@USP ‘THE UNIVERSITY OF THE SOUTH PACIFIC Course Code: AF304 FBE — School of Accounting & Finance Final Examination Semester 2 2020 Online Mode Duration of Exam: 3 hours + 10 minutes Reading Time: 10 minutes Writing Time: 3 hours Instructions: INSTRUCTIONS FOR ALL CANDIDATES * THERE ARE THREE SECTIONS IN THIS PAPER * ATTEMPT ALL QUESTIONS ‘SECTION DESCRIPTION | MARK ‘SUGGESTED ALLOCATION TIME Aa Ql - 20 Multiple Choice Questions - | 20 ‘40 minutes General B 4 Short Discussion Questions 20 30 minutes | © 2 Professional Questions 30 ‘45 minutes D 1 Case study 30 ‘45 minutes TOTAL 100 ‘3 HOURS There are a total of 12 pages in this exam paper. This a closed book exam, and only a calculator is allowed into the exam room,SECTION A MULTIPLE CHOICE QUESTIONS (20 marks) (use approx. 40 minutes) Please circle the letter that represent the most correct answer on the answer sheet. 1. Which assertion is defined as: ‘transactions and events that have been recorded or disclosed, have occurred and such transactions and events pertain to the entity’? a. Completeness. b. Occurrence. ©. Accuracy. d. Cut-off. 2. Incompatible duties are those that allow an irregularity to be perpetrated: a. and concealed through collusive actions. b. by two or more employees. c. and concealed by a single employee. 4. by accounting personnel. 3. The assessment of inherent risk requires consideration of matters that have a pervasive effect on the entity as a whole and matters that may affect only specific accounts. Which of the following is an example of a “pervasive effect” matter? a. Industry of operation, b, Susceptibility to misappropriation. ©. Sensitivity of valuations to economic factors. d. All of the above. Page 2 of 12During the audit of Patel Ltd the auditor found a misstatement that equated to 7% of the base amount. Based on historical practice, this amount is deemed to be: a. a matter of professional judgement whether it is considered material b. material, ©. not material, 4. none of the above. 5. The auditor has determined that, as the assessment of control risk is high, the audit strategy adopted will be the predominantly substantive approach. What is the cost of this audit likely to be? a. Low. b. Moderate. ©. High, d. Cannot be determined, 6. If the bank reconciliation is incorrect the assertion violated would be: accuracy, valuation and allocation, b. existence, ¢. rights and obligations. 4. completeness. 7. The relationship between the required understanding of the internal control structure and the preliminary audit strategy is that: 4, normally, greater understanding is required when the lower assessed level of control tisk approach is used, b. normally, greater understanding is required when the primarily substantive approach is used ©. no understanding is required in the planning stage unless tests of controls are a planned part of the strategy. 4. normally, less understanding is required when the lower assessed level of control risk approach is used, Page 3 of 128. Which of the following would be a necessary control to av an iny being paid twice? a. Segregating the duties of approving invoices and signing cheques. b, Invoice stamped paid when the cheque is issued. ¢. Making payments by cheque. 4. Periodic bank reconciliations. 9, When control risk is assessed at the maximum, the extent of documentation required in the working papers is that: a. only the basis for the assessment must be documented. b. only the conclusion needs to be documented. c. the basis for the assessment and the conclusion must both be documented. d. no documentation is necessary. 10. If the lower assessed level of control risk approach preliminary audit strategy is used, the planned level of substantive procedures will be: a. high or very high. b. atthe lower level. ©. moderate or high. d._ at the higher level. LL. Which of these would be a reason for adopting a predominantly substantive approach? a, Accounts are affected by more than one transaction class. b. Detection risk has been assessed as high. ©. There are no significant control procedures that pertain to the assertion. d. Control risk has been assessed as low. Page 4 of 1212. Each income statement account is linked to at least one balance sheet account, Which of the following would be the related income statement account for the balance sheet account of inventories? a. Sales b. Cost of sales. c. Depreciation expense. d. None of the above. 13. The risk of concluding a material error does not exist when in fact it does, is also known as: a. risk of overreliance, b. risk of under-reliance, ¢. risk of incorrect acceptance. d._ tisk of incorrect rejection. 