AOF ACCA Paper F8 – Audit and Assurance

Question practice

ACCA F8
QUESTION BOOK

4.2023

Ngo Nhu Vinh, PhD, FCCA

Dinh Thi Thu Ha, PhD, ACCA
Nguyen Thu Hao, MA, FCCA

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SECTION 1: AUDIT AND ASSURANCE ENGAGEMENTS 3

1.1. THEORY QUESTION – AUDIT and assurance engagements 4

1.2. MCQ – AUDIT and assurance engagements 5

SECTION 2: CODE OF ETHICS AND CONDUCT 7

2.1. THEORY QUESTION - ETHICS 7

2.2. MCQ - ETHICS 9

2.3. CASE STUDY - ETHICS 12

SECTION 3: RISK ASSESSMENT 14

3.1. THEORY QUESTION – RISK ASSESSMENT 15

3.2. MCQ – RISK ASSESSMENTS 17

3.3. CASE STUDY - Risk assessment 20

SECTION 4: AUDIT PLANNING AND DOCUMENTATION 24

4.1. THEORY QUESTION – Audit planning and documentation 25

4.2. MCQ – Audit planning and documentation 29

SECTION 5: INTERNAL CONTROLS 31

5.1. THEORY QUESTION – internal control 32

5.2. MCQ - INTERNAL CONTROL 33

5.3. CASE STUDY - Internal control 36

SECTION 6: AUDIT SUBSTANTIVE PROCEDURES 39

6.1. THEORY QUESTION – subtantive procedures 40

6.2. MCQ – SUBSTANTIVE PROCEDURES 42

6.3. CASE STUDY - Substantive procedures 45

SECTION 7: REPORTING 47

7.1. THEORY QUESTION - Reporting 48

7.2. MCQ Audit report 49

7.3. CASE STUDY: Audit report 52

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SECTION 1: AUDIT AND ASSURANCE ENGAGEMENTS

EXTERNAL AUDIT AGENCY THEORY AUDIT VS. REVIEW ISA

Objectives Benefits Accountability Reasonable Limited

assurance assurance

Stewardship
Positive format Negative format
assurance assurance

Agency

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SECTION 1: AUDIT AND ASSURANCE ENGAGEMENTS

1.1. THEORY QUESTION – AUDIT AND ASSURANCE ENGAGEMENTS
1. Discuss the differences between “audit engagement” and “review engagement”.

(in term of criteria: level of assurance, scope of work, form of assurance) (10 marks)

2. Discuss the three benefits and three limitations of an audit engagement

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1.2. MCQ – AUDIT AND ASSURANCE ENGAGEMENTS

1. Which of the following is the most appropriate definition of the external audit?
A The external audit is an exercise carried out by auditors in order to give an opinion on
whether the financial statements of a company are materially misstated.
B The external audit is an exercise carried out in order to give an opinion on the effectiveness
of a company's internal control system.
C The external audit is performed by management to identify areas of deficiency within a
company and to make recommendations to mitigate those deficiencies.
D The external audit provides negative assurance on the truth and fairness of a company's
financial statements
2. Is the following statement regarding stewardship true or false? Directors are stewards of
the investment made by shareholders in a company.
A True Directors are accountable, steward and agent of shareholders

B False
3. Which two of the following are elements of an assurance engagement?
(1) A three-party relationship
5 elements of assurance engagement
(2) Suitable criteria - a three-party relationship
- a subject matter
(3) Determination of materiality - suitable criteria
- evidence collection
(4) An engagement letter - a conclusion
A (1) and (2) only
B (1) and (3) only
C (2) and (3) only
D (1) and (4) only

4. Who normally appoints the external auditors of a company?

A Directors
B Shareholders
C Audit committee
D Senior management
5. The level of assurance provided by an external audit is absolute. Is this statement true or
false?
- reasonable --> positive conclusion
A True - limited --> negative conclusion
B False

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SECTION 2: CODE OF ETHICS AND CONDUCT

5 PRINCIPLES 5 THREATS

Integrity Objectivity Self-interest Self-review

Professional
competence Confidentiality Advocacy Familiarity
and due care

Professional
Intimidation
behavior

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SECTION 2: CODE OF ETHICS AND CONDUCT

2.1. THEORY QUESTION - ETHICS
1. List and explain FIVE code of ethics requirement (5 marks)

2. What are threats that impair objectivity of the auditor

3. What do you understand by “Confidentiality”? Why confidentiality is an important

concept for the audit profession
Give TWO examples for each of the following:
- A situation when the auditor has the right to disclose confidential information
- A situation when the auditor has the duty to disclose confidential information

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4. An auditor’s independence from their client is regarded as an essential component of an

audit.
(I) Discuss why it is important that an auditor is independent from their audit client?

(ii) There are 5 types of threats to Objectivity and Independence that an auditor may encounter:
Self-interest, Self-review, Advocacy, Familiarity, Intimidation.
Give TWO examples for each of the following:
- A situation when the auditor may encounter self-interest threat
- A situation when the auditor may encounter self-review threat

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2.2. MCQ - ETHICS

1. Which of the following could cause ADVOCACY?
‘a. Audit team to be offered a balloon flight entertainment self-interest
‘b. Tax fee to be based on a percentage of tax saved
‘c. Firm to represent Stark in a dispute with the tax authorities
2. You are an audit manager of Ali & Co and have just been assigned the audit of Stark Co
(Stark). In an initial meeting with the finance director of Stark, you learn that the audit
team will not be entertained on Stark's yacht this year, instead, he has arranged a balloon
flight costing less than one-tenth of the expense of using the yacht and hopes this will be
acceptable.
Which of the following actions should be taken to ensure the firm complies with ACCA’s
Code of Ethics and Conduct?
‘a. The gift may be accepted as Stark has taken appropriate measures to reduce the value of
the gift compared to previous years.
‘b. The value of the gift should be assessed to determine whether it is of material value to
the financial statements.
‘c. The gift should only be accepted if its value is trivial and inconsequential to the recipients.
‘d. Only the audit partner and audit manager should accept the gift.
3. You are the audit manager of Jones & Co and you are planning the audit of LV Fones Co, a
listed company, which has been an audit client for four years and specialises in
manufacturing luxury mobile phones. The employees of LV Fones Co are entitled to
purchase smartphones at a discount of 10%. The audit team has in previous years been
offered the same level of staff discount.
Which of the following options best identifies the valid potential threats to independence in
the audit of LV Fones and allocates the threat to the most appropriate category?
a) Familiarity
b) self-interest because it relates to financial interest
c) Self-review
d) intimidation
4. The audit team being offered a 10% discount on mobile phones of the client.
Which of the following statements is true in accordance with ACCA's Code of Ethics and
Conduct?
a) The audit team can accept the discount as it is on the same terms as that offered to staff
b) Junior members of the audit team are allowed to accept the discount, but the audit manager
and audit partner should not

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c) Unless the value of the discount is trivial and inconsequential to the audit team members,
the offer should be declined
D) The audit team is only allowed to accept a discount of up to 5%
5. Which TWO of the following are fundamental principles as stated in the ACCA’s Code of
Ethics and Conduct?
1 Objectivity 5 codes of ethic
- integrity ( chính trc)
2 Independence - objectivity ( khách quan)
- professional behavior
3 Confidentiality - confidentiality ( bo mt)
4 Professional skepticism - professional competence and due care

