Certificate in Accounting and Finance Stage Examination

16 February, 2021
3 hours – 100 marks
Additional reading time – 15 minutes

Audit and Assurance

Mock
Instructions to examinees:
(i) Answer all TWELVE questions.
(ii) Answer in black ballpoint pen only.
(iii) Attempt each part of the question on a new page.

Q.1 (a) List the matters on which an external auditor is required to form an opinion for an unlisted
company, as required by the Companies Act 2017. (05)

(b) During the external audit of Bailey Ltd (Bailey) your firm has concluded that there is a
material uncertainty over whether Bailey is a going concern. State, with reasons, the
implications for the auditor's report. (04)

(c) You are assembling the final audit documentation on the audit of Green Pastures Ltd for
the year ended 30 June 2018.
Required:
List four examples of acceptable changes to the audit documentation during the final assembly
process. (02)

Q.2 Regional Assurance Partners (RAP) is a three-partner audit and assurance firm. The three
partners are Bob, Finlay and Shelley. RAP has been appointed as auditor of Exquisite
Accessories Limited (EAL), a metals processing firm. This is the first year that RAP is
undertaking the EAL audit.

The chief executive officer (CEO) of EAL is Ralph Trinket. Ralph’s wife is a well-known
jewellery designer who frequently produces pieces for fashion shows and other high-profile
media events. Ralph has been vocal about his wife’s successful jewellery business and has
offered to source some exclusive and limited-edition pieces for the audit team.

Owen Jackson, the CFO, and Bob have been friends for many years. Their families usually go
on holiday together once a year, and they frequently socialise with one another. Bob rates
Owen very highly as a CFO and he is confident that Owen will cooperate with the auditors.

Elspeth O’Keefe, a new audit manager at RAP, was previously employed by EAL, and she
prepared the EAL financial report for the period under audit.

Required:
(a) Identify and explain three threats to independence for RAP when performing the EAL
audit.
(b) For each threat identified in (a), state what actions RAP needs to implement to eliminate
or reduce the threat to an acceptable level. (06)
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Q.3 You are an audit supervisor of Pluto & Co and are currently planning the audit of your client,
Venus Magnets Co (Venus) which manufactures decorative magnets. Its year end is 31
December 2015 and the forecast profit before tax is $9.6 million.

During the year, the directors reviewed the useful lives and depreciation rates of all classes of
plant and machinery. This resulted in an overall increase in the asset lives and a reduction in
the depreciation charge for the year.

Inventory is held in five warehouses and on 28 and 29 December a full inventory count will be
held with adjustments for movements to the year end. This is due to a lack of available staff on
31 December. In October, there was a fire in one of the warehouses; inventory of $0.9 million
was damaged and this has been written down to its scrap value of $0.2 million. An insurance
claim has been submitted for the difference of $0.7 million. Venus is still waiting to hear from
the insurance company with regards to this claim, but has included the insurance proceeds
within the statement of profit or loss and the statement of financial position.

The finance director has informed the audit manager that the October and November bank
reconciliations each contained unreconciled differences; however, he considers the overall
differences involved to be immaterial.

A directors' bonus scheme was introduced during the year which is based on achieving a target
profit before tax. In order to finalise the bonus figures, the finance director of Venus would
like the audit to commence earlier so that the final results are available earlier this year.

Required:
Describe FIVE audit risks, and explain atleast two audit procedures to address each risk in the
audit of Venus Magnets Co. (10)

Q.4 You are undertaking the audit of Precious Metals Ltd (PML) for the year ended 30 June 2018.
During the audit planning process, the following information is obtained:
(i) PML management’s remuneration is heavily weighted towards incentive-based
payments that rely on optimistic sales targets.
(ii) Recently, the human resources department of PML has been short staffed and has not
been able to provide training to new staff responsible for administrative and financial
processing functions. Generally, new staff members have experience within the
industry.
(iii) One of the outputs produced by PML is a titanium bolt, which is small but very
valuable. There is a high demand for these bolts in the construction industry.
(iv) Receivables are agreed to the sub-ledger, but there is no aging review completed, and
an increasing percentage of total receivables are falling into the 90 days+ category.
Required:
Identify and explain three key fraud risk factors within PML. (06)

Q.5 You are the auditor of Knave Ltd and are in the process of completing the audit for the year
ended 30 June 2018. The following two outstanding matters have been highlighted in your
firm’s completion documentation:
(i) You have heard a rumour that Knave is planning to merge with a competitor, King Ltd. If
accurate, this will have disclosure implications. Management have advised you that although
they have had several meetings with the management of King Ltd, no such merger is currently
planned. Management have offered to make written representations confirming their
intentions.
(ii) The invoices to support the cost of a significant purchase of plant and machinery cannot be
traced. Management have offered to make written representations confirming the cost of the
plant and machinery.
Required:
Are the client’s written representations sufficient to resolve each of the two outstanding
matters noted above? Justify your answer. (04)
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Q.6 (a) Briefly define any three examples of data validation controls. (03)
(b) Define intimidation threat. (02)
(c) Differentiate between test data and embedded audit facility. (04)
(d) Explain the terms “control environment” and “control procedures”. (04)
(e) Sampling for tests of controls may lead to two types of incorrect conclusions by the
auditors. Briefly explain these two types of conclusions and their impact on audit. (04)
(f) Give two examples of the situations creating advocacy threat. (02)

Q.7 You are the audit senior responsible for the audit of Spectrum Ltd for the year ended 30 June
2018. During your initial planning meeting with Justin James, the chief financial officer
(CFO), he informs you of the following changes in the company’s operations.

