UK TR2 2020-21 1st Diet Auditing Questions PDF

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Download UK TR2 2020-21 1st Diet Auditing Questions PDF

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Edinburgh Napier University

AUDITING

ACC09109

Academic session: Diet: Exam duration (excluding reading time): 3 hours 30 minutes Reading time: Total exam time: 3 hours 45 minutes Please read the full instructions before you start writing.

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Exam paper information Total number of pages:

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Number of questions:

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Attempt ALL questions

10 13

Special instructions None For student solutions, you may submit either:

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ONE Word document, collating all narrative and calculation answers, or

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ONE Word document containing narrative answers and ONE Excel document, containing calculations.

Special items None

Examiner(s): Dr Rachel Findlay & Dr Morrison Handley-Schachler

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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. 1. Audit risk is: A. The risk that the auditor expresses an inappropriate audit opinion B. Inherent risk x Control risk x Detection risk C. Reduced if the auditor considers the client’s business risks when planning the audit D. All of the above Total 2 marks.

2. The auditor will obtain written representations from management in order to: A. B. C. D.

Agree the scope of the audit Support other evidence Agree the audit fee Remind clients of their responsibilities

Total 2 marks.

3. Which of the following audit procedures would most likely provide an auditor with the most assurance about the effectiveness of the operation of an entity's internal control? A. B. C. D.

Confirmation with outside parties Inquiry of client staff Observing performance of a control procedure Agreeing details on a customer order to the sales ledger

Total 2 marks.

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4. When does the external auditors term of office end? A. B. C. D.

At the end of the general meeting at which the accounts are laid At the end of the company’s financial year On the date stated in the engagement letter On the date agreed by both the auditors and the directors

Total 2 marks.

5. You are an external auditor and your manager has asked you to trace a sample of sales orders from your client’s customer order file to the listing of sales used for the revenue figures on your client’s income statement. Which of the following income statement assertions are you testing with this audit work? A. Occurrence B. Completeness C. Cut-off D. Classification Total 2 marks.

6. An external auditor has no access to the accounting records or other evidence for a material balance on the client’s financial statements. When considering the audit opinion this is referred to as a/an: A. B. C. D.

Limitation of scope Disagreement Adverse Opinion Emphasis of matter

Total 2 marks.

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7. The legal case of Royal Bank of Scotland vs Bannerman Johnstone MacLay (RBS v Bannerman) in 2002 established which legal principle in relation to external auditors: A. B. C. D.

Responsibility for fraud Negligence Duty of care to third parties Reasonable skill and care towards audit client

Total 2 marks.

8. Which of the following are controls which can detect errors in a company’s accounting records: i. ii. iii. A. B. C. D.

bank reconciliations computer generated batch totals passwords for access the computerised accounting system i and ii only i and iii only ii and iii only None of the above

Total 2 marks.

9. Which one of the following is not a type of internal control activity: A. B. C. D.

Maintaining staff job descriptions Performing walkthrough tests Monitoring of aged debtors reports Review of management information

Total 2 marks.

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10. When a client manually adds up the total of ten customer orders and agrees the result to the total value of the sales input to the accounting system, this is an example of a/an: A. B. C. D.

Management information control Supervision control Accounting control Arithmetic control

Total 2 marks. Total marks for questions 1-10 are 20

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SECTION B: Attempt this Question

Question 11 You are an audit manager with Windsor and Markle, a firm of external auditors. It is April 2021 and you are completing the audit planning for the audit of their client Queen Ltd. (Queen). Queen has a financial statement year end of 30 June 2021. Queen manufacturers and sells goods made from different fabrics. Their product lines include bed linen, cushion covers and blankets. Your audit team has just finished the interim audit and have provided you with their systems notes and the following information. The purchasing system has changed since the previous audit conducted by Windsor and Markle. The audit team have provided the following description of the purchasing system. No other controls exists apart from those described. 

Queen does not have a purchasing department so employees can place orders with suppliers in their own department. They use a three part order form: copy 1 is kept by the originator, copy 2 is sent to the goods received department and copy 3 is sent to the customer;

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Goods are received, but not checked on arrival by the warehouse staff. Warehouse staff are also responsible for inventory control and dispatch of goods. Once goods have been received, the advice note and the purchase order for the goods are sent to the purchase ledger clerk;

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When the supplier’s invoice is received some time later the purchase ledger clerk checks the calculations on it, signs it and staples the advice note and purchase order to it. The purchase ledger clerk then updates the purchase ledger with the details of the invoice.