A 1 and 4
B 1 and 2
C 2 and 3
D 1 and 3
6. Which of the following are recognised threats to independence and objectivity as
identified in ACCA's Code of Ethics and Conduct?
(1) Familiarity
5 threats
(2) Self-interest - self- interest
- self-review
(3) Integrity code of ethic - advocacy
- familiarity
(4) Advocacy - inmitidation
A (1), (2), (3) and (4)
B (1), (2) and (4)
C (2), (3) and (4)
D (2) and (4) only
7. In which of the following situations would the auditor be able to disclose confidential
information about a client?
(1) Disclosure is required by law.
(2) Disclosure is permitted by law but the auditor has not requested the client's permission.
(3) The auditor suspects that the client has committed money-laundering offences.
A (1) and (2) only
B (1) and (3) only
C (2) and (3) only
D (1), (2) and (3)

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8. Andrew Jones has been the key audit partner of X Co, a public interest entity, for seven
years. For how long must he be rotated off the audit as a minimum to comply with ACCA's
Code of Ethics and Conduct? no key audit partner more than 7 years and two-year gap
A 1 year B 2 years
C 3 years D 4 years
9. Who is ultimately responsible for a company's system of internal controls?
A External auditors
B Board of directors
C Internal auditors
D Audit committee
10. AB & Co audits DEF Co. In accordance with ACCA Code of Ethics and Conduct which two of
the following circumstances would constitute a threat to objectivity?
(1) An employee of AB & Co owns shares in DEF Co but is not part of the audit team
(2) The best friend of the engagement partner owns a significant indirect financial interest in DEF
Co
(3) The audit manager of DEF Co owns a small number of shares in DEF Co
self-interest
(4) The husband of the audit partner owns shares in DEF Co
A (1) and (2)
B (1) and (4)
C (2) and (3)
D (3) and (4)
11. Which two of the following are fundamental principles as stated in the ACCA's Code of
Ethics and Conduct?
(1) Objectivity
(2) Independence 5 codes of ethics
- integrity
(3) Confidentiality - objectivity
- professional behavior
(4) Professional scepticism - confidentially
- professional competence and due care
A (1) and (4)
B (1) and (2)
C (2) and (3)
D (1) and (3)

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2.3. CASE STUDY - ETHICS

1. CS – Ethics – Question 1
You are auditing Palms and its rival Tulips Co., who are both shoes manufacturers. Tulips has been
facing with financial difficulty in recent years lost. The Company lost one of its major suppliers in the
year and is struggling to find another in time to meet their orders. As the Director knows you also
audit Palms he often asks about their major suppliers and whether you can suggest an alternative.

Required:

Discuss whether you think you should break this duty of confidentiality

2. CS – Ethics – Question 2
You are auditing Coconut Co and you observe that in their warehouse the staff are not adhering to
proper the health and safety procedures. When you enquire with one of the members of the staff
they say that the Directors told them to do it this way as it saves time and money

Required:

Discuss whether you think you should break this duty of confidentiality

3. CS – Ethics – Question 3
You have recently won a major new client Palm Corp, this will represent 20% of the recurring
practice income for the firm. Your firm were able to win the client without it going out to tender as
one of the Directors of Palm corp is married to a Partner at the firm. Sebastian were very impressed
with one of the audit managers they met and have asked if that manager could come and work
temporarily in their accounts department as they’ve had some members of the team leave recently
who haven’t yet been replaced.

Required:

Identify and explain the ethical threats and where possible suggest safeguards for the firm

4. CS – Ethics – Question 4
You are an audit manager at J&W LLP, and have worked on the audit of Palm plc for a number of
years reporting into the same partner. You have just heard from this partner that they are leaving
the firm to join Palm plc as their Finance Director. The Partner has always been very thorough and
you’re sure that next years audit will be easy as they will have everything in order.

Required:

Identify and explain the ethical threats and where possible suggest safeguards for the firm

5. CS – Ethics – Question 5
Palm Ltd, a current client of J&W company, is looking to employ someone to run their payroll
function. One of the audit partners of J&W company suggested that J&W company provides this
non-audit service to Palm Ltd.

Required:

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Discuss the above situation and make recommendations to auditing firm in respect of them

6. CS – Ethics – Question 6
Armstrong plc, another client of Mouse, Rat and Company, has threatened to sue Mouse, Rat and
Company in the past. Mouse, Rat and Company decided to resign as auditors of Armstrong plc, but
Mouse, Rat and Company solvency problems make it necessary to retain Armstrong plc as client. (5
marks)

Required:

Discuss the two situations outlined above and make recommendations to Mouse, Rat and
Company in respect of them.

7. CS – Ethics – Question 7
You are a Partner at J&W LLP, a large audit firm and are about to commence the audit of Palm Corp,
a global luxury travel company. Palm has been a client of your audit firm for over 25 years and you
have a long-standing personal relationship with the Finance Director (FD).

The FD requires the audit this year to be undertaken in a very short time frame and has suggested
that if this is met then it would result in some additional tax work which would be a substantial
increase on the amount of recurring fees from Palm. The FD has also offered an incentive to the
audit team that if the audit is signed off on time they will be offered vouchers for a holiday at any of
Palm’s worldwide resorts.

Required:

Identify and explain the ethical threats outlined in the scenario above and outline any safeguards
that would be appropriate in the circumstances.

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SECTION 3: RISK ASSESSMENT

AUDIT RISK MATERIALITY UNDERSTANDING THE ENTITY & ITS ENVIRONMENT

WHAT TYPES WHY? WHAT? HOW?

Risk of material
misstatement

Inherent Control Detection

Misstatement would Performance
risk risk risk Materiality Risk assessment IRE A
reasonably influence the Materiality
economic decisions of
users taken on the basis
of the financial
Design & perform
Nature of the entity E
statements audit procedures

Frame of reference Accounting

for exercising audit I
policies
judgment

Objectives and O
strategies

KPIs

INTERIM AUDIT VS FINAL AUDIT RESPONDING THE RISK ASSESSMENT

Substantive
Test of control procedures

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SECTION 3: RISK ASSESSMENT

3.1. THEORY QUESTION – RISK ASSESSMENT
1. Explain THREE components of audit risk; for each component state an example of a factor
which can result in increased audit risk (5 marks)
Which of the above categories of risk can be controlled by the auditor? Discuss in general how
the auditor might try to reduce the level of detection risk on an audit?

2. Define materiality and performance materiality in accordance with ISA 320 Materiality in
Planning and Performing an Audit (5 marks)

3. Explain THREE REASONS why obtaining an understanding of the entity and its environment
is important for the auditor. (5 marks)

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4. List and explain THREE examples of matter that the auditor may consider when obtaining
an understating an understanding of the entity (5 marks)

5. List THREE source of information that would be used in gaining an understanding of the
entity’s environment, for each source what auditor would expect to obtain (5 marks)

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3.2. MCQ – RISK ASSESSMENTS

1. When gaining an understanding of the specific business operations of an audit client which
of the following matters would an auditor need to consider?
A Accounting principles and industry specific practices relevant to the client's business
regulatory factor
B Acquisitions or disposals of the client's business activities
type of investment of entity
C Leasing of property, plant or equipment for use in the client's business
way of entity is structured and how it is financed
D Products or services and markets of the client's business

2. Which of the following procedures must the auditor use to obtain an understanding of the
entity and its environment in accordance with ISA 315 Identifying and assessing the risks
of material misstatement through understanding the entity and its environment?
(1) Analytical procedures
risk assessment procedure
(2) Inquiry
- inquiry ( s iu tra)
- analytical procedure
(3) Confirmation - observation and inspection

(4) Reperformance

A (1), (2) and (3)

B (1) and (2)

C (2), (3) and (4)

3. What are the two elements of the risk of material misstatement at the assertion level?
A Inherent risk and detection risk

B Audit risk and detection risk

C Inherent risk and control risk

D Detection risk and control risk

4. 'Audit risk' represents the risk that the auditor will give an inappropriate opinion on the
financial statements when the financial statements are materially misstated. Which of the
following categories of risk can be controlled by the auditor? Category of risk:
(1) Control risk can't control because it depends on internal control

(2) Detection risk

(3) Sampling risk

A (1) and (2)

B (2) only

C (1) and (3)

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D (2) and (3)

5. The definition of the risk of material misstatement is 'Inherent Risk × Control Risk ×
Detection Risk'. Is this statement true or false?
A True audit risk = inherent risk x control risk x detection risk

B False

6. Which of the following statements about materiality are correct?

(1) Information is material if its omission or misstatement could influence the economic
decisions of users of the financial statements.

