2024_AAA2_Lecture note& Question bank_sent to STUDENTS

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AAA2 – LECTURE NOTES & INTERACTIVE QUESTIONS
CHAPTER 1 – AUDITING NON-CURRENT ASSETS

I. THEORY QUESTION
1. Audit objectives
2. Sources of information
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3. General risks associated with NCA
4. General test of control procedures to assess the effectiveness of internal

controls
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5. Substantive analytical procedures
6. General audit procedures to verify ASSERTIONS of NCA

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II. SCENARIO QUESTION

1- Risk assessment procedures
Question 1
You are an audit supervisor of Loius & Co and are currently planning the audit of your
client, Yexmarine Co (Yexmarine) 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, Yexmarine 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, Yexmarine 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, Yexmarine borrowed $1·2 million from the bank which is
repayable over five years.
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.
Required:
(b) Describe TWO audit risks, and explain the auditor’s response to each risk, in planning the
audit of Yexmarine Co.
Audit Risks Auditor’s responses

Yexmarine placed an order in April for $720,000 of Discuss with mgt as to whether the
new plant and machinery; one third of this order remaining plants and equiptment
was received in May with the remainder expected ordered have been
to be delivered by the supplier in late July or early received/arrived. If so, PHYSICALLY
August. VERIFY a sample of these assets to
 There is a risk that the whole order has ensure EXISTENCE.
been recorded in PPE while remainder
order has not yet delivered. Determine if assets arrived is in use
 In addition, 1/3 order received in May, if it in the period to check
is ready to use, it should be decpreciated in depreciation point and the
accordance with IAS 16. If depreciation has ACCURACY of depreciation expense
not been commenced, dept expense will for the period.
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be understated and profit is overstated

respectively.
Yexmarine purchased a patent for $1•3 million Discuss with mgt about their
which gives them the exclusive right to accounting treatment. If they
manufacture specialised elevator equipment for recognised the patent as intangible
five years asset, auditor should inspect
 According to ISA 38 Intangible assets, the purchase invoices and relevant
patent purchased meets regconition documents to VERIFY cost of
criteria, then should be recornised as an intangible assets and the useful life
intangible asset in SoFP and should be of 5 years.
amotised over 5 years. There is a risk that
the patent has been omissed from RECALCULATE amotise cost to
intangible asset, resulting in understated ensure ACCURACY of the charge and
intangible asset. the appropriateness of intangible
asset’s value at year end.
AUDIT PROCEDURES: DO STH ON ST TO DO STH

