SINGAPORE INSTITUTE OF MANAGEMENT

UNIVERSITY OF LONDON
PRELIMINARY EXAM 2018

MODULE CODE : AC3093

MODULE TITLE : Auditing & Assurance

DATE OF EXAM : 02/03/2018

DURATION : 3 hours

TOTAL NUMBER : 6
OF PAGES
(INCLUDING
THIS PAGE)
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INSTRUCTIONS TO CANDIDATES :-

Candidates should answer FOUR of the following EIGHT questions: TWO from
Section A, ONE from Section B and ONE further question from either section.

Calculator: Not needed

8-column accounting paper: No
Graph Paper: No

All questions carry equal marks, candidates are strongly advised to divide their time
accordingly.

DO NOT TURN OVER THIS QUESTION PAPER UNTIL YOU ARE TOLD TO
DO SO.

AC3093 Auditing & Assurance Page 1 of 6

 Section A
1. Boing plc was established in 2002 as a tour operator offering cut-price
holidays. Since 2015, sales increased by an average of 20% per annum,
much better than most of its competitors. In 2017, the company was
acquired by Cheap Trip plc.
On October 28, 2017, one of Boing’s planes crashed killing one hundred
passengers. The chief executive of Boing reassured the passengers’
relatives that the company had adequate insurance cover. Almost
immediately, a significant number of other customers cancelled their
holidays and demanded refunds. This put the company in a serious
financial situation. Its bankers, Tanbest, refused requests for further loans
since the company had used its borrowing facilities to purchase new
planes during 2017.
Boing’s financial accounting year ended on December 31, 2017. Thomas
& Co has been Boing’s auditors since 2002. The audit took place during
January 2018 and the auditors’ unqualified report was signed on January
28, 2018. A few days before the report was signed one of the junior
members of the audit team had overheard Boing staff talking of concerns
about short-cuts being taking in the planes’ maintenance routines but the
audit team member had been unable to corroborate the matter and
therefore he had not reported it to the audit partner. No one on the audit
team had checked whether the insurance policy covered death and injury
caused by poor maintenance of the plane. Not being insurance experts,
the auditors relied on the directors’ confirmation that the insurance was
adequate - this later proved to be false.
On February 10, 2018, the company was declared insolvent. As a result of
Boing’s indebtedness to its parent, Cheap Trip was also declared to be
insolvent.
Thomas & Co. now faces law suits from (a) Tanbest (b) the creditors of
Cheap Trip, and (c) relatives of those killed in the crash on the basis that
the financial statements were wrongly prepared on a going concern basis,
that the auditors failed to ensure the planes were safe and failed to ensure
that Boing’s insurance cover was adequate.
Required:
(a) From your knowledge of case law, assess the strength of the
claims being brought against the auditors, Thomas & Co.
(15 marks)
(b) Identify factors which you think would have been relevant to the
auditors’ risk assessment in doing the audit of the financial
statements for the year ended December 31, 2017.
(10 marks)

AC3093 Auditing & Assurance Page 2 of 6

2. SouthWind Co. is a construction company (building houses, offices and
hotels) employing a large number of workers on various construction sites.
The internal audit department of SouthWind Co. is currently reviewing the
wages system within the company.
The following information is available:

 Hours worked are recorded using a clocking in/out system. On arrival

for work and at the end of each day’s work, each worker enters their
unique employee number on the keypad.

 Workers on each site are under the control of a foreman. The foreman
has a record of all employee numbers and has authority to issue
temporary numbers for new employees.

 Any overtime has to be authorised by the foreman. The rate is 150%

outside normal hours during the week and 200% at week-ends and
holidays. Overtime is calculated by the computerised wages system
and added to the standard pay.

 Any amendments necessary for sickness and holidays are made

manually by the accounts personnel in the wages department. They
are also responsible for setting up and maintaining employee records.

 The computer calculates the wages and produces a report showing net
pay for each employee.

 Cash is delivered to the wages office by secure courier.