(a) To help achieve budgeted sales for the year, Spectrum is about to introduce bonuses for
sales staff. The bonuses will be an increasing percentage of the gross sales made by each
salesperson above certain monthly targets.

(b) Spectrum plans to close an inefficient factory in country Tasmania before the end of 2018.
It is expected that the redeployment and disposal of the factory assets will not be completed
until the end of the following year. However, Justin is confident that he will be able to
determine reasonably accurate closure provisions.

(c) The chief executive officer (CEO), Geoff Alderton, has just returned from Italy, where he
signed a contract to import a line of clothing that has become the latest fashion fad there.The
company has not previously been engaged in the clothing industry.

Required:
For each of the scenarios provided, outline how the information affects inherent risk. (03)

Q.8 (a) What makes evidence relevant? (03)

(b) Jenny is the statutory auditor of Crystal Ltd, a diamond jewellery shop. Crystal Ltd has
engaged James, an expert, to value its diamond jewellery. While drafting the audit report, she
does not want to take responsibility for the work done by James. She wants to mention the
name of James in her audit report as she is relying on his work. She wants to give a modified
audit report.
Required:
Explain to Jenny the circumstances in which she can give a reference to an expert. (02)

(c) List the contents of typical terms of reference that should be agreed with an auditor's
expert. (02)

Q.9 As a result of work undertaken during the planning stage and audit evidence collected for the
tests of controls stage of the audit, the audit senior, Rose Chung, has determined that there is a
low risk of material misstatement for the following account balances:
(i) telephone
(ii) repairs
(iii) sales commission
(iv) wages and salaries.
Due to the expected reliability of these controls, Rose has undertaken extensive testing of the
controls regarding these account balances, and has concluded that the controls are reliable.
Required:
Identify one audit procedure for each of the income statement account balances above that
will obtain sufficient appropriate audit evidence regarding the accuracy of that account
balance. (04)
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Q.10 (a) You are reviewing the audit working papers for Plastics Ltd, which have been prepared by
a junior audit team member. During your review, you noted that when testing the accuracy,
valuation and allocation assertion for the property, plant and equipment (PPE) account
balance, the junior team member tested the PPE additions and disposals during the year and
recalculated the depreciation. No discrepancies were found in the testing. The junior team
member concluded that PPE was appropriately valued. PPE is a material account balance to
Plastics Ltd.
Required:
Explain whether the junior audit team member has arrived at an appropriate conclusion. (04)

(b) You are the auditor of Critical Solutions Ltd (CSL) for the year ended 30 June 2018.
During your planning process you note that the human resources department of CSL has been
short staffed recently and has not been able to provide training to new staff responsible for
administrative and financial processing functions. Generally, new staff members have
experience within the industry.

While reviewing the accounting system you note that accounts receivable are agreed to the
sub-ledger, but there is no aging review, and an increasing percentage of total receivables are
falling into the 90 days+ category. Time sheets for processing staff are approved by
supervisors, then passed on to Susan Rogers in payroll. Susan prepares the pay sheet
information, which gets reviewed against the time sheets and approved by the CFO, Peter
Cummins, prior to payment being processed.

Access to the information technology (IT) system at CSL is controlled by usernames and
passwords, which are required to be changed regularly through a programmed system prompt.

Required:
Identify and explain two internal control strengths and two internal control weaknesses for
CSL. (04)

Q.11 Electro Ltd is a large Victorian manufacturer of electronic components, which it supplies to
the automobile industry. Electro maintains its inventory records on a computer inventory
system that includes the following details for each product:
 stock code, which includes a physical location code
 product description
 quantity on hand
 unit cost
 total value on hand
 date of last sale
 quantity sold during the year
 sales value of the stock sold during the year.
Required:
List five substantive tests that you could perform using generalised audit software in relation (05)
to the inventory for Electro.

Q.12 (a) Describe the purpose of performing analytical procedures at the planning stage of an audit. (02)
(b) List four indicators of dominant influence being exerted by a related party. (02)
(c) Describe three types of enquiry that an auditor will make of management with regard to
fraud. (03)
(d) Provide four additional audit procedures that the auditor should perform when events or
conditions are identified that call into question the ability of an entity to continue as a going
concern. (04)
(e) Identify four factors that influence sample sizes for tests of controls. (02)
(f) If the evaluation of sample results suggests that there is material misstatement in the
population, what courses of action are available to the auditor? (02)
(g) Identify four requirements of policies and procedures designed to give an audit firm
reasonable assurance that it will be notified of breaches of independence requirements. (02)
(THE END)