Eg: INSPECT purchase invoices TO VERIFY COST OF
INTANGIBLE ASSETS AND USEFUL LIFE OF FIVE
YEARS
2- IC Question
Question 1: IC deficiencies (MARCH 2020 SAMPLE EXAM)
It is 1 July 20X5. You are an audit supervisor with Loius & Co, reviewing extracts from the
internal controls documentation in preparation for the interim audit of Yexmarine Co. The
company's year end is 30 September 20X5.
The company provides training services for individuals looking to become qualified
engineers. Yexmarine Co's customers are the employers that send their employees for
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training on a weekly basis. Yexmarine Co runs classes in its 45 training centres across the
country.
The company has a small internal audit (IA) department, which has experienced
significant staff shortages and is currently under-resourced. This has resulted in a
reduction in their programme of work for the year in many areas.
Non-current assets
Yexmarine Co's training centres are either owned by the company or are held under a
long-term lease.
The company also has a head office and central warehouse for storage of training
materials. Each training centre is set up as a separate department and is given an annual
capital expenditure budget but some departments have already significantly exceeded
their annual budgets.
When new equipment is acquired the finance department classifies the expenditure
between capital and revenue, noting the classification on the purchase order.
The classification is made with reference to guidelines established by the finance director,
who sample checks that the capital or revenue expenditure allocation has been correctly
applied.
Part of the work which Yexmarine Co's IA department is required to carry out is a
comparison of the assets per the non-current assets register and those physically present
in each of the centres.
This year's programme of visits, which has been planned and carried out on the same
basis as previous years, means that by the year end IA will only have visited the four
largest centres and five of the other centres randomly selected.
Required:
Identify and explain TWO DEFICIENCIES in Yexmarine Co's internal control system over
NCA and provide a recommendation to address each of these deficiencies.
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Question 2
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Yexmarine International Co (Yexmarine) 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
Yexmarine’s internal control in preparation for the interim audit.
In the past six months Yexmarine 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 Yexmarine 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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Substantive Testing
Question 1
It is 1 July 20X5. You are an audit supervisor with Loius & Co and you are working on the
final audit of Yexmarine Co for the year ended 30 April 20X5. Yexmarine Co is a waste
management company, supplying its services to a variety of governmental and business
organisations.
Yexmarine Co's draft profit before tax is $5.3m (20X4: S4.6m) and total assets are $40.1m
(20X4: $33.9m). You have been provided with the following information regarding the
draft financial statements.
Vehicle additions and disposals
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On 1 February 20X5, Yexmarine Co replaced 20 of its recycling vehicles. The old vehicles
had a carrying amount of $1.8m, as recorded in the non-current assets register and were
given in part-exchange against new vehicles costing $4.6m. Cash consideration of $3.9m
was also paid.
Describe substantive procedures the auditor should perform to obtain sufficient and
appropriate audit evidence in relation to Yexmarine Co's vehicle additions and
disposals.
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Question 2 IAS 16
BBQ Co operates a large number of restaurants throughout the country, which are
operated under four well- known brand names. The company’s strategy is to offer a
variety of different dining experiences in restaurants situated in city centres and
residential areas, with the objective of maximising market share in a competitive business
environment. You are a senior audit manager in Louis & Co, a firm of Chartered Certified
Accountants, and you are planning the audit of the financial statements of BBQ Co for the
year ended 31 May 2009. Extracts from the draft operating and financial review are
shown below:
Business segement
The Coffee House café chain is a recent addition to the range of restaurants. There are
only 30 restaurants in the chain, mostly located in affluent residential areas. All of the 30
restaurants have been newly constructed by BBQ Co, and are capitalised at $210 million.
This includes all directly attributable costs, and borrowing costs capitalised relating to
loans taken out to finance the acquisition of the sites and construction of the restaurants.
BBQ Co is planning to double the number of Coffee House cafés operating within the next
twelve months.
Required:
Describe the principal audit procedures to be performed in respect of:
The amount capitalised in relation to the construction of the new The coffee House
cafés (5 marks)
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QUESTION 3: IAS 38
You are the manager responsible for the audit of Winmart Co, a company which operates
supermarkets across the country. The final audit for the year ended 31 January 2013 is
nearing completion and you are reviewing the audit working papers. The draft financial
statements recognise total assets of $300 million, revenue of $620 million and profit
before tax of $47·5 million.
Distribution licence
The statement of financial position includes an intangible asset of $15 million, which is
the cost of a distribution licence acquired on 1 September 2012. The licence gives
Winmart Co the exclusive right to distribute a popular branded soft drink in its stores for
a period of five years.
Required:
Comment on the matters to be considered, and explain the audit evidence you should
expect to find during your file review in respect of each of the issues described above.
(5 marks)
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Question 4 IAS 38
It is 1 July 20x5. Dell Technology Co develops and manufactures computer components
and its year end was 31 December 20X8. The company has a large factory, and two
warehouses, one of which is off-site. You are the audit supervisor of Loius & Co and the
final audit is due to commence shortly. Draft financial statements show total assets of
$23.2m and profit before tax of $6.4m. The following three matters have been brought
to your attention:
Research and development
Dell Technology Co includes expenditure incurred in developing new products within
intangible assets once the recognition criteria under IAS 38 Intangible Assets have been
met. Intangible assets are amortised on a straight line basis over four years once
production commences. The amortisation policy is based on past experience of the likely
useful lives of the products. The opening balance of intangible assets is $1.9m.
In the current year, Dell Technology Co spent $0.8m developing three new products which
are all at different stages of development.
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Describe substantive procedures the auditor should perform to obtain sufficient and
appropriate audit evidence in relation to Dell Technology Co’s research and
development expenditure.(4 marks)
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Question 5 (combination of IAS 16 and IAS 38)

