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EXAMINATION PAPER: ACADEMIC SESSION 2019/2020

Campus Greenwich Maritime and International Partners

Faculty Business

Department Accounting & Finance

Module Code ACCO 1152

Module Title Audit and Assurance - Exam 1

Level 6

Duration THREE HOURS

Date May 2020

Module co-ordinator: Dr Dawn Reilly

INSTRUCTIONS TO CANDIDATES

Section A: Compulsory question (this carries 10 marks).

Section B: Answer THREE of the four questions (each question carries 30 marks).

This is a CLOSED book examination.

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Module Title Audit and Assurance – Exam 1
Module Code – ACCO 1152
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SECTION A – COMPULSORY – You must answer Question 1

Question 1

There are five elements of an internal control system:

i. The control environment

ii. The entity’s risk assessment process

iii. The information system relating to financial reporting

iv. Control activities

v. Monitoring of controls

Required:

Briefly explain the meaning of each of the five elements of an internal control
system.

Total 10 marks

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Module Code – ACCO 1152
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SECTION B – Answer THREE of the following four questions ONLY

Question 2

Your audit firm, AMS LLP, has a new client, Tasty Meals Limited (TM). TM is a
food manufacturer whose customers are major supermarkets and other retailers. You
have found out the following information in your discussions with the client:

• Most of TM’s ingredients are imported from overseas suppliers who invoice
TM in their local currencies.
• TM’s major customers have experienced a slowdown in trade over the past
few years and are often late in paying their invoices.
• One large customer, Shopstop, is a large chain of smaller shops which went
into liquidation before the year end and TM are not sure if they will receive
the £200,000 which they are owed by Shopstop.
• In order to cover any short term cashflow difficulties, the directors have
decided to ask the bank for an increase in their overdraft facility.

Materiality for the audit has been set at £175,000.

Required:

a) Explain the risks of material misstatement likely to affect TM’s financial

statements based on the information given above.
12 marks

b) i. Explain what is meant by the following:

• materiality for an audit; and
• performance materiality for an audit.
8 marks

ii. If the materiality threshold is increased to £250,000 for the TM audit,

explain how this would affect the treatment by the auditors of the amount
owed by Shopstop.
4 marks

c) The audit partner has reminded the audit team of TM that they should use their
professional scepticism when they are carrying out their audit procedures.

Required:

Explain the meaning of professional scepticism and the reasons why it is

fundamental in audit work.
6 marks

Total 30 marks

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Module Title Audit and Assurance – Exam 1
Module Code – ACCO 1152
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Question 3

“Corporate Governance is a system by which companies are directed and controlled.

Good corporate governance is important because the owners of the company and the
people who manage the company are not always the same.” (ACCA)

Required:

a) Discuss the agency relationship between the directors and shareholders of a

company. Your answer should include an explanation of the auditor’s
relationship with the shareholders.
b) 8 marks

c) The corporate governance code outlines the responsibilities of both the Executive
and the Non-Executive Directors.

Required:

i. Explain the differences between Executive and Non-Executive

Directors
8 marks

ii. Give four examples of the responsibilities of the Executive Directors.

8 marks

d) Outline the matters the auditors would communicate to Those Charged With
Governance.
6 marks

Total 30 marks

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Module Code – ACCO 1152
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Question 4

Both legislation and professional bodies’ codes of ethics set out clear requirements for
auditors.

Required:

a) List and explain the five ‘fundamental principles’ found in these codes.
10 marks

b) Woody and Buzz LLP are a two-partner firm of statutory auditors. The following
information relates to two of their clients: Jessy Corp and Andy plc.

i. Jessy Corp is going to employ someone to run their payroll function.

One of the audit partners of Woody and Buzz LLP has suggested that
their firm provides this non-audit service to Jessy Corp.

ii. Andy plc has threatened to sue Woody and Buzz LLP in the past.
Woody and Buzz LLP previously decided to resign as auditors of
Andy plc but Woody and Buzz LLP’s solvency problems make it
necessary to retain Andy plc as client.

Required:

Describe the threats to the ethical principles which may arise in each of the
situations outlined above and make recommendations to Woody and Buzz LLP
in relation to them.

You should discuss two threats for scenario i. and two threats for scenario ii.

i. Jessy Corp 10 marks

ii. Andy plc 10 marks

Total 30 marks

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Module Code – ACCO 1152
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Question 5

You have taken over the audit manager role for Moon Pool Ltd, a garden accessories
supplier. The previous audit manager has left the following notes on the purchases
system.

1. There is no central purchasing department. Departmental managers make

requests for purchases directly to suppliers whenever they need to.

2. Once the goods are delivered, the manager who ordered them is responsible for
picking them up from the storeroom.

3. The supplier sends an invoice to the accounts department of Moon Pool.

Someone from the accounts department then calls the departmental manager
who ordered the goods to check the amount to be paid.

Required:

a) For Moon Pool Limited’s purchases cycle:

i. Identify three deficiencies in the internal control system;

ii. Give the possible consequence of each deficiency; and
iii. Suggest possible ways to improve the internal control system.
18 marks

b) As part of the planning process, an auditor documents and tests the client’s
internal controls.

Required:
Explain two ways in which an auditor can document a client’s internal
control system.
6 marks

c) Any internal control system has limitations.

Required:
Explain three possible limitations in an internal control system
6 marks

Total 30 marks
End of paper.

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Module Code – ACCO 1152
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