(2) Materiality is based on the auditor's experience and judgement.

(3) Materiality is always based on revenue.

(4) Materiality should only be calculated at the planning stage of the audit.

A (1), (2) and (3)

B (1), (3) and (4)

C (1) and (2)

D (2) and (4)

7. Performance materiality levels are higher than the materiality for the financial statements
as a whole. Is this statement true or false? lower
A True

B False

8. Is the following statement regarding the interim audit true or false? The higher the risk of
material misstatement the more likely it is that the auditor will decide to perform
substantive procedures during the interim audit rather than at the period end.
A True

B False

9. Who is responsible for the prevention and detection of fraud?

A Internal auditors

B External auditors

C Those charged with governance and management

D The audit committee

10. The auditor of A Co wishes to reduce audit risk. Which of the following actions could the
auditor take to achieve this?

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(1) Increase sample sizes

(2) Reduce control risk it depends on internal control

(3) Assign more experienced staff to the engagement team

A (1) only

B (2) only

C (1) and (3)

D (2) and (3)

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3.3. CASE STUDY - RISK ASSESSMENT

1. CS - RA - Question 1
Donald Co operates an airline business. The company’s year end is 31 July 2011.
You are the audit senior and you have started planning the audit. Your manager has asked you to
have a meeting with the client and to identify any relevant audit risks so that the audit plan can be
completed. From your meeting you ascertain the following:
In order to expand their flight network, Donald Co will need to acquire more airplanes; they have
placed orders for another six planes at an estimated total cost of $20m and the company is not sure
whether these planes will be received by the year end. In addition the company has spent an
estimated $15m on refurbishing their existing planes. In order to fund the expansion Donald Co has
applied for a loan of $25m. It has yet to hear from the bank as to whether it will lend them the
money.
The company receives bookings from travel agents as well as directly via their website. The travel
agents are given a 90-day credit period to pay Donald Co, however, due to difficult trading
conditions a number of the receivables are struggling to pay. The website was launched in 20X0 and
has consistently encountered difficulties with customer complaints that tickets have been booked
and paid for online but Donald Co has no record of them and hence has sold the seat to another
customer
Donald Co used to sell tickets via a large call centre located near to their head office. However, in
May they closed it down and made the large workforce redundant.
Required:
Using the information provided, describe FIVE audit risks and explain the auditor’s response to
each risk in planning the audit of Donald Co. (10 marks)

2. CS – RA - Question 2
You are the audit supervisor of Maple & Co and are currently planning the audit of an existing client,
Sycamore Science Co (Sycamore), whose year end was 30 April 2015. Sycamore is a pharmaceutical
company, which manufactures and supplies a wide range of medical supplies. The draft financial
statements show revenue of $35•6 million and profit before tax of $5•9 million.

Sycamore’s previous finance director left the company in December 2014 after it was discovered
that he had been claiming fraudulent expenses from the company for a significant period of time. A
new finance director was appointed in January 2015 who was previously a financial controller of a
bank, and she has expressed surprise that Maple & Co had not uncovered the fraud during last
year’s audit.

During the year Sycamore has spent $1•8 million on developing several new products. These
projects are at different stages of development and the draft financial statements show the full
amount of $1•8 million within intangible assets. In order to fund this development, $2•0 million was
borrowed from the bank and is due for repayment over a ten-year period. The bank has attached
minimum profit targets as part of the loan covenants.

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The new finance director has informed the audit partner that since the year end there has been an
increased number of sales returns and that in the month of May over $0•5 million of goods sold in
April were returned.

Maple & Co attended the year-end inventory count at Sycamore’s warehouse. The auditor present
raised concerns that during the count there were movements of goods in and out the warehouse
and this process did not seem well controlled.

During the year, a review of plant and equipment in the factory was undertaken and surplus plant
was sold, resulting in a profit on disposal of $210,000.

Required:

(a) State Maples & Co’s responsibilities in relation to the prevention and detection of fraud and
error (4 marks)

(b) Describe SIX audit risks, and explain the auditor’s response to each risk, in planning the audit
of Sycamore Science Co. (12 marks)

3. CS – RA - Question 3
You are an audit supervisor of Amethyst & Co and are currently planning the audit of your client,
Aquamarine Co (Aquamarine) which manufactures elevators. Its year end is 31 July 2016 and the
forecast profit before tax is $15•2 million.

The company undertakes continuous production in its factory, therefore at the year end it is
anticipated that work in progress will be approximately $950,000. In order to improve the
manufacturing process, Aquamarine placed an order in April for $720,000 of new plant and
machinery; one third of this order was received in May with the remainder expected to be delivered
by the supplier in late July or early August.

At the beginning of the year, Aquamarine purchased a patent for $1•3 million which gives them the
exclusive right to manufacture specialised elevator equipment for five years. In order to finance this
purchase, Aquamarine borrowed $1•2 million from the bank which is repayable over five years.

In January 2016 Aquamarine outsourced its payroll processing to an external service organisation,
Coral Payrolls Co (Coral). Coral handles all elements of the payroll cycle and sends monthly reports
to Aquamarine detailing the payroll costs. Aquamarine ran its own payroll until 31 December 2015,
at which point the records were transferred over to Coral.

The company has a policy of revaluing land and buildings and the finance director has announced
that all land and buildings will be revalued at the year end. During a review of the management
accounts for the month of May 2016, you have noticed that receivables have increased significantly
on the previous year end and against May 2015.

The finance director has informed you that the company is planning to make approximately 65
employees redundant after the year end. No decision has been made as to when this will be
announced, but it is likely to be prior to the year end.

