoverable debts
writing off irrecoverable debts. In connection should be authorised by a member of
with the lack of segregation of duties staff senior to Amy, for example the
discussed accountant, or a director.
above, this is a major deficiency in the system.
It means that some debts might be written off
wrongly and also gives Amy substantial scope
to commit a fraud by stealing receipts.
The change of address of a customer is not Changes to the master file on the computer
evidenced in writing or authorised. Again, should be made by someone other than
this gives scope for Amy to make mistakes Amy, and should be authorised and based
or commit fraud. on written evidence.
Spoilt invoices are simply put into a recycling Spoilt invoices should be locked away or
bin. They could be stolen and used to try to shredded, after the relevant sequence
steal money from the company or Arrowblaze numbers have been noted.
Co’s customers.
Note: Only four control deficiencies and four control recommendations were required.
Question 22 of 27


(c) Explain the meaning of the term ‘control environment’ and describe the control
environment at Arrowblaze Co and explain how it will affect your audit approach. (4 marks)
Question not answered

0 out of 4
The control environment is the framework within which controls operate. It is determined by
the management of a business. A good control environment can be a positive factor when
assessing the risk of material misstatement. If management establish an appropriate tone
with respect to adherence to controls then there is a higher chance that the controls will
operate well. However, if the controls themselves are weak, then a good control
environment does not mean that risk will be low.
It appears that at Arrowblaze Co there is a good control environment, in that certain
controls exist and the staff members involved are keen to maintain them.
However, the system at Arrowblaze Co is weak and there are many controls which should
be in place are missing. Therefore, although there is a strong control environment, there is
a weak system and control risk is high. In relation to the revenue system, controls testing
would not be perdived and instead detailed substantive testing of receivables and revenue
would be carried out.
Question 23 of 27


(d) Describe THREE substantive procedures the auditor of Arrowblaze Co should perdiv at
the year end in confirming each of the following areas:
i. The completeness of sales revenue (3 marks)

ii. The valuation of receivables (3 marks)
(Total: 20 marks)
Completenes of sales:
1. Compare this years figures with last year and investigate any considerable gaps.
2. Compare budgets against financial statement and make investigate any
discrepancis
3. Check a sample of cheques and bank payments to make sure that they have been
posted
4. observe a bank reconciliation and compare the ammount on the bank statement to
the nominal ledger
Valuation of Receivables
1. Compare this year figures wuth last year
0 out of 6
(i) Procedures - completeness of sales revenue
For a sample of goods received notes, verify a related invoice has been raised and
recorded for the appropriate value in the correct accounting period.
Compare monthly sales for the year with the sales from the same month in the
previous year and to expectations. Where there are significant differences, follow up
to ensure this is not due to unrecorded revenue.
Review the unfulfilled orders tray against the goods outward notes for evidence of
unrecorded sales, in case accounts staff have actually actioned the order but
forgotten to file/send on the order.
Compare actual sales by product or month against budgeted sales to help identify any
lines/months that are lower than expected and may indicate unrecorded sales.
Note: Only three procedures were required
(ii) Procedures - valuation of receivables
Obtain a copy of the aged receivables listing, test a sample of balances to ensure the
aging is accurate and discuss the recoverability of any significant, long outstanding
balances with management. Vouch any explanations given to supporting
documentation.
For a sample of year end receivable balances that include material balances, review
post-year end receipts from customers to assess their recoverability.
Review pre and post year end correspondence with customers who have significant/
long overdue balances at the year end.
Inspect the board minutes after the year end for evidence of discussions of
uncollected receivables balances, eg due to administration of major customers.
Note: Only three procedures were required
Question 24 of 27
You are an audit senior currently engaged on the external audit of Grasshopper Co a
children’s clothing retail company with branches located in major towns and cities
throughout the country in which it operates.
Grasshopper Co has recently taken out a large loan of $20,000,000 for the purposes of re-
fitting the shops in order to modernise them and better reflect the brand of the company.
Additionally, $1,000,000 of this money was used to purchase a new integrated payroll and
HR system. The system will consolidate the records of the two departments and will be
accessible to both payroll and HR staff members. The system is bespoke and its
development and implementation has taken well over a year. Each individual member of
staff will still have a paper HR file containing copies of important documents such as their
contract of employment, details of any pay rises awarded and other documents such as
copies of disciplinary letters. This will continue to be held in a locked room in the HR office.
Grasshopper Co has a well-established internal audit function. The internal auditors have
recently carried out an extensive review of the combined payroll system. The report has
been provided to you to avoid the duplication of work.
Required
(a) Describe FOUR substantive procedures you should perdiv to obtain sufficient,
appropriate audit evidence in relation to the bank loan. (4 marks)
1. Request a bank letter to confirm the balance and the conditions of the loan
2. Inspect any other corespondence with the bank
3. Inspect board minuts for anu firther indivation in relation with the loan
4. Reconcile the amount in the financial statement against the bank statements and
against the bank letter
5.
0 out of 4
Substantive procedures relating to the bank loan:
Discuss with management the purposes of the loan and confirm the accounting
treatment to ensure it has been accounted for correctly in accordance the relevant
accounting standards. The interest costs relating to the refurbishment of the shops
should be treated as revenue expenditure and treated as an expense in the period in
which they are incurred. The $1,000,000 spent on the software will most likely be able
to be capitalised.
Re-perdiv the calculation of the split of loan repayments between interest and capital
repayments.
Obtain a copy of the terms and conditions of the loan agreements and review to
ensure they are being followed in practice.
Obtain a letter of confirmation directly from the bank to confirm the amount
outstanding on the loan at the year end.
Confirm payments of interest and capital repayments to the cash book and bank
statements.
Review the financial statements to ensure any relevant disclosures have been made.
Note. Only four substantive procedures were required
Question 25 of 27
(b) Identify THREE control objectives of payroll. (3 marks)
1. Segragation of duties
2. Authorisation of the net pay from a senior manager befor any payment are being done
3. Validation of the above by signature
0 out of 3
Control objectives of payroll
To ensure that payments are only made to valid employees of the company.
To ensure that all employees who provided work for the company during the period
are paid on time.
To ensure that salaries, wages, deductions from pay and employer on-costs are
recorded in the correct accounts in the ledger and supporting records.
To ensure that all salary and wage transactions that have been recorded in the period
actually took place.
Note. Only three control objectives were required
Question 26 of 27
(c) Describe FOUR audit risks associated with the integrated payroll and HR system, and
explain the auditor's response to each risk, in planning the audit of Grasshopper Co.
Note. Prepare your answer using two columns headed Audit risk and Auditor's response
respectively. (8 marks)

