ACCA MOCK C

AAA (INT/UK)
Advanced Audit and
Assurance –
International & UK
September 2022

Time allowed 3 hours and 15 minutes

All THREE questions are compulsory and MUST be attempted

Do NOT open this paper until instructed by the supervisor.

This question paper must not be removed from the examination hall.

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 MO CK C QUESTIONS

All THREE questions are compulsory and MUST be attempted

1 It is 1 July 20X5. You are a manager in the audit department of Maple & Co, a firm of chartered
certified accountants, responsible for the audit of Oak Co, which has a financial year ending
30 September 20X5. Oak Co, a listed company, manufactures electrical appliances such as
televisions and radios, which are sold to retail outlets and direct to consumers via a website.
The following exhibits, available below, provide information relevant to the question:
1 An email which you have received from Holly Elm, the audit engagement partner.
2 Notes taken at a recent meeting between Holly Elm and the finance director.
3 Projected financial statements for 30 September 20X5, comparative information and
accompanying notes.
4 A reference document prepared by Maple & Co containing an overview of the
accounting requirements for share‐based payment plans.
5 An email from Cherry Hornbeam with suggestions for increasing audit efficiency on
audits performed by Maple & Co.
This information should be used to answer the question requirement within your chosen
response option(s).

Required:
Respond to the instructions in the email from the audit engagement partner. (40 marks)
Note: The split of the mark allocation is shown in the partner’s email (Exhibit 1).
Professional marks will be awarded for the demonstration of skill in communication, analysis
and evaluation, professional scepticism and judgement and commercial acumen in your
answer. (10 marks)
(Total: 50 marks)
Exhibit 1 – Email from the audit engagement partner

To: Audit manager

From: Holly Elm, Audit engagement partner
Subject: Oak Co – audit planning
Hello
You need to start planning the audit of Oak Co, and to help with this I have provided you with
some relevant information. I held a meeting yesterday with the finance director and we
discussed a number of issues which will impact on the audit planning. Based on the analysis
I have done on this industry, it is appropriate for overall materiality to be based on the
profitability of the company.
Using the information provided in Exhibits 2, 3 and 4, I require you to prepare briefing notes
for my use in which you:
(a) Evaluate and prioritise the significant audit risks to be considered in planning the audit
for the financial year ending 30 September 20X5. You should use analytical procedures
to assist in identifying audit risks. (24 marks)

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(b) Design the principal audit procedures to be performed in respect of:

(i) the recognition and measurement of the share‐based payment plan, and
(ii) long‐term borrowings. (10 marks)
I have also provided you with suggestions made by another audit manager, Cherry
Hornbeam, for improving audit efficiency within the firm. As you know, our revenue
has been declining which has impacted the firm’s profitability. We need to look at ways
of becoming more efficient to try and reverse this trend.
(c) Using the information in Exhibit 5, comment on the practice management and quality
management issues raised by Cherry Hornbeam’s suggestions to improve the audit
firm’s efficiency and profitability. (6 marks)
Thank you.

Exhibit 2 – Notes from client meeting

The manufacturing sector has suffered over recent years due to fierce competition from
overseas companies which have a much lower cost base and as a consequence are able to
sell at lower prices. During the year, Oak Co lost several customer contracts to overseas
competitors. In order to increase sales, a new division has been created to sell products
directly to the consumer via a new website which will reduce costs by cutting out the
intermediary. This is seen as a major strategic development for the company. The new
website was launched on 1 June 20X5 and Oak Co is yet to see how successful this strategy
will be. The website has generated minimal sales in its first month and an advertising
campaign is currently being run to promote the site and generate business.
All products sold by Oak Co are sold with a warranty that entitles customers to return the
item for a repair or replacement within the first twelve months if the product does not work
as intended. Historically the provision has been calculated based on the average actual
warranty costs for the preceding five years. This year management have changed the basis
of the provision to the average actual warranty costs for the preceding three years.
On 1 October 20X4, Oak Co established an equity‐settled share‐based payment plan for its
senior management team. 100 executives and senior managers have received 100 share
options each, which vest on 30 September 20X7 if the person remains in employment at that
date, and if Oak Co’s share price increases by 10% per annum. The finance director has
explained that as Oak Co’s share price has fallen by 5% in the last six months, it is felt that
the condition relating to the share price will not be met this year end and therefore no
expense has been recognised this year.
Oak Co is in the process of renegotiating the loan to extend the repayment dates as
$12.5 million is due for repayment in March 20X6 and the company does not have sufficient
cash to make this repayment. The company is also seeking to increase the loan amount by
$5 million to help with cash flow until business picks up.