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Required: (b) Describe SIX audit risks, and explain the auditor’s response to each risk, in planning
the audit of Aquamarine Co. (12 marks)

4. CS – RA - Question 4
You are the audit senior of White & Co and are planning the audit of Redsmith Co for the year ended
30 September 2010. The company produces printers and has been a client of your firm for two
years; your audit manager has already had a planning meeting with the finance director. He has
provided you with the following notes of his meeting and financial statement extracts.
Redsmith’s management were disappointed with the 2009 results and so in 2010 undertook a
number of strategies to improve the trading results. This included the introduction of a generous
sales-related bonus scheme for their salesmen and a high profile advertising campaign. In addition,
as market conditions are difficult for their customers, they have extended the credit period given to
them.
The finance director of Redsmith has reviewed the inventory valuation policy and has included
additional overheads incurred this year as he considers them to be production related. He is happy
with the 2010 results and feels that they are a good reflection of the improved trading levels.
Financial statement extracts for year ended 30 September DRAFT ACTUAL
2009 2010
$m $m
Revenue 23.0 18.0
Cost of sales (11.0) (10.0)
Gross profit 12.0 8.0
Operating expenses (7.5) (4.0)
Profit before interest and taxation 4.5 4.0
Inventory 2.1 16
Receivables 4.5 30
Cash - 2.3
Trade payables 1.6 1.2
Overdraft 0.9 -
Required:
Using the information above:
(i) Calculate FIVE ratios, for BOTH years, which would assist the audit senior in planning the audit;
and(5 marks)
(ii) From a review of the above information and the ratios calculated, explain the audit risks that
arise and describe the appropriate response to these risks. (10 marks)
5. CS – RA – Question 5
Bigfoure LLP are the statutory auditors of Anthill plc, a medical equipment manufacturer. The
financial statements of Anthill plc for the year ended 31st December 2017 shows a turnover of £43
million with a profit of £10 million after corporation tax.

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During the year ended 31st December, 2017 the events listed below occurred.

(i) It was discovered that an employee, Nick Stocker, had been deliberately damaging the packaging
of equipment in the finished goods warehouse. Under a contractual arrangement a scrap company,
Junkaway Ltd., buys all such items, at scrap value. However, Nick was in collusion with Junkaway Ltd
and was paid by that company for the goods with the damaged packaging. Junkaway Ltd then sold
them on for a good price. The value of such stock write-offs for Anthill plc amounted to £86,000.
Nick was dismissed during the year, when this was discovered.

(ii) ‘Sales Commissions’ contained directors’ bonuses of £15,000

(iii) Various purchases invoices had been entered twice in the trading account which caused turnover
to be understated by £1,800,056

(iv) Missing petty cash of £261 was included in the cash balance

Required:

(a) Explain ‘materiality’ and its role throughout the audit process.

(b) Comment on the implications of each of the events (i) to (iv) above on the audit with particular
regard to materiality, and suggest actions that the auditor might recommend in the management
letter.

6. CS – RA – Question 6
Your audit firm Warhol LLP has a new client, Hunky Dory limited (HD). HD manufacture home
furnishings and supply major retailers. You have found out the following information in your
discussions with the client.

Most of HD’s materials come from overseas and their suppliers invoice in their local currency. Some
of HD’s major customers are high street department stores which have been having a troubled time
in the last few years. One of the largest is House of Fashley which went into liquidation before the
year end and HD are unsure whether they will get the £250,000 they are owed. In light of this HD
have decided to apply to

the bank for an extension in their overdraft to ensure they don’t run into cashflow difficulties.

Materiality for the audit has been set at £200,000.

Required:

a) From the above information, explain the risks of material misstatement arising in the financial
statements for HD

b) Explain what is meant by the concept of performance materiality for an audit. If the
materiality threshold was £500,000 how would this impact on the treatment by the auditors of the
amount owed by House of Fashley?

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SESSION 4: AUDIT PLANNING & DOCUMENTATION

AUDIT PLANNING AUDIT EVIDENCE

General principles Why plan? REQUIREMENT

AUDIT PROCEDURES
SUFFICIENCY APPROPRIATIVENESS
Audit strategy Audit plan
Inspection
RELIABILITY

AUDIT DOCUMENTATION Observation Entity Written External

Objectives Audit working paper Inquiry Originals Auditor

Confirmation FINANCIAL STATEMENT ASSERTIONS

PAF CAF

Recalculation
TRANSACTIONS &
ACCOUNT BALANCES
EVENTS
Reperformance
Occurrence Existence
Analytical procedures

Completeness Completeness

Accuracy Valuation & allocation

Cut off Cut off

Classification Right & obligation

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SECTION 4: AUDIT PLANNING AND DOCUMENTATION

4.1. THEORY QUESTION – AUDIT PLANNING AND DOCUMENTATION
1. Explain THREE REASONS indicated the importance of an audit planning (5 marks)

2. List and explain THREE purposes of the main sections of an audit strategy documents and
for each section provide a relevant example. (5 marks)

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3. List and explain TWO REQUIREMENTS for audit evidence (5 marks)

4. List and explain THREE factors that will influence the auditor’s judgment regarding the
sufficiency of the evidence obtained (5 marks)

5. List FOUR factors that influence the reliability of audit evidence (5 marks)

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6. List and explain THREE ASSERTIONS from ISA 500 Audit evidence that relate to the
recording of classes of transactions and balances (5 marks)

7. Discuss what the assertion means in relation to Property, Plant and Equipment. Suggest
TWO audit substantive procedures which could help to confirm the above assertions

8. State and explain THREE procedures for obtaining audit evidence (5 marks)

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9. List FOUR benefits of documenting audit work (5 marks)

(Discuss reasons why working papers are helpful to the auditor)

10. List FOUR items that should be included in every working paper of the auditor

11. Give examples of documentation which you might find in a permanent file and current file
(3 examples for each file)

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4.2. MCQ – AUDIT PLANNING AND DOCUMENTATION

1. Which of the following would normally be included in the audit plan?
A Reporting objectives
audit strategies
B Industry-specific financial reporting requirements

C Nature, timing, and the extent of planned risk assessment procedures

2. Which of the following statements are correct with regard to the relationship between the
audit plan and the audit strategy for an external audit engagement?
(1) The audit plan should be developed before the audit strategy is established.

(2) The audit plan and the audit strategy should be established and developed at the same time.

(3) The overall audit strategy should be more detailed than the audit plan.

(4) The audit strategy should be established before the audit plan is developed.

A (1) and (3) audit strategy: set scope, timing, direction for the audit

B (2) only translate

C (3) and (4) audit plan: detailed audit procedures

D (4) only

3. What are the purposes of planning the audit?

(1) To ensure appropriate attention is devoted to different areas of the audit

(2) To identify potential problem areas

(3) To facilitate delegation of work to audit team members

(4) To ensure the audit is completed within budget and time restraints

A (1), (2), (3) and (4)

B (1), (3) and (4)

C (1), (2) and (3)

D (2) and (3)

4. Which of the following factors influence the form and content of audit working papers?
(1) Risks of material misstatement
size and complexity of the entity; the nature of audit
(2) Exceptions identified procedures, identified risks of material misstatement

(3) Nature of the package used for documentation

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(4) Cost to the audit

A (1), (2) and (4)

B (1), (3) and (4)

C (1) and (2)

D (2) and (4) (2 marks)

5. Is the following statement regarding audit evidence true or false? Appropriateness is the
measure of the quality of audit evidence.
A True
- appropriateness: quality
B False - sufficient: quantity

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SESSION 5 - INTERNAL CONTROL

LIMITATION OF INTERNAL THE USE OF INTERAL CONTROL BY

WHAT COMPONENTS
CONTROL AUDITOR

The process designed and

Costs of control not outweighing
affected by those charged with RECORDING CONTROL SYSTEMS
Control environment their benefits
governance to provide
reasonable assurance about
Human error
the achievement of the entity’s Management’s Assignment Communication Narrative Flowcharts Questionnaires
objective with regard to philosophy and of authority and enforcement notes
Collusion
operating style and of integrity and
reliability of financial reporting,
responsibility ethical values
effectiveness and efficiency of Controls being by-passed or
operations and compliance overridden by management
with applicable laws and
regulations. Human resource Commitment Organization
policies and to competence structure Controls designed to cope with
practices routine and not-routine
transactions
EVALUATION OF INTERNAL CONTROL
Entity’s risk assessment
process
Information Confirm understanding – walk-through
system
Control activities relevant to
financial Tests of control
reporting
Monitoring of control
SALES PURCHASE INVENTORY
SYSTEM SYSTEM SYSTEM