14. Before selecting a sample, it necessary to specify the expected error. The main purpose a. itis necessary in determining sampling risk. b. itis necessary to compare it to the previous year: ¢. itis the maximum amount that can be misstated where the auditor can still conclude that the account is fairly stated. dit is important in determining sample size. Page 5 of 1215. The control which is least likely to be used as an attribute in an audit sampling plan for tests of controls is: a. authorisation of sale by appropriate sales order department personnel. b. approval of credit by authorised credit department personnel. hiring of competent personnel only. existence ofa sales invoice copy. 16. Analytical procedures are used in the overall review for all of these reasons except: a. to identify contingent liabilities, b. to corroborate conclusions formed during the audit, ©. to gain assurance that the company will remain a going concern, d. to assist in arriving at the overall conclusion that the financial information is consistent with the knowledge of the business. The event in a subsequent period that is an example of a condition existing at the reporting date is: a. loss resulting from a flood, b. discovery of fraud or errors, c. purchase of a business, d. the issue of preferred shares 18. The auditing standards suggest that management representations are acceptable audit evidence where other sufficient appropriate audit evidence: 4. management representations are never appropriate audit evidence for financial statement assertions. ‘b. cannot reasonably be expected to exist. ©. can reasonably be expected to exist. d._ has not been furnished to the auditor. Page 6 of 1219, A standard unqualified audit report is not required to have which of the elements set out below? a, A heading ‘Auditors Opinion’, b, An opinion paragraph. ¢. Matters the auditor wishes to emphasise, 4. The opinion of the auditor on the financial statements. 20. Which of these would not be considered a scope limitation? a. Access to the board of directors’ meetings was limited to those meetings taking place before the balance sheet date. b, The auditor is appointed to the engagement too late to observe the client’s counting of the inventory. ©. The auditor is forced to call upon an outside expert to properly value antiques that are held the client’s vault as investments. d. The client would not permit confirmation of receivables with their best customers for fear of annoying the customers. Page 7 of 12SECTION B - SHORT DISCUSSION QUESTIONS 20 marks Compulsory er all four (4) question) 1 Intemal control can only provide reasonable assurance as there are inherent limitations within an entity’s control structure. * Identify and describe three of these limitations. 5 marks “The auditor shall obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor’s opinion’ — ASA 500 (ISA 500). + Identify the factors that may affect the sufficiency and appropriateness of audit evidence and briefly explain how they impact on these criteria, 5 marks What audit strategy is the auditor likely to adopt if at the planning stage, control risk is assessed as less than high? (ch10) Smarks ‘Why may an auditor decide to perform tests of details on income statement accounts rather than relying on analytical review? Smarks Page 8 of 12SECTION C ~ Professional type questions - 30 marks Compulsory section. 1. Use of sampling methods You are a senior accountant with Da Silva, Chang and Partners (DC), a four-partner firm operating in Perth. DC was formed 2 months ago, as a result of a merger between Da Silva Partners and Chang Partners, The only major audit client of the merged firm is Nebraska Lid, which has 12 outdoor wear stores across Australia and a 30 June year-end DC’s accounting records show significant write-offs on the Nebraska audit over the past few years, mainly due to the performance of extensive testing, To increase audit efficiency and reduce write-offs, the partners have asked you to review the 2020 planning information and suggest methods of sampling that will reduce the level of work performed without compromising audit effectiveness. The partners have stressed that they still wish to comply fully with audit standards ‘The 2020 planning notes contain the following information. 1. Trade creditors are handled centrally in Perth. Major purchases of products are made through Perth, but each shop also orders about 20% of its stock. Each shop sends all authorised invoices to Perth for processing and payment on a weekly basis. An alphabetical list of all unpaid invoices is produced each month, There are no individually significant creditors, You need to select a sample of creditors to test for existence and a sample to test for completeness, 2. Fifty per cent of the stock is held in the main warehouse in Perth, which is subject to an annual stocktake and maintains perpetual inventory records, The remainder of the stock is held across the 12 branches, with each holding approximately similar quantities. The branches maintain periodic inventory records and are required to perform a stocktake and send the information to Perth every 6 months, You need to select a sample of stock to test for existence, 3. Although about 70% of total sales are paid for by cash or credit cards, 30% of sales are on account. The Perth head office deals with these accounts and the responsibility for debtor collection. An alphabetical debtors list is produced each month, showing the invoices making up each debtor, payment details and the outstanding balance. The Teport also shows the ageing details of each debtor. You need to select a sample of debtors to test for existence and a sample to test for valuation, Required Describe how you would select the above samples to ensure the audit is performed in an efficient and effective manner. 