QQI

BA (Hons) Accounting & Finance

Level 3

SUMMER 2023 SOLUTIONS

Module Code: B8AF108

Module Description: Audit and Assurance

Examiner: Ms. Georgina Skehan

Internal Moderator: Mohamad Naim Shaffie

External Examiner:

Date:
Time:

INSTRUCTIONS TO CANDIDATES
1. Time allowed is THREE (3) hours
2. Questions 1, 2 & 3 in Section A are compulsory
3. Answer ONE question only from Section B.
All questions carry equal marks
 Section A
ALL THREE questions are compulsory

Question 1

You are the audit senior of a new audit client Appliances Co and you are currently planning
the audit for the year ended 31 December 2022.

Appliances Co manufactures white goods for domestic and commercial use including
washing machines, tumble dryers, fridges, dishwashers.
Their key client, who represents 90% of their revenue, was the market leader in white goods
industry last year with 65% market share.

The company recognises revenue when the customer places an order as 92% of orders are
processed and dispatched the day they are received.

Inventory is initially valued at cost, and management then performs a review of the aged
inventory listing to identify any write downs required. Inventory that is more than 200 days
old is written down by 10%.

Appliances Co uses several suppliers to source components for their products. Most
suppliers are based in Europe. They assemble their goods in their single factory based in
Dublin. The work in progress balance is expected to be material at the year end.

During the year Appliances Co started developing advanced steam clothing care system
which is a new advanced technology using steam to clean more delicate fabrics that were
traditional only dry clean. They have spent €5 million on these stream cleaning machines.
There was a technical difficulty in production of the steam cleaning machines and as a result
their launch was delayed from November 2022 to August 2023.

In March 2022 the finance director of Appliances Co was dismissed. He had been employed
by the company for over 16 years, and he is suing the company for unfair dismissal.

Appliances Co is also seeking a listing on the Irish Stock Exchange in January 2024.

The directors have agreed to pay themselves a profit related bonus for the year.

Required:

(a) Identify and evaluate EIGHT audit risks to be considered in planning the audit of
Appliances Co AND discuss the auditor’s response to each audit risk. (25 marks)

Total 25 marks
 SOLUTION
8 X 3 marks for each relevant audit risk and response
1 discretionary mark
Question 2

This is an extract from the purchase cycle of Gerard Co

Recording transaction

The purchases ledger clerk enters invoices onto the system in batches. A batch control sheet
is used, which details the number of invoices and the total value. These details are checked to
the system batch report.

Each invoice is stamped as "recorded" once the details have been entered onto the system.
The purchase ledger manager inspects the file of invoices on a monthly basis to ensure that
all invoices have been recorded.

Suppliers are required to submit monthly supplier statements, which are reconciled to the
suppliers ledger account by the purchases ledger manager. The purchase ledger is reconciled
to the purchase ledger control account on a monthly basis by the purchase ledger manager,
and reviewed by the company accountant.

Cash payment

The list of payments is sent to the company accountant, who agrees the details of each
payment to the relevant invoice and signs each invoice to authorise payment and evidence the
check. The list of payments is signed by the accountant once all invoices have been checked,
and sent to the cashier's office for payment.

If any individual payment is for more than $30,000 or total payments are for more than
$300,000 a second signatory is required. These payments must also be checked and signed by
either the financial controller, or finance director.

Payments are made by the cashier's office by bank transfer. Invoices are stamped as "paid",
and returned to the purchases ledger team who record the payment and file the invoices
(separately from invoices not yet paid).

The purchase ledger manager checks GRNs on a monthly basis to ensure that invoices have
been received and paid on a timely basis.