CASH PAYROLL FIXED ASSETS

SYSTEM SYSTEM

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SECTION 5: INTERNAL CONTROLS

5.1. THEORY QUESTION – INTERNAL CONTROL
1. State the FIVE components of an entity’s internal control and give a brief explanation of
each component.
(Note: the explanation should be what each one is and why important to the auditor)

2. Explain ‘segregation of duties’ and discuss its benefits, using an example (5 marks)

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5.2. MCQ - INTERNAL CONTROL

1. Which of the following is NOT an inherent limitation of internal control systems?
A Insufficient segregation of duties
B Possibility that employees may collude together fraudulently nhân viên thông ng hoc mc li thì ko th
ksoat c xy ra hay không
C Possibility of human error in undertaking tasks

2. Which of the following controls of a sales system ensure that all goods despatched are
completely and accurately invoiced?
a) Good despatched notes are matched to sales invoices phiu xut kho ghi lng hàng gi i
b) Sales invoices are sequentially numbered giúp qun lý h thng hóa n theo trình t

c) Sales invoices are matched to customer orders cho thy n hàng có tht
3. ISA 315 Identifying and Assessing the Risks of Material Misstatement through
Understanding the Entity and Its Environment sets out the five components of internal
control. Which of the following is NOT set out as a component of internal control within
ISA 315?
A Control environment
B The information system relevant to financial reporting
C Human resource policies and practices thuc control environment
4. Which of the following procedures are TESTS OF CONTROL an auditor should perform in
testing the inventory cycle of their client whilst attending the inventory count?
(1) Observe whether the client’s staff are following the inventory count instructions
(2) Review inventory present in the warehouse for evidence of damage or obsolescence
(3) Obtain a sample of the last goods received notes and goods despatched notes and follow
through to ensure inclusion in the correct accounting period
(4) Inspect and review management’s inventory count instructions
A 2 and 3 ch ktra giá tr HTK
B 1 and 4
C 1 and 2
D 3 and 4
5. Is the following statement regarding the assurance provided by an internal control system
true or false? An effective internal control system provides the auditor with absolute
assurance that control objectives have been achieved. reasonable
A True
B False

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6. Which of the following methods of recording an accounting and controls system is a series
of questions used to determine whether controls exist which meet specific control
objectives?
A Internal control questionnaire
B Internal control evaluation questionnaire
C Flowchart ch là minh ha ha v lung thông tin qua h thng k toán

7. One of the control objectives of the sales system of B Co is to ensure that goods and
services are sold to credit-worthy customers. Which of the following control activities
would assist B Co in achieving this objective?
A All sales orders are based on authorised price lists.
B Credit limits are checked before sales orders are accepted.
C Overdue debts are chased each month by the credit controller.
D The aged-debt listing is reviewed by the finance director on a monthly basis
8. The draft financial statements of T Co show the following information:
$'000
Revenue 420 receivable collection period = TR/ Revenue * 365
= 160/420 * 365 = 139 days
Cost of sales 270
Gross profit 150
Trade receivables 160
Trade payables 130
What is the receivables collection period?
A 139 days
B 175 days
C 758 days
D 958 days
9. Which of the following controls helps to ensure that payroll payments are only made to
bona fide employees?
= real
(1) Personnel records maintained for all employees
(2) Comparison of bank transfer listing with payroll
(3) Segregation of duties between staff involved in human resources and payroll functions
(4) Reperformance of the calculation of a sample of payroll deductions
A (1) and (2)
B (1) and (3)
C (2) and (4)

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D (3) and (4)

10. B Co maintains perpetual inventory records. Which of the following control activities
would contribute to the auditor's confidence that inventory recorded in the financial
statements exists?
(1) Procedures to identify obsolete and damaged inventory valuation
(2) Physical safeguards to protect inventory from theft
(3) Sequential numbering of goods dispatched notes completeness

(4) Reconciliation of inventory records to results of inventory counts

A (1) and (2)
B (1) and (3)
C (2) and (3)
D (2) and (4)
11. Which of the following is not a test of control?
A Inspection of purchase order documentation to confirm that it has been authorised
B Review of monthly bank reconciliations performed by the audit client
C Examination of purchase invoices for evidence of mathematical accuracy checks
D Agreement of the cost of non-current asset additions to purchase documentation
substantive procedure

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5.3. CASE STUDY - INTERNAL CONTROL

1. CS – IC - Question 1 – Sales system
Pear International Co (Pear) is a manufacturer of electrical equipment. It has factories across the
country and its customer base includes retailers as well as individuals, to whom direct sales are
made through their website. The company’s year end is 30 September 2012. You are an audit
supervisor of Apple & Co and are currently reviewing documentation of Pear’s internal control in
preparation for the interim audit.

Pear’s website allows individuals to order goods directly, and full payment is taken in advance.
Currently the website is not integrated into the inventory system and inventory levels are not
checked at the time when orders are placed.

Goods are despatched via local couriers; however, they do not always record customer signatures as
proof that the customer has received the goods. Over the past 12 months there have been customer
complaints about the delay between sales orders and receipt of goods. Pear has investigated these
and found that, in each case, the sales order had been entered into the sales system correctly but
was not forwarded to the despatch department for fulfilling.

Pear’s retail customers undergo credit checks prior to being accepted and credit limits are set
accordingly by sales ledger clerks. These customers place their orders through one of the sales team,
who decides on sales discount levels.

Required:

In respect of the internal control of Pear International Co:

(i) Identify and explain TWO deficiencies;

ii) Suggest controls to address each of these deficiencies; and

(iii) Describe a test of control Apple & Co would perform to assess if each of these controls is
operating effectively.

(10 marks)

2. CS – IC - Question 2 – Purchase system

Pear International Co (Pear) is a manufacturer of electrical equipment. It has factories across the
country and its customer base includes retailers as well as individuals, to whom direct sales are
made through their website. The company’s year end is 30 September 2012. You are an audit
supervisor of Apple & Co and are currently reviewing documentation of Pear’s internal control in
preparation for the interim audit.

Raw materials used in the manufacturing process are purchased from a wide range of suppliers. As a
result of staff changes in the purchase ledger department, supplier statement reconciliations are no
longer performed. Additionally, changes to supplier details in the purchase ledger master file can be
undertaken by purchase ledger clerks as well as supervisors.

Required:

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In respect of the internal control of Pear International Co:

(i) Identify and explain TWO deficiencies;

(ii) Suggest controls to address each of these deficiencies; and

(iii) Describe a test of control Apple & Co would perform to assess if each of these controls is
operating effectively.

