Pratice Final exam paper PDF

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University of Tasmania Practice Exam paper for Final Exam, S1, 2018

AUDIT & ASSURANCE (BFA713)

Writing period: 180 duration Study period: 10 Minutes duration Permitted material: None You must attempt to answer all questions. All questions to be completed on the space provided in this paper This test paper must not be removed from the examination room

Total marks on paper: 80 marks Weighting of test: 60%

Disclaimer: The objective of this practice paper and the revision materials therein are to assist students in their preparation for the Major Test. The practice is therefore similar in format to the Major Test. However questions in the Major Test will be different, so students should also revise all the learning materials, such as lecture notes and workshop discussion, and review the learning outcomes that are stated in the unit outline.

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QUESTION 1 (10 MARKS) This question contains 10 multiple choice items. Indicate the most appropriate response on the computer marking sheet provided. 1: How does the extent of substantive tests required to constitute sufficient appropriate audit evidence vary with the auditor's assessment of control risk? A: Randomly B: Disproportionately C: Directly D: Inversely 2: Which of the following procedures would an auditor most likely perform to verify management's assertion of completeness? A: Compare a sample of shipping documents to related sales invoices. B: Observe the client's distribution of payroll cheques. C: Confirm a sample of recorded receivables by direct communication with the debtors. D: Review standard bank confirmations for indications of kiting. 3: Your audit client has a new management incentive scheme in place which includes a bonus calculated on the basis of the increase in net profit over the previous year. The basis of the bonus will remain the same for the next three (3) years. Your client has had a poor year and will not meet its budget or last year's net profit. Which of the following represents an inherent risk? A: Insufficient provisions. B: Next year's expenses taken up this year. C: Next year's sales incorrectly taken up this year. D: Overstatement of debtors. 4: Which of the following auditing procedures is ordinarily performed last? A: Reading the minutes of the directors' meetings. B: Confirming accounts payable. C: Obtaining a management representation letter. D: Testing the purchasing function. 5. Which of the following would not be considered to be a source of non-sampling risk? A: human mistakes. B: inappropriate audit procedures. C: inappropriate sample size. D: reliance on erroneous information. 6: Which of the following is LEAST likely to indicate an increased risk of fraud? (a) The company is operating in a growing industry. (b) The internal audit function is not properly staffed. (c) There is evidence of management override. (d) The corporate structure is complex and appears unwarranted.

7: A procedure that would most likely be used by an auditor in performing tests of controls that involve segregation of functions and that leave no audit trail is: A: Observation. B: Inspection. BFA 713

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C: Reconciliation. D: Re-performance. 8: An auditor concluded that no excessive costs for idle plant were charged to inventory. This conclusion most likely related to the auditor's objective to obtain evidence about the account balance assertion regarding inventory, of: A: Valuation and allocation. B: Completeness. C: Existence. D: Rights and obligations. 9. The auditor’s duty of care to a client arises in: (a) The law of joint and several liability. (b) The tort of negligence. (c) The contract. (d) Both the tort of negligence and the contract. 10: The auditor is unable to reach a conclusion as to the reasonableness of management's representations. The auditor will have to consider issuing a(an): A: qualified opinion because of inadequate disclosure. B: qualified opinion because of uncertainty. C: qualified opinion or an inability to provide an opinion. D: Adverse opinion.

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QUESTION 2 (24 MARKS) 2a (12 MARKS) You are conducting the 30/06/11 audit of Ivory Ltd which manufactures small- to medium-sized home appliances. This is the second year you are conducting the audit. You have had documented your assessment of inherent risk and control risk for this audit based on your understanding of the company. Below are some extracted notes from your working papers: 1. Over the past several years, the market for domestic home appliances has been favourable and the industry as a whole has been growing steadily. 2. Ivory Ltd recently switched to a new integrated central accounting system. During the switch, audit trails were not kept intact due to system failures. 3. Ivory has recently appointed a new financial controller. The old controller resigned to take a job in another city. 4. Ivory has always been a follower in the industry and seen as a bit old-fashioned and conservative. REQUIRED For each item state the impact on inherent risk or control risk, and justify your answer. Item Impact on inherent risk/control risk (1 mark each) Explanation (2 mark each) Item

Impact on inherent risk/control risk (1mark each)

1.

2.

4.

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Explanation (2 mark)

2b (12 marks) You have been assigned to perform the tests of controls on the sales system at DeHoney WorkWear Ltd (DWWL) as part of the 30 June 2011 audit. During testing, you noted the following errors: 1. No prices were entered on invoice number 56286, issued on 18 January 2011, resulting in a zero dollar invoice being issued. The error was discovered when receivable staff accounts queried the zero amount appearing on the accounts receivable ledger. 2. Invoice number 58222, issued on 10 February 2011, and matched the customer’s order. However, the order was only partly filled owing to a lack of stock in the warehouse, with the result that items were included in the invoice that were never delivered. The error was discovered when the customer rang to complain about being overcharged. 3. Invoice number 59001, issued on 25 April 2011, and contained incorrect prices. As a result, the customer was charged at total $890 instead of $980. The error was discovered when the salesperson complained about not receiving a full commission for the month. 4. Invoice number 62035, issued on 28 June 2011, and was not processed through the usual channels. Although the invoice details were correct, certain procedures, such as a formal credit check, were not documented. The invoice was a special order for a complete new office development and amounted to ten times the value of DWWL’ average invoices. The sale was personally handled by the executive manager and the invoice prepared by her assistant.

