EXAMINATION

Code: N/A

Lecturer’s Signature& full name

Program: VNU
Course Code: INS3014
Course Title: Financial Auditing 2
Level: UG Nguyễn Đức Nghĩa
Date: 20 May 2021
Time allowed: 15 days
Due Date: 6/6/2021 Department’s Signature & full
name
Due time: 9:00 AM

Date: ………………………………

Instructions to students:

1. This is an individual assignment which accounts for 60% of the total scores of the course.
2. Your answers should be written in the form of essays.
3. Plagiarism is not accepted.

This exam paper contains 06 pages, including the cover page.

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 EXAM QUESTIONS
Question 1 (05 marks)
Your firm has recently been appointed as the external auditor of Barden Metalwork Ltd
(Barden). You are the senior responsible for planning the external audit for the year ended 31
August 20X4 and the engagement partner has asked you to consider the following key areas of
audit risk:
(1) Trade receivables
(2) Work in progress
(3) Trade payables
Barden supplies bespoke light fittings to hotels and restaurants. Customers commission Barden
to design and construct light fittings to their specific requirements using specialist metals. When
a customer commissions work, a Barden designer meets with the customer to draw the design
and calculate a fixed price for the work. The customer is required to provide written approval of
the design and price before the design is passed to the production team who order the metals
required and construct the light fitting. Customers are invoiced and revenue is recognised when
the light fittings are despatched, which may be many months after the date of the commission.
Barden's credit terms are 30 days.
All direct costs (labour, metal and other materials) relating to each commission are recorded
in Barden's job costing system. Each month these direct costs are manually transferred into the
job costing system from the payroll and purchases systems. The direct costs recorded in the
job costing system are used as a basis for the calculation of the work in progress figure to be
included in the financial statements. The finance director adds 20% to the direct costs to cover
overheads.
It is Barden's policy to order the metals required for a commission only when written approval
of the design is received from the customer. Metals are purchased from suppliers around the
world who invoice Barden in their local currency.
Barden's light fittings have recently become very fashionable and the volume of commissions
has grown rapidly. As a result, Barden sourced its metals from a number of new suppliers during
the year, to avoid production delays. However, it has experienced quality issues with metals
from some of the new suppliers which have resulted in a number of customer complaints.
In April 20X4 Barden's finance director appointed an internal auditor, Howard Ng, as she was
concerned that Barden's internal controls were inadequate for the increasing size of the business.
She instructed Howard to undertake a review of Barden's internal controls over purchasing.
Howard concluded that the internal controls were effective with the exception of the following
internal control deficiencies:
- Supplier statements are not retained or reconciled with the payables ledger.
- Metals were ordered and work started on some commissions before written approval of
the design and price were obtained from the customer.

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Howard resigned and left his post as internal auditor in August 20X4 without completing his
final report on the internal controls over purchasing.
The engagement partner has provided you with the following extracts from the financial
statements of Barden which are to be used as part of your consideration of the key audit risks:

Statements of profit or loss for the year ended 31 August

20X4 (Draft) 20X3 (Draft)
£’000 £’000
Revenue 8,997 6,128
Cost of sales (6,468) (4,413)
Gross profit (6,468) 1,715

Statements of financial position as at 31 August

20X4 (Draft) 20X3 (Draft)
£’000 £’000
Work in progress 1,015 587
Trade receivables 980 451
Trade payables 571 483
On 1 June 20X4, Barden acquired 100% of the ordinary share capital of Bellass Ltd (Bellass).
Barden is required to prepare group financial statements for the year ended 31 August 20X4 and
your firm will act as group auditor. Bellass’ financial statements for the year ended 31 August
20X4 will be audited by another audit firm, Capella LLP. The financial statement extracts above
exclude financial information relating to Bellass.
Requirements:
1. Outline the matters your firm should consider in respect of whether it should use the work
of: (0.5
marks)
a) Howard Ng; and
- Howard resigned and left his post as internal auditor in August 20X4 without completing his
final report on the internal controls over purchasing
b) Capella LLP.
-

2. Justify why the items listed by the engagement partner have been identified as key
areas of audit risk and, for each item, describe the procedures that should be included in

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 the audit plan in order to address those risks. You should present your answer using the
following subheadings: (03 marks)
a) Trade receivables
b) Work in progress
c) Trade payables
3. For each of the two internal control deficiencies identified by Howard Ng, outline the
possible consequence(s) of the deficiency and provide recommendation(s) to remedy
each deficiency. You should present your answer under the following subheadings:
a) Supplier statements not retained or reconciled with the payables ledger.
b) Metals ordered and work started before written approval of the design and price
obtained from the customer. (1.5 marks)