You are an audit manager of Louis & Co and you are currently responsible for the audit of
Estée Lauder Co, a company which develops and manufactures health and beauty
products and distributes these to wholesale customers.
Its draft profit before tax is $6.4m and total assets are $37.2m for the financial year ended
31 January 20X8.
The final audit is due to commence shortly and the following matters have been brought
to your attention:
Research and development
Estée Lauder Co spent $1.9m in the current year developing nine new health and beauty
products, all of which are at different stages of development.
Once they meet the recognition criteria under IAS 38 Intangible Assets for development
expenditure, Estée Lauder Co includes the costs incurred within intangible assets.
Once production commences, the intangible assets are amortised on a straight line basis
over three years.
Management believe that this amortisation policy is a reasonable approximation of the
assets’ useful lives, as in this industry there is constant demand for innovative new
products.
Depreciation
Estée Lauder Co has a large portfolio of property plant and equipment (PPE).
In March 20X7, the company carried out a full review of all its PPE and updated the useful
lives, residual values, depreciation rates and methods for many categories of asset.
The finance director felt the changes were necessary to better reflect the use of the
assets.
This resulted in the depreciation charge of some assets changing significantly for this year.
Required:
a) Describe substantive procedures the auditor should perform to obtain sufficient
and appropriate audit evidence in relation to Estée Lauder Co's research and
development expenditure. (5 marks)
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b) Describe substantive procedures the auditor should perform to obtain sufficient

and appropriate audit evidence in relation to the matters identified regarding
depreciation of property, plant and equipment. (5 marks)
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Question 6 IAS 16 – Revaluation of PPE

Sinopec Co manufactures chemical compounds using a continuous production process.
Its year end was 31 July 20X6 and the draft profit before tax is $13·6 million. You are the
audit supervisor and the year-end audit is due to commence shortly. The following
matters have been brought to your attention.
Revaluation of property, plant and equipment (PPE)
At the beginning of the year, management undertook an extensive review of Sinopec Co’s
non-current asset valuations and as a result decided to update the carrying value of all
PPE. The finance director, Peter Dullman, contacted his brother, Martin, who is a valuer
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and requested that Martin’s firm undertake the valuation, which took place in August
20X5. (5 marks)
Required:
(a) Describe substantive procedures you should perform to obtain sufficient,
appropriate audit evidence in relation to the above matter.
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CHAPTER 2 AUDIT OF CASH AND CASH EQUIVALENTS

THEORY QUESTION
1. Audit objectives
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3. General risks associated with cash and cash equivalents
4. Internal controls over cash and cash equivalents

Control objectives Internal Controls Tests of controls
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5. Audit substantive procedures to verify ASSERTIONS of cash and cash

equivalents
 Substantive procedures of cash receipts and payments transactions
Audit Objectives Substantive Procedures
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 The substantive procedures for test of details of cash balances

Audit Objectives Substantive Procedures
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Question 1: (Bank confirmation/bank reconciliation)

