f8 Questions

Fundamentals Level – Skills Module
Paper F8
Audit and Assurance
March/June 2017 – Sample Questions
Time allowed: 3 hours 15 minutes
This question paper is divided into two sections:
Section A – ALL 15 questions are compulsory and MUST be attempted

Section B – ALL THREE questions are compulsory and MUST be
attempted
Do NOT open this question paper until instructed by the supervisor.

Do NOT record any of your answers on the question paper.
This question paper must not be removed from the examination hall.
The Association of
Chartered Certified
Accountants
Section B – ALL THREE questions are compulsory and MUST be attempted
Please write your answers to all parts of these questions on the lined pages within the Candidate Answer Booklet.
16 (a) Define audit risk and the components of audit risk. (4 marks)
You are an audit supervisor of Caving & Co and you are planning the audit of Hurling Co, a listed company, for the
year ending 31 March 20X7. The company manufactures computer components and forecast profit before tax is
$33·6m and total assets are $79·3m.
Hurling Co distributes its products through wholesalers as well as via its own website. The website was upgraded
during the year at a cost of $1·1m. Additionally, the company entered into a transaction in February to purchase a
new warehouse which will cost $3·2m. Hurling Co’s legal advisers are working to ensure that the legal process will
be completed by the year end. The company issued $5m of irredeemable preference shares to finance the warehouse
purchase.
During the year the finance director has increased the useful economic lives of fixtures and fittings from three to four
years as he felt this was a more appropriate period. The finance director has informed the engagement partner that a
revised credit period has been agreed with one of its wholesale customers, as they have been experiencing difficulties
with repaying the balance of $1·2m owing to Hurling Co. In January 20X7, Hurling Co introduced a new bonus based
on sales targets for its sales staff. This has resulted in a significant number of new wholesale customer accounts being
opened by sales staff. The new customers have been given favourable credit terms as an introductory offer, provided
goods are purchased within a two-month period. As a result, revenue has increased by 5% on the prior year.
The company has launched several new products this year and all but one of these new launches have been
successful. Feedback on product Luge, launched four months ago, has been mixed, and the company has just
received notice from one of their customers, Petanque Co, of intended legal action. They are alleging the product sold
to them was faulty, resulting in a significant loss of information and an ongoing detrimental impact on profits. As a
precaution, sales of the Luge product have been halted and a product recall has been initiated for any Luge products
sold in the last four months.
The finance director is keen to announce the company’s financial results to the stock market earlier than last year and
in order to facilitate this, he has asked if the audit could be completed in a shorter timescale. In addition, the company
is intending to propose a final dividend once the financial statements are finalised.
Hurling Co’s finance director has informed the audit engagement partner that one of the company’s non-executive
directors (NEDs) has just resigned, and he has enquired if the partners at Caving & Co can help Hurling Co in
recruiting a new NED. Specifically he has requested the engagement quality control reviewer, who was until last year
the audit engagement partner on Hurling Co, assist the company in this recruitment. Caving & Co also provides
taxation services for Hurling Co in the form of tax return preparation along with some tax planning advice. The finance
director has recommended to the audit committee of Hurling Co that this year’s audit fee should be based on the
company’s profit before tax. At today’s date, 20% of last year’s audit fee is still outstanding and was due to be paid
three months ago.
Required:
(b) Describe EIGHT audit risks, and explain the auditor’s response to each risk, in planning the audit of Hurling
Co.
Note: Prepare your answer using two columns headed Audit risk and Auditor’s response respectively.
(16 marks)
(c) (i) Identify and explain FIVE ethical threats which may affect the independence of Caving & Co’s audit of
Hurling Co; and
(ii) For each threat, suggest a safeguard to reduce the risk to an acceptable level.
Note: The total marks will be split equally between each part. Prepare your answer using two columns headed
Ethical threat and Possible Safeguard respectively. (10 marks)
(30 marks)
2
17 Airsoft Co is a listed company which manufactures stationery products. The company’s profit before tax for the year
ended 31 December 20X6 is $16·3m and total assets as at that date are $66·8m. You are an audit supervisor of
Biathlon & Co and you are currently finalising the audit programmes for the year-end audit of your existing client
Airsoft Co. You attended a meeting with your audit manager where the following matters were discussed:
Trade payables and accruals
Airsoft Co purchases its raw materials from a large number of suppliers. The company’s policy is to close the purchase
ledger just after the year end and the financial controller is responsible for identifying goods which were received pre
year-end but for which no invoice has yet been received. An accrual is calculated for goods received but not yet
invoiced (GRNI) and is included within trade payables and accruals.
The audit strategy has identified a risk over the completeness of trade payables and accruals. The audit team will
utilise computer assisted audit techniques (CAATs), in the form of audit software while auditing trade payables and
accruals.
Bank overdraft and savings accounts
Airsoft Co’s draft financial statements include a bank overdraft of $2·6m, which relates to the company’s main current
account. In addition Airsoft Co maintains a number of savings accounts. The savings account balances are classified
as cash and cash equivalents and are included in current assets. All accounts have been reconciled at the year end.
Directors’ remuneration
Airsoft Co’s board is comprised of eight directors. Their overall remuneration consists of two elements: an annual
salary, paid monthly; and a significant annual discretionary bonus, which is paid in a separate payment run on
20 December. All remuneration paid to directors is included within wages and salaries. Local legislation requires
disclosure of the overall total of directors’ remuneration broken down by element and by director.
Required:
(a) Describe substantive procedures the auditor should perform to obtain sufficient and appropriate audit
evidence in relation to the COMPLETENESS of Airsoft Co’s trade payables and accruals. (4 marks)
Excluding procedures included in part (a):

(b) Describe audit software procedures which could be carried out during the audit of Airsoft Co’s trade payables
and accruals. (3 marks)
(c) Describe substantive procedures the auditor should perform to obtain sufficient and appropriate audit
evidence in relation to Airsoft Co’s year-end bank balances. (5 marks)
(d) Describe substantive procedures the auditor should perform to confirm the directors’ remuneration included
in the financial statements at the year end. (3 marks)
A member of your audit team has asked for information on ISA 701 Communicating Key Audit Matters in the
Independent Auditor’s Report as she has heard this standard is applicable to listed clients such as Airsoft Co.
Required:
(e) Identify what a key audit matter (KAM) is and explain how the auditor determines and communicates KAM.
(5 marks)
(20 marks)
3 [P.T.O.
18 (a) ISA 315 Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its
Environment requires auditors to obtain an understanding of control activities relevant to the audit.