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The invoice is then sent to the manager responsible for the staff member who ordered the goods. The manager codes the invoice and returns it to the purchase ledger clerk. Purchase invoices are coded, entered on an analysis sheet and posted to the nominal ledger each month end as a journal entry.

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The cashier pays suppliers monthly on instructions from the purchase ledger clerk. The purchase ledger control account (trade creditors balance) is reconciled monthly by the purchase ledger clerk who also reconciles suppliers’ statements.

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On a number of occasions goods have been delivered to customers but no invoice has been raised or sent out by Queen.

As external auditor you will share the results of your firm’s review of the systems and highlight any weaknesses and risks to Queen’s directors. You will also make suggestions and recommendations for improvements the directors will make to their system. Required: 6

A. Identify and explain the implications of any weaknesses in Queen’s systems. (10 marks) Questions continue on next page

B. For each weakness you identify in A (above) suggest a recommendation for improvement. (10 marks)

As part of your planning for the audit you have arranged a meeting of your audit team. This is a planning meeting and will provide an update on the audit plans for the team before the audit visit for substantive testing in the second half of January 2021. Two new team members are scheduled to work on the audit together with more experienced audit staff. The two new audit team members have just finished university having started with your firm at the start of December 2020. Your aim is to remind them of some key principles and auditing activities including tests of control, substantive audit procedures and materiality. Required: C. Define tests of control and substantive audit procedures and explain their purpose in external auditing. (7 Marks) D. Explain, briefly, why materiality is an important consideration for the auditor. (3 Marks) Total 30 marks.

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SECTION C: Attempt both of these questions

Question 12 You are the audit senior on the audit of Café Shell Ltd. a small chain of cafes in Scotland. You are preparing a list of substantive tests on the accounts payable balance for your junior auditor to perform when they visit the client. You are also training your junior staff on how to document client systems and the purpose and methods of conducting walk through tests. Required: A. Detail the substantive audit procedures you would carry out in relation to the accounts payable balance on Café Shell Ltd.’s yearend financial statements. (10 marks) B. Explain the purpose of a ‘walk through’ test when planning an audit. (6 marks)

C. Identify and explain three fundamental principles of ethics required of auditors. (9 marks) Total 25 marks.

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Question 13 You are an audit partner with Smash & Grab and, a few months ago you signed your audit opinion after completing the audit of Granite plc, a large mining and aggregate group with several subsidiaries. The turnover of the group is £600m and it has reported a profit for the last financial year ended 28 February 2021 of £18m. You receive a call from the group financial controller, Mary Wright who tells you: Internal audit has uncovered a fraud in the purchasing department of Granite. The purchasing manager had secretly set up several companies and had used them to sell materials and services to Granite at inflated prices by redirecting supplies from approved suppliers to the fraudulent companies and adding a large additional amount to the selling price used for selling to Granite. The manager has been put in indefinite leave and Mary Wright is seeking to pursue prosecution of the manager. Required:

A. Explain the auditor’s responsibility to detect fraud and how you would respond to Mary Wright in respect of this. (9 marks)

You have been the auditor of Teckie Ltd for several years. You are attending the annual shareholder’s meeting of your audit client Teckie Ltd. One of the shareholders, who owns 18% of the company’s issued ordinary shares, made a short speech about how the audit fee would be much lower if auditors would exercise better management throughout the year of Teckie Ltd.’s company internal controls. Required: B. State the responsibilities of external auditors in performing their work, and

of directors, in relation to the design and operation of internal control systems. (8 marks)

Corporate governance has received increasing attention over the last few decades. This is largely due to the incidence of high profile corporate failures and scandals such as Enron and WorldCom. Legislation and provisions in relation to corporate governance include the Sarbanes-Oxley Act (2002) and the UK Corporate Governance Code.

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Required: C. Briefly describe the background to and role of the Sarbanes-Oxley Act (2002). (4 marks)

D. Discuss briefly the role and advantages of audit committees as included in the UK Corporate Governance Code. (4 marks)

Total 25 marks. Total marks for paper are 100

End of Paper

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