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Exhibit 3 – Projected financial statements of Oak Co

Statement of profit or loss
Projected to Actual to
30 September 30 September
Note 20X5 20X4
$000 $000
Revenue 25,700 29,300
Cost of sales (15,420) (15,900)
–––––– ––––––
Gross profit 10,280 13,400
Operating expenses (6,200) (7,750)
–––––– ––––––
Operating profit 4,080 5,650
Finance costs (1,500) (1,500)
–––––– ––––––
Profit before tax 2,580 4,150
–––––– ––––––
Statement of financial position
Note As at As at
30 September 30 September
20X5 20X4
Projected Actual
ASSETS $000 $000
Non‐current assets
Property plant and equipment (1) 85,000 75,750
Intangible assets (2) 1,250 –
–––––– ––––––
86,250 75,750
–––––– ––––––
Current assets
Inventories 1,800 1,715
Trade receivables 4,928 4,815
Cash and cash equivalents 100 2,350
–––––– ––––––
6,828 8,880
–––––– ––––––
Total assets 93,078 84,630
–––––– ––––––

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EQUITY AND LIABILITIES

Equity
Share capital 20,000 20,000
Revaluation reserve (1) 10,000 –
Retained earnings 32,278 34,895
–––––– ––––––
Total equity 62,278 54,895
–––––– ––––––
Non‐current liabilities
Long‐term borrowings (3) 25,000 25,000
Provisions (4) 1,000 1,250
–––––– ––––––
26,000 26,250
–––––– ––––––
Current liabilities
Bank overdraft (5) 1,300 –
Trade and other payables 3,500 3,485
–––––– ––––––
4,800 3,485
–––––– ––––––
Total liabilities 30,800 29,735
–––––– ––––––
Total equity and liabilities 93,078 84,630
–––––– ––––––
Notes:

(1) On 1 March 20X5, Oak Co’s management had all of the company’s properties revalued
by a firm of chartered surveyors resulting in a revaluation surplus of $10 million which
has been recognised in other comprehensive income.
(2) Intangible non‐current assets relate to the development of the new website which
allows direct consumers to purchase goods directly from Oak Co rather than
purchasing from a retailer. During the year, $1.25 million has been spent on developing
the website which launched on 1 June 20X5.
(3) The long‐term borrowings are due to be repaid in two equal instalments on
31 March 20X6 and 20X7.
(4) Provisions relate to a 12‐month assurance type warranty which is provided with all
goods sold.
(5) The overdraft limit agreed with Oak Co’s bank is $1.5 million.

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Exhibit 4 – Reference document – Extract from Maple & Co’s internal technical guidance
for audit staff
IFRS®2 Share‐based Payments
If an entity issues share options (e.g. to employees), the fair value of the option at the grant
date should be used as the cost of the services received.
The expense in relation to the share‐based payment must be recognised over the period in
which the services are rendered or goods are received (vesting period) and a corresponding
credit recognised in equity.
The grant date is the date a share‐based payment transaction is entered into.
The vesting date is the date on which the cash or equity instruments can be received by the
other party to the agreement.