Control activities are the policies and procedures which help ensure that management directives are carried out.
Required:
Describe FOUR different types of control activities and, for each type, provide an example control a company
may implement. (4 marks)
Equestrian Co manufactures smartphones and tablets. Its main customers are retailers who then sell to the general
public. The company’s manufacturing is spread across five sites and goods are stored in its nine warehouses located
across the country. You are an audit supervisor of Baseball & Co and in preparation for the forthcoming audit for the
year ending 30 June 20X7, you are reviewing the following notes your audit manager has provided you with in
relation to the company’s internal controls.
Equestrian Co has a small internal audit (IA) department. During the year, IA started a programme of physically
verifying the company’s assets and comparing the results to the non-current assets register, as this type of
reconciliation had not occurred for some time. To date only 15% of assets have had their existence confirmed as IA
has experienced significant staff shortages and several members of the current IA team are new to Equestrian Co.
During the year, Equestrian Co conducted an extensive reorganisation of its manufacturing process to improve
efficiency. Due to the significant number of employee changes required, the human resources department (HR) has
been very busy and to ease their workload during this period, the payroll department has assisted by setting up any
new employees who have joined the company. In January 20X7, the wage rate paid to employees was increased by
the HR director and he notified payroll by emailing the payroll supervisor.
A new sales ledger system was introduced in May 20X6 and will continue to be run in parallel with the old system
until IA has completed its checks between the two systems. New customers obtained by the sales team are required
to undergo a full credit check; on the basis of this, a credit limit is proposed by sales staff and approved by the sales
director and these credit limits remain static in the sales system.
Monthly perpetual inventory counts are undertaken at each of the nine warehouses, as a full year-end inventory count
is too disruptive for the company. High value items are stored in a secure area in each warehouse. Access is via a
four digit code, which for convenience is the same across all sites. Due to the company’s reorganisation programme,
some of the monthly inventory counts were not performed.
Bank reconciliations are undertaken monthly by an accounts clerk and details of all reconciling items are included.
Where the sum of the reconciling items is significant, the reconciliation is sent to the financial controller for review.
In order to maximise cash balances, the finance director approves all purchase invoices for payment 75 days after
receipt of the invoice.
Required:
(b) Identify and explain EIGHT deficiencies in Equestrian Co’s internal controls and provide a recommendation
to address each of these deficiencies.
Note: Prepare your answer using two columns headed Control deficiency and Control recommendation
respectively. (16 marks)
(20 marks)
End of Question Paper
4
Paper F8
Audit and Assurance
September/December 2017 – Sample Questions
Section A – A
LL 15 questions are compulsory and MUST be attempted
Section B – A
LL THREE questions are compulsory and MUST be
attempted

The Association of
Chartered Certified
Accountants
16 You are an audit supervisor of Halley & Co and you are reviewing the documentation describing Comet Publishing
Co’s purchases and payables system in preparation for the interim and final audit for the year ending 30 September
20X7. The company is a retailer of books and has ten stores and a central warehouse, which holds the majority of the
company’s inventory.
Your firm has audited Comet Publishing Co for a number of years and as such, audit documentation is available from
the previous year’s file, including internal control flowcharts and detailed purchases and payables system notes. As far
as you are aware, Comet Publishing Co’s system of internal control has not changed in the last year. The audit manager
is keen for the team to utilise existing systems documentation in order to ensure audit efficiency. An extract from the
existing systems notes is provided below.
Extract of purchases and payables system
Store managers are responsible for ordering books for their shop. It is not currently possible for store managers to
request books from any of the other nine stores. Customers who wish to order books, which are not in stock at the
branch visited, are told to contact the other stores directly or visit the company website. As the inventory levels fall
in a store, the store manager raises a purchase requisition form, which is sent to the central warehouse. If there is
insufficient inventory held, a supplier requisition form is completed and sent to the purchase order clerk, Oliver Dancer,
for processing. He sends any orders above $1,000 for authorisation from the purchasing director.
Receipts of goods from suppliers are processed by the warehouse team, who agree the delivery to the purchase order,
checking quantity and quality of goods and complete a sequentially numbered goods received note (GRN). The GRNs
are sent to the accounts department every two weeks for processing.
On receipt of the purchase invoice from the supplier, an accounts clerk matches it to the GRN. The invoice is then sent
to the purchase ordering clerk, Oliver, who processes it for payment. The finance director is given the total amount of
the payments list, which she authorises and then processes the bank payments. Due to staff shortages in the accounts
department, supplier statement reconciliations are no longer performed.
Other information – conflict of interest
Halley & Co has recently accepted the audit engagement of a new client, Edmond Co, who is the main competitor of
Comet Publishing Co. The finance director of Comet Publishing Co has enquired how Halley & Co will keep information
obtained during the audit confidential.
Required:
(a) Explain the safeguards which Halley & Co should implement to ensure that the identified conflict of interest is
properly managed. (5 marks)
(b) Explain the steps the auditor should take to confirm the accuracy of the purchases and payables flowcharts
and systems notes currently held on file. (5 marks)
(c) In respect of the purchases and payables system for Comet Publishing Co:
(i) Identify and explain FIVE deficiencies;
(ii) Recommend a control to address each of these deficiencies; and
(iii) Describe a TEST OF CONTROL the auditor should perform to assess if each of these controls, if
implemented, is operating effectively to reduce the identified deficiency.
Note: Prepare your answer using three columns headed Control deficiency, Control recommendation, and Test
of control respectively. The total marks will be split equally between each part. (15 marks)
(d) Describe substantive procedures the auditor should perform to obtain sufficient and appropriate evidence in
relation to Comet Publishing Co’s purchases and other expenses. (5 marks)
(30 marks)
2
17 You are an audit supervisor of Cupid & Co, planning the final audit of a new client, Prancer Construction Co, for the
year ending 30 September 20X7. The company specialises in property construction and providing ongoing annual
maintenance services for properties previously constructed. Forecast profit before tax is $13·8m and total assets are
expected to be $22·3m, both of which are higher than for the year ended 30 September 20X6.
You are required to produce the audit strategy document. The audit manager has met with Prancer Construction Co’s
finance director and has provided you with the following notes, a copy of the August management accounts and the
prior year financial statements.
Meeting notes
The prior year financial statements recognise work in progress of $1·8m, which was comprised of property construction
in progress as well as ongoing maintenance services for finished properties. The August 20X7 management accounts
recognise $2·1m inventory of completed properties compared to a balance of $1·4m in September 20X6. A full
year-end inventory count will be undertaken on 30 September at all of the 11 building sites where construction is in
progress. There is not sufficient audit team resource to attend all inventory counts.