Describe the purpose of bank confirmation, bank reconciliations. What evidence does
the auditor gain from these documents
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SCENARIO QUESTION
1- Internal control deficiencies
Question 4
Valentino Co is a clothing retailer which operates 45 stores throughout the country. The
company's year end is 31 March 20X7. Valentino Co has an internal audit department
which has undertaken a number of internal control reviews specifically focusing on cash
controls at stores during the year. The reviews have taken place in the largest 20 stores
as this is where most issues arise.
You are an audit supervisor of Woodlouse & Co and are reviewing the internal controls
documentation in relation to the cash receipts system in preparation for the interim audit
which will involve visiting a number of stores and the head office.
Each of Valentino Co's stores has on average three or four cash tills to take customer
payments. All employees based at the store are able to use each till and individuals do
not have their own log on codes, although employees tend to use the same till each day.
Customers can pay using either cash or a credit card and for any transaction either the
credit card payment slips or cash are placed in the till by the cashier. Where employees'
friends or family members purchase clothes in store, the employee is able to serve them
at the till point.
At the end of each day, the tills are closed down with daily readings of sales taken from
each till; these are reconciled to the total of the cash in the tills and the credit card
payment slips and any discrepancies are noted. To save time, this reconciliation is done
by the store's assistant manager in aggregate for all of the store tills together.
Once this reconciliation has taken place, the cash is stored in the shop's small safe
overnight and in the morning it is transferred to the bank via collection by a security
company. If the store is low on change for cash payments, a junior sales clerk is sent by a
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till operator to the bank with money from the till and asked to change it into smaller
denominations.
The daily sales readings from the tills along with the cash data and credit card payment
data are transferred daily to head office through an interface with the sales and cash
receipts records. A clerk oversees that this transfer has occurred for all stores.
On a daily basis, he also agrees the cash transferred by the security company has been
banked in full by agreeing the cash deposit slips to the bank statements, and that the
credit card receipts have been received from the credit card company. On a monthly
basis, the same clerk reconciles the bank statements to the cash book. The reconciliations
are reviewed by the financial controller if there are any unreconciled amounts.
Required:
(a) State TWO control objectives of Valentino Co's cash receipts system. (2 marks)
(b) Identify and explain THREE CONTROL STRENGTHS in Valentino Co's cash receipts
system and describe a TEST OF CONTROL the auditor should perform to assess if
each of these controls is operating effectively. (6 marks)
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2- Substantive Testing
Question 5
Johnson & Johnson Co (Johnson & Johnson) manufactures in the pharmaceutical
industry. Its year-end was 31 December 20X1. You are the audit manager and the
following matter has been brought to your attention.
Bank reconciliation
During last year's audit of Johnson & Johnson's bank and cash, the auditor has
discovered that there were significant cut-off errors with a number of post-year-end
cheques being processed prior to the year-end to reduce payables. The finance director
has assured the audit engagement partner that this error has not occurred again this year
and that the bank reconciliation has been carefully prepared. The audit engagement
partner has asked that the bank reconciliation is comprehensively audited.
Required:
Describe substantive procedures you would perform to obtain sufficient and
appropriate audit evidence in relation to the above matter.
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Question 6
You have worked on the audit for Yexmarine for a few years and this year you are
in charge of the audit. A newly recruited accounting graduate who has no practical
experience is assigned as your assistant. You have already conducted tests of controls for
the transaction cycles and control risks are assessed as relatively low for these cycles. You
decide the first task to set for your assistant is the verification of cash at bank and in hand.
A lead schedule stating all the bank balances and cash in hand balance of the current and
last years, bank statements and bank reconciliation statements are provided by the client.
Required:
(a) The balance of cash account is relatively small compared to the balances of
other assets. Why is the audit of cash an important part of the audit?
(b)
i. List the audit objectives and related management assertions for cash at
bank and in hand.
ii. List the audit procedures that should be performed on the bank
reconciliation statements. The items which appeared in the bank reconciliation
statements are mainly unpresented cheques and deposits in transit
(c) “To confirm the amount of the bank balances, (1) bank statements are a reliable
source of audit evidence and (2) no more further audit procedure is required”
Evaluate this statement by considering the circumstances under which evidence
gathered is in general considered to be reliable in accordance with ISA 500 Audit Evidence.
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CHAPTER 3 – AUDITING CAPITAL ACQUISITION AND REPAYMENT CYCLE
THEOY QUESTION
1. Audit objectives
3. General risks
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4. General test of control procedures to assess the effectiveness of internal

controls
CONTROLS TEST OF CONTROLS
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5. Substantive analytical procedures
6. General audit procedures to verify relevant ASSERTIONS

Balance-related audit Common test of detail of balance procedures
objective
Notes payable in the
schedule exist (existence)
Existing notes payable are

included in the notes
payable
schedule (COMPLETENESS
Notes payable and accrued

interest on schedule are
accurate (accuracy)
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Notes payable in the