(5 marks)

3. CS – IC – Question 3 – Cash system

Shiny Happy Windows Co (SHW) is a window cleaning company. Customers’ windows are cleaned
monthly, the window cleaner then posts a stamped addressed envelope for payment through the
customer’s front door.
SHW has a large number of receivable balances and these customers pay by cheque or cash, which is
received in the stamped addressed envelopes in the post. The following-procedures are applied to
the cash received cycle:
1. A junior clerk from the accounts department opens the post and if any cheques or cash have
been sent, she records the receipts in the cash received log and then places all the monies into
the locked small cash box.
2. The contents of the cash box are counted each day and every few days these sums are banked
by which ever member of the finance team is available.
3. The cashier records the details of the cash received log into the cash receipts day book and
also updates the sales ledger.
4. Usually on a monthly basis the cashier performs a bank reconciliation, which he then files, if
he misses a month then he catches this up in the following month’s reconciliation.
Required:
For the cash cycle of SHW:
i) Identify and explain THREE deficiencies in the system; (3 marks)
ii) Suggest controls to address each of these deficiencies; and (3 marks)
iii) List tests of controls the auditor of SHW would perform to assess if the controls are
operating effectively. (3 marks)

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4. CS – IC - Question 4 – Payroll system

You are the audit senior of Blair & Co and your team has just completed the interim audit of Chuck
Industries Co, whose year end is 31 January 2012.
The company operates three shifts every day with employees working eight hours each. They are
required to clock in and out using an employee swipe card, which identifies the employee number
and links into the hours worked report produced by the computerised payroll system.
The payroll department calculates on a weekly basis the cash wages to be paid to the workforce,
based on the hours worked report multiplied by the hourly wage rate, with appropriate tax
deductions. These calculations are not checked by anyone as they are generated by the payroll
system. During the year the hourly wage was increased by the Human Resources (HR) department
and this was notified to the payroll department verbally.
Required:
Identify TWO deficiencies in the payroll system of Chuck Industries Co explain the possible
implications of these; and suggest a recommendation to address each deficiency. (10 marks)

5. CS – IC – Question 5 – Fixed assets system

Pear International Co (Pear) is a manufacturer of electrical equipment. It has factories across the
country and its customer base includes retailers as well as individuals, to whom direct sales are
made through their website. The company’s year end is 30 September 2012. You are an audit
supervisor of Apple & Co and are currently reviewing documentation of Pear’s internal control in
preparation for the interim audit.

In the past six months Pear has changed part of its manufacturing process and as a result some new
equipment has been purchased, however, there are considerable levels of plant and equipment
which are now surplus to requirement. Purchase requisitions for all new equipment have been
authorised by production supervisors and little has been done to reduce the surplus of old
equipment.

Required:

In respect of the internal control of Pear International Co:

(i) Identify and explain TWO deficiencies;

(ii) Describe a test of control Apple & Co would perform to assess if each of these controls is
operating effectively. (5 marks)

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SECTION 6: AUDIT SUBSTANTIVE PROCEDURES

SUBSTANTIVE
SUBSTANTIVE AUDIT PROCEDURES FOR SPECIFIC ITEMS
AUDIT PROCEDURES

Analytical Sales and Liabilities and

Test of detailed Inventory
procedures Receivables capital

What is AP?
Cash and bank Fixed assets

Types of AP?

When to use
AP?

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SECTION 6: AUDIT SUBSTANTIVE PROCEDURES

6.1. THEORY QUESTION – SUBTANTIVE PROCEDURES
1. Discuss the difference between a controls-based audit and a substantive audit?

2. Discuss the aim of Test of control and Substantive test? (4marks)

3. Even when the auditor determines that the clients internal controls are strong and performs
a controls based audit they still must do some substantive testing. Why is this necessary?
(6marks)

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4. State substantive procedures to audit revenue

5. State substantive procedures to audit receivables

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6.2. MCQ – SUBSTANTIVE PROCEDURES

1. Which of the following substantive procedures provides evidence over the
EXISTENCE of non-current assets? account balance --> book to physical
A Select a sample of assets included in the non-current asset register and physically
verify them at the client premises
B Review the repairs and maintenance expense account to identify any items of a capital
nature completeness
C For assets disposed of, agree the sale proceeds to supporting documentation and cash book accuracy
2. Which of the following is a substantive audit procedure for wages and salaries?
A Inspect a sample of clock cards for evidence of authorization by a responsible official
B Recalculate a sample of payroll deductions such as employment taxes to confirm accuracy
C Attempt to access and make changes to the payroll master file using the log on for a junior
clerk a,c are test of control
3. Which of the following NOT should be included in an audit engagement letter?
a) Objective and scope of the audit
b) Results of previous audits
c) Management’s responsibilities
4. Which of the following is NOT a responsibility of the auditor?
A To provide an opinion on the truth and fairness of the financial statements
B To conduct an audit in accordance with International Standards on Auditing
C To express an opinion on the company’s going concern status
5. Which TWO of the following substantive procedures provide evidence over the EXISTENCE
of trade receivables?
(1) Agreeing a sample of goods despatched notes to sales invoices and to the sales ledger completeness
(2) Undertaking a receivables circularisation ( tun hoàn hóa phi thu)
(3) Review of post year-end cash receipts, if these relate to year-end receivables follow through
to the sales ledger
(4) Recalculating the allowance for uncollectible accounts valuation
A 1 and 3
B 2 and 4
C 2 and 3
D 1 and 4
6. Which of the following statements is/are true with respect to analytical procedures?
(1) Analytical procedures can be used throughout the audit.
(2) Analytical procedures must be used as risk assessment procedures.
A (1) only

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B (2) only
C (1) and (2)
D Neither (1) nor (2)
7. Which two of the following would be classified as substantive procedures?
(1) Tests of control
internal control
(2) Walk-through tests
(3) Analytical procedures
(4) Tests of details
A (1) and (2)
B (1) and (4)
C (2) and (3)
D (3) and (4)
8. The auditor of G Co is performing audit procedures to confirm the company's ownership of
motor vehicles. Which of the following would provide the most persuasive evidence of
this?
A Physical inspection of the motor vehicles existence
B Inspection of vehicle registration documents xác minh audit objective thông qua right and obligation
C Checking that the motor vehicles are recorded in the non-current asset register completeness
D Review of vehicle insurance documentation cng c nhng B áng tin cy hn
9. Which of the following audit procedures would provide the auditor with evidence of
completeness of inventory?
A Tracing test counts performed at the inventory count to the detailed inventory listing completeness
B Reviewing the physical condition of inventory when attending the inventory count valuation
(cng)
C Casting the inventory listing accuracy
D Vouching the cost of a sample of inventory items to suppliers' invoices
10. Which of the following statements is/are true regarding direct confirmation of accounts
receivable?
(1) Responses from the customer must be returned directly to the client. audit
(2) Under the positive method the customer only replies if the amount stated is agrees with the
customer's records. always
A (1) only
B (2) only
C (1) and (2)
D Neither (1) nor (2)
11. The auditor of M Co has agreed a sample of non-current assets selected by physical
inspection back to the non-current asset register. For which of the following assertions
does this test provide assurance?