In line with industry practice, Prancer Construction Co offers its customers a five-year building warranty, which covers
any construction defects. Customers are not required to pay any additional fees to obtain the warranty. The finance
director anticipates this provision will be lower than last year as the company has improved its building practices and
therefore the quality of the finished properties.
Customers who wish to purchase a property are required to place an order and pay a 5% non-refundable deposit prior
to the completion of the building. When the building is complete, customers pay a further 92·5%, with the final 2·5%
due to be paid six months later. The finance director has informed you that although an allowance for receivables has
historically been maintained, it is anticipated that this can be significantly reduced.
Information from management accounts
Prancer Construction Co’s prior year financial statements and August 20X7 management accounts contain a material
overdraft balance. The finance director has confirmed that there are minimum profit and net assets covenants attached
to the overdraft.
A review of the management accounts shows the payables period was 56 days for August 20X7, compared to 87 days
for September 20X6. The finance director anticipates that the September 20X7 payables days will be even lower than
those in August 20X7.
Required:
(a) Describe the process Cupid & Co should have undertaken to assess whether the PRECONDITIONS for an audit
were present when accepting the audit of Prancer Construction Co. (3 marks)
(b) Identify THREE main areas, other than audit risks, which should be included within the audit strategy
document for Prancer Construction Co, and for each area provide an example relevant to the audit.
(3 marks)
(c) Using all the information provided describe SEVEN audit risks, and explain the auditor’s response to each risk,
in planning the audit of Prancer Construction Co.
(14 marks)
(20 marks)
3 [P.T.O.
18 Dashing Co manufactures women’s clothing and its year end was 31 July 20X7. You are an audit supervisor of Jaunty
& Co and the year-end audit for Dashing Co is due to commence shortly.
The draft financial statements recognise profit before tax of $2·6m and total assets of $18m. You have been given
responsibility for auditing receivables, which is a material balance, and as part of the audit approach, a positive
receivables circularisation is to be undertaken.
At the planning meeting, the finance director of Dashing Co informed the audit engagement partner that the company
was closing one of its smaller production sites and as a result, a number of employees would be made redundant. A
redundancy provision of $110,000 is included in the draft financial statements.
Required:
(a) Describe the steps the auditor should perform in undertaking a positive receivables circularisation for Dashing
Co. (4 marks)
(b) Describe substantive procedures, other than a receivables circularisation, the auditor should perform to verify
EACH of the following assertions in relation to Dashing Co’s receivables:
(i) Accuracy, valuation and allocation;
(ii) Completeness; and
(iii) Rights and obligations.
Note: The total marks will be split equally between each part. (6 marks)
(c) Describe substantive procedures the auditor should perform to confirm the redundancy provision at the year
end. (5 marks)
A few months have now passed and the audit team is performing the audit fieldwork including the audit procedures
which you recommended over the redundancy provision. The team has calculated that the necessary provision should
amount to $305,000. The finance director is not willing to adjust the draft financial statements.
Required:
(d) Discuss the issue and describe the impact on the auditor’s report, if any, should this issue remain unresolved.
(5 marks)
(20 marks)
4
Paper F8
Audit and Assurance
F8 ACCA
Section A – A
Section B – A
attempted

The Association of
Chartered Certified
Accountants
16 Raspberry Co operates an electric power station, which produces electricity 24 hours a day, seven days a week. The
company’s year end is 30 June 20X8. You are an audit manager of Grapefruit & Co, the auditor of Raspberry Co. The
interim audit has been completed and you are reviewing the documentation describing Raspberry Co’s payroll system.
Systems notes – payroll
Raspberry Co employs over 250 people and approximately 70% of the employees work in production at the power
station. There are three shifts every day with employees working eight hours each. The production employees are paid
weekly in cash. The remaining 30% of employees work at the head office in non-production roles and are paid monthly
by bank transfer.
The company has a human resources (HR) department, responsible for setting up all new joiners. Pre-printed forms are
completed by HR for all new employees and, once verified, a copy is sent to the payroll department for the employee
to be set up for payment. This form includes the staff member’s employee number and payroll cannot set up new
joiners without this information. To encourage staff to attend work on time for all shifts, Raspberry Co introduced a
discretionary bonus, paid every three months, for production staff. The production supervisors determine the amounts
to be paid and notify the payroll department. This quarterly bonus is entered into the system by a clerk and each entry
is checked by a senior clerk for input errors prior to processing. The senior clerk signs the bonus listing as evidence of
undertaking this review.
Production employees are issued with clock cards and are required to swipe their cards at the beginning and end of
their shift. This process is supervised by security staff 24 hours a day. Each card identifies the employee number and
links into the hours worked report produced by the payroll system, which automatically calculates the gross and net
pay along with relevant deductions. These calculations are not checked.
In addition to tax deductions from pay, some employees’ wages are reduced for such items as repayments of student
loans owed to the central government. All employers have a statutory obligation to remit funds on a timely basis and
to maintain accounting records which reconcile with annual loan statements sent by the government to employers. At
Raspberry Co student loan deduction forms are completed by the relevant employee and payments are made directly
to the government until the employee notifies HR that the loan has been repaid in full.
On a quarterly basis, exception reports relating to changes to the payroll standing data are produced and reviewed by
the payroll director. No overtime is worked by employees. Employees are entitled to take 28 holiday days annually.
Holiday request forms are required to be completed and authorised by relevant line managers, however, this does not
always occur.
On a monthly basis, for employees paid by bank transfer, the senior payroll manager reviews the list of bank payments
and agrees this to the payroll records prior to authorising the payment. If any errors are noted, the payroll senior
manager amends the records.
For production employees paid in cash, the necessary amount of cash is delivered weekly from the bank by a security
company. Two members of the payroll department produce the pay packets, one is responsible for preparing them
and the other checks the finished pay packets. Both members of staff are required to sign the weekly payroll listing
on completion of this task. The pay packets are then delivered to the production supervisors, who distribute them to
employees at the end of the employees’ shift, as they know each member of their production team.
Monthly management accounts are produced which detail variances between budgeted amounts and actual. Revenue
and key production costs are detailed, however, as there are no overtime costs, wages and salaries are not analysed.
