All Rights Reserved

THE ASSOCIATION OF ACCOUNTING TECHNICIANS OF SRI LANKA

FINAL EXAMINATION – DECEMBER 2009

03-01-2010
Afternoon
(36) Auditing [2.00 - 5.00]
(Stream A)
Time: 3 hours
No. of Pages: 03
• Instructions to candidates: No. of Questions: 06
(1) All questions should be answered.
(2) Answers should be in one language, in the medium applied for, in the booklets provided.
(3) 100 marks.
(4) . (

01. (a) Explain what is meant by substantive procedures and briefly state the
circumstances in which an auditor applies substantive procedures in the audit of a
business entity. (08 marks)

(b) Hilary Ceramics (Pvt) Ltd. had the following balances in its balance sheets as at
31st December, 2008 and 2007.
2008 2007
Particulars
Rs.’000 Rs.’000
Trade Payables (creditors) 260,000 178,000
Investments 7,500 7,500

List six(06) audit procedures an auditor will adopt to verify in respect of each of
the two items of the 2008 Balance Sheet. (12 marks)
(Total 20 marks)

02. (a) (i) State the circumstances under which an "unqualified opinion" is expressed
upon financial statements by the auditor. (02 marks)

(ii) State the different types of audit opinions that may be expressed in relation
to financial statements of an entity. (02 marks)

(b) You have been requested to audit the payments to workers employed in a factory,
who are paid their wages on a monthly payroll.
State:

(i) Four(04) audit objectives in regard to Payroll payment of wages under such a
system, and (04 marks)

(ii) Four(04) key internal controls that should be in place. (04 marks)

(c) An audit assistant has completed the work assigned upon a detailed audit
programme and submitted the work and results to the audit supervisor.

State six(06) matters that the audit supervisor is expected to consider in his review
of the work performed by an audit assistant. (06 marks)
(Total 18 marks)

03. (a) List under six(06) headings, the matters that should be taken into account in the
preparation of an overall audit plan of a business entity. (06 marks)
(b) Plastic Products(Pvt) Ltd. commenced business in 2001, and prepares
annual accounts to 31st December. The company’s accounts for 2008
furnished for audit was as follows:
Summarized Balance Sheets as at 31st December
2008 2007
Rs. ‘000 Rs. ‘000
Stated capital 20,000 20,000
Retained earnings 15,000 2,000
Non-current liabilities
Bank loan 15,000 19,000
Current liabilities
Trade Payables 8,000 8,500
58,000 49,500

Non- current assets 13,000 19,000

Current assets
Inventories 25,000 15,000
Trade Receivables 12,000 10,000
Cash in hand and at bank 8,000 5,500
58,000 49,500

Income Statements for the year ended 31st December

2008 2007
Rs. ‘000 Rs. ‘000
Sales 240,000 150,000
Cost of sales 200,000 120,000
Gross Profit 40,000 30,000
Less: Expenses
Administration 2,000 1,800
Selling 10,000 4,200
Distribution 3,800 -
Financial 5,000 2,000
Other 4,200 4,000
Net profit 15,000 18,000
Further information available:
(1) The company budgeted for a 50% increase in sales considering sales
of the new product, “plastic compost bins” introduced in early 2008
following the drive for waste collection by local authorities.

Budget targets for 2008 were:

sales at Rs.220 million,
a Gross Profit of Rs.44 million at 20% of sales,
selling expenses at Rs.8 million, and,
other expenses at Rs.5 million.
(2) The company settled an earlier Bank loan and got a concessionary loan
of Rs.5 million on 1st January 2008 to commence a sales agency for
compost plastic bins.

(3) In 2008 selling prices were increased by 5%, but purchase prices
showed no appreciable change.

2
 (4) Closing inventories, including compost plastic bins, were on average around
the value of 6 weeks of purchases for the year.

You are required to;

(i) Perform an analytical review. (07 marks)

(ii) Identify seven(07) items for special audit attention, giving reasons for
selecting each such item. (07 marks)
(Total 20 marks)

04. In the audit of a business organization, it is not practical to test and verify all the
transactions. Therefore, the auditor resorts to test-checking of selected samples of
transactions. In respect of certain types of transactions the auditor also conducts
depth-checks.
(a) Explain briefly:

(i) What is meant by depth-checking, of transactions? (02 marks)

(ii) What are the principles to be followed in selecting samples of transactions for
test checking?
Also state what is the audit risk in checking using samples. (05 marks)

(b) In the process of a depth-check of a credit sales transaction, the following

document and information may be found in the audit working paper:
• Order received from customer for sale.
• Date of transaction.

List five(05) other documents and information which can be seen in the audit
working paper to record result of checking of sales transactions. (05 marks)
(Total 12 marks)

05. (a) You have audited the accounts of ST (Pvt) Ltd. which had maintained the accounts
on a manual system, for many years. The company has recently computerized the
accounting system and presented the financial statements to you for the audit.

List five(05) differences between audit of a manual system and audit of a

computerized system, which present difficulties to the auditor, and briefly explain
these difficulties. (10 marks)

(b) (i) List the types of government organizations the Auditor General is required
to audit under the provisions of the Constitution. (03 marks)

(ii) Briefly describe five(05) objectives expected to be achieved by the Auditor

General in carrying out the audit of a Government Department. (07 marks)
(Total 20 marks)

06. According to the Code of Professional Conduct & Ethics of AAT, state:

(i) The matters that should be taken into account in determining professional service
fees. (05 marks)

(ii) The safeguards that should be taken regarding clients’ monies entrusted to an AAT
member. (05 marks)
(Total 10 marks)
- o0o -
3