Certificate in Accounting and Finance Stage Examination

03 June, 2022
60 minutes – 32 marks
Additional reading time – None

Audit and Assurance

Test # 6
Instructions to examinees:
(i) Answer all SIX questions.
(ii) Answer in BLACK ballpoint pen only.
(iii) Attempt each part of the question on a new page.

Q.1 During the audit of Tether Limited (TL), the audit senior noticed that in one of the floors of
the office building, a business other than that of TL was being run. On inquiry with TL’s
management, it was identified that the floor was given to the daughter of a director for six
months for running her online business. No rent is being charged as it has been a vacant floor
and carries no marginal cost to TL.
Required:
Evaluate the above arrangement and discuss the procedures which should be performed by the
audit senior. (09)

Q.2 During the audit of Cedar Limited (CL), your audit team observed that CL has sold one of its
freehold lands to Maple (Private) Limited (MPL) at a loss of Rs. 10 million. Your team’s further
investigation of the matter and reading of the minutes of the board of directors’ meeting revealed
that:

(i) a director of CL holds 20% shareholdings in MPL which makes this entity as CL’s related
party; and
(ii) MPL would pay 30% of the consideration in cash and the remaining amount over a
period of five years.

Required:
Evaluate the above related party transaction and suggest any eight key audit procedures that your
team should perform in this respect. (10)

Q.3 The draft statement of financial position of ABC Company includes an amount of Rs.300,000
owed by DE Company. The total assets of ABC Company are Rs.200 million.

The auditor has obtained the following audit evidence:

 DE Company is controlled by the chairman of ABC Company, who is its majority
shareholder.
 The draft financial statements of ABC Company do not provide any disclosures about
the Rs.300,000 transaction, on the grounds that it is immaterial.
 There is no information about the nature of the transaction, but the Rs.300,000 had
been included in receivables at the end of the previous financial year.

Required:
What further measures should the auditor take? (04)
 Audit and Assurance | Page 2 of 2

Q.4 You are the audit manager on the audit of Gold Limited. During the planning phase of the
audit, the audit senior had a meeting with the CFO of the company. While discussing matters
such as performance of the company, financial ratios and the overall audit strategy etc., the
CFO informed that there were no related party transactions during the year. He also
acknowledged that management is responsible for identification and disclosure of related
parties. In view of the above, the audit senior feels that there is no need to prepare audit
program in respect of related parties.
Required:
Comment on the conclusion drawn by the audit senior and give brief explanation of the
auditor’s responsibility in respect of related party transactions. (04)

Q.5 During your planning meeting with the finance director of Medlar Ltd for the year ending 31
December 2006, he informed you that his wife, an interior designer, had provided consultancy
services in relation to the refurbishment of the company’s head office.

State why this should be considered by the auditor. (02)

Q.6 Your audit firm has conducted the external audit of JJ Ltd. for the past 4 years and issued an
unqualified opinion each year. JJ provides flight services to travel companies, mainly in
western Canada. Last year, profits declined because of a sudden increase in the price of fuel.
This year, the company president retired and, under the guidance of the new president, JJ
acquired 100% ownership of a small oil company called X-OIL Inc. to protect its profits from
increases in fuel prices. X-OIL was for sale because its production of fuel was too small to
compete with the larger multinational companies in that industry. JJ expects better profits in
the future because it can be guaranteed a steady supply of fuel for its airplanes.
Required:
Explain any concerns you would have as the auditor regarding the action taken by JJ to
protect its profits. (03)

(THE END)