ACCA Audit and Assurance (AA)

Achievement Ladder
Course Exam 1 Questions

Questions

Time allowed: 1 hour and 30 minutes

ALL questions are compulsory and MUST be attempted

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Get into good exam habits now!
Take a moment to focus on the right approach for this exam.

Effective time management

 Watch the clock, allocate 1.8 minutes to each mark and move on if you get behind.
 Take a few moments to think what the requirements are asking for and how you are going to
answer them.
 Remember one mark is usually allocated for each valid point you give in a discursive
question.

Effective planning
 This exam is half the real exam.
 Read the requirements carefully: focus on mark allocation, question words (see below) and
potential overlap between requirements.
 Identify and make sure you pick up the easy marks available in each question.

Effective layout
 Present your numerical solutions using the standard layouts you have seen. Show and
reference your workings clearly.
 With written elements try to make a number of distinct points using headings and short
paragraphs. You should aim to make a separate point for each mark.
 Ensure that you explain the points you are making ie why is the point a strength, criticism or
opportunity?
 Give yourself plenty of space to add extra lines as necessary; it will also make it easier for the
examining team to mark.

Common terminology
Advise To counsel, inform or notify
Analyse Examine in detail the structure of
Calculate/compute To ascertain or reckon mathematically
Compare and contrast Show the similarities and/or differences
Define Give the exact meaning of
Describe Communicate the key features of
Discuss To examine in detail by argument
Distinguish Highlight the differences between
Evaluate To appraise or assess the value of
Explain Make clear or intelligible/state the meaning of
Identify Recognise, establish or select after consideration
Interpret Process information to explain its meaning
Justify To produce reasons in support of
List State short pieces of information on separate lines
Prepare To make or get ready for use
Recommend To advise on a course of action
Summarise To express the most important facts of
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Section B
BOTH questions are compulsory and MUST be attempted.
Question 1 SeaPass
(a) List and explain the elements of an assurance engagement. (5 marks)
SeaPass is a ferry company which operates daily ferry crossings from the UK to France. The
company's year end is 30 June 20X9. You are the audit senior and you have started planning the
audit. Your audit manager has asked you to have a planning meeting with the client and to identify
any relevant audit risks so that the audit plan can be completed.
You obtained the following information at the meeting:
SeaPass has had a challenging year. The current economic crisis and worries about the future of
the Euro currency have meant that many passengers who might previously have booked ferry
crossings to France are now choosing to spend their holiday within the UK. SeaPass is under
continual pressure from its shareholders to show consistent performance.
In an attempt to win new passengers and generate additional income, SeaPass spent $800,000 on
an advertising campaign which featured both in the national press and on national television. The
campaign took place in May 20X9 and the company is convinced that this will vastly improve
customer numbers during Summer 20X9. Consequently the finance director is proposing to match
most of the advertising cost against summer revenues and has shown $600,000 of the $800,000
spent as a prepayment at the year end.
When customers book their ferry crossing they are required to pay an upfront deposit of 20% of the
total cost. In previous years this has been recognised as revenue in the month that the ferry
crossing is made. However, this year SeaPass has recognised the revenue when the deposit is
received. The finance director has explained that this is because the company has spent the
money as it was received in order to finance the advertising campaign. The balance of 80% is
taken by the company on the day of departure.
SeaPass wants its customers to have an excellent experience when they travel with them. With
this in mind it offers a 'money back guarantee'. If customers are excessively delayed or they are
not happy with the service provided by SeaPass, then they can claim compensation under the
company's money-back guarantee. Despite the company's very best efforts to improve customer
satisfaction, compensation payments are made on a regular basis.
SeaPass has also found that the price of fuel has risen sharply during the course of the year and it
has not been able to pass this price rise on to its customers in the form of higher ticket prices. This
has meant that its operating costs have increased considerably, leading to falling profit margins.
The company does hold some cash reserves in the form of bank deposits. However, these cannot
be accessed for six months and so the company has had to take out a short-term overdraft. The
finance director is pleased that the financial statements will show a net positive cash position as
the bank deposits will be greater than the overdraft at the year end.
Required
(b) Using the information provided, describe FIVE audit risks and explain the auditor's response to
each risk in the planning of the audit of SeaPass.
Note. Prepare your answer using two columns headed Audit risk and Auditor's response
respectively. (10 marks)

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You have always carried out the audit of SeaPass using substantive procedures because SeaPass's
internal controls have been relatively limited. However, the finance director has told you that the
company is considering establishing an internal audit function and as a result he expects a significant
improvement in the company's internal controls. The internal audit work will be outsourced to an
external consultancy firm. On hearing this news your audit manager mentioned that your firm might be
able to change the way it carries out the audit of SeaPass.
Required
(c) State the FIVE components of an internal control system and give a brief explanation of each
component. (5 marks)
(d) Explain why the external auditor needs to obtain an understanding of a client's internal control
system. (3 marks)
(e) Explain how and why the external auditor will try to rely on internal controls wherever possible
when carrying out their audit and the implications for the audit if the auditor concludes that controls
are not operating effectively. (5 marks)
(f) Define a 'test of control' and a 'substantive procedure'. (2 marks)
(Total = 30 marks)

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Question 2 Jaffa Co
(a) Explain what analytical procedures are and explain how the auditor uses analytical procedures
during the course of the audit. (4 marks)
You are planning the audit of Jaffa Co, whose principal activity is the manufacture, sale and
distribution of tableware and cookware. You are preparing for your planning meeting with the
finance director and have obtained, in advance of the meeting, a copy of the draft accounts for the
year ended 31 March 20X2. Your initial review of the draft accounts identified the following
significant changes over the 20X1 figures.
STATEMENT OF PROFIT OR LOSS (EXTRACT)
Draft Actual Increase/
20X2 20X1 (decrease)
$'000 $'000 %
Revenue 16,759 13,298 26
Cost of sales (8,039) (7,114) 13
Gross profit 8,720 6,184 41
STATEMENT OF FINANCIAL POSITION (EXTRACT)
Draft Actual Increase/
20X2 20X1 (decrease)
$'000 $'000 %
Non-current assets
Property, plant and equipment 5,479 2,379 130
Current assets
Trade receivables 3,459 2,127 63
Current liabilities
Bank overdraft 1,891 503 276
Trade payables 918 1,134 (19)

During a telephone conversation the finance director informed you that the company had had a
good year, mainly due to securing a new contract to supply a number of major new customers in
the UK.
He also stated that there has been no revaluation of non-current assets but there has been
extensive refurbishment and improvement of the company's manufacturing facility and its plant and
machinery.
You have also learned that the company introduced a new accounting system three months before
the year end. All balances were transferred from the old system to the new one which will form the
basis of the numbers in the financial statements. Training for accounts staff on this new system is
ongoing.
Required
(b) Using the information provided, describe SIX audit risks and explain the auditor's response to each
risk in the planning of the audit of Jaffa Co.
Note. Prepare your answer using two columns headed Audit risk and Auditor's response
respectively. (12 marks)

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(c) Following your initial planning visit you receive a letter from the finance director of Jaffa Co which
expresses grave concern that a previously undetected fraud has been discovered. Over the last
few years, office staff have taken between $50 and $100 each month from petty cash and used the
funds for non-business use. He demands to know why the auditors have not picked this up on
previous audits and is considering replacing your firm.
Describe the auditor's responsibilities in relation to fraud and explain why your firm is unlikely to
detect a fraud such as the one described by the director during the course of the audit. (4 marks)
(Total = 20 marks)

SEP20/DEC20/MAR21/JUN21 EDITION

These materials are provided by BPP