Audit and Risk

Practice exam A

Question 1 (10 marks)

Consider the pre-release and the following information:

The following extract is from an Articulate Auditors (AA) planning meeting about its audit of Post2Go (P2G):

P2G GROUP – 30 JUNE 20X3 AUDIT

Audit planning meeting minutes

Business The pandemic continued to boost the core parcel delivery service for the financial year ended
performance 30 June 20X3, albeit at a slower rate.
For Courier2Day (C2D), the last three months of the last financial year saw revenue and profit
decrease by 40% against prior year performance as office workers continued to prefer
working from home, contrary to management’s expectation.

Required
(a) Based on your understanding of the entity and audit planning to date:

(i). Explain two (2) key risks of material misstatement at the assertion level.

(ii). For each risk in (i), determine the key account and key assertion at risk. (6 marks)

(b) Design an audit procedure to test the accuracy, valuation and allocation assertion for accounts receivable.
(2 marks)

(c) Based on your understanding of the entity, design an audit procedure to evaluate whether one (1) of the
entity-level controls has been implemented. (2 marks)

10 marks

© 2023 Chartered Accountants Australia and New Zealand ABN 50 084 642 571. All rights reserved.
Page 1
AR_ASM_3-2-3_PEA-Qs_v3-0
 Question 2 (12 marks)
Consider the pre-release and the following information:

It is now 17 July 20X3. As in previous years, AA has decided to adopt a controls-based approach for P2G’s services
revenue for the year ended 30 June 20X3. In accordance with AA’s audit methodology, the tolerable deviation rate for
controls testing has been set at 5%.

You refer to your walkthrough notes from a previous discussion to prepare for your controls testing over services
revenue:

Every delivery driver uses an app, ParcelTrack, on their personal smartphone to scan parcels and update the
status of parcels. This includes attaching proof of delivery photos and recording the recipient’s signature upon
delivery. Once the delivery driver has delivered the parcel and changes the status from ‘shipped’ to ‘delivered’,
the ParcelTrack app automatically sends an email to the recipient confirming delivery. The recipient then has
48 hours to dispute the delivery. Where the recipient submits a dispute claim, the ParcelTrack app automatically
updates the status to ‘on hold’.

At month end, the revenue recognition accountant downloads a report of all the ‘delivered’ parcels for the month
from ParcelTrack by tracking number and ensures that for each there is either an attached proof-of-delivery photo
or recipient’s signature. Where there is neither a photo nor a signature, the revenue recognition accountant
investigates.

Once the revenue recognition accountant has finalised their review, they manually raise a revenue recognition
journal in Moon Systems. The accountant then submits evidence of their review, with the delivered parcels report,
to the Finance Manager for approval.

You perform the following procedure, which tests the key control over the recognition of services revenue:

Procedure (R2): Select a sample of 30 revenue transactions recognised during the year ended 30 June 20X3.
For each sample, obtain the relevant supporting documentation (proof-of-delivery photo or recipient’s signature).
Investigate where there is no relevant supporting documentation.

After performing procedure R2, the only matters that required following up with P2G were as follows:

Matter P2G’s response

1. T2447 – The delivery driver forgot to take a photo of this delivery as they were in a rush to get out of the
no photo nor rain. The accountant has provided email correspondence with the recipient who confirmed they
signature received the parcel. The confirmation from the recipient was before the related revenue recognition
journal was recorded.

2. T2596 – The delivery driver had issues with the connectivity on his phone and could not upload his proof of
no photo nor delivery photos to ParcelTrack. The accountant prepared the revenue journal file during month end
signature assuming the driver would send the photo evidence through quickly. However, the accountant
eventually forgot to check whether they had received the photos before the revenue journal was
posted and it seems they forgot to follow this up.

3. T2971 – The revenue recognition accountant missed investigating this one. The accountant had an
no photo nor emergency during month end so they asked the new assistant accountant to run the ParcelTrack
signature report and send it to the Finance Manager who only did the usual spot checks, so they missed it.

