ACC09109 TRI2 formatted PDF

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Matric No:

Edinburgh Napier University

AUDITING ACC09109 Academic session: Diet: Exam duration (excluding reading time): 6 hours Reading time: Total exam time: 6 hours 15 minutes

Please read the full instructions before you start writing. Exam paper information 

Total number of pages:

8

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Number of questions:

13

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Attempt ALL questions Special instructions  Dictionaries may only be used during reading time. After reading time, all dictionaries must be placed on the floor for the rest of the exam. 

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Only standard, non-programmable calculators are permitted in the exam.

Special items None

Examiner(s):

Dr Rachel Findlay

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Section A Attempt ALL questions Each question is worth 2 marks. Candidates should clearly identify the answer to each question in their answer booklet. Only one answer per question should be identified. Question 1 Which of the following documents MUST be followed by external auditors? A. B. C. D.

Practice notes Bulletins International Standards on Auditing Exposure Drafts

Total 2 marks. Question 2 Which of the following are statutory rights of the auditor under the provisions of the Companies Act 2006? i. ii. iii. iv. A. B. C. D.

The right to be heard at any general meeting or any part of the business that concerns them as the auditor; The right to obtain from the parent company and its auditor such information and explanations as they may reasonably require The right to requisition a general meeting on resignation The right to make a written statement to shareholders which should be distributed by the company upon removal as auditors

i, ii and iii only i, iii and iv only ii, iii and iv only None of the above

Total 2 marks. Question 3 Which of the following tests would give the auditor evidence over the existence and/or valuation of machines in the factory of a manufacturing company: i. ii. iii.

Trace a sample of machines from the fixed asset register to the physical asset in the factory Trace a sample of machines from the fixed asset register to the original purchase contract Trace a sample of machines in the factory to the fixed asset register

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Question continues on next page A. i and ii only B. i and iii only C. ii and iii only D. All of the above Total 2 marks. Question 4 You have heard from a worried auditor colleague that he did not detect a fraud during the three years he has audited his client company Aldo and Ladle plc. Which one of the following best represents the responsibility the auditor bears in relation to detection of fraud: A. The auditor is responsible for implementing the controls which should prevent fraud and should test those controls for material misstatements B. The responsibility for detecting fraud lies solely with the directors C. If the auditor plans and executes the audit so that there is a reasonable chance of detecting material misstatements arising from fraud then the auditor has no further responsibility D. The auditors should have designed audit testing to detect all frauds Total 2 marks. Question 5 Which of the following would best give the auditor assurance over completeness of creditors: A. B. C. D.

Agreeing a sample of invoices to goods received notes Verifying the authorization of a sample of purchase orders Agreeing a sample of sales invoices to the sales ledger Calculating the creditor days’ ratio and comparing it to the ratio in previous years

Total 2 marks. Question 6 Which one of the following audit procedures would be most likely to detect the inclusion of a fake employee on the payroll: A. Checking employee overtime sheets have been correctly authorised B. Performing a review of changes in total employee pay for each pay date in the accounting period C. Inspecting personnel records for a sample of employees listed on the payroll D. Re-casting the totals of all the pay roll amounts made for a sample of pay dates 3

Total 2 marks. Question 7 The auditor attends a client stock count and observes client staff counting stock in accordance with documented client procedures. Which of the following best represents this audit activity: A. B. C. D.

Test of controls Substantive testing of the rights and obligations assertion Walk-through testing Consultancy service

Total 2 marks. Question 8 You are auditing your new client Hogg Ltd. Hogg Ltd. are a high tech company developing new software code. 50% of the balance sheet value is recorded as a non-current asset being intangible Research and Development (R and D), which is difficult to value. Which of the following best represents the audit risk associated with the R and D balance at Hogg Ltd. A. B. C. D.

Fraud risk Inherent risk Control risk None of the above

Total 2 marks. Question 9 Which of the following procedures is/are an example(s) of an application control activity: i. ii. iii. A. B. C. D.

Back up of files and contingency planning Marking invoices on files as paid Computer access controls in the form of passwords i only ii only iii only All of the above.

Total 2 marks.

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Question 10 Which of the following provides the strongest form of audit evidence for existence and valuation of receivables: A. Customer responses to the auditor’s circularisation of debtors B. Aged debtor analysis C. Recalculating the total of the sales ledger and agreeing to the receivables balance on the draft financial statements D. Evidencing that the correct product price has been applied to a sample of invoice copies sent to customers Total 2 marks.