schedule are correctly
classified (Classification)
Notes payable are included

in the proper period (cut-
off)
The company has an

obligation to pay the notes
payable (obligation)
Notes payable in the notes

payable schedule agree
with the client’s notes
payable register or master
file, and the total is
correctly added and agrees
with the general ledger
SCENARIO QUESTION
Question 1 (Bank loan)
Sinopec Co manufactures chemical compounds using a continuous production process.
Its year end was 31 July 20X6 and the draft profit before tax is $13·6 million. You are the
audit supervisor and the year-end audit is due to commence shortly. The following matter
has been brought to your attention
Bank loan
Sinopec Co secured a bank loan of $2·6 million on 1 October 20X4. Repayments of
$200,000 are due quarterly, with a lump sum of $800,000 due for repayment in January
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20X7. The company met all loan payments in 20X5 on time, but was late in paying the
April and July 20X6 repayments.
Required:
Describe substantive procedures you should perform to obtain sufficient, appropriate
audit evidence in relation to the above matter
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Question 2
You are manager of Louis & Co, and you are incharge of Jotun Co – existing client with a
year ended 31 March 20x5. Jotun Co manufactures paint products in seven factories
across the country and the draft FS show total equity and liabilites of $11.6m. The
following matter has been brought to your attention for the company.
Bank loan
In readiness for the operational changes, the director of Jotun decided to restruture the
company’s bank loans. As a result, several long-term loans were repaid early and a new
ten-year bank loan of $4.8m was taken out on 1 Jan 20x5. Repayment of $150,000 are
due quarterly in arrears which includes interest.
Required:
Describe substantive audit procedures the auditor should perform to obtain sufficient
and appropriate audit evidence in relation to Jotun’s bank loan.
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Question 3 ( Risk assessment)

Alex Monroe (AM) company sells handmade jewelry to customer. This product is largely
sold through retail outlets but approximately 27% of Alex Monroe’s revenue is generated
through sale made on the company website. A new listing on Singapore stock exchange
is planned for the next year. For this reason, management would like the audit completed
by 31 December 202X
A loan of $ 40 million was taken out on 1 March 202X to fund upgrading outlets in 202X.
The loan carries an annual interest rate of 6%, with interest payments made annually in
arrears. The loan will be repaid in 5 years at a premium of $5 million. The accountant
recognizes it as trade payable and explain that it is a liability for bank.
Required:
a. Evaluate the risk of material misstatement to be considered in the audit planning of
Alex Monroe company.
b. Recommend the principle audit procedures to be performed in respect of the loan.
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Question 4 (Share issue)

You are the auditor responsible for the audit of VINUT, a listed company, specialize in
food and drinks production.
(a) Share issue
In January 202X, the company's board of directors decided to issue more shares to raise
capital to build a new factory in Thai Nguyen with a par value of $10 per share. Market
investors have high expectations for this development of the company, so the share price
has increased to $12 per share. All cash received is record in paid-in capital (common
stock).
(b) Government Grant
The company received a grant of $25 million on 1 April 202X in relation to redevelopment
of its main manufacturing site. The government is providing grants to companies for
capital expenditure on environmentally friendly asset. The accountant credit on capital
account and spent $20million of the amount received on solar panels which generate
electricity, and intends to spend the remaining $5million on upgrading its production and
packing lines.
Required
(a) Comment on the matters to be considered. And
(b) How does the auditor find out the share issues described above?
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Question 5
The ending general ledger balance of $186,000 in notes payable for the Sterling
Manufacturing Company is made up of 20 notes to eight different payees. The notes vary
in duration anywhere from 30 days to 2 years, and in amounts from $1,000 to $10,000.
In some cases, the notes were issued for cash loans; in other cases, the notes were issued
directly to vendors for the acquisition of inventory or equipment. The use of relatively
short-term financing is necessary because all existing properties are pledged for
mortgages. Nevertheless, there is still a serious cash shortage. Record-keeping
procedures for notes payable are not good, considering the large number of loan
transactions. There is no notes payable master file or independent verification of ending
balances; however, the notes payable records are maintained by a secretary who does
not have access to cash. The audit has been done by the same audit firm for several years.
In the current year, the following procedures were performed to verify notes payable:
1. Obtain a list of notes payable from the client, foot the notes payable balances on the
list, and trace the total to the general ledger.
2. Examine duplicate copies of notes for all outstanding notes included on the listing.
Compare the name of the lender, amount, and due date on the duplicate copy with the
list.
3. Obtain a confirmation from lenders for all listed notes payable. The confirmation should
include the due date of the loan, the amount, and interest payable at the balance sheet
date.
4. Recompute accrued interest on the list for all notes. The information fordetermining the
correct accrued interest is to be obtained from the duplicate copy of the note. Foot the
accrued interest amounts and trace the balance to the general ledger.
a. What should be the emphasis in the verification of notes payable in this situation?
Explain.
b. State the purpose of each of the four audit procedures listed.
c. Evaluate whether each of the four audit procedures was necessary.
d. List other audit procedures that should be performed in the audit of notes payable in
these circumstances.
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Question 6 – Internal control