Required:
(a) Identify and evaluate SEVEN controls in Gerard Co’s recording transaction and cash
payment system AND discuss how the auditor would test those controls. (15 marks)
Kay Co
Non-current assets: Property, Plant and equipment note
Land and Fixtures Motor Total
buildings and fittings vehicles
€000 €000 €000 €000
Cost at 1 January 2022 3,000 2,525 375 5,900
Additions - 1,050 75 1,125
Disposals - (300) - (300)
Cost at 31 December 2022 3,000 3,275 450 6,725

Accumulated depreciation at 1 386 489 125 1,000

January 2022
Charge for the year 97 338 56 499
Disposals - (116) - (124)
Accumulated depreciation at 31 483 711 181 1,375
December 2022

Carrying value at 31 December 2,517 2,564 269 5,350

2022
Carrying value at 31 December 2,614 2,036 250 4,900
2021

Required:
(b) Describe TEN key audit procedures to be performed to confirm the non-current assets
included in Kay Co’s financial statements. (10
marks)

Total 25 marks

SOLUTION PART A
12 X 2 marks for each relevant control and corresponding test
1 discretionary mark
 SOLUTION PART B

Key Audit Procedures

• Obtain the non-current asset register, cast and agree the totals to the financial statements:
verifies completeness, classification, presentation.
• Select a sample of assets from the non-current asset register and physically inspect them:
verifies existence.
• Select a sample of assets visible at the Orange's premises and inspect the asset register to
ensure they are included: verifies completeness.
• Inspect assets for condition and usage to identify signs of impairment: verifies valuation.
• For revalued assets, inspect the independent valuation report and agree the amount stated to
the amount included in the general ledger and the financial statements: verifies valuation; and
ensure that all assets in the same class have been revalued.
• Select a sample of additions and agree the cost to supplier invoice: verifies valuation.
• Obtain a list of additions and inspect the description to confirm that they relate to capital
expenditure items rather than repairs and maintenance: verifies existence.
• Inspect a breakdown of repairs and maintenance expenditure for the year to identify items
of a capital nature: verifies completeness.
• Inspect supplier invoices (for equipment), title deeds (for property), and registration
documents (for motor vehicles) to ensure they are in the name of the client: verifies rights and
obligations.
• If assets have been constructed by the client, obtain an analysis of the costs incurred, cast
for arithmetical accuracy and agree a sample of costs to supporting documentation (e.g.
payroll, material invoices): verifies valuation.
Disposals
• Obtain a breakdown of disposals, cast the list and agree all assets have been removed from
the non-current asset register: verifies existence.
• Select a sample of disposals and agree sale proceeds to supporting documentation such as
sundry sales invoices: verifies accuracy of profit on disposal.
• Recalculate the profit/loss on disposal and agree to the statement of profit or loss: verifies
accuracy of profit on disposal.
Depreciation
• Inspect the capital expenditure budgets for the next few years to assess the appropriateness
of the useful economic lives in light of plans to replace assets: verifies valuation.
• Recalculate the depreciation charge for a sample of assets to verify arithmetical accuracy:
verifies accuracy, valuation.
• Inspect the financial statement disclosure of the depreciation charges and policies in the
draft financial statements and compare to the prior year to ensure consistency: verifies
presentation.
• Recalculate the depreciation charge for revalued assets to ensure the charge is based on the
new carrying value: verifies accuracy, valuation.
• Review profits and losses on disposal of assets disposed of in the year to assess the
reasonableness of the depreciation policies (if depreciation policies are reasonable, there
should not be a significant profit or loss): verifies valuation.
• Compare depreciation rates to companies with the same type of assets to assess
reasonableness: verifies valuation.
• Perform a proof in total calculation for the depreciation charged for each category of assets,
discuss with management if significant fluctuations arise: verifies completeness, valuation.
(Analytical procedure)
10 X 1 mark
Question 3

ISA 560 Subsequent Events

Subsequent events review for James Co for the year ended 31 December 2022.

 On 21 January 2023, Daniel Co, a major customer of James Co, was placed into
administration owing €500,000.
 On 30 January 2023, the sales director left the company. The sales director is suing
James Co for constructive dismissal. If successful, the claim amounts to €700,000.
 On 7 February 2023 there was a fire at the premises of the third party warehouse
provider, which destroyed all inventory held there. Approximately one third of James
Co's inventory was stored in these premises. The total value of inventory stored at the
premises was $1,000,000.