2
Required:
(a) In respect of the payroll system for Raspberry Co:
(i) Identify and explain FIVE KEY CONTROLS which the auditor may seek to place reliance on; and
(ii) Describe a TEST OF CONTROL the auditor should perform to assess if each of these key controls is
operating effectively.
Note: Prepare your answer using two columns headed Key control and Test of control respectively. The total
marks will be split equally between each part. (10 marks)
(b) Identify and explain FIVE DEFICIENCIES in Raspberry Co’s payroll system and provide a recommendation to
address each of these deficiencies.
Note: Prepare your answer using two columns headed Control deficiency and Control recommendation
The finance director is interested in establishing an internal audit department (IAD). In the company she previously
worked for the IAD carried out inventory counts, however, as this is not relevant for Raspberry Co, she has asked for
guidance on what other assignments an IAD could be asked to perform.
Required:
(c) Describe assignments the internal audit department of Raspberry Co could carry out. (5 marks)
Raspberry Co deducts employment taxes from its employees’ wages on a weekly/monthly basis and pays these to the
local taxation authorities in the following month. At the year end the financial statements will contain an accrual for
income tax payable on employment income.
Required:
(d) Describe the substantive procedures the auditor should perform to confirm the year-end accrual for tax payable
on employment income. (5 marks)
(30 marks)
3 [P.T.O.
17 You are an audit senior of Loganberry & Co and are planning the audit of Blackberry Co for the year ending 31 March
20X8. The company is a manufacturer of portable music players and your audit manager has already had a planning
meeting with the finance director. Forecast revenue is $68·6m and profit before tax is $4·2m.
She has provided you with the following notes of the meeting:
Planning meeting notes
Inventory is valued at the lower of cost and net realisable value. Cost is made up of the purchase price of raw materials
and costs of conversion, including labour, production and general overheads. Inventory is held in three warehouses
across the country. The company plans to conduct full inventory counts at the warehouses on 2, 3 and 4 April, and
any necessary adjustments will be made to reflect post year-end movements of inventory. The internal audit team will
attend the counts.
During the year, Blackberry Co paid $1·1m to purchase a patent which allows the company the exclusive right for three
years to customise their portable music players to gain a competitive advantage in their industry. The $1·1m has been
expensed in the current year statement of profit or loss. In order to finance this purchase, Blackberry Co raised $1·2m
through issuing shares at a premium.
In November 20X7, it was discovered that a significant teeming and lading fraud had been carried out by four members
of the sales ledger department who had colluded. They had stolen funds from wholesale customer receipts and then
to cover this, they allocated later customer receipts against the older receivables. These employees were all reported
to the police and subsequently dismissed. As a result of the vacancies in the sales ledger department, Blackberry Co
decided to outsource its sales ledger processing to an external service organisation. This service organisation handles
all elements of the sales ledger cycle, including sales invoicing and chasing of receivables balances and sends monthly
reports to Blackberry Co detailing the sales and receivable amounts. Blackberry Co ran its own sales ledger until
31 January 20X8, at which point the records were transferred to the service organisation.
In December 20X7, the financial accountant of Blackberry Co was dismissed. He had been employed by the company
for nine years, and he has threatened to sue the company for unfair dismissal. As a result of this dismissal, and until
his replacement commences work in April, the financial accountant’s responsibilities have been adequately allocated
to other members of the finance department. However, for this period no supplier statement reconciliations or purchase
ledger control account reconciliations have been performed.
In January 20X7, a receivable balance of $0·9m was written off by Blackberry Co as it was deemed irrecoverable as
the customer had declared itself bankrupt. In February 20X8, the liquidators handling the bankruptcy of the company
publicly announced that it was likely that most of its creditors would receive a pay-out of 40% of the balance owed. As
a result, Blackberry Co has included a current asset of $360,000 within the statement of financial position and other
income in the statement of profit or loss.
Required:
(a) Describe Loganberry & Co’s responsibilities in relation to the prevention and detection of fraud and error.
(4 marks)
(b) Describe EIGHT audit risks and explain the auditor’s response to each risk in planning the audit of
Blackberry Co.
(16 marks)
(20 marks)
4
18 You are an audit manager of Cranberry & Co and you are currently responsible for the audit of Gooseberry Co, a
company which develops and manufactures health and beauty products and distributes these to wholesale customers.
Its draft profit before tax is $6·4m and total assets are $37·2m for the financial year ended 31 January 20X8. The final
audit is due to commence shortly and the following matters have been brought to your attention:
Research and development
Gooseberry Co spent $1·9m in the current year developing nine new health and beauty products, all of which
are at different stages of development. Once they meet the recognition criteria under IAS® 38 Intangible Assets
for development expenditure, Gooseberry Co includes the costs incurred within intangible assets. Once production
commences, the intangible assets are amortised on a straight line basis over three years. Management believes that
this amortisation policy is a reasonable approximation of the assets’ useful lives, as in this industry there is constant
demand for innovative new products.
Depreciation
Gooseberry Co has a large portfolio of property, plant and equipment (PPE). In March 20X7, the company carried
out a full review of all its PPE and updated the useful lives, residual values, depreciation rates and methods for many
categories of asset. The finance director felt the changes were necessary to better reflect the use of the assets. This
resulted in the depreciation charge of some assets changing significantly for this year.
Bonus
The company’s board is comprised of seven directors. They are each entitled to a bonus based on the draft year-end net
assets, excluding intangible assets. Details of the bonus entitlement are included in the directors’ service contracts. The
bonus, which related to the 20X8 year end, was paid to each director in February 20X8 and the costs were accrued
and recognised within wages and salaries for the year ended 31 January 20X8. Separate disclosure of the bonus, by
director, is required by local legislation.
Required:
(a) Describe substantive procedures the auditor should perform to obtain sufficient and appropriate audit evidence
in relation to Gooseberry Co’s research and development expenditure. (5 marks)
(b) Describe substantive procedures the auditor should perform to obtain sufficient and appropriate audit evidence
in relation to the matters identified regarding depreciation of property, plant and equipment. (5 marks)
(c) Describe substantive procedures the auditor should perform to obtain sufficient and appropriate audit evidence
in relation to the directors’ bonuses. (5 marks)
During the audit, the team discovers that the intangible assets balance includes $440,000 related to one of the nine
new health and beauty products development projects, which does not meet the criteria for capitalisation. As this
project is ongoing, the finance director has suggested that no adjustment is made in the 20X8 financial statements.
She is confident that the project will meet the criteria for capitalisation in 20X9.
Required:
(d) Discuss the issue and describe the impact on the auditor’s report, if any, should this issue remain unresolved.
