Class: Certificate in Accounting and Finance Total marks :100 Marks

CAF-09: Audit and Assurance Time allowed:3hours

Teacher : Mr.Muhammad Asif Reading Time: 15 minutes
MOCK 22 August 2017

Name: ___________________________________
RiseID:_________________________

Q. 1 (a) State four control objectives relating to inventory. (02)

(b) Give three examples (with brief explanation) of sample selection methods that can be used in
audit sampling. (03)
(c) Name two types of CAAT that are commonly used. (explanation not required) (01)
(d) There are three criteria for evaluating internal audit function. State these criteria, including two
factors that can be considered in assessing each criteria. (03)
(e) State four types of account which should receive special attention when picking a sample for a
receivables confirmation. (02)
(f) Explain why the control environment in a small not-for-profit entity might be weak. (02)
(g) Briefly discuss the use of analytical procedures at the review stage of the audit. (03)
(h) Explain THREE limitations of the internal audit function. (03)

Q. 2 You are an audit senior for Mills & Co. Mills & Co were recently appointed as external auditors of
Sleeptight Co for the year ending 31 March 20X0 and you are in the process of planning the audit.
The previous auditors issued an unmodified audit opinion last year and access to prior year
working papers has been granted.

Sleeptight's principal activity is the manufacture and sale of expensive high quality beds which are
largely sold to luxury hotels and owners of holiday apartments. Each bed is crafted by hand in the
company's workshop. Construction of each bed only begins once a customer order is received, as
each customer will usually want their bed to have a unique feature or to be in a unique style.

The business is family run and all the shares in Sleeptight are owned by the two joint Managing
Directors.
The directors are two sisters, Anna and Sophie Jones and they both have a number of other
business interests. As a result they only spend a few days a week working at the company and rely
on the small accounts department to keep the finances in order and to keep them informed. There
is no finance director but the financial controller is a qualified accountant.

Sleeptight requires customers who place an order to pay a deposit of 40% of the total order value at
the time the order is placed. The beds will take 4 to 8 weeks to build, and the remaining 60% of the
order value is due within a week of the final delivery. Risks and rewards of ownership of the beds
do not pass to the customer until the beds are delivered and signed for. Beds also come with a two
year guarantee and the financial controller has made a provision in respect of the expected costs to
be incurred in relation to beds still under guarantee.

Although the company does have some employees working in the workshop, it often uses external
subcontractors to help make the beds in order to fulfil all its orders. These sub-contractors should

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 invoice Sleeptight at the end of each month for the work they have carried out, but sometimes do
not get round to it until the following month.

The company undertakes a full count of raw materials at the year end. The quantities are recorded
on inventory sheets and the financial controller assigns the costs based on the cost assigned in the
previous year or, if there was no cost last year, using the latest invoice. Most beds are made of oak
or other durable woods and the cost of these raw materials is known to fluctuate considerably.

There has been steady growth in sales in recent years and, in January 20X0 Sleeptight purchased a
building close to its existing workshop. Anna and Sophie plan to turn this into another workshop
which should more than double its existing manufacturing capacity. The new workshop is currently
undergoing extensive refurbishment in order to make it suitable for bed manufacturing.

The purchase of the new premises was funded by a bank loan repayable in monthly instalments
over 12 years and has covenants attached to it. These covenants are largely profit related measures
and if they are breached the bank has the option to make the remaining loan balance repayable
immediately.

Required
Identify and explain SEVEN audit risks in respect of the financial statements of Sleeptight for the
year ending 31 March 20X0. For each risk suggest a suitable audit response. (14 marks)

Q. 3 The growing recognition by management of the benefits of good internal control and the
complexities of an adequate system of internal control have led to the development of internal
auditing as a form of control over all other internal controls. The emergence of internal auditors as
experts in internal control is the result of an evolutionary process similar in many ways to the
evolution of external auditing.

Required
(a) Explain why the internal and independent external auditors' review of internal control
procedures differ in purpose. (02)

(b) Explain the reasons why internal auditors should or should not report their findings on internal
control to the following company officials:
(i) The board of directors (01)
(ii) The chief accountant (01)

Q. 4 Derek, a limited liability company, operates a computerised purchase system. Invoices and credit
notes are posted to the purchases ledger by the purchases ledger department. The computer
subsequently raises a cheque when the invoice has to be paid.