Exhibit 5 – Email from Cherry Hornbeam with suggestions for increasing audit efficiency

To: Holly Elm, Audit engagement partner

From: Cherry Hornbeam, Audit manager
Subject: Suggestions for increasing efficiency and profitability of audits
Hello
In response to your request for suggestions on how to improve the efficiency and
profitability of audits performed by the firm, below are some ideas for your consideration.
 To make our audits more efficient, I think we should fix materiality at the planning
stage at the maximum possible materiality level for all audits. This would reduce the
work we need to do as more balances would not be deemed material and would
therefore not require as much testing.
 I also think we can cut the firm’s overheads by reducing our spending on training.
We spend a significant amount of money on external training courses for junior
members of the audit team, and on Continuing Professional Development for our
qualified members of staff. We could bring these in‐house and have senior
managers conduct the training instead. This also has the advantage that we can
cancel courses at late notice without any cost if needed, for example, if urgent client
work comes up.
 We could also guarantee our clients that all audits will be completed quicker than
last year. Reducing the time spent on each assignment will force the firm to become
more efficient. This will enable us to take on more audit clients and generate more
revenue without the need for extra resource.
Thank you, Cherry

END OF QUESTION 1

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2 It is 1 July 20X5. You are a manager in the audit department of Beech & Co, responsible for
the audits of Fir Co and Willow Co. The audits of these clients are nearing completion and the
auditor’s reports are due to be signed shortly. Both clients have a year end of 31 March 20X5.
The following exhibits, available below, provide information relevant to the question:
1 Fir Co completion matters – details of an issue relating to a decommissioning provision
discovered during the audit.
2 Willow Co draft auditor’s report and supplementary information.
This information should be used to answer the question requirements within the response
option provided.

Required:
(a) Using the information contained in Exhibit 1:
(i) Comment on the matters that should be discussed with management in
relation to the decommissioning provision. (6 marks)
(ii) Discuss the implications for the auditor’s report, if any, if no adjustment is
made to the financial statements. (4 marks)

(b) Using the information in Exhibit 2, critically appraise the draft auditor’s report of
Willow Co for the year ended 31 March 20X5, prepared by the audit senior.
Note: You are NOT required to re‐draft the extracts from the auditor’s report.
(10 marks)
Professional marks will be awarded for the demonstration of skill in analysis and
evaluation, professional scepticism and judgement and commercial acumen in your
answer. (5 marks)
(Total: 25 marks)

Exhibit 1 – Fir Co completion matters

Fir Co is a company involved in energy production. It owns several nuclear power stations
which have a remaining useful life of 20 years. Fir Co intends to decommission the power
stations at the end of their useful life. The statement of financial position at 31 March 20X5
recognises a provision in respect of decommissioning costs of $97 million which has been
measured using current costs. The audit senior has calculated that the provision should be
$83 million after taking into account inflation and discounting. The notes to the financial
statements disclose the opening and closing value of the provision but no other information
is provided. The financial statements show profit before tax of $115 million and total assets
of $305 million.

Exhibit 2 – Willow Co draft auditor’s report

You are also the manager responsible for the audit of Willow Co, a large client of your audit
firm, operating in the pharmaceutical industry. The audit work for the year ended 31 March
20X5 is nearly complete, and you are reviewing the draft auditor’s report which has been
prepared by the audit senior. You are aware that Willow Co is developing a new drug and has
incurred significant research and development costs during the year, most of which have
been capitalised as an intangible asset. The asset recognised has a carrying amount of
$4.4 million.

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Total assets recognised in the draft statement of financial position are $55 million, and
Willow Co has a draft profit before tax of $3.1 million. Having reviewed the audit working
papers, you are aware that management has not allowed the audit team access to the results
of scientific tests and trials performed on the new drug being developed. An extract from the
draft auditor’s report is shown below:

Basis of opinion
Evidence available to us in respect of the intangible asset capitalised was limited because of
restrictions imposed on our work by management. As a result of this we have been unable
to verify the appropriateness of the amount capitalised, and we are worried that the asset
may be overvalued.
Because of the significance of the item, and the lack of integrity shown by management, we
have been unable to form a view on the financial statements as a whole.
Opinion: Disclaimer on view given by financial statements
Because of the lack of evidence that we could obtain over the intangible asset, we are unable
to form an opinion as to whether the financial statements are properly prepared in
accordance with the relevant financial reporting framework.