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A Completeness chn mu thc t ti xng xem có trên s hay không

B Existence
C Rights and obligations
D Accuracy and valuation
12. Which of the following techniques is generally accepted to be the most efficient to obtain
evidence regarding the existence of bank balances?
A Reperformance
B Confirmation gi xác nhn cho ngân hàng
C Analytical procedures
D Observation
13. Which of the following assertions about classes of transactions and events for the period
under audit is defined below: 'Amounts and other data relating to recorded transactions
and events have been recorded appropriately'.
A Cut-off
B Accuracy
C Occurrence
D Classification
14. Is the following statement regarding audit evidence true or false? Appropriateness is the
measure of the quality of audit evidence.
A True - appropriateness: quality
- sufficient: quantity
B False
15. As the audit senior on the year-end audit of Z Co, you have instructed the audit junior to
obtain and inspect supporting sales contracts for large sales transactions. Which of the
following assertions are you seeking to test with this audit procedure?
A Cut-off
B Accuracy
C Occurrence ( phát sinh)
D Completeness (2 marks)
16. Is the following statement regarding direct confirmation of accounts receivable true or
false? The verification of trade receivables by direct confirmation provides evidence that
the debts are recoverable. existence
A True
B False

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6.3. CASE STUDY - SUBSTANTIVE PROCEDURES

1. CS – ST - Question 1 - Receivables
Hawthorn Enterprises Co (Hawthorn) manufactures and distributes fashion clothing to retail
stores. Its year end was 31 March 2015. You are the audit manager and the year-end
audit is due to commence shortly. The following three matters have been brought to your
attention.
Receivables
Hawthorn’s receivables ledger has increased considerably during the year, and the year-
end balance is $2·3 million compared to $1·4 million last year. The engagement partner has
agreed to this request, and tasked you with identifying alternative procedures to confirm the
existence and valuation of receivables.
Required:
Describe FOUR substantive procedures you would perform to obtain sufficient and
appropriate audit evidence in relation to the above matter.

2. CS – ST - Question 2 – Trade Payables

Westra Co assembles mobile telephones in a large factory. Each telephone contains up to 100
different parts, with each part being obtained from one of 50 authorised suppliers. Like many
companies, Westra’s accounting systems are partly manual and partly computerised.
Required:
List the audit procedures you should perform on the trade payables balance in Westra Co’s
financial statements. For each procedure, explain the purpose of that procedure. (8 marks)

3. CS – ST - Question 3 – Payroll expenses

You are the audit senior of Blair & Co and your team has just completed the interim audit of Chuck
Industries Co, whose year end is 31 January 2012. You are in the process of reviewing the systems
testing completed on the payroll cycle, as well as preparing the audit programmes for the final audit.

Chuck Industries Co manufactures lights and the manufacturing process is predominantly

automated; however there is a workforce of 85 employees, who monitor the machines, as well as
approximately 50 employees who work in sales and administration. The company manufactures 24
hours a day seven days a week.

Below is a description of the payroll system along with deficiencies identified by the audit team:

Factory workforce

The company operates three shifts every day with employees working eight hours each. They are
required to clock in and out using an employee swipe card, which identifies the employee number
and links into the hours worked report produced by the computerised payroll system. Employees are
paid on an hourly basis for each hour worked. There is no monitoring/supervision of the clocking

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in/out process and an employee was witnessed clocking in several employees using their employee
swipe cards.

The payroll department calculates on a weekly basis the cash wages to be paid to the workforce,
based on the hours worked report multiplied by the hourly wage rate, with appropriate tax
deductions. These calculations are not checked by anyone as they are generated by the payroll
system. During the year the hourly wage was increased by the Human Resources (HR) department
and this was notified to the payroll department verbally.

Each Friday, the payroll department prepares the pay packets and physically hands these out to the
workforce, who operate the morning and late afternoon shifts, upon production of identification.
However, for the night shift workers, the pay packets are given to the factory supervisor to
distribute. If any night shift employees are absent on pay day then the factory supervisor keeps
these wages and returns them to the payroll department on Monday.

Sales and administration staff

The sales and administration staff are paid monthly by bank transfer. Employee numbers do
fluctuate and during July two administration staff joined; however, due to staff holidays in the HR
department, they delayed informing the payroll department, resulting in incorrect salaries being
paid out

Required:

a) For the deficiencies already identified in the payroll system of Chuck Industries Co:
(i) explain the possible implications of these; and
(ii) suggest a recommendation to address each deficiency. (12 marks)
b) Describe substantive procedures you should now perform to confirm the accuracy and
completeness of Chuck Industries’ payroll charger. (6 marks)

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SECTION 7: REPORTING

BASIC ELEMENTS OF AN AUDIT REPORT TYPES OF AUDIT REPORT

• Title

• Addressee

• Auditor’s opinion

• Basis for opinion

• Going concern

• Key audit matters

• Other information

• Responsibilities for the financial

statements

• Auditor’s responsibilities for the audit of

the financial statements

• Other reporting responsibilities

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SECTION 7: REPORTING
7.1. THEORY QUESTION - REPORTING
1. Describe FOUR elements of an audit report (5 marks)

2. Describe the THREE types of modified audit opinions. (5 marks)

3. Describe the content of an emphasis of matter and other matter paragraph (5 marks)

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7.2. MCQ AUDIT REPORT

1. The auditor of S Co has concluded that the use of the going concern assumption is
appropriate and that the material uncertainty has been adequately disclosed. What is the
impact of this conclusion on the auditor's report?
A Adverse opinion ý kin trái ngc
ý kin không cn chnh sa vi phn nhn mnh v vn
B Qualified opinion ng ý mt phn
C Unmodified opinion without an emphasis of matter paragraph
ý kin không cn chnh sa vi phn nhn mnh v vn
D Unmodified opinion with an emphasis of matter paragraph
2. The auditor of Y Co has concluded that Y Co is not a going concern. The financial
statements have been prepared on a going concern basis and management has refused to
change them. What form of audit opinion will be issued by the auditor?
A An unmodified opinion
B A qualified 'except for' opinion due to material misstatement
C A qualified 'except for' opinion due to insufficient appropriate audit evidence
D An adverse opinion
3. Misstatements can arise from error or fraud. Which of the following statements is correct
regarding the auditor's accumulation of identified misstatements?
A The auditor must accumulate all misstatements identified during the audit.
B The auditor must only accumulate individually material misstatements identified during the
audit.
C The auditor must accumulate misstatements identified during the audit, other than those
that are clearly trivial
4. ISA 700 Forming an opinion and reporting on financial statements sets out the basic
elements of an auditor's report. Which of the following is not included in an unmodified
auditor's report? báo cáo kim toán không cn chnh sa
A Management's responsibility for the financial statements
B Auditors' responsibilities
C Audit opinion
D Deficiencies of internal controls ( s thiu sót)
5. The auditor of Q Co has completed the audit and has concluded that sufficient appropriate
evidence has been obtained, which confirms that the financial statements are not
materially misstated. Which form of audit opinion will the auditor issue?
A Adverse opinion
B Qualified opinion
C Unmodified opinion ý kin không cn chnh sa

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D A disclaimer of opinion
6. ISA 705 Modification to the opinion in the independent auditor's report identifies three
possible types of modification. In which of the following circumstances would a disclaimer
of opinion be issued? ( tình hung nào KTV t chi a ra ý kin)
A The auditor concludes that the financial statements include misstatements which are
material but not pervasive to the financial statements. ( lan ta)
B The auditor concludes that the financial statements include misstatements which are both
material and pervasive to the financial statements.
C The auditor has not been able to obtain sufficient appropriate audit evidence on which to
base an opinion but has concluded that the possible effects of any undetected
misstatements could be material but not pervasive .
D The auditor has not been able to obtain sufficient appropriate audit evidence on which to
base an opinion and has concluded that the possible effects of any undetected
misstatements could be both material and pervasive.
7. The auditor of B Co has concluded that inventory is overstated as a number of lines have
not been valued at the lower of cost and net realisable value. The overstatement is
material but not pervasive to the financial statements. Management has refused to make
an adjustment to the financial statements. What form of modified opinion should the
auditor issue?
A Adverse opinion
B Disclaimer of opinion
C Qualified opinion due to a material misstatement material misstatement
D Qualified opinion due to insufficient appropriate evidence on which to base an opinion
8. The financial statements of Z Co include a receivables balance of $20,000 which the
auditors do not believe will be recovered. Materiality has been set at $100,000. There are
no other unadjusted misstatements. What form of audit opinion would be issued by the
auditor?
A Adverse opinion
B Unmodified opinion
C Disclaimer of opinion
D Qualified opinion due to overstatement of receivables
9. The auditor may wish to draw the users' attention to a matter which is not presented or
disclosed in the financial statements but which is relevant to the users' understanding of
the auditor's report. How would this affect the auditor's report?
A An emphasis of matter paragraph would be included.
B The audit opinion would be qualified.
C An other matters paragraph would be included.