15 marks Page 9 of 122, Effect of circumstances on audit opinion Scarborough Hydraulics Ltd contracts with governments to carry out a variety of infrastructure projects including water treatment and desalination plants and other drainage works. It also acts as a contractor to maintain a range of government infrastructure assets. ‘The contracts that it has with its government customers have very strict turnaround times to ensure that, in the event of problems, water services to the public are quickly brought back on-line. You have completed your audit of Scarborough Hydraulics and the following material events occurred: L Scarborough holds a stock of high-value drainage components to allow them to be able to respond quickly to their customers’ needs. Due to the size and quantity of these items, they were stored in a large outdoor space on the outskirts of Sydney. Shortly after the year end a significant amount of this stock was stolen. ‘The security at this site was inadequate and no record of the theft is available. Scarborough has a large manufacturing centre in Melbourne which provides prefabricated concrete for the company’s infrastructure projects. The company policy is to include factories in the balance sheet at market value less accumulated depreciation. The Melbourne factory is included in the balance sheet based on a valuation carried out five years ago. The company has not engaged a valuer to revalue the property because the directors believe that market values have remained fairly level over the last five years, so the existing carrying value is not materially different from current value, During the year, Scarborough completed a contract to provide drains for a private construction company that was building 500 houses in a new suburb of Brisbane. Shortly before the year end, a downpour of rain saw the drainage system fail causing damage to the houses being built, The construction company is suing Scarborough for the costs of rectifying the damage, Scarborough have not provided for any possible payout because they expect their losses to be covered by a claim against one of their sub-contractors that supplied the faulty part that caused the failure, Required Discuss each of the above issues, state what effect cach would have on the audit opinion and give reasons. 15 marks Page 10 of 12SECTION D CASE STUDY 30 MARKS Compulsory section. 1. Subsequent events ‘Your client is Queenscorp Ltd, a diversified business operating throughout Australia. Year- end was 30 June 2017, the auditor’s report was signed on 31 July 2017 and the financial statements were mailed to shareholders on 14 August 2017. During your subsequent events review, you noted the following independent and material items, 1. Queenscorp has been involved in a legal dispute with a competitor for a number of years. The dispute relates to alleged breaches of copyright by Queenscorp. On 27 July, you discovered that Queenscorp had settled the legal action out of court on terms more favourable than expected. 2. As for (1) above, except that the legal action was settled on 5 August. 3. On 10 July, one of Queenscorp’s major product lines developed a fault that rendered the product unusable. Queenscorp became aware of the fault on 30 July. Although the fault posed no safety risks to consumers, Queenscorp decided to launch a full product recall on the following day. 4, On 30 July 2017, the Bureau of Meteorology issued a cyclone warning for patts of Far North Queensland. Queenscorp has a large sugar cane plantation in this area. On 2 August, the cyclone hit, wiping out about 90% of the crop. 5. Queenscorp has invested significant funds in developing a new type of cholesterol- reducing margarine. On 7 July, Queenscorp applied for a patent for the margarine, only to discover that a competitor had lodged a similar application on 28 June. The granting of Queenscorp’s application is now in doubt. 6. Queenscorp’s bank Joan is conditional upon certain ratios being maintained at all times. On 20 August, you discovered that one of the ratios was breached for a 24-hour period on 18 August. 7. Queenscorp has large landholdings on the outskirts of Sydney. On 20 July, Queenscorp received preliminary notice from the federal government informing the company that, should the new Sydney airport proceed, about 30% of this land will be forcibly acquired. Queenscorp has no legal right to challenge the acquisition. Page 11 of 128. In early June, one of Queenscorp’s largest debtors informed Queenscorp that it was experiencing serious financial difficulties. On 5 July, Queenscorp was informed that the debtor had gone into receivership. Preliminary reports suggest Queenscorp will recover only 10 cents in the dollar of the outstanding debt, Required (a) Outline the key additional procedures you should have performed in relation to each of the above events, 15 marks (b) What actions should you have recommended to management in relation to each of the above events? 15 marks THE END Page 12 of 12@ The University of the South Pacific Serving the Cok ids Fi, Kia, Malia Naar Nie, Sno, Slama es Tee, Tones, Tl an Vana School of Accounting & Finance STUDENT’S SURNAME. OTHER NAMES. STUDENT ID. AF304 FINAL SEM 2 EXAM 2020 Multiple Choice Questions Answer Sheet Circle the letter that represents the most correct answer 1 atofefda] we [a [ob c | da 2[alpf{ec|d wilalp lec | da 3 falp|ela wfailbp {eld aerate |e Efe peor | Ft 19 | a |b |e | a s [a |bjfeld 20 | a b [ec | a 6 a b ce a | [7 ]albfe la 8 a |b c d 9f[afebtlej|da two [a {|b |e | d wija lp te | a | wzilatlopfe|da [ wmla lp ile ila 4 | a |b |] clad wfajebtfe|d