 The financial statements include a €100,000 provision for an injury case brought by a
customer of James Co. On 10 February 2023 a letter was received from the claimant's
solicitors stated that they would be willing to settle outofcourt for €90,000. It is likely
the company will agree to this.

Financial Statements extract 31/12/2022

€’000
Revenue 25,000
Total assets 15,300
Profit before tax 1,500

Required:

(a) Discuss whether each issue above is an adjusting or non-adjusting event, in accordance
with IAS 10, Events after the reporting period. (17 marks)

(b) Discuss EIGHT audit procedures you would undertake with regard to subsequent events
at the completion and review stage of the audit. (8 marks)

Total 25 marks
 SOLUTION PART A

 James Co was placed into administration after the yearend, which provides
evidence of the recoverability of the receivables balance at the year end.
Therefore this is an adjusting event. The total value of the balance is
€500,000 which is 2% of revenue, 3% of total assets and 33% of profit, and is
therefore material. The receivables balance should be writtenoff or an
allowance for receivables created.

 The marketing director left the company after the yearend and is suing for
constructive dismissal, which is an event that arose after the reporting date.
Therefore this is a nonadjusting event. The total value of the claim is
€700,000, which is 2.8% of revenue, 4.6% of assets and 46.7% of profit
before tax and is therefore material. This may also be considered material by
nature. The nature of the event and any estimates of the financial impact
should therefore be disclosed.

 The fire destroyed inventory after the yearend, which is therefore a non-
adjusting event (as the inventory was not damaged at the yearend). The total
value of inventory stored at the premises is €1,000,000, which is 4% of
revenue, 6.5% of total assets and 66.7% of profit and is therefore material
and the nature of the event and any estimates of the financial impact should be
disclosed.
 After the yearend a letter was received offering to settle a claim for unfair
dismissal outofcourt. This is an event that provides evidence of the valuation of
the provision at the yearend and is therefore an adjusting event. The current
provision is for €100,000 and the adjustment would therefore be €10,000. This is
not material being 0.04% of revenue, 0.07% of total assets and .7% profit before
tax. Therefore no adjustment is necessary.

4 x 4 mark
1 Discretionary mark
 SOLUTION PART B

• Enquiring of directors if they are aware of any subsequent events that require
adjustment in the financial statements.

• Enquiring into management's procedures for the identification of subsequent

events.

• Inspection of minutes of members’ and directors’ meetings.

• Reviewing accounting records including budgets, forecasts and interim
information.

• Obtaining written representation from management that all subsequent events

have been considered in the preparation of the financial statements.

• Inspection of correspondence with legal advisors.

• Enquiring of the progress with regards to reported provisions and
contingencies.

• ‘Normal’ post reporting period work performed in order to verify yearend

balances:
– Inspecting after date receipts from receivables.
– Inspecting the cash book for payments/receipts that were not accrued for
at the yearend.
– Inspecting the sales price of inventories.

8 x 1 mark
 Section B
Answer ONE question
Both questions carry equal marks

Question 4

Various Companies

 Garden Co operates a perpetual inventory system. No year-end count is performed. You

have reviewed the level of adjustments made each month after each perpetual count and
concluded that due to the significance of the adjustments, the inventory system is not
reliable. You have requested that a full year-end count is performed but management have
refused saying it would be too disruptive. The inventory balance is €8 million. Sales
revenue is €50 million and profit for the year is €15 million.

 The audit of Orchid Co is nearing completion. During the audit, it was identified that the
notes to the financial statements do not include a disclosure note to the closing inventory
(which is material), which is required by the applicable financial reporting framework.
The audit engagement partner has discussed the issue with management and those
charged with governance but no amendment to the disclosures has been made.

 Rose Co is a cash retailer. There is no system to confirm the accuracy of cash sales.