4. T2986 – We have sent the proof of delivery photo through to the audit team now.
outstanding
documentation

© 2023 Chartered Accountants Australia and New Zealand ABN 50 084 642 571. All rights reserved.
Page 2
AR_ASM_3-2-3_PEA-Qs_v3-0
 Required
(a) Identify and explain the key assertion tested by audit procedure R2. (2 marks)

(b) With respect to procedure R2:

(i). Determine whether each of the matters is a deviation.

(ii). Explain whether the control tested by procedure R2 is operating effectively. Show all workings.

(iii). Determine whether changes are required to the audit approach for services revenue. (7 marks)

(c) Identify and explain a control deficiency in the services revenue recognition controls. Recommend a practical
improvement. (3 marks)

12 marks

© 2023 Chartered Accountants Australia and New Zealand ABN 50 084 642 571. All rights reserved.
Page 3
AR_ASM_3-2-3_PEA-Qs_v3-0
 Question 3 (13 marks)
Consider the pre-release and the following information. It is now 24 July 20X3. The audit team has completed controls
testing over the fixed assets process and noted no issues. You refer to an extract of the property, plant and equipment
(PPE) audit program and an email from the audit analyst:

Procedure (P6): Develop an independent expectation for depreciation expense of property, plant and equipment
for the year ended 30 June 20X3 by calculating the depreciation expense using the information below. Compare
this expectation to the recorded depreciation expense and investigate any variances greater than 25% of overall
materiality.

From: A. Analyst

Date: 24 July 20X3

Subject: P2G 30 June 20X3 audit – PPE

As requested, I’ve summarised the property, plant and equipment balance by category. I’ve also summarised
the purchase dates and effective lives of motor vehicles.

30 June 20X3 30 June 20X2

Category
$ $

Land and buildings (Note 1) – cost 1,575,000 1,575,000

Motor vehicles (Note 2) – cost 1,016,247 967,854

Total accumulated depreciation (831,499) (681,588)

Total PPE (net) 1,759,748 1,861,266

Note 1: Includes $325,000 in land. There have been no additions nor disposals to land and buildings during
the year.

Note 2: Further breakdown from our prior year and current year testing workpapers:

Cost Effective life

Motor vehicles Acquisition date
$ (years)

Delivery vans – 20W7 152,000 5 31.05.W7

Delivery vans – 20W9 215,300 10 01.10.W9

Delivery vans – 20X0 234,578 8 01.9.X0

Delivery vans – 20X1 290,452 8 15.07.X1

Delivery vans – 20X2 75,524 7 01.04.X2

Delivery vans – 20X3 48,393 6 01.04.X3

Total 1,016,247

Required
(a) Identify and explain the key assertion tested by audit procedure P6. (2 marks)

(b) Perform procedure P6 and explain whether further investigation is required. (11 marks)

13 marks

© 2023 Chartered Accountants Australia and New Zealand ABN 50 084 642 571. All rights reserved.
Page 4
AR_ASM_3-2-3_PEA-Qs_v3-0
 Question 4 (8 marks)
Consider the pre-release and the following information.

You are now performing audit work for contract liability. Due to the complexity of estimating the value of postage
products sold but not yet used as at 30 June 20X3, AA has engaged an actuarial expert to assess the valuation.

You refer to the actuarial report (extract) below:

Actuarial Report on Contract Liability

Work performed

We have reviewed the detailed contract liability report provided, totalling $301,554. In performing our work,
which includes sensitivity analyses using our actuarial model, we considered the impact of inflation, discount
rates, industry and consumer trends and cost to the business of providing postage services …

Conclusion

Based on our work, we estimate that the contract liability as at 30 June 20X3 would fall between $310,000 and
$330,000.

