ACCA

Paper F8 (INT & UK)

Audit and Assurance
Tuition Mock Examination
June 2012
Question Paper

ALL questions are compulsory and MUST be attempted

Time Allowed 15 minutes Reading and planning

3 hours Writing

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ALL FIVE questions are compulsory and MUST be attempted

1 You are the senior auditor in charge of the audit of Fitzgerald Ltd, which sells,
services and repairs a wide rage of agricultural machinery.
Your notes of the purchases system include a number of points that need to
be considered in the audit. These are as follows:
1. Delivery notes accompanying goods are checked on arrival by the stores
department. Where there is no delivery note from the supplier, a goods
received note is completed by stores. Delivery notes and goods received
notes are listed by stores and passed to the buying department for
checking against orders. Only the goods received notes are sequentially
numbered.
2. Purchase invoices are passed immediately upon receipt to the buying
department to check for the receipt of goods and prices charged. If
there is a query, the buying department holds the invoice until the
matter is resolved. Invoices are then passed to the accounts
department for input to the accounting system.
3. A grid stamp on the purchase invoices to record the checks made is not
completed in every case.
4. Invoices are approved for payment by the accounts department but,
when a cheque is prepared, the invoice is not marked as paid.
5. Reconciliation of supplier statements to the ledger balances is not
carried out on a regular basis; only the year-end statements are
retained for the audit.

Required:
(a) Identify the weaknesses in the above purchases system and for
each weakness
(i) Explain the potential consequences to Fitzgerald; and
(ii) Recommend a control to mitigate the weakness. (15 marks)
(b) Describe the audit procedures that you would perform in order to
ensure that
(i) Trade payables are fairly stated in the financial statements;
(ii) Cut off procedures in respect of purchases and payables are
adequate. (10 marks)
Inventories are currently ascertained by physical count at each month and
year-end. In order to avoid the disruption caused by the monthly counts,
management intend to introduce an inventory control system consisting of
computerized inventory records supported by a system of continuous
counting.
Management has acquired a software package that will integrate with the
existing purchase and sales ledger systems. Inventory movements will be
determined from purchase and sales invoice details, which will be input by
clerks in the general office. Terminals will be located in the warehouse to
enable staff to access the inventory records and enter adjustments.

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 Management is anxious to ensure a smooth transition and obtain the
maximum benefit from the system.
(c) Describe
(i) The physical controls required to prevent unauthorised
access to the terminals to be sited in the warehouse;
(ii) The software controls required to prevent unauthorised
access to the purchase and sales ledger. (5 marks)
(30 marks)

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2 ISA 315 states that the auditor should obtain an understanding of the control
environment at a client.
(a) Explain what is meant by the term ‘control environment’ and list
THREE factors that would indicate a strong control environment.
(4 marks)

ISA 500 states that auditors should obtain sufficient, appropriate audit
evidence to be able to draw reasonable conclusions on which to base the audit
opinion.
(b) List three factors that should be considered by an auditor when
assessing the sufficiency of audit evidence and for each factor
identified, briefly state the effect it has on the amount of
evidence required. (3 marks)
(c) State three types of threat to an auditor’s objectivity and
independence. For each, give an example of how the threat may
arise for an auditor. (3 marks)
(10 marks)

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3 You are planning the audit of Basher Ltd for the year ended 31 March 2012.
The principal activity of the company is the sale of mobile telephone handsets
and accessories. All products are purchased from international suppliers
outside of the United Kingdom.
You have been provided with the following information in respect of the years
ended 31 March 2012 and 31 March 2011.