Required:
(a) For each of the above situations, discuss the implications for the audit opinion and the
audit report. (15 marks)

To be effective, the internal audit activity must be undertaken by qualified, skilled and
experienced people who can work in accordance with the Code of Ethics and the
International Standards. (Chartered Institute of Internal Auditors)

Required:

(b) Discuss FIVE benefits to a company of establishing an internal audit department.

(10 marks)

Total 25 marks
 SOLUTION PART A

Garden Co
– Inventory is material as it represents 16% of sales revenue and 53% of profit.
– There is a lack of sufficient appropriate audit evidence over inventory. The auditor cannot
form a conclusion as to whether inventory is materially misstated or free from material
misstatement.
– The audit opinion will be modified.
– A qualified opinion using the 'except for' wording will be issued as the matter is material
but not pervasive.
– The basis for opinion section will be amended to basis for qualified opinion.
– The basis for qualified opinion section will explain the reason for the qualified opinion and
quantify the effect of the issue on the financial statements.

Orchid Co
- The disclosure is required by the financial reporting framework to provide
information to users to aid their understanding of the loan.
- The loan is material.
- The financial statements are materially misstated and should be adjusted.
- The misstatement is material but not pervasive.
- If management refuse to amend this misstatement, the audit opinion will need to be
modified. The opinion paragraph will be qualified.
- The ‘except for’ wording will be used.
- The basis for qualified opinion paragraph will explain the issue and provide the
missing information that should have been included in the disclosure.

Rose Co
- There is no system to confirm cash sales therefore the auditor cannot form a
conclusion as to whether revenue is materially misstated or free from material
misstatement.
- The auditor is unable to obtain sufficient appropriate evidence for a significant class
of transaction in the financial statements.
- The issue is material and pervasive.
- The audit opinion will be modified.
- A disclaimer of opinion will be issued stating that the auditor does not express an
opinion of the financial statements.
- The basis for opinion section will be amended to a basis for disclaimer of opinion.
- The basis for disclaimer of opinion section will explain the reason for the disclaimer
and quantify the effect of the issue on the financial statements.
- The statement referring to the audit being conducted in accordance with ISAs and
ethical requirements will be moved form the basis for opinion section and included in
the Auditor responsibilities section.
3 x 5 marks
 SOLUTION PART B

Regulation
Nowadays companies operate in a regulated sector and is under the supervision of a
regulatory authority. It is very likely that there are regulatory controls and reports that they
must produce or comply with. Establishing an internal audit department will enable a
company to produce those reports more efficiently and show compliance with the regulatory
regime. Even if internal audit is not required now, codes of governance increasingly suggest
that it is good practice to have an internal audit department.

Reports to the board

Company staff will be producing various financial reports for their board. The internal audit
department will be able to monitor the accuracy of those reports, especially those not audited
by the external auditors. This function will help enhance the accuracy and reliability of the
reports.

Liaison with external auditors

The internal auditors can liaise with the external auditors, especially where it is possible for
the external auditors to place reliance on the work of internal audit. This will decrease the
time and cost of the external audit. Internal audit can also monitor the external audit to
ensure they are carrying out an efficient and effective service.

Monitor effectiveness of internal controls

Companies are required to maintain a strong internal control systems. Internal audit can
review the effectiveness of those controls and make recommendations to management for
improvement where necessary.

Value for Money Audit

Internal audit can carry out value for money audits within the comapany. For example, a
review could be undertaken on the cost effectiveness of the various control systems or
whether investment advice being provided is cost-effective given the nature of products being
recommended and the income/commission generated from those products.

Risk assessment
Internal audit enables management to perform proper risk assessments (another central theme
of corporate governance codes) by means of properly understanding the strengths and
weaknesses of all parts of the control systems in the business.

Any 5 x 2 marks
Question 5

Computer-assisted audit techniques (CAAT) are becoming increasingly common as computer

technology develops, although the cost and sophistication involved currently limits their use
to the larger accountancy firms with greater resources.

