QQI

BA (Hons) Accounting & Finance

Level 3

SUMMER 2018

Module Code: B8AF108

Module Description: Audit and Assurance

Examiner: Ms. Georgina Skehan

Internal Moderator: Mr. James Browne

External Examiner:

Date:
Time:

INSTRUCTIONS TO CANDIDATES
1. Time allowed is THREE (3) hours
2. Question No.1 is compulsory
3. Answer THREE (3) questions only from the remaining FIVE
questions.
All questions carry equal marks

Page 1 of 6
 Section A
This question is compulsory

Question 1

You are head of the training department in your audit firm and a new group of interns have
just started. Many of these interns have not studied auditing to date.

Required:

Write a report to these interns outlining the following:

(a) Discuss the key features of the internal and external audit, clearly distinguishing each
audit type. (10 marks)

(b) Discuss FIVE benefits to a company of establishing an internal audit department.

(10 marks)

(c) Discuss TWO rights of the external auditor. (5 marks)

Total 25 marks

Page 2 of 6
 Section B
Answer any THREE questions.
(All questions carry equal marks).

Question 2

Chemical Ltd is a pharmaceutical company with 5,000 employees and has strong internal
controls.

You are the external auditor observing the control procedures in relation to the payroll
system.

You observe the following:

The payroll system calculates the gross and net pay and a payroll report is generated by the
payroll manager. The payroll manager recalculates a sample of employee wages and
compares his figures to the amounts calculated by the payroll system. He passes the payroll
report to the wages clerk who creates a payment list detailing the payments to be made.

The payroll report and payment list are passed to the company accountant. The company
accountant reviews the payment list for any unusual amounts and compares each employee’s
net pay on the payroll report to the payments list. He also compares the totals with the
previous week as a reasonableness check.

Once all these procedures are complete, the company accountant signs both documents and
raises a cheque requisition for the weekly paid workers. The signed payroll report is returned
to the payroll clerk who generates the payslips from the payroll system. The payslips, cheque
requisition and signed payment list are then passed to the cashier’s department for processing.

Leaver and joiner forms must be completed and authorised by the employee’s immediate
manager and the finance director at least one month before the amendment is required to the
payroll.

A monthly report of amendments to standing data is sent to the finance director for review
and authorisation. Standing data files are sent to departmental managers on a quarterly basis
for review.

Required:

Discuss FIVE of the controls in Chemical Ltd payroll system and discuss how the auditor
would test those controls. Total 25 marks

Page 3 of 6
Question 3

(a) Explain what you understand by the term audit risk and explain the three elements that
make up audit risk giving one example of each. (10 marks)

You have recently been appointed as the audit senior of a new client Aviation Ltd, which
designs and builds high quality luxury private jets. All private jets are built to customers
specifications with a large amount of bespoke features. However, few orders have been
received in the last year and as a result Aviation Ltd is building generic jets without orders
for inventory.

Aviation Ltd has expanded considerably in recent years and has purchased jet manufacturers
in the USA and the UK. This is in addition to its manufacturing facility just outside of
Dublin. As a result Aviation Ltd has considerable debt and is nearing its overdraft limit. The
bank overdraft is to be reviewed in February. The company has a year end of 31 December.
The directors want the audit completed quickly so that they can renew the overdraft in
February.
The directors are developing a new design that will allow the jets to fly for longer without
refuelling. This is still at the design stage however, industry experts believe that the new
design is not technically feasible. Despite this the directors have capitalised all of the costs of
this project to date.

Controls are weak at all three of the locations in Dublin, the USA and the UK.

As audit senior you are currently planning the audit of Aviation Ltd.

(b) Identify and discuss the factors particular to Aviation Ltd that must be taken into
account at the audit planning stage AND discuss why such factors must be taken into
account.
(15 marks)
Total 25 marks

Page 4 of 6
Question 4

The audit report can be modified without modifying the opinion where the financial
statements give a true and fair view but there is something that needs to be brought to the
attention of the user by way of an additional paragraph.

(a) Describe, according to ISA 706 (Revised) what are “Emphasis of Matter Paragraphs”
and give an example of an “Emphasis of Matter Paragraphs” as it would appear in an
audit report. (10 marks)

Your audit client Wisteria Ltd has not provided an allowance for receivables for which
recoverability is in doubt for an amount of €310,000. (This is considered a material amount.)
Wisteria Ltd has a year end of 31 December 2017.

(b) Draft the appropriate audit opinion, including all relevant paragraphs that should be
included in the independent audit report. (10 marks)

(c) Outline THREE circumstances when a matter should be considered pervasive.

(5 marks)

Total 25 marks

Question 5

(a) Describe and give examples of the FIVE fundamental principles that every auditor must
follow. (10 marks)

You will be the engagement partner in the audit of Northern Hotels Ltd as you have done so
for the last 11 years and you are also a close friend of the finance director of Northern Hotels
Ltd and he trusts you with the audit.

The audit fees for the last two years audit of Northern Hotels Ltd have not yet been received
and you know they have had a cash shortage and that you will eventually receive payment.

Northern Hotels Ltd is being sued by a former employee and has asked your audit firm to
support them in the upcoming court case.

Northern Hotels Ltd is an important client to your audit firm as it represents 18% of total fee
income. For that reason you have also decided to appoint Jane as the audit senior as she
worked in Northern Hotels Ltd as the finance director up to six months ago.

Page 5 of 6
(b) Explain FIVE ethical threats and discuss how the threats can be mitigated in the audit
of Northern Hotels Ltd. (15 marks)
Total 25 marks

Question 6

ISA 520 Analytical Procedures are compulsory at the planning and review stage of the audit.

Required:

(a) Define the term analytical procedures, including the various types of analytical
procedures and the occasions when analytical procedures can be used. (10 marks)

High Tech Solutions Ltd sells components and parts to the computer industry. There are
2,000 accounts receivables in the sales ledger. The aged accounts receivables list shows a
number of nil balances, credit balances and old balances. High Tech Solutions Ltd included a
bad debt allowance of 2% in the financial statements. Some of the accounts receivables owe
large amounts while others have very small balances owing.

(b) Discuss the audit procedures you will perform on the accounts receivables of High
Tech Solutions Ltd. (15 marks)

Total 25 marks

END

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