Items 1 through 6 are common questions found in internal control questionnaires used
by auditors to obtain an understanding of internal control for owners’ equity. In using the
questionnaire for a client, a “yes” response indicates a possible internal control, whereas
a “no” indicates a potential deficiency
1. Does the company use the services of an independent registrar or transfer agent?
2. If an independent registrar and transfer agent are not used: (a) Are unissued
certificates properly controlled? (b) Are cancelled certificates mutilated to
prevent their reuse?
3. Are common stock master files and stock certificate books periodically reconciled
with the general ledger by an independent person?
4. Is an independent transfer agent used for disbursing dividends? If not, is an
imprest dividend account maintained?
5. Are issues and retirements of stock authorized by the board of directors?
6. Are all entries in the owners’ equity accounts authorized at the proper level in
the organization?
Required:
a. For each of the preceding questions, state the purpose of the control.
b. For each of the preceding questions, identify the type of potential financial statement
misstatements if the control is not in effect.
c. For each of the potential misstatements in part b, list an audit procedure that the
auditor can use to determine whether a material misstatement exists.
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CHAPTER 4 – INVESTMENT CYCLE

I – THEORY QUESTION
1- Audit Objectives
Assertions about classess of investment transactions and events for the period
Specific audit objectives Content

Occurrence
Completeness
Accuracy and valuation
Cut-off
Classification
Presentation
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Assertions about investement account balances at the period - end

Specific audit objectives Content
Existence:
Rights and obligations
Valuation and allocations
Completeness
Presentation and disclosure
Assertions about investement presentation and disclosure

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2- Source of information
3- General risks associated with investment cycle

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4- Internal control & Test of control

KEY INTERNAL CONTROLS
Segregation of duty: mgt should

separate from approval, account and
physical function
Proper Authorisation
Sales/Purchases of investment
assets
Adequate documents and records
Prenumbered documents and

internal verification procedures
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TEST OF CONTROLS
5- General audit procedures

Substantive procedures for investment transactions, balances and disclosures
Assertions Audit procedures
Occurrence/ Existence
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Rights and obligations
Completeness
Accuracy
Valuation
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Classification
Cut-off
Disclosures
II – SCENARIO QUESTION
Question 1 -
You are the manager responsible for the new audit client named Asian Handicrafts Ltd, a
handicraft manufacturing company with a year ended 31 December 20X0. Some issues
are identified in the planning phase as follows:
- Asian Handicrafts Ltd made its first acquisition by purchasing 100% of the share capital
of Yellow Ltd – an old famous company specializing in decoration products serving for
foreign markets on 1 February 20X0. There is a change in Asian Handicrafts’s structure
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due to the acquisition of Yellow Ltd. To help finance the acquisition, Asian Handicrafts
issued loan stock, raising cash of £80 million. The loan has a four-year term and will be
repaid at a premium of £20 million. 5% interest is payable annually in arrears.
- Asian Handicrafts Ltd disposed of its wholly owned subsidiary, White Ltd, for proceeds
of £60 million and a profit of a disposal of £6 million.
- On 1 January 20X1, a new IT system was introduced to Asian Handicrafts Ltd with the
aim of improving financial reporting controls, but the Asian Handicrafts’s chief accountant
left the company last month. The projected total assets in Asian Handicrafts’s Balance
Sheet on 31 December 20X0 is £ 500 million and profit before tax for the year is £ 40
million.
- Audit tests on investment sales indicate a weakness in internal control system, with a
potential, understatement of income in the region of $300,000. 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 daybook. This was identified by audit
senior when performing analytical procedures of sales.
Required:
1. Identify and explain the implications of the acquisition of Yellow Ltd for the audit
planning of the Asian Handicrafts’s individual financial statements.
2. Evaluate the risks of material misstatement to be considered in the audit planning of
the Asian Handicrafts’s individual financial statements.
3. Suggest the principal audit procedures to be performed in respect of the disposal of
White Ltd.
4. For audit test on investment sales, list the audit procedures you should conduct to
reach a conclusion and if you have performed all the audit procedures that you can, but
the issue is still unresolved, explain the potential effect (if any) on the audit opinion about
investment cycle.
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Question 2
Kubota Co is a company which manufactures tractors and other machinery to be used in
the agricultural industry. You are the manager responsible for the audit of Kubota Co, and
you are reviewing the audit working papers for the year ended 31 December 20X1. The
draft financial statements show revenue of $8.5 million, profit before tax of $2.2 million,
and total assets of $30 million.
Two matters have been brought to your attention by the audit senior, both of which relate
to assets recognized in the statement of financial position for the first time this year:
Financial assets
Non-current assets include financial assets recognized at $1.06 million. A note to the
financial statements describes these financial assets as investments classified as ‘fair
value through profit or losses, and the investments are described in the note as ‘held for
trading’. The investments are all shares in listed companies. A gain of $250,000 has been
recognized in net profit in respect of the revaluation of these investments.
Required: In your review of the audit working papers, comment on the matters you
should consider, and state the audit evidence you should expect to find in respect of
the financial assets.
AOF
AOF
CHAPTER 5 – AUDIT OF OTHER FINANCIAL INFORMATION

