April (Semester 1 Deferrals) Examinations 2021-2022

Course Instance 1MIA1

Exams MSc International Accounting & Analytics

Module Code AY5110

Module AY5110 Auditing & Assurance I

(Bonded with AY5116)

External Ms. Elaine Greaney

Examiner(s)
Internal Prof. Breda Sweeney
Examiner(s) Mr. Frank Conaty

Instructions:
Candidates are required to attempt:
Question 1
And
Either Question 2 or 3

Duration Two hours

Number of Pages including this one: 8

Pages
School J. E. Cairnes School of Business & Economics

Requirements:
Release in Exam Venue Yes 
Handout N/A
MCQ N/A
Statistical Tables N/A
Graph Paper N/A
Log Graph Paper N/A
Other Material: Students are permitted to bring the following
publications into the examination:

 Irish Auditing & Accounting Supervisory Authority –

Ethical and Auditing Standards 2021

Page 1 of 8
Question 1

Extended responses to these questions are not required. They may be answered
in note form. Each question carries 7 marks except for the final two parts (e) and
(f) which carry 6 marks each.

(a) In the context of auditor independence distinguish between the ‘fact’ and the
‘appearance’ of independence and explain why might the latter be regarded as
important?
7 marks

(b) The financial statement element ‘receivables’ can be regarded as a set of

‘assertions’ in relation to amounts due to the company from customers. Identify
four ‘receivable’ assertions and briefly explain what they represent to the users
of the financial statements.
7 marks

(c) Identify and explain the significance of three key considerations that the auditor
must address when deciding to accept or continue with an audit engagement.
7 marks

(d) In most instances, audit evidence is cumulative and persuasive rather than
singular and absolute in assurance of truth and fairness. In the context of the
auditor’s responsibility to obtain ‘sufficient appropriate audit evidence’, what do
you understand this statement to mean? Use examples where appropriate.
7 marks

(e) Set out your understanding, with examples, of what is meant by the ‘qualitative’
aspect of materiality in an auditing context.
6 marks

(f) Distinguish between and in the context of ‘assertions’ of ‘completeness’ and

‘existence’, explain the nature and purpose of ‘tracing’ and ‘vouching’ as
substantive tests of detail.
6 marks
Total marks 40

Cont/---

Page 2 of 8
Question 2

Connacht Cleaning Products Ltd. (CCP) manufactures household cleaning products

for the Irish and European markets. The company’s year-end is 31 December 2021.
You are the audit manager with the company’s auditors, Lally & Co. and will be
responsible for the forthcoming audit of CCP. You attended the planning meeting with
the engagement partner and senior management of CCP last week. CCP’s general
business strategy is to grow both organically and through acquisitions in order to
maximise returns and dividends to shareholders. CCP has enjoyed a strong
performance in 2021, largely due to an increase in demand for their products due to
Covid-19. Revenues have grown 18% to €7.4 million and profit before interest and tax
has come in at €628,000. Initial materiality has been assessed at 1% of net assets =
€37,500.

Notes from planning meeting for CCP

i) The company has invested heavily in upgrading (updating, repairing and

replacing) and improving production lines. This resulted in expenditure of €1.4
million.

ii) As production has increased, the company has expanded the number of
warehouses it uses to store inventory. It now uses four warehouses; two existing
warehouses owned by CCP and two leased from a third party. There will be
inventory counts taking place at all four of these sites at the year-end.

iii) CCP administer their own payroll system. In mid-2021, a new payroll system
was commissioned. For a period of two months, the old and new systems
operated in parallel. While there were some ‘initial problems’ with the system
management are happy that the system is now running smoothly.

iv) CCP has recently changed its customer credit assessment and credit
management policy and have recruited a new fully dedicated credit controller.
With a likely significant improvement in defaulting customers, the finance
director feels that it is not necessary to continue to maintain a provision for trade
receivable credit loss and so has released the opening general provision of
€55,000 in full.

v) CCP has a small R&D department. Up to December 2021, €350,000 of costs

were incurred in developing a new floor cleaner which have been accounted for
as an intangible asset. The company started this process in January 2020 and
is close to launching their new product into the market place, expected in 2022
or early 2023.

Question 2 continues on the following page/---

Page 3 of 8
Question 2 continued from the previous page…

vi) The finance director stated that there was a problem in October in the mixing of
raw materials within the production process that resulted in a batch of
dishwasher tabs not meeting quality control standards. When the tabs were
used in low temperature cycles, a yellow residue was left on the dishes. A
quantity of the product was sold in 2021; however, due to complaints by
customers the tabs were withdrawn from market. No adjustment has been made
to the valuation of the damaged inventory, which is still held at cost of €115,000
at the year-end. Management have estimated that there would be significant
costs associated with converting the finished product into usable raw material
for use in production. Nevertheless, they feel that this is the most economical
way forward as otherwise the product would have to be disposed of in an
environmentally safe manner at an even greater cost.

vii) The management of CCP are due to be paid a significant annual bonus based
on a performance factor that is made up of a combination of the percentage
increase in revenues and the change in net assets year on year.