(5 marks)
(20 marks)
5
Applied Skills
Audit and Assurance

(AA)
September/December 2018 – Sample Questions
AA
AA ACCA
Section A – A
Section B – A
attempted

The Association of
Chartered Certified
Accountants
16 You are an audit supervisor of Earl & Co and are planning the audit of Darjeeling Co for the year ending 30 September
20X8. The company develops and manufactures specialist paint products and has been a client of your firm for
several years. The audit manager has attended a planning meeting with the finance director and has provided you
with the following notes of the meeting and financial statement extracts. You have been asked by the audit manager to
undertake preliminary analytical procedures using the financial statement extracts.
During the year Darjeeling Co has spent $0·9m, which is included within intangible assets, on the development of new
product lines, some of which are in the early stages of their development cycle. Additionally, as the company is looking
to expand production, during the year it purchased and installed a new manufacturing line. All costs, incurred in the
purchase and installation of that asset, have been included within property, plant and equipment. These capitalised
costs include the purchase price of $2·2m, installation costs of $0·4m and a five-year servicing and maintenance plan
costing $0·5m. In order to finance the development projects and the new manufacturing line, the company borrowed
$4m from the bank which is to be repaid in instalments over eight years and has an interest rate of 5%. Developing
new products and expanding production is important as the company intends to undertake a stock exchange listing in
the next 12 months.
The company started a number of initiatives during the year in order to boost revenue. It offered extended credit terms
to its customers on the condition that their sales order quantities were increased. In addition, Darjeeling Co made an
announcement in October 20X7 of its ‘price promise’: that it would match the prices of any competitor for similar
products purchased. Customers who are able to prove that they could purchase the products cheaper elsewhere are
asked to claim the difference from Darjeeling Co, within one month of the date of purchase of goods, via its website.
The company intends to include a refund liability of $0·25m, which is based on the monthly level of claims to date, in
the draft financial statements.
The finance director informed the audit manager that a problem arose in June 20X8 in relation to the mixing of
materials within the production process for one particular product line. A number of these faulty paint products had
already been sold and the issue was identified following a number of complaints from customers about the paint
consistency being incorrect. As a precaution, further sales have been stopped and a product recall has been initiated
for any of these specific paint products sold since June. Management is investigating whether the paint consistency of
the faulty products can be rectified and subsequently sold.
Financial statement extracts for year ending 30 September
Forecast Actual
20X8 20X7
$’000 $’000
Revenue 19,850 16,990
Cost of sales (12,440 ) (10,800 )
––––––– –––––––
Gross profit 7,410 6,190
––––––– –––––––
Inventory 1,850 1,330
Trade receivables 2,750 1,780
Bank (810 ) 560
Trade payables 1,970 1,190
2
Required:
(a) Explain why analytical procedures are used during THREE stages of an audit. (3 marks)
(b) Calculate THREE ratios, for BOTH years, which would assist you in planning the audit of Darjeeling Co.
(3 marks)
(c) Using the information provided and the ratios calculated, describe EIGHT audit risks and explain the auditor’s
response to each risk in planning the audit of Darjeeling Co.
(16 marks)
(d) Describe substantive procedures the auditor should perform in relation to the faulty paint products held in
inventory at the year end. (3 marks)
(e) Describe substantive procedures the auditor should perform to obtain sufficient and appropriate evidence in
relation to Darjeeling Co’s revenue. (5 marks)
(30 marks)
3 [P.T.O.
17 (a) ISA 260 Communication with Those Charged with Governance provides guidance to auditors in relation to
communicating with those charged with governance on matters arising from the audit of an entity’s financial
statements.
Required:
(i) Explain why it is important for auditors to communicate throughout the audit with those charged with
governance; and
(ii) Identify TWO examples of matters which the auditor may communicate to those charged with governance.
(b) Camomile Co operates six restaurant and bar venues which are open seven days a week. The company’s year end
is 31 December 20X8. You are the audit supervisor reviewing the internal controls documentation in relation to
the cash receipts and payments system in preparation for the interim audit, which will involve visiting a number
of the venues as well as the head office. The company has a small internal audit (IA) department based at head
office.
The purchasing department based at the company’s head office is responsible for ordering food and beverages
for all six venues. In addition, each venue has a petty cash float of $400, held in the safe, which is used for the
purchase of sundry items. When making purchases of sundries, employees are required to obtain the funds from
the restaurant manager, purchase the sundries and return any excess money and the receipt to the manager.
At any time the petty cash sum held and receipts should equal the float of $400 but it has been noted by the
company’s IA department that on some occasions this has not been the case.
Each venue has five cash tills (cash registers) to take payments from customers. Three are located in the bar area
and two in the restaurant area. Customers can pay using either cash or a credit card and for any transaction either
the credit card vouchers or cash are placed in the till by the employee operating the till. To speed up the payment
process, each venue has a specific log on code which can be used to access all five tills and is changed every two
weeks.
At each venue at the end of the day, the tills are closed down by the restaurant manager who counts the total cash
in all five tills and the sum of the credit card vouchers and these totals are reconciled with the aggregated daily
readings of sales taken from each till. Any discrepancies are noted on the daily sales sheet. The daily sales sheet
records the sales per the tills, the cash counted and the total credit card vouchers as well as any discrepancies.
These sheets are scanned and emailed to the cashier at head office at the end of each week.
Approximately 30% of Camomile Co’s customers pay in cash for their restaurant or bar bills. Cash is stored in the
safe at each venue on a daily basis after the sales reconciliation has been undertaken. Each safe is accessed via
a key which the restaurant manager has responsibility for. Each key is stored in a drawer of the manager’s desk
when not being used. Cash is transferred to the bank via daily collection by a security company. The security
company provides a receipt for the sums collected, and these receipts are immediately forwarded to head office.
The credit card company remits the amounts due directly into Camomile Co’s bank account within two days of the
transaction.
At head office, on receipt of the daily sales sheets and security company receipts, the cashier agrees the cash
transferred by the security company has been banked for all venues. She agrees the cash per the daily sales sheets
to bank deposit slips and to the bank statements. The cashier updates the cash book with the cash banked and
details of the credit card vouchers from the daily sales sheets. On a monthly basis, the credit card company sends
a statement of all credit card receipts from the six venues which is filed by the cashier.
Every two months, the cashier reconciles the bank statements to the cash book. The reconciliations are reviewed
by the financial controller who evidences her review by signature and these are filed in the accounts department.