You also refer to the contract liability reconciliation as at 30 June 20X3 that you received from management:

Account: Contract liability

GL code: 245783

Per detailed report ($301,554)

Manual adjustment $50,000

($251,554)

Per GL ($244,916)

Difference ($6,638)

Required
(a) Identify and explain the key assertion that the actuarial expert is addressing. (2 marks)

(b) Outline why AA has engaged an actuarial expert and outline the three (3) key actions the AA audit team will
need to take when evaluating the adequacy of the actuarial expert’s work. (4 marks)

(c) With reference to the reconciliation, determine what further actions are required to finalise the audit work on
the contract liability balance. (2 marks)

8 marks

© 2023 Chartered Accountants Australia and New Zealand ABN 50 084 642 571. All rights reserved.
Page 5
AR_ASM_3-2-3_PEA-Qs_v3-0
 Question 5 (17 marks)
Consider the pre-release and the following information.

P2G’s financial statements for the year ended 30 June 20X3 are due to be signed on 10 September 20X3.

On 2 September, AA presented the audit closing report to the P2G Audit and Risk Committee (ARC). The following is
an extract of the report:

Our audit
We conducted our audit in line with the Auditing Standards. In particular, we continued to perform extensive audit
work on the contract liability balance, given that this estimate relies on subjective assumptions and inputs. We
considered that the assumptions and inputs used were reasonable and we have nothing to report in this regard.

Another area of audit focus, where extensive work was performed, was the impairment of goodwill. One of the
procedures performed was an assessment of the reasonableness of key assumptions used by management in
developing cash flow forecasts and selecting the discount rates used.

Summary of misstatements
Subject to the outstanding matters noted below, all material misstatements found from audit testing to date have
been appropriately corrected by P2G Group’s management.

Outstanding items
We note that we are required to complete remaining audit work before signing the audit report. Other than the
outstanding items, we have obtained sufficient appropriate evidence for the audit.

The outstanding matters are as follows:

1. On 3 September 20X3, P2G paid a repairs and maintenance invoice of $12,480 for two service jobs of equal cost
on 24 June 20X3 and 16 August 20X3. As at 30 June 20X3, no accrual was recorded for this invoice.
2. As at 30 June 20X3, the electricity accrual for the quarter ending 30 June was recorded as $232,500; however,
the invoice received after the year end was for $235,631.
3. The relevant paperwork (purchase order, signed delivery confirmation and invoice) for one of the delivery vans,
purchased in April 20X3, was traced and agreed with no issues. However, when the delivery manager inspected the
fleet, they noticed the van was missing and realised that the person who used it last left the company on 20 June
20X3. The van cost $28,100, with accumulated depreciation of $1,170 as at 30 June 20X3. The van was not
insured.
4. The damage to merchandise caused by a fire within the Melbourne warehouse on 29 June 20X3 has been
quantified as $40,000.

Misstatements were accumulated and communicated to P2G’s management; however, management refused to correct
them as they did not consider it necessary.

On 7 September 20X3, you received a final draft of the P2G annual report. The report included Emily Barton’s CEO
letter, which she signed on 7 September 20X3 – before her scheduled holiday. The audit team read the annual report
and did not note any material inconsistencies between the report and the financial statements.

© 2023 Chartered Accountants Australia and New Zealand ABN 50 084 642 571. All rights reserved.
Page 6
AR_ASM_3-2-3_PEA-Qs_v3-0
 Required
(a) Prepare the summary of uncorrected misstatements. Explain any exclusions and show all relevant workings.
Conclude whether the financial statements are materially misstated. (9 marks)

(b) Based on the information in the question, explain an additional matter that AA should communicate to the
ARC. (2 marks)

(c) For the auditor’s report:

(i). Conclude on the most appropriate audit opinion and justify your response.

(ii). Describe two (2) matters that should be reported as Key Audit Matters.

(iii). Explain why the ‘Other information’ paragraph should be included, and whether it needs to be tailored.
(6 marks)

17 marks

© 2023 Chartered Accountants Australia and New Zealand ABN 50 084 642 571. All rights reserved.
Page 7
AR_ASM_3-2-3_PEA-Qs_v3-0