0 out of 8
Audit risk Auditor’s response

Errors may have arisen during the transfer Discuss with management the procedures
of data from the old payroll system to the for how and when this transfer was carried
new one increasing the risk of incorrect out.
payments and causing over or Sample check records from the new system
understatements of employee costs and back to the paper HR and Payroll records
profit in the financial statements. and vice versa.
The system has been newly implemented Review training procedures that have been
so the risks of material misstatements due carried out with staff and discuss with staff
to user error is increased as the staff learn members their experiences of using the new
to use the new system. This may in turn system and how user friendly they have found
lead to misstatements in the indivation in it to be.
the financial statements. Increase sample testing of transactions in
order to confirm accuracy.
As the system can now be accessed by Carry out a walk-through of the system,
members of both teams, there is the risk observing the full set up of a new employee
that a single individual could both set up from start to finish, confirming that suitable
and pay a new employee on the system. segregation of duties and authorisation
This increases the risk of fraud in relation processes
to the payment to non-existent employees are both in place and enforced by the system.
and the associated misstatement of the Select a sample of employees from the system
financial statements. and trace the records back to the physical
documentation held in the HR department.
Meet the employees to confirm their existence.
There is a risk that the records held in the Review the responsibilities schedule of the
system may not be complete if elements system to ensure no elements of the system
of the process have been inappropriately have been missed out.
defined, resulting in both Payroll and HR Obtain a sample of any changes to payment
believing the other has carried out the task. records and trace back to the original
For example, both could believe the other
has the responsibility for updating the documentation received from the line
system managers of the employees.
when an employee leaves the
organisation,
or is on long term sick leave. Inappropriate
payments may then be made to
employees.
The labour cost and profit could then both
be over (or under) stated.
Question 27 of 27
(d) Discuss why you might choose to rely on the work carried out by the internal audit team
in relation to payroll, and describe the work you would need to do in this area to ensure you
could rely on their work. (5 marks)
(Total = 20 marks)