(including Selling expenses, Administrative expenses, Other expense, Financial income, Financial
expenses)
I - THEOY QUESTION
1- Audit Objectives
Assertions
Occurrence
Completeness
Accuracy
Cut-off
Classification
Presenatation and disclosure

AOF
3. General risks associated with other financial information
4. Internal control & Test of control

KEY INTERNAL CONTROLS TEST OF CONTROLS
AOF
5. Substantive audit procedures

Selling and Administrative expense
Audit objectives Audit procedures
Occurrence
Completeness
AOF
Accuracy
Cut-off
Classification and
disclosure
AOF
For financial income and expense

Audit objectives Audit procedures
Occurrence
Completeness
Accuracy
Cut-off
AOF
Classification and
Disclosure
For other income and expense

Audit objectives The popular audit procedures
Occurrence
Completeness
AOF
Accuracy
Cut-off
Classification and
disclosure

2024_AAA2_Lecture note&amp; Question bank_sent to STUDENTS

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AOF

AAA2 – LECTURE NOTES & INTERACTIVE QUESTIONS

CHAPTER 1 – AUDITING NON-CURRENT ASSETS

3. General risks associated with NCA

4. General test of control procedures to assess the effectiveness of internal

5. Substantive analytical procedures

6. General audit procedures to verify ASSERTIONS of NCA

II. SCENARIO QUESTION

Audit Risks Auditor’s responses

be understated and profit is overstated

AUDIT PROCEDURES: DO STH ON ST TO DO STH

Yexmarine International Co (Yexmarine) is a manufacturer of electrical equipment. It has

(i) Identify and explain TWO deficiencies;

Question 5 (combination of IAS 16 and IAS 38)

b) Describe substantive procedures the auditor should perform to obtain sufficient

Question 6 IAS 16 – Revaluation of PPE

CHAPTER 2 AUDIT OF CASH AND CASH EQUIVALENTS

3. General risks associated with cash and cash equivalents

4. Internal controls over cash and cash equivalents

5. Audit substantive procedures to verify ASSERTIONS of cash and cash

 The substantive procedures for test of details of cash balances

Question 1: (Bank confirmation/bank reconciliation)

CHAPTER 3 – AUDITING CAPITAL ACQUISITION AND REPAYMENT CYCLE

4. General test of control procedures to assess the effectiveness of internal

5. Substantive analytical procedures

6. General audit procedures to verify relevant ASSERTIONS

Existing notes payable are

Notes payable and accrued

Notes payable in the

Notes payable are included

The company has an

Notes payable in the notes

Question 3 ( Risk assessment)

Question 4 (Share issue)

Question 6 – Internal control

CHAPTER 4 – INVESTMENT CYCLE

Specific audit objectives Content

Accuracy and valuation

Assertions about investement account balances at the period - end

Rights and obligations

Valuation and allocations

Presentation and disclosure

Assertions about investement presentation and disclosure

3- General risks associated with investment cycle

4- Internal control & Test of control

Segregation of duty: mgt should

Adequate documents and records

Prenumbered documents and

5- General audit procedures

Rights and obligations

CHAPTER 5 – AUDIT OF OTHER FINANCIAL INFORMATION

Presenatation and disclosure

3. General risks associated with other financial information

4. Internal control & Test of control

5. Substantive audit procedures

For financial income and expense

For other income and expense

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2024_AAA2_Lecture note& Question bank_sent to STUDENTS

2024_AAA2_Lecture note& Question bank_sent to STUDENTS