Total marks for questions 1-10 are 20.

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Question 11 - Laldy Ltd. Laldy Ltd. (Laldy) is a company which owns a chain of shops selling groceries 24 hours a day and 7 days a week throughout Scotland. Laldy has over 300 permanent employees and has a financial year end of 31 July 2020. You have worked for Moffat, Muffin and Broon, an audit firm, as an audit manager for several years. You are now reviewing the notes and file information about Laldy’s payroll system (below) in order to prepare for the interim audit of Laldy. Laldy’s payroll system. All permanent employees have contractual standard weekly working hours. Nevertheless, when the shops are very busy, Laldy’s managers can ask the permanent staff to work extra hours as overtime. The payments for overtime are either paid each month, or staff can choose to take payment as additional time off. Laldy uses overtime sheets which are completed each week by employees who have worked more than the standard weekly hours. Employees then send the overtime sheets to the payroll department. The payroll system automatically records the standard hours worked by employees each week. When overtime sheets are received in the payroll department an administrator inputs the overtime data into the system and the gross and net pay, less deductions such as tax, are made automatically by the system. Because the system calculates the payroll and overtime automatically, no checks are made of the calculations at all. Wages are increased by the rate of inflation each year and the administration staff are responsible for updating the agreed salaries and hourly overtime pay rates in the payroll system. Employees are paid for contracted weekly hours and overtime hours each month by bank transfer. Where employees claim pay for overtime hours which are more than 20% of the standard hours, authorisation is required by department managers. Where an employee takes time off instead of payment, the administration staff are required to check the ‘hours worked’ report. Due to business in the administration department this check is not always made. The ‘hours worked’ report, documents the overtime recorded by employees and is prepared each week before it is emailed to department managers for authorisation. Department managers are asked to contact payroll only if there are any errors in the hours recorded. Department managers are required to arrange for overtime sheets to be authorised by a responsible colleague if they are away on holiday or ill. Some examples have been found where this has not occurred. The payroll system generates details of payments for each employee. This is connected to Laldy’s banking system and creates a list of scheduled automatic payments. The company accountant reviews the list of bank payments and checks this against the total amount to be paid according to the payroll records; if any differences arise then the automatic bank payments can be changed on the system by the company accountant.

Question continues on next page: 6

Required: A. Identify SIX weaknesses in the payroll system of Laldy. (6 marks) B. Explain the risk or implication of each weakness identified in (a) above in the payroll system of Laldy. (6 marks) C. Recommend a control to address each of the weaknesses identified. (6 marks) D. For each control you recommend in (c) above, describe a test of control your audit team could perform to assess if the control is operating effectively. (6 marks) E. Explain the differences between an interim and a final audit. (4 marks) Note: For presentation marks, please use a table format for your answer to sections a, b, c and d above. (2 marks) Total 30 marks.

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Question 12 Oatmeal LTD. You are part of the external audit team at Oatmeal Ltd, a supplier of biscuits and energy bars to retail outlets in Scotland. You are about to commence the final audit of receivables for the financial year ending 31 March 2020. The interim audit was carried out during January 2020 and it showed that there was a good system of internal control in the sales system, with no serious errors being identified by the audit procedures that were carried out. You have the following information available that relates to past financial year: £ 832,050 120,035 10,035 16,641

Revenue Receivables Bad debt write off Provision for bad debts An aged list of receivables balances Required:

A. Identify and discuss at what points analytical procedures should be used during the course of an audit. (6 marks) B. Explain the difference between tests of control and substantive audit procedures. (4 marks) C. Identify and briefly explain THREE audit assertions for the substantive testing of the receivables balance. (3 marks) D. Prepare a schedule that details the substantive audit tests that you will perform on Oatmeal Ltd’s receivables balance. (12 Marks) Total 25 marks.

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Question 13 Write notes under each of the following headings analysing their significance to the external auditor: A. Audit Engagement Letter (5 marks) B. Fraud (5 marks) C. True and Fair Concept (5 marks) D. Using the work of an expert to obtain audit evidence. (5 marks) E. Events occurring after the reporting period. F. (5 Marks)

Total 25 marks. Total marks for paper are 100

End of Paper

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