Question 2 (05 marks)

Your firm has recently been appointed as the external auditor of Weselton plc (Weselton) which
is your firm's largest and only listed client. You are the senior responsible for planning the
external audit for the year ended 28 February 20X5 and the engagement partner has asked you
to consider the following key areas of audit risk:
(1) Work in progress
(2) Trade receivables
Weselton provides global relocation services to corporate customers. Services include project
management of overseas relocation of offices and employees.
For each relocation project, Weselton estimates the cost of supplying services based on
customer requirements and the locations in which the services will be supplied. An indicative
price is provided to the customer equal to the estimated cost plus a mark-up of 35%. Actual
costs incurred often vary from estimated costs due to changes in customer requirements during
the relocation project or unforeseen issues resulting in higher than expected costs. On
completion of each project, the customer is invoiced, in sterling, for actual costs incurred plus
the 35% mark-up. Credit terms are 30 days.
Weselton employs a small team of project managers who manage multiple projects. However,
the majority of costs billed by Weselton arise from the use of external suppliers and other
third parties. Costs include payments to local employment agencies for temporary personnel
who pack the items to be relocated, fees for overseas legal and HR advice, local visa and
immigration costs, shipping and transport fees and insurance costs.
Temporary personnel submit timesheets to local employment agencies which invoice Weselton
each month for the total hours worked at rates agreed with Weselton. Invoices may include
hours relating to more than one relocation project. Other suppliers invoice Weselton for
services at varying points during the relocation and some overseas suppliers invoice in their
local currency. All costs incurred, including those of Weselton's own project managers, are
recorded in the job costing system against a unique code for each relocation project. Any costs

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recorded for projects not completed at 28 February are included as work in progress in the year-
end financial statements.

Weselton's financial controller, Olaf Cyro, has provided you with the following information:

 In July 20X4, the directors decided that the job costing system was outdated. A
replacement system was implemented on 21 January 20X5 and use of the old system
ceased immediately. A delay in training employees on the new system resulted in a
backlog of costs to be recorded and some customers were invoiced before all the costs
relating to their projects were included on the new system. Additional invoices in respect
of the omitted costs, plus the 35% mark-up, were sent to customers in February or are
due to be sent by 31 March 20X5.

 Bulda GmbH (Bulda), a customer, is refusing to pay its balance outstanding at 28

February 20X5 due to a disagreement over the amount invoiced in respect of its
relocation project. The disagreement has arisen due to a significant variation between
the indicative price and the actual amount invoiced. The balance due from Bulda at 28
February 20X5 is £1.8 million. The original indicative price provided was £1.3 million.
Olaf believes all of the additional costs arose due to changes in Bulda's requirements
during the relocation and that the full amount is recoverable

 Weselton's previous auditors did not seek reappointment after completing the external
audit for the year ended 28 February 20X4. During that audit, reliance was placed on the
controls over the job costing system. Olaf requested that your firm also relies on those
controls as he believes this will ensure the audit is conducted efficiently.
Olaf also provided you with the following extracts from the financial statements of Weselton to
use as part of your consideration of the key audit risks:

Statement of profit or loss for the year ended 28 February

20X5 (Draft) 20X4 (Audited)
£’000 £’000
Revenue 45,467 41,339
Cost of sales (30,795) (30,622)
Gross profit 14,672 10,717
Statement of financial position as at 28 February
20X5 (Draft) 20X4 (Audited)
£’000 £’000

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Work in progress 7,171 5,034
Trade receivables 5,481 3,741
Your discussion with Olaf also revealed the following internal control deficiencies:
(1) Customers are not required to provide written confirmation of changes to their
requirements arising during a relocation project.
(2) Project managers do not monitor actual costs incurred to date compared with the
estimated cost of each project.
Requirements
1. List the matters your firm should have considered and the procedures it should have
performed before accepting appointment as external auditor of Weselton. (01 mark)
2. Justify why work in progress and trade receivables have been identified as key areas of
audit risk and, for each one, describe the procedures that should be included in the audit
plan in order to address those risks. You should present your answer using the following
subheadings: (2.5 marks)
a) Trade receivables
b) Work in progress
3. Explain why reliance on controls over the job costing system, requested by Olaf, is
unlikely to be appropriate in respect of the audit for the year ended 28 February 20X5.
(0.5 marks)
4. For each internal control deficiency listed as (1) and (2) in the scenario, draft points for
inclusion in your firm’s report to those charged with governance and management at
Weselton. For each deficiency, you should outline the possible consequence(s) of the
deficiency and provide recommendations to address it. (01 marks)

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