This means that the FS does not show a true and fair view
because it can have misstatement or have omitted an important
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Question practice

D The auditor's report would not be affected as the auditor's report only refers to matters
presented or disclosed in the financial statements.
10. The statement of financial position of R Co includes a material amount of $200,000 in
respect of costs capitalised in the year as development expenditure. The auditor has
concluded that these costs are research expenditure. If the auditor is to issue an
unmodified opinion which financial statements will require adjustment?
A Statement of financial position only
B Statement of profit or loss only
C Statement of financial position and statement of profit or loss adjust asset and expense
D Neither the statement of financial position nor the statement of profit or loss (2 marks)
11. An emphasis of matter paragraph is used in an audit report to draw attention to a matter
affecting the financial statements. Which two of the following are correct in relation to an
Emphasis of Matter Paragraph in the Auditor's Report?
(1) It is used when there is a material uncertainty.
(2) It constitutes a modified audit opinion. sai modified vì không nh hng n opinion
(3) The auditor's report is referred to as an unmodified report.
(4) The matter is deemed to be fundamental to the users understanding of the financial
statements.
A (1) and (2)
B (1) and (4)
C (1) and (3)
D (2) and (4)
12. P Co is being sued by a customer for the supply of faulty products. At the year end the
outcome of the legal case is still uncertain. The directors have fully disclosed the matter as
a contingent liability and the auditors are satisfied with the treatment and the level of
disclosure. The auditors have concluded that the uncertainty is fundamental to the
understanding of the financial statements. What form of audit opinion would the auditor
give?
ý kin không cn chnh sa vi phn nhn mnh v vn
A Disclaimer
B Unmodified opinion with an emphasis of matter paragraph
C Unmodified opinion without an emphasis of matter paragraph
D Qualified opinion B: ý kin ko cn chnh sa vi phn nhn mnh v vn

13. The majority of the books and records of Q Co have been destroyed by a flood and the
auditor has no other realistic means of obtaining sufficient, appropriate audit evidence.
Which form of opinion will the auditor issue?

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A An adverse opinion
B A disclaimer of opinion ( t chi a ra ý kin)
C Qualified opinion on the basis that sufficient appropriate evidence is not available
D Unmodified opinion with an emphasis of matter paragraph explaining the circumstances of
the flood

7.3. CASE STUDY: AUDIT REPORT

1. CS – Audit Report - Question 1
You are the audit manager of Villa & Co and you are currently reviewing the audit files for
several of your clients for which the audit fieldwork is complete. The audit seniors have raised
the following issue:
Czech Co
Czech Co is a pharmaceutical company and has incurred research expenditure of $2·1m
and development expenditure of $3·2m during the year, this has all been capitalised as an
intangible asset. Profit before tax is $26·3m.
Required:
Discuss the issue, including an assessment of whether it is material; and describe the impact on
the audit report if the issue remains unresolved.
2. CS – Audit Report - Question 2
You are the audit manager of Villa & Co and you are currently reviewing the audit files for
several of your clients for which the audit fieldwork is complete. The audit seniors have raised
the following issue:
Dawson Co
Dawson Co’s computerised wages program is backed up daily, however for a period of two
months the wages records and the back-ups have been corrupted, and therefore cannot be
accessed. Wages and salaries for these two months are $1·1m. Profit before tax is $10m.
Required:
Discuss the issue, including an assessment of whether it is material; and describe the impact
on the audit report if the issue remains unresolved.

3. CS – Audit Report - Question 3

You are the audit manager in charge of the audit of MSV Co for the year ended 28 February
2007. MSV Co is based in a seaside town and hires motor boats and yachts to individuals for
amounts of time between one day and one week. The majority of receipts are in cash, with a few
customers paying by debit card. Consequently, there are no trade receivables on the balance
sheet. The main non-current assets are the motor boats and yachts.

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Question practice

The company is run by four directors who are also the major shareholders.
Total income for the year was about $ 10/million.
The following issues have been identified during the audit:
Issue 1
Audit tests on sales indicate a weakness in die internal control system, with a potential,
understatement of income in the region of $500,000. The weakness occurred because sales
invoices are not sequentially numbered, allowing one of the directors to remove cash sales prior
to recording in the sales day book. This was identified during analytical procedures of sales,
when the audit senior noted that on the days when this director was working, sales were always
lower than on the days when the director was not working. (8marks)
Issue 2
During testing of non-current assets, one yacht was found to be located at the property of one
of the directors. This yacht has not been hired out during the year and enquiries indicate that
the director makes personal use of it. The yacht is included in the non- y current assets balance
in the financial statements.
Required:
For each of the issues above:
(i) List the audit procedures you should conduct to reach a conclusion on these issues;
(ii) Assuming that you have performed all the audit procedures that you can, but the issues
are still unresolved, explain the potential effect (if any) on the audit report.

4. CS – Audit Report - Question 4

Cardin Ltd is manufacturing company. During the year ended 31 December 20X9, Cardin
incurred cost of $40,000 in respect of repair expenses to its plant and machinery. These costs
have been capitalized and included non-current assets. The Director of Yellow refuse to
amend the financial statement for the year ended 31 December 20X9, which show the draft
pre-tax profit of $522,000.

Required:

Discuss the issue, including an assessment of whether it is material; and describe the impact
of the audit report if the issue remains unresolved in above case

5. CS – Audit Report - Question 5

A fire in the warehouse of Life Care Ltd in August 20X9 destroyed the inventory sheets, which
were the only record of the company’s inventories at the year end. The company has included
an estimated inventory figure of $110,000. The draft financial statements for the year ended
30 June 20X9 show a profit before tax of $1.2 million.

Required:

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Discuss the issue, including an assessment of whether it is material; and describe the impact
of the audit report if the issue remains unresolved in above case

6. CS – Audit Report - Question 6

Yellow Ltd is manufacturing company. As at 31 December 20X8, Yellow has a receivables

balance of $1,400,000. This included a debt of $50,000 due from customer A that went to
bankruptcy in March 20X9. The Director of Yellow refuse to make any adjustment with regard
to this debt to Financial statement as at 31 December 20X8 as the customer did not enter
liquidation until after the year end. Yellow’s draft financial statement show a pre-tax profit of
$600,000.

Required:

Discuss the issue, including an assessment of whether it is material; and describe the impact
of the audit report if the issue remains unresolved in above case

7. CS – Audit Report - Question 7

The fiscal year of Green Ltd is 30 June 20X9. Your audit firm was appointed as auditor of Green
Ltd on 15 July 20X9, therefore auditor did not attend the inventory count which was carried
out on 30 June 20X9. No alternative audit procedures could be performed in this case. The
inventory balance of Green at reporting date 30 June 20X9 is $250,000. The draft financial
statements show a profit before tax of $1.7 million.

Required:

Discuss the issue, including an assessment of whether it is material; and describe the impact
of the audit report if the issue remains unresolved in above case

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