 The accounts staff in the wages department place the cash in pay
packets for each employee together with a hand written note showing
gross pay and deductions for tax. These pay packets are passed to
the foremen for distribution to the employees.
Required:
(a) Identify the strengths and weaknesses within the SouthWind’s
wages system that could result in a loss or misappropriation of
company assets and for each weakness you identify suggest an
internal control to overcome the weakness.
(15 marks)
(b) What factors will determine how much reliance the external auditors
of SouthWind Co. can place on the work of the internal audit
department in relation to the company’s wages system?
(10 marks)

AC3093 Auditing & Assurance Page 3 of 6

3. You have just been approached by the newly-appointed Senior Regulator
for the financial services (including accounting and auditing) industry in a
country which has previously had little or no regulation on the provision of
financial information. The Regulator has said that his first priority is to
improve the quality of annual financial statements which the major
companies in the country publish. The Regulator has established working
parties to examine improvements in the quality of accounting and financial
reporting practices. Another working party has been established to
examine the quality of audit fieldwork.
The Regulator tells you that he wants your working party to put forward
proposals which will improve the quality of audit reporting. He is
concerned that present practices allow individual auditors to report in their
own way. This has led to confusion, since there are so many different
styles of audit report. The Regulator believes that a standardised
approach will reduce this confusion. He is aware that there are
international auditing standards on auditing and asks you to examine the
possibility of adopting an approach consistent with the international
standards.
He asks you to look at the following specific aspects of audit reporting:

 To whom the audit report is addressed

 A reference to the framework of accounting

 A reference to the framework of auditing

 Some discussion of what can be and what cannot be expected from

an audit

 The style of opinion on the financial statements, and

 Any other issues you think might be relevant.

Required:
(a) Draft a report from your working party on the specific issues
mentioned above.
(15 marks)
(b) Draft an appendix to this report setting out the advantages and
disadvantages of a standardised approach to audit reporting.
(10 marks)

AC3093 Auditing & Assurance Page 4 of 6

4. Merthyr Ltd is a high quality computer maintenance company. They pride
themselves on having staff with expertise in all the main computer
manufacturers and have service contracts with a number of high profile
companies nationwide.
The company’s head office is in London. The engineers may be based
around the country and rarely visit head office.
Engineers’ vans must be stocked with as many parts as possible in order
to prevent delays when called in on a service contract. They have basic
stock lists which they are expected to maintain. In order to keep track of
the stock held, head office require the engineers to keep a running list of
all stock items used and this list may be requested at any time.
Every Thursday, engineers should perform a stock take on their vans and
place an order on the pre-printed order pads for replacement stock. These
are then emailed to head office and the goods are despatched the next
day to the engineer’s home address.
If a part not kept in stock is required then the engineer has to telephone
head office to place the order. The goods are then ordered from head
office and requested to be sent direct to the engineer. If certain items are
regularly being requested as a ‘special’ order then they often become an
addition to the basic stock held on the van.
At the company’s year end the engineers are required to complete a stock
take on their vans and report back to head office. Random checks are
carried out by management at least once a year on engineers’ vans. The
engineers are normally given 24 hours’ notice that their van will be
checked.
Required:
(a) Identify the weaknesses in Merthyr Ltd’s purchases system for
parts stock and the van stock control. State what could go wrong as
a consequence of each weakness and recommend an internal
control to prevent any error.
(15 marks)
(b) Explain the role of an internal auditors department in ensuring the
effectiveness of a company’s control environment and to what
extent the work of an internal auditor may be of use to the external
auditor when assessing control risk.
(10 marks)

AC3093 Auditing & Assurance Page 5 of 6

Section B

5. If you were required to write a conceptual framework for the audit of

financial statements, explain what ideas, concepts or assumptions you
would include.

6. Sampling is a key component of any audit strategy. Explain the various

factors which auditors consider when setting up their sampling strategy.

7. Closing the expectations gap is simply a case of educating the public

about the true nature of auditing. To what extent do you agree with this
statement and explain why we still face an expectations gap about the
role of auditors?

8. Assess the various ways in which an auditor’s independence can be

compromised and suggest methods for helping auditors remain
independent.

END OF PAPER

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