Required

a) Explain the ‘Audit Risk Model’, its components, how they interact with each other,
and how differing risk assessments for each component may impact audit strategy.
10 marks
b) In relation to requirement 1 and 2 below, for each of the items in the notes from
the planning meeting of CCP above:
1. provide an assessment of the implications for audit risk assessment explaining
the nature of the risk;
14 marks
2. identify which if any financial statement assertions might be effected and state
why (you should limit your answer to the two assertions you feel are most
relevant in this regard); and
7 marks
3. set out a brief view on an appropriate response in terms of planned audit
procedures for the following matters only:
 The treatment of the €1.4 million expenditure incurred in upgrading the
production lines (item i) above);
 The release of the €55,000 provision for receivable credit loss (item iv)
above); and
 The damaged inventory (item vi) above.
12 marks
Question 2 continues on the following page/---

Page 4 of 8
Question 2 continued from the previous page…

c) Assessing materiality requires careful judgement by the auditor.

Critically comment on the method used to guide the assessment of materiality for
CCP above suggesting, with reasons, whether you feel an alternative approach
may be warranted and what that approach might be.
9 Marks

d) After the completion of the audit of CCP, it came to your attention that your audit
senior, Jason, had been approached by CCP management and offered a job.
While this had occurred during the audit, Jason had told CCP that he could not
consider the offer until after the audit was over. You now understand that Jason
has in fact accepted the position. Set out your consideration of the ethical
implications and suggest an appropriate response.
8 Marks

Total marks 60

Cont/-

Page 5 of 8
Question 3

Quick Parts plc is an importer and distributor of construction industry consumables.

2020 was a particularly difficult year with the impact of Covid-19 on construction
activity. Coming out of the Covid-19 lockdown difficulties in 2021, the company
experienced further trading difficulties with input prices increasing at a time when there
is increased competition in the market.

As a senior member of the 2021 audit team for Quick Parts, you are reviewing the audit
plan with a particular focus on Sales and Receivables. The inherent risk assessment
for Sales and Receivables is ‘medium’. Interim systems work, carried out three months
before the year-end, proved satisfactory, and therefore the planned ‘low’ control risk
assessment for Sales & Receivables was confirmed. Materiality has been set at
€20,000.

You have extracted the following information from the draft financial statements:

2021 2020 2019 2018

Draft
€ € € €
Income Statement; extract
Sales Revenue 7,203,072 5,385,960 7,244,204 7,631,568
Cost of sales 6,089,160 4,493,520 5,348,000 5,729,600
Gross Profit 1,113,912 892,440 1,896,204 1,901,968
Net operating expenses 919,368 888,903 968,952 879,050

Operating profit 194,544 3,537 927,252 1,022,918

Balance Sheet Extract

Receivables
Trade receivables 989,248 793,416 751,192 802,464
Provision for credit loss 18,008 13,465 18,111 19,079
971,240 779,951 733,081 783,385
Other receivables 166,400 89,440 100,880 153,868
Prepayments 47,320 57,720 56,134 62,400
1,184,960 927,111 890,095 999,653

Question 3 continues on the following page/---

Page 6 of 8
Question 3 continued from the previous page…

In addition, you have ascertained the following:

(i) Three large customers account for 42% of the trade receivables. The balance
is made up of approximately 163 smaller accounts.
(ii) The company’s policy is to maintain a general provision for trade receivable
credit loss equal to a quarter of one percent of turnover.
(iii) Other receivables include loans to directors amounting to €108,000.
(iv) Prepayments are made up of half a dozen small accounts.

Required

a) Apart from the audit of ‘Sales’ and ‘Trade Receivables’ and focusing on the audit
as a whole, considering the detail on the trading performance and conditions being
experienced by Quick Parts provided in the opening paragraph above, how might
this inform the planned strategy for the audit of the company.
8 marks

b) Complete a brief analytical review of Sales and Receivables and informed by this
and the details above, what in your opinion would be an appropriate ‘Detection
Risk’ assessment for the audit of ‘Sales’ and Receivables’ and why.
8 marks

c) Given this risk assessment, prepare a detailed substantive audit work programme
for the audit of ‘Sales’ and ‘Receivables’.
24 marks

d) During the course of completing your substantive work, the following error came to
light. Due to a cut off error, some January 2022 sales were recorded in the
December 2021 financial system. The sales amounted to €25,830 including VAT
(Sales Tax) of 23%. The actual goods were still in the company’s storeroom at the
year end and included in closing inventory at cost. Set out an appropriate audit
response to this discovery and suggest what the appropriate adjusting entries to
the financial statements might be.
8 marks

Question 3 continues on the following page/---

Page 7 of 8
Question 3 continued from the previous page…

e) Consider the two alternative expressions of the audit opinion below and critically
comment on the impact of the differing wordings and what this might meant for the
auditor and the users of the financial statements:

i. In our opinion the accompanying Financial Statements

present fairly, in all material respects, (or give a true and fair
view of) the financial position of the Company as at December
31, 20X1, and (of) its financial performance and its cash flows
for the year then ended in accordance with the reporting
framework under which they were prepared (Usually in Ireland
IFRS or IAS’s).
----------- or -------------

ii. In our opinion the accompanying Financial Statements:

- present fairly, in all material respects, (or give a true

and fair view of) the financial position of the Company
as at December 31, 20X1, and (of) its financial
performance and its cash flows for the year then ended.

- have been properly prepared in accordance with the

reporting framework under which they were prepared
(Usually in Ireland IFRS or IAS’s).

12 marks

Total marks: 60

END OF PAPER

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