All purchases of food and beverages for the venues are paid by bank transfer. At the relevant payment dates, the
finance director is given the total amount of the payments list which he authorises.
4
Required:
Identify and explain EIGHT DEFICIENCIES in Camomile Co’s cash receipts and payments system and provide
a recommendation to address each of these deficiencies.
Note: Prepare your answer using two columns headed Control deficiencies and Control recommendation
(20 marks)
5 [P.T.O.
18 Jasmine Co manufactures motor vehicle components and its year end was 30 June 20X8. You are an audit supervisor
of Peppermint & Co and the final audit is due to commence shortly. Total assets are $43·2m and profit before tax is
$7·2m. The following matters have been brought to your attention:
Trade receivables
Jasmine Co’s trade receivables ledger is comprised of a large number of customers. In previous years, the audit
team has undertaken a positive trade receivables circularisation to confirm year-end balances. However, the customer
response rate has historically been low and so alternative audit procedures have been undertaken. A decision has been
made that for the current year audit a circularisation will not be performed. The year-end trade receivables balance is
$3·9m (20X7: $2·8m) and the allowance for trade receivables is $410,000 (20X7: $300,000).
Bank balances
The bank and cash figure included in Jasmine Co’s draft financial statements is comprised of a number of bank account
balances: an overdraft of $5·1m which is the company’s main current account and $0·2m relating to several savings
accounts. The finance director has informed the audit manager that all accounts have been reconciled as at the year
end.
The overdraft of $5·1m has increased significantly since the prior year (20X7: $1·2m). The directors have informed
you that the overdraft facility, which the company requires in order to operate on a daily basis, is due for renewal in
October 20X8 and that they are confident it will be renewed.
Required:
in relation to Jasmine Co’s trade receivables. (5 marks)
in relation to Jasmine Co’s bank balances. (5 marks)
(c) Describe the audit procedures the auditor should perform in assessing whether or not Jasmine Co is a going
concern. (5 marks)
During the final audit, the finance director has informed the audit team that Jasmine Co’s bankers will not make a
decision on the renewal of the overdraft facility until after the auditor’s report is signed. The audit engagement partner
is satisfied that the use of the going concern basis is appropriate.
The directors have agreed to include some brief going concern disclosures in the draft financial statements and the
audit team still have to assess the adequacy of these disclosures.
Required:
(d) Discuss the issue and describe the impact on the auditor’s report of Jasmine Co of adequate AND inadequate
going concern disclosure. (5 marks)
(20 marks)
6
Applied Skills
Audit and Assurance

(AA)
AA
AA ACCA
Section A – A
Section B – A
attempted

The Association of
Chartered Certified
Accountants
Section A – ALL 15 questions are compulsory and MUST be attempted
Please use the grid provided on page two of the Candidate Answer Booklet to record your answers to each multiple choice
question. Do not write out the answers to the MCQs on the lined pages of the answer booklet.
Each question is worth 2 marks.
The following scenario relates to questions 1–5

You are an audit manager at Horti & Co and you are considering a number of ethical issues which have arisen on some of
the firm’s long-standing audit clients.
Tree Co
Horti & Co is planning its external audit of Tree Co. Yesterday, the audit engagement partner, Charlie Thrower, discovered
that a significant fee for information security services, which were provided to Tree Co by Horti & Co, is overdue. Charlie
hopes to be able to resolve the dispute amicably and has confirmed that he will discuss the matter with the finance director,
Percy Marsh, at the weekend, as they are both attending a party to celebrate the engagement of Charlie’s daughter and
Percy’s son.
Bush Co
Horti & Co is the external auditor of Bush Co and also provides other non-audit services to the company. While performing
the audit for the year ended 31 October 20X8, the audit engagement partner was taken ill and took an indefinite leave of
absence from the firm. The ethics partner has identified the following potential replacements and is keen that independence
is maintained to the highest level:
Brian Smith who is also the partner in charge of the tax services provided to Bush Co
Monty Nod who was the audit engagement partner for the ten years ended 31 October 20X7
Cassie Dixon who introduced Bush Co as a client when she joined the firm as an audit partner five years ago
Pete Russo who is also the partner in charge of the payroll services provided to Bush Co
Plant Co
Plant Co is a large private company, with a financial year to 30 June, and has been an audit client of Horti & Co for several
years. Alan Marshlow, a partner of Horti & Co, has acted as the engagement quality control reviewer (EQCR) on the last two
audits to the year ended 30 June 20X8. At a recent meeting, he advised that he can no longer be EQCR on the engagement
as he is considering accepting appointment as a non-executive director and will sit on the audit committee of Plant Co.
The board of directors has also asked Horti & Co if they would be able to provide internal audit services to the company.
Weed Co
Weed Co, a listed company, is one of Horti & Co’s largest clients. Last year the fee for audit and other services was $1·2m
and this year it is expected to be $1·3m which represents 16·6% and 18·1% of Horti & Co’s total income respectively.
1 Which of the following statements correctly explains the possible threats to Horti & Co’s independence and
recommends an appropriate safeguard in relation to their audit of Tree Co?
(1) An intimidation threat exists due to the overdue fee and Tree Co should be advised that all fees must be paid prior
to the auditor’s report being signed
(2) A self-review threat exists due to the nature of the non-audit work which has been performed and an engagement
quality control review should be carried out
(3) A self-interest threat exists due to the relationship between Charlie and Percy and Charlie should be removed as
audit partner
A 1, 2 and 3
B 1 and 2 only
C 2 only
D 3 only
2
2 Taking into account the concern of the ethics partner, which of the partners identified as potential replacements
should take over the audit of Bush Co for the year ended 31 October 20X8?
A Brian Smith
B Monty Nod
C Cassie Dixon
D Pete Russo
3 Which of the following correctly identifies the threats to Horti & Co’s independence and proposes an appropriate
course of action for the firm if Alan Marshlow accepts appointment as a non-executive director of Plant Co?
Threats Course of action
A Self-interest and familiarity Can continue with appropriate safeguards
B Self-interest and self-review Must resign as auditor
C Self-review and familiarity Must resign as auditor
D Familiarity only Can continue with appropriate safeguards
4 You are separately considering Plant Co’s request to provide internal audit services and the remit of these services if
they are accepted.
Which of the following would result in Horti & Co assuming a management responsibility in relation to the internal
audit services?