Required:

(a) Briefly explain the terms “integrated test facilities” and “embedded audit software”.
(5 marks)

You will be the engagement partner in the audit of Fast Food Giant Co as you have done so
for the last 9 years and you are also a close friend of the finance director of Fast Food Giant
Co and he trusts you with the audit.

The audit fees for last years audit of Fast Food Giant Co have not yet been received and you
know they have had a cash shortage and that you will eventually receive payment.

Fast Food Giant Co is being sued by a former employee and has asked your audit firm to
support them in the upcoming court case.

Fast Food Giant Co is an important client to your audit firm as it represents 28% of total fee
income. For that reason you have also decided to appoint Frank as the audit senior as he
worked in Fast Food Giant Co as the finance director up to six months ago.
Required:

(b) Explain FIVE ethical threats and discuss how the threats can be mitigated in the audit
of Fast Food Giant Co. (10 marks)

(c) Discuss the inherent limitations of all internal control systems. (10 marks)
Total 25 marks
 SOLUTION PART A

Integrated test facilities- this involves the creation of dummy ledgers and records to which
test data can be sent. This enables more frequent and efficient test data procedures to be
performed live and the information can simply be ignored by the client when printing out
their internal records.

Embedded audit software – this requires a purpose written audit program to be embedded into
the clients accounting system. The program will be designed to perform certain tasks similar
to audit software with the advantage that it can be turned on and off at the auditors wish
throughout the accounting year. This will allow the auditor to gather information on certain
transaction (material ones) for later testing and will also identify peculiarities that require
attention during the final audit.
2 x 2.5 marks

SOLUTION PART B

Threat Mitigate
Familiarity Threat Auditor loses independence as have become
You will be the engagement partner in the too friendly/familiar with the client. Audit
audit of Fast Food Giant Co as you have
partner should be rotated every 5 to 7 years.
done so for the last 9 years and you are also
a close friend of the finance director of Fast
Food Giant Co and he trusts you with the
audit.

Self interest threat All outstanding audit fees must be collected

The audit fees for last years audit of Fast prior to the commencement of the audit.
Food Giant Co have not yet been received
and you know they have had a cash shortage
and that you will eventually receive
payment.

Advocacy Threat Do not represent the client in the court case.

Fast Food Giant Co is being sued by a
former employee and has asked your audit
 firm to support them in the upcoming court
case.
Self interest threat / Intimidation 10 – 15% rule
Fast Food Giant Co is an important client to
your audit firm as it represents 28% of total
fee income
Self review threat Wait an appropriate amount of time such as
For that reason you have also decided to two years.
appoint Frank as the audit senior as he
worked in Fast Food Giant Co as the
finance director up to six months ago.

5 x 2 marks for each

SOLUTION PART C
It is possible to reduce the volume of transaction testing required in conducting an audit if the
internal controls are sound and are operating effectively, but it is not likely that an auditor
will be able to rely on internal controls entirely. This is because all control systems have
inherent limitations such as:

 The need to balance the cost of the control with its benefits.
 The fact that internal controls are usually applied to regular, recurring transactions,
not one-off year-end adjustments or unusual transactions, which are often large and
subject to error.
 The potential for human error.
 The possibility of fraudulent collusion ( two or more persons operating together) to
get round controls that segregate duties. e.g. the supervisor responsible for checking
and authorising overtime claims could collude with employees, to enable excess
overtime payments to be claimed.
 The abuse of authority and override of controls by senior managers or the owners of
the business. E.g. Abuse of authority might involve ordering personal goods through
the firm. It is very easy for directors and managers of organisations of any size to
instruct staff to bypass normal procedures such as the requirement for authorisation
for payments.
 The obsolescence of controls which have not changed to reflect changes in the
business activities or organisation.

In practice the training of auditors always involves a warning never to rely on internal
controls entirely, no matter how effective they may appear to be. Hence, some verification of
transactions is always carried out as part of the auditor’s work. The auditor should always to
aware of the possibility of fraud and error and, if they find something unusual during their
audit testing which may not form part of that piece of work, they should always investigate
further.
10 marks