Required
List the controls that should be in operation:
(a) Over the addition, amendment and deletion of suppliers, ensuring that the standing data
only includes suppliers from the company's list of authorised suppliers (02)
(b) Over purchase invoices and credit notes, to ensure only authorised purchase invoices and
credit notes are posted to the purchase ledger. (02)

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Q. 5 (a) Give two examples of tests to verify prepayments. (02)
(b) What two matters should auditors consider in auditing dividends paid? (02)

(c) Describe how you would test the bank reconciliation shown below. (04)
ANOTHER CO
BANK RECONCILIATION 31 DECEMBER 20X1
$ $
Balance per bank statement 31 December 20X1 35,111.91
Add: deposits outstanding
30 December (ref 1122) 10,222.00
31 December (ref 1123) 25,000.00 35,222.00
70,333.91
Less: outstanding cheques
2411 10,250.00
2721 2,300.40
2722 5,000.00
2723 1,345.25
2724 1,900.00
2726 2,200.00
2728 1,005.50
2729 1,576.75
2730 1,255.65 26,833.55
Balance per bank in the general ledger 31 December 20X1 43,500 36

Q. 6 (a) ISA 320 Materiality in planning and performing an audit deals with the auditor's responsibility
to apply the concept of materiality in planning and performing an audit of financial statements.
Materiality has both qualitative and quantitative aspects.

Required
Explain what is meant by 'performance materiality' and contrast it with materiality for the financial
statements as a whole. Give two examples of qualitative factors which may cause misstatements of
quantitatively small amounts to be material. (06)

(b) Explain the difference between the overall audit strategy and the audit plan and state the key
contents of the overall audit strategy document. (04)

Q. 7 One method of recording an audit client's accounting and internal control system is using narrative
notes.
(a) Describe two advantages and two disadvantages of using narrative notes to document
accounting and control systems. (04)
(b) Briefly describe two alternative methods of documenting accounting and control systems. (02)

Q. 8 (a) Auditors are required to plan and perform an audit with professional scepticism, to exercise
professional judgement and to comply with ethical standards.

Required

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 (i) Explain what is meant by ‘professional scepticism’ and why it is so important that the
auditor maintains professional scepticism throughout the audit. (03)
(ii) Define ‘professional judgement’ and describe two areas where professional judgement is
applied when planning an audit of financial statements. (03)

(b)
Assume you are the audit manager of Piano & Co. The finance director of Recorder (a mobile phone
company which is your audit client) informed the audit partner that the reason for appointing
Piano & Co as auditors was because they audit other mobile phone companies, including Recorder’s
main competitor. The finance director has asked how Piano & Co keeps information obtained
during the audit confidential.

Required
Explain the safeguards which your firm should implement to ensure that this conflict of interest is
properly managed. (04)

Q. 9 (a) ISA 560 Subsequent events provides guidance on the responsibilities of auditors regarding
subsequent events. Briefly explain the responsibilities of auditors for facts discovered up to the
date of the auditor's report, and facts discovered after the date of the auditor's report (04)

(b) ISA 580 Written representations explains the purpose and use of written representations as
audit evidence. State six items that could be included in a written representation. (03)

(c) ISA 620 Using the work of an auditor's expert provides guidance to auditors on relying on work
carried out by an auditor's expert.

Required
(i) Describe the factors that should be considered by the auditor when evaluating the work
carried out by the expert. (02)
(ii) Explain the actions the auditor should take if they conclude that the results of the expert's
work do not provide sufficient appropriate audit evidence or if the results are inconsistent
with other audit evidence. (02)

Q. 10 You are the audit manager of Kiwi & Co and you have been provided with financial statements
extracts and the following information about your client, Strawberry Kitchen Designs Co
(Strawberry), who is a kitchen manufacturer. The company’s year end is 30 April 20X2.

Strawberry has recently been experiencing trading difficulties, as its major customer who owes
$0.6m to Strawberry has ceased trading, and it is unlikely any of this will be received. However the
balance is included within the financial statements extracts below. The sales director has recently
left Strawberry and has yet to be replaced.

The monthly cash flow has shown a net cash outflow for the last two months of the financial year
and is forecast as negative for the forthcoming financial year. As a result of this, the company has
been slow in paying its suppliers and some are threatening legal action to recover the sums owing.

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Due to its financial difficulties, Strawberry missed a loan repayment and, as a result of this breach in
the loan covenants, the bank has asked that the loan of $4.8m be repaid in full within six months.
The directors have decided that in order to conserve cash, no final dividend will be paid in 20X2.

Financial statements extracts for year ended 30 April:

DRAFT ACTUAL
20X2 20X1
$m $m
Current Assets
Inventory 3.4 1.6
Receivables 1.4 2.2
Cash – 1.2

Current Liabilities
Trade payables 1.9 0.9
Overdraft 0.8 –
Loans 4.8 0.2

Required
(a) Explain the potential indicators that Strawberry Kitchen Designs Co is not a going concern.
(06)
(b) Describe the audit procedures that you should perform in assessing whether or not the
company is a going concern. (03)

(c) Having performed the going concern audit procedures, you have serious concerns in relation
to the going concern status of Strawberry. The finance director has informed you that as the
cash flow issues are short term he does not propose to make any amendments to the financial
statements.
Required
(i) State Kiwi & Co’s responsibility for reporting on going concern to the directors of
Strawberry Kitchen Designs Co; and (02)
(ii) If the directors refuse to amend the financial statements, describe the impact on the
auditor’s report. (03)

(THE END)

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