(1) Taking responsibility for designing and maintaining internal control systems
(2) Determining which recommendations should take priority and be implemented
(3) Determining the reliance which can be placed on the work of internal audit for the external audit
(4) Setting the scope of the internal audit work to be carried out
A 1 and 3
B 2, 3 and 4
C 1, 2 and 4
D 3 and 4 only
5 Which of the following actions should Horti & Co take to maintain their objectivity in relation to the level of fee
income from Weed Co?
(1) The level of fee income should be communicated to those charged with governance
(2) Separate teams should be used for the audit and non-audit work
(3) Request payment of the current year’s audit fee in advance of any work being performed
(4) Request a pre-issuance review be conducted by an external accountant
A 1 and 4 only
B 3 and 4 only
C 2 and 3 only
D 1, 2, 3 and 4
3 [P.T.O.
Chester Co manufactures and sells pet toys to the wholesale market. It has prepared its financial statements to 31 July
20X8. You are an audit assistant with Durham & Co and you have been assigned the current liabilities balances in the audit
work plan.
You have calculated the payables payment period to be 66 days in 20X8 (45 days in 20X7) and have asked the directors
of Chester Co to provide an explanation as to the increase in days.
Chester Co receives monthly statements from its main suppliers and performs regular supplier statement reconciliations.
There were inconsistencies noted in respect of the following at 31 July 20X8:
Supplier Balance per Balance per
purchase ledger supplier statement
$ $
Oxford Co 151,480 296,120
Poole Co (72,168 ) 84,235
Bath Co 82,348 92,340
Oxford Co
Chester Co has a credit agreement with Oxford Co under which it receives goods 14 days before the supplier raises the
invoice. Chester Co received goods worth $144,640 on 18 July 20X8 for which the invoice was received shortly after the
year end in accordance with the agreement. Chester Co entered the transaction into its accounting records at the date of
invoice.
Poole Co
The difference on this balance has still to be investigated.
Bath Co
Chester Co’s finance director has informed you that there was an error in closing the purchase ledger and it was closed three
days early. Invoices received 29, 30 and 31 July 20X8 were posted to the 20X9 ledger. The directors of Chester Co have
confirmed that following the discovery of this error, a manual adjustment was made using the journal book.
6 Which of the following supplier balances would indicate a high risk in relation to the COMPLETENESS of the
liability recorded at the year end?
A A supplier with a high balance at the year end and with a low volume of transactions during the year
B A supplier with a low balance at the year end and with a high volume of transactions during the year
C A supplier with a low balance at the year end and with a low volume of transactions during the year
D A supplier with a high balance at the year end and with a high volume of transactions during the year
7 Which of the following would correctly explain why the payables payment period has increased from 45 days in
20X7 to 66 days in 20X8?
A Chester Co received a prompt payment discount from one of its suppliers for the first time in 20X8
B Chester Co obtained a trade discount from one of its biggest suppliers which has reduced the amount owed to that
supplier by 10% in the year
C Chester Co purchased an unusually high level of goods in July 20X8 to satisfy a large order and had not paid for
those goods by the year end
D Chester Co took advantage of extended credit terms offered by a new supplier in respect of a large order which it
had fully settled by the year end
4
8 Which of the following is an appropriate action in respect of the inconsistency in the balance with Oxford Co?
A The auditor should take no further action as this is a timing difference which was resolved upon receipt and
posting of the invoice
B The auditor should request that the purchase ledger balance is amended at the reporting date to reflect the recent
invoice
C The auditor should contact the supplier and request a supplier statement as at the current date
D The auditor should request that an accrual is created in respect of the goods received but not yet invoiced
9 Which of the following would be a valid explanation for the difference in respect of Poole Co?
(1) An invoice for $156,403 has been paid twice
(2) An invoice for $156,403 has been posted as a debit note
(3) An invoice for $156,403 has been received and processed prior to receipt of the goods
A 1 only
B 1 and 2 only
C 2 and 3 only
D 1, 2 and 3
10 Which of the following would NOT provide sufficient and appropriate audit evidence over the COMPLETENESS of
the purchase ledger balance in respect of Bath Co?
A Obtain the journal book and confirm that all invoices recorded as received from Bath Co dated 29–31 July have
been manually adjusted for
B Review the accruals listing to ensure goods received from Bath Co post year end for which an invoice has not been
received have been recorded in the correct period
C For post year-end cash book payments to Bath Co, confirm date of matching invoice and if pre year end agree to
liability
D Review a sample of invoices received from Bath Co recorded post year end and match to GRN to determine if they
should have been recorded at the year end
5 [P.T.O.
Viola Co is a manufacturer of shoes. You are an audit manager with Cello & Co and you are performing an overall review of
the financial statements for the year ended 30 September 20X8 prior to the issue of the auditor’s report. Profit before tax for
the year was $131·4m (20X7: $120·9m).
Analytical procedures
As part of your overall review, you have performed analytical procedures over the draft financial statements and have noted
that the trade receivables collection period is lower than it was during the interim audit performed in July 20X8. You are
aware that the credit controller of Viola Co left the company in August 20X8 and that the directors have said that, as a result,
the company is experiencing difficulties in debt collection.
Disclosures
During the year, Viola Co revalued its head office and as part of your review, you are considering the detail which is disclosed
in the property, plant and equipment note in the draft financial statements.
Uncorrected misstatements
Your review also includes an assessment of uncorrected misstatements. These have been recorded by the audit team as
follows:
$’000
(1) Interest payable omitted in error 1,942
(2) Additional allowance for receivables required 9,198
(3) Error in sales invoice processing resulting in understatement of sales 8,541
(4) Write off in respect of faulty goods 2,900
Faulty goods
The adjustment for faulty goods listed as an uncorrected misstatement above relates to an entire batch of shoes, which was
produced on 12 September 20X8. The audit work concluded that the cost of this inventory exceeded its net realisable value
by $2·9m. The directors dispute the audit team’s figures and believe that the realisable value of the inventory still exceeds
its cost.
11 Which of the following would form part of the auditor’s overall review of the financial statements?
(1) Establishing whether the pre-conditions for an audit are present
(2) Assessing whether the information and explanations obtained during the audit are adequately reflected
(3) Performing a detailed review of the audit working papers to ensure the work has been properly performed
(4) Reviewing the adequacy of the disclosure of accounting policies
A 1 and 2
B 3 and 4
C 1 and 3
D 2 and 4
12 Which of the following is a valid explanation for the INCONSISTENCY between the results of the analytical
procedures on trade receivables and the directors’ statement regarding debt collection problems?