0 out of 5
Relying on the work of internal audit would be beneficial for the external auditor as it would
save time and, as noted in the requirement, reduce the need to duplicate work which has
already been carried out.
The internal audit team is not new and appears to have been established at Grasshopper
Co for a long time. While this suggests that they will have strong knowledge of the
organisation and have strong internal auditing skills, it does also throw into question the
extent to which the team can be considered to be independent. The external auditor will
need to bear this in mind when determining the extent to which the work of the team can be
relied upon.
How well the audit function's organisational status and relevant policies and procedures
support the objectivity of the internal auditors will therefore be a key consideration.
The external auditor must also bear in mind that there is no requirement for internal auditors
to be professionally qualified. There is therefore a potentially greater risk of error if their
financial skills and experience are limited. The external auditor will therefore need to make
an assessment of the level of competence of the function.
Before using the work of internal audit, the external auditors need to evaluate and perdiv
audit procedures on the entirety of the work that they plan to use, in order to determine its
adequacy for the purposes of the audit.
This will include ensuring the work was properly planned, perdived, supervised, reviewed
and documented; determining whether sufficient appropriate evidence was obtained to
allow the internal auditors to draw reasonable conclusions; and establishing whether the
conclusions reached are appropriate in the circumstances and the reports prepared are
consistent with the results of the work done.
The external auditor will also need to consider the amount of judgement involved in the
areas reviewed, and the assessed risk of material misstatement.
ISA 610 ((Revised) requires the external auditor's procedures to include re-perdivance of
some of the internal audit work used. Audit procedures that might be carried out by the
external auditor could include:
Examination of items already examined by the internal auditors

Examination of other similar items
Observation of procedures perdived by the internal auditors

ACCA - AA Audit and Assurance - CBEs - 18-19 - AA - CBE Mock - 1.BPP PDF

Caricato da

Informazioni sul documento

Titolo originale

Copyright

Formati disponibili

Condividi questo documento

Condividi o incorpora il documento

Opzioni di condivisione

Hai trovato utile questo documento?

Questo contenuto è inappropriato?

Copyright:

Formati disponibili

ACCA - AA Audit and Assurance - CBEs - 18-19 - AA - CBE Mock - 1.BPP PDF

Caricato da

Copyright:

Formati disponibili

11/16/2018 ACCA - AA Audit and Assurance - CBEs - 18-19: AA - CBE Mock - 1

ACCA F8 CBE Mock (1117)

The following scenario relates to questions 1-5.

The Board of Bionic Spirit Co is comprised of the following individuals:

Stephen Johnson - Chief Executive

The correct answer is:

The NEDs at Bionic Spirit Co are appropriately remunerated in accordance with

The following scenario relates to questions 1-5.

The Board of Bionic Spirit Co is comprised of the following individuals:

Stephen Johnson - Chief Executive

The correct answers are:

The following scenario relates to questions 1-5.

The Board of Bionic Spirit Co is comprised of the following individuals:

Stephen Johnson - Chief Executive

Which TWO of the following recommendations would you make in relation to

The correct answers are:

Appoint additional NEDs to improve the balance of executive and non-executive

It would not be appropriate to alter the remuneration of the executive directors as an

The following scenario relates to questions 1-5.

The Board of Bionic Spirit Co is comprised of the following individuals:

Stephen Johnson - Chief Executive

The correct answer is:

To respond to management’s need to assess and improve the internal controls of

The following scenario relates to questions 1-5.

The Board of Bionic Spirit Co is comprised of the following individuals:

Stephen Johnson - Chief Executive

The correct answer is:

The following scenario relates to questions 6-10.

The correct answer is:

The following scenario relates to questions 6-10.

The correct answer is:

The following scenario relates to questions 6-10.

i. Whether the events or conditions constitute a material uncertainty.

(i) and (ii)

The correct answers are:

(i) Whether the events or conditions constitute a material uncertainty.

The auditor should communicate to Purple Island Co:

Whether the events or conditions constitute a material uncertainty.

The following scenario relates to questions 6-10.

The correct answer is:

The following scenario relates to questions 6-10.

How would this discovery impact on the auditor’s report?

The correct answer is:

The following scenario relates to questions 11-15.

The correct answer is:

The following scenario relates to questions 11-15.

As a registered charity, Watermelon will differ significantly from a commercial organisation.

Which of the following statements is NOT true?

The correct answer is:

The following scenario relates to questions 11-15.

Which TWO of these would be helpful in managing this risk?

The correct answers are:

The following scenario relates to questions 11-15.

The correct answer is:

The following scenario relates to questions 11-15.

The correct answer is:

Dual control over the counting and recording of cash.

This question has not yet been scored.

AUDIT RISK AUDITOR'S RESPONSE

As some of the receivables balances are very old, it

There is a shortage of staff

This question has not yet been scored.

Audit Risk Auditors Response