Extracts from the Income Statement

Draft 2012 Actual 2011
$’000 $’000
Revenue 472,953 325,033
Cost of Sales (456,076) (317,573)
Gross Profit 7,877 7,460
Administration expenses (4,703) (4,174)
Profit from operations 3,714 3,286

Extracts from the Statement of Financial Position

Draft 2012 Actual 2011
$’000 $’000
Non Current Assets
Property Plant and Equipment 437 224
Current Assets
Inventories 7,453 4,952
Trade Receivables 4,190 3,152
Sales Tax Receivable 1,336 1,637
Prepayments 102 40
Cash 2 1,843

Current liabilities
Bank Overdraft 423 593
Trade Payables 6,227 6,137
Other Payables 352 413
Accruals and Deferred Income 28 221
Your firm has prepared the corporation tax returns for the company for the
last three years. Your firm has also been asked to provide advice on the
selection and installation of a new computer system for Basher.

Required:
(a) State when analytical procedures should be used in an audit, and
explain the benefits of using such procedures. (4 marks)
(b) Using the results of analytical procedures, explain the audit risks
arising for Basher Ltd. (10 marks)
(c) Explain the ethical issues to be considered regarding the
provision of the other services set out above, and identify
appropriate safeguards that should be applied. (6 marks)
(20 marks)

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4 You are the auditor of Leviathan Ltd, a manufacturer of heavy machinery for
use in the railway industry. Extracts from its balance sheets for the years
ended 31 March 2012 and 21 March 2011 are as follows:
2012 2011
$’000 $’000
Current assets
Inventory 129 108
Receivables 228 197
Cash 68 121

Payables (218) (196)

Warranty Provision (314) (216)

The company offers a one-year warranty on all machinery supplied. The

warranty provision is calculated by the company using a combination of the
estimated cost of making good known defects at the reporting date, together
with a percentage of that year’s sales.
During the year ended 31 March 2012, the company suffered a large bad debt
due to the appointment of a liquidator at a major customer one week after the
final delivery of an order of machinery.

Required:
(a) Set out audit procedures that you would perform to reach a
satisfactory conclusion on the value of the warranty provision,
the value of trade receivables at the year-end. (10 marks)
(b) Describe the issues faced by the auditor when auditing
provisions, such as the warranty provision described above.
(4 marks)
In November 2011, Leviathan dismissed its sales director because of an
alleged fraud. The director is contesting the allegation and commenced legal
proceedings against the company in late February 2012. The company
lawyers have suggested that there is a possibility that Leviathan may lose the
case but are unsure as to the exact amount of damages that may have to be
paid, although they are likely to be significant. There is no mention of the
case anywhere in the financial statements.
(c) (i) List the audit procedures and actions that you should now
take in respect of the above matter. (3 marks)
(ii) Explain the effect on the audit report if the directors refuse
to disclose the details of the case in the financial
statements. (3 marks)
(20 marks)

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5 You are the external auditor of Garb Ltd for the year ended 31 January 2012.
Its principal activity is the design, manufacture and sale of clothing.
The company made a loss in the year ended 31 January 2012, but the profit
forecast indicates a return to profitability in the year ended 31 January 2013.
The loss was due to redundancy and restructuring costs following the loss of
its major customer, a national retailer, to whom it supplied clothing under the
retailer’s brand name. The company is now focusing on its own branded
goods, which have been sold historically at a higher margin. There are plans
to develop its overseas market and to expand the customer base for its
recently launched sports wear products and contracts have been recently
agreed with several new overseas customers. The company has also
negotiated a new contract with a major supplier, which has resulted in
reduced prices for committed monthly purchases.
During the year ended 31 January 2012, the company suffered severe cash
flow difficulties but managed to stay within the overdraft facility by delaying
payments to trade payables and the tax authorities. The company has a bank
loan, which is due for repayment in April 2012 and is negotiating with its
bankers for a replacement loan to repay the present loan.

Required:
(a) Explain what is meant by the going concern concept and describe
the director’s and the auditor’s responsibilities with regards to
going concern. (6 marks)
(b) Explain the matters that give cause for concern with regards to
Garb’s going concern status. (10 marks)
(c) Discuss the implications for the audit report of Garb Ltd in
respect of the financial statements for the year ended 31 January
2012, if the negotiations for the replacement loan are not
completed by the time the audit report is due to be signed.
(4 marks)
(20 marks)

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