REQURIED For each error, describe one specific application control that would have either prevented or detected the error, one example of follow up work you would perform in relation to the error, and one implication for your substantive testing of accounts receivable. Item 1 (invoice with no price) Preventative or detective control (1 mark)  Further work required regarding error (1 mark)     Substantive testing implication (1 mark)      

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Item 2 (Undelivered items on invoice) Preventative or detective control (1 mark)

Further work required regarding error (1 mark)

Substantive testing implication (1 mark)

Item 3 (Invoice with incorrect prices) Preventative or detective control (1 mark)   Further work required regarding error (1 mark)  Substantive testing implication (1 mark)

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Item 4 (Invoice not processed through usual channels) Preventative or detective control (1 mark)

Further work required regarding error (1 mark)

Substantive testing implication (1 mak)   

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Question 3 (14 marks) 3a (9 marks) In auditing payroll expense, the audit assistant has: select a sample of individual pays from the monthly payroll listings of May and June; vouched the pay rates used to related industrial awards; checked the calculations of each pay; traced any annual, sick and other leave to authorised forms; and agreed the balance of the payroll listings for May and June to the general ledger. Required: (i) Indicate which audit assertion each procedure is primarily directed towards (5 marks). Procedures

Assertion

(ii) Indicate two assertions you believe the audit assistant should perform further testing on (2 marks) (iii) For each of the assertions identified in (ii), name one (1) additional procedure that could be used to gather sufficient appropriate audit evidence (2 marks)

(ii) Assertions

iii) Additional procedures

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3b) Discuss what is meant by ‘sufficient appropriate audit evidence’. (5 marks)

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Question 4 (18marks) 4a (9 marks) Your firm is the external auditor of CanboSpec Ltd, and the following timelines apply: Balance date: 30 June 2011 Directors’ declaration and audit report signed: 20 September 2011 Financial report and audit report mailed to shareholders: 2 October 2011 Consider each of the following independent and material situations which have come to your attention: a) On 12 July 2011, CanboSpec Ltd received a notice that one of its customers was taking legal action in relation to a disputed warranty claim. The customer purchased the goods in April 2011, and first informed CanboSpec Ltd of problems with the goods on 20 May 2011. b) On 8th August 2011, the auditor discovered that a company that CanboSpec Ltd invested in was declared bankrupt on 4th August 2011. CanboSpec Ltd has recorded $185,000 investment in the company on the balance sheet at 30 June 2011, none of which is likely to recover. c) On 10 September 2011, CanboSpec Ltd announced that it would be offering a rights issue to its shareholders. The offer will open on 15 September 2011 and close on 15 December 2011. Required: For each of the above events or transactions, indicate the action required in the financial report (3marks), and provide one (1) additional procedure you would perform in relation to each of the events to ensure that the above information was correct (6marks).

Case

Action required (1 mark each)

Additional procedure (2 marks each)

a.

b.

c.

4b Discuss auditors’ responsibility in relation to subsequent events (5 marks). Provide three audit tests normally performed to discover subsequent events. (4 marks)

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Question 5 (12 marks) The following are independent situations relating to the year ended 30 June 2011. Assume all entities are reporting entities and that all situations are material. For each situation, (i) describe one additional procedure you would perform prior to issuing your audit report (3 marks); (ii) Assuming the matters remain unsolved, recommend and justify an audit opinion for each of the entity for the year ended 30 June 2008 (9 marks). a) The depreciation rates used by Langer Ltd have not changed for the past three years. Given recent technologies in the industry in which Langer operates, you are convinced the useful lives of Langer’s assets need to be adjusted downwards. The directors refuse to make this change despite that you have explained this places them in breach of impairment tests contained in approved accounting standards. One additional audit procedure

Audit opinion

Justification

b) You have received the draft annual report from Arun Ltd. On reading the “Year in Review” you note the club chairman states that revenues increased by 200%. On checking the accuracy of this information you note that revenues have actually fallen by 20%. The club refuses to change anything in the annual report for fear of missing printing deadlines. One additional audit procedure  Audit opinion

Justification

c) The audit of Zoen Ltd was extremely difficult this year as the client did not keep appropriate books and records. The accounting department was chronically understaffed, so transactions were not promptly entered and reconciliations not performed. A temporary accountant was employed to help sort out the mess but was unable even to reconcile the bank account at yearend You are not satisfied that all transactions that occurred during the year are reflected in the financial report.

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One additional audit procedure

Audit opinion

Justification

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Question 6 (12 Marks) You are the external auditor of Jupiter Ltd, a public company with a 30 June 2010 fiscal year end. You sent a privity letter to Jupiter’s bank acknowledging that Jupiter has requested a substantial bank loan which is dependent on the bank receiving an audited financial report. You performed the audit and issued an unmodified audit opinion on 28th September 2010. The bank granted the loan to Jupiter Ltd upon receiving the audited financial report. Another company, Apex Inc., also bought a large amount of the shares at the price corresponding to the audited financial report. In spite of the fact that a substantial bank loan was received, Jupiter went bankrupt the following year. It was exposed that Jupiter had extensive off-balance sheet liabilities and recorded some finance leases as operating leases, which you failed to detect.

Required: i) Is your firm liable to the bank? Give reasons (6 marks);

(ii) Is your firm liable to Apex Inc.? Justify your answer with reference to applicable case law (6 marks);

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