END OF QUESTION 2

3 It is 1 July 20X5. You are the manager in Sycamore & Co, a firm of Chartered Certified
accountants.
The following exhibits, available below, provide information relevant to the question:
1 Juniper Co – engagement to examine and report on a forecast.
2 Juniper Co – request to attend a meeting with the bank.
3 Poplar Co – findings from post‐issuance quality review.
This information should be used to answer the question requirements within the response
option provided.

Required:
(a) Using the information in Exhibit 1, recommend the procedures that should be
performed in order to examine and report on the forecast to be provided to the bank.
(8 marks)
(b) Using the information in Exhibit 2, comment on the ethical and professional issues
arising in relation to the request for your firm to attend the meeting with the bank.
(4 marks)
(c) Using the information in Exhibit 3, comment on the quality of the audit performed
discussing the quality management and other professional issues raised. (8 marks)
Professional marks will be awarded for the demonstration of skill in analysis and
evaluation, professional scepticism and judgement and commercial acumen in your
answer. (5 marks)
(Total: 25 marks)

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Exhibit 1 – Juniper Co
Sycamore & Co has agreed to perform an assurance engagement for Juniper Co, an audit
client of the firm. The engagement will be a review of prospective financial information which
is needed to support a loan application. Juniper Co had a financial year ended 31 December
20X4, and an unmodified opinion was issued on these financial statements last month.
Sycamore & Co’s partner responsible for ethics has agreed that any threats to objectivity will
be reduced to an acceptable level through the use of a team separate from the audit team
to perform the work.
Juniper Co is a supplier of components used in the manufacture of vehicle engines. Due to a
downturn in the economy, and in the automotive industry particularly, the company has
suffered a decline in sales and profitability over the last two years, mainly due to the loss of
several key customer contracts. Many of Juniper Co’s non‐current assets are impaired in
value, and a significant number of receivables balances have been written off in the last six
months.
In response to the deteriorating market conditions, the management of Juniper Co decided
to restructure the business. The main manufacturing facility will be reduced in size by two‐
thirds, and investment will be made in new technology to make the remaining operations
more efficient, and to enable the manufacture of a wider variety of components for use in
different types of engines and machinery. In order to fund this restructuring, the
management of Juniper Co approached the company’s bank with a request for a significant
loan. You are aware that without the loan, Juniper Co is unlikely to be able to restructure
successfully, which will cast significant doubt over its ability to continue as a going concern.
Your firm has been engaged to provide assurance on the forecasts and projections that the
bank will need to see in order to make a decision regarding the finance requested.

Exhibit 2 – Request to attend a meeting with Juniper Co’s bank

Management has also requested that your firm attends a meeting with the bank at which the
forecasts will be discussed.

Exhibit 3 – Poplar Co
You are also responsible for carrying out periodic post‐issuance quality reviews of audit files.
You are carrying out a review of the completed audit file of a client, Poplar Co, for the year
ended 31 December 20X4. A number of matters have been brought to your attention.
A written representation was requested from Poplar Co’s management regarding its
intention to sell an operating division in 20X5. Management refused to provide the
representation stating that it did not want the details of the sale agreement becoming public
knowledge. No further action was taken and the audit opinion was not modified in respect
of this matter.
On 5 April 20X5 notification was received from the directors of Poplar Co that they had
settled a claim made by a customer. The claim related to an accident the customer blamed
on defective goods supplied by Poplar Co. The amount claimed was disclosed as a contingent
liability in the financial statements. The auditor’s report was signed on 28 March 20X5 with
an unmodified opinion. The financial statements were issued on 12 April 20X5. The amount
paid to the customer represented 25% of the profit of Poplar Co. No action was taken by
Sycamore & Co as a result of this notification.

END OF QUESTION 3

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