A A change in sales mix towards high value products
B An increase in the proportion of cash sales since August 20X8
C An increase in the rate of sales tax in September 20X8
D Sales growth of 1% per month over the year
6
13 Which of the following details should be disclosed in respect of the revaluation of the head office if the auditor is
to conclude that the disclosures are adequate?
(1) Effective date of the revaluation
(2) Name of the valuer
(3) The amount of the revaluation increase
(4) Carrying amount of the head office under the cost model
A 1, 2 and 3 only
B 1, 3 and 4 only
C 2, 3 and 4 only
D 1, 2, 3 and 4
14 Which of the uncorrected misstatements numbered (1), (2) and (3) by the audit team MUST be adjusted for if the
auditor is to issue an unmodified audit opinion?
A Misstatements 2 and 3 only
B Misstatements 1 and 3 only
C Misstatements 1, 2 and 3
D Misstatement 2 only
15 All adjustments required by the auditors have been made to the financial statements with the exception of
adjustment (4) relating to the faulty goods.
Which of the following correctly describes the effect of this matter on the auditor’s report?
A Unmodified opinion with no further disclosure
B Unmodified opinion with disclosure in an emphasis of matter paragraph
C Qualified opinion due to material misstatement
D Qualified opinion due to inability to obtain sufficient appropriate audit evidence
(30 marks)
7 [P.T.O.
16 (a) Auditors are required to document a company’s accounting and internal control systems as part of their audit
process. Two methods available for documenting internal control systems are narrative notes and questionnaires.
Required:
For each of the two methods, NARRATIVE NOTES and QUESTIONNAIRES:
(i) Describe the method for documenting internal control systems; and
(ii) Explain an ADVANTAGE of using this method.
Freesia Co is a company listed on a stock exchange. It manufactures furniture which it supplies to a wide range of
retailers across the region. The company has an internal audit (IA) department and the company’s year end is 30 June
20X9. You are an audit supervisor with Zinnia & Co, preparing the draft audit programmes and reviewing extracts from
the internal controls documentation in preparation for the interim audit.
Sales
Freesia Co generates revenue through visits by its sales staff to customers’ premises. Sales ledger clerks, who work at
head office, carry out credit checks on new customers prior to being accepted and then set their credit limits. Sales staff
visit retail customers’ sites personally and orders are completed using a four-part pre-printed order form. One copy is
left with the customer, a second copy is returned to the sales ordering department, the third is sent to the warehouse
and the fourth to the finance department at head office. Each sales order number is based on the sales person’s own
identification number in order to facilitate monitoring of sales staff performance.
Retail customers are given payment terms of 30 days and most customers choose to pay their invoices by bank transfer.
Each day Lily Shah, a finance clerk, posts the bank transfer receipts from the bank statements to the cash book and
updates the sales ledger. On a monthly basis, she performs the bank reconciliation.
Purchases and inventory
Receipts of raw materials and goods from suppliers are processed by the warehouse team at head office, who agree the
delivery to the purchase order, check the quantity and quality of goods and complete a sequentially numbered goods
received note (GRN). The GRNs are sent to the finance department daily. On receipt of the purchase invoice from the
supplier, Camilla Brown, the purchase ledger clerk, matches it to the GRN and order and the three documents are sent
for authorisation by the appropriate individual. Once authorised, the purchase invoices are logged into the purchase
ledger by Camilla, who utilises document count controls to ensure the correct number of invoices has been input.
The company values its inventory using standard costs, both for internal management reporting and for inclusion in the
year-end financial statements. The basis of the standard costs was reviewed approximately 18 months ago.
Payroll
Freesia Co employs a mixture of factory staff, who work a standard shift of eight hours a day, and administration and
sales staff who are salaried. All staff are paid monthly by bank transfer. Occasionally, overtime is required of factory
staff. Where this occurs, details of overtime worked per employee is collated and submitted to the payroll department
by a production clerk. The payroll department pays this overtime in the month it occurs. At the end of each quarter, the
company’s payroll department sends overtime reports which detail the amount of overtime worked to the production
director for their review.
Freesia Co’s payroll package produces a list of payments per employee which links into the bank system to produce
a list of automatic bank transfer payments. The finance director reviews the total to be paid on the list of automatic
payments and compares this to the total payroll amount to be paid for the month per the payroll records. If any issues
arise, then the automatic bank transfer can be manually changed by the finance director.
8
Required:
(b) In respect of the internal controls of Freesia Co:
(i) Identify and explain SIX deficiencies;
(ii) Recommend a control to address each of these deficiencies; and
(iii) Describe a TEST OF CONTROL the external auditors should perform to assess if each of these controls,
if implemented, is operating effectively to reduce the identified deficiency.
Note: Prepare your answer using three columns headed Control deficiency, Control recommendation and Test
of control respectively. The total marks will be split equally between each part. (18 marks)
Freesia Co deducts employment taxes from its employees’ wages and salaries on a monthly basis and pays these to the
local taxation authorities in the following month. At the year end, the financial statements will contain an accrual for
employment tax payable.
Required:
(c) Describe the substantive procedures the auditor should perform to obtain sufficient and appropriate audit
evidence in respect of Freesia Co’s year-end accrual for employment tax payable. (4 marks)
The listing rules of the stock exchange require compliance with corporate governance principles and the directors of
Freesia Co are confident that they are following best practice in relation to this. However, the chairman recently received
correspondence from a shareholder, who is concerned that the company is not fully compliant. The company’s finance
director has therefore requested a review of the company’s compliance with corporate governance principles.
Freesia Co has been listed for over eight years and its board comprises four executive and four independent
non-executive directors (NEDs), excluding the chairman. An audit committee comprised of the NEDs and the finance
director meets each quarter to review the company’s internal controls.
The directors’ remuneration is set by the finance director. NEDs are paid a fixed fee for their services and executive
directors are paid an annual salary as well as a significant annual bonus based on Freesia Co’s profits. The company’s
chairman does not have an executive role and so she has sole responsibility for liaising with the shareholders and
answering any of their questions.
Required:
(d) Describe TWO corporate governance weaknesses faced by Freesia Co and provide a recommendation to
address each weakness to ensure compliance with corporate governance principles.
Note: Prepare your answer using two columns headed Weakness and Recommendation respectively.
(4 marks)
(30 marks)
9 [P.T.O.
17 (a) Define and explain materiality and performance materiality. (4 marks)
You are an audit supervisor of Daffodil & Co and are planning the audit of Peony Co for the year ending 31 May 20X9.
The company is a food retailer with a large network of stores across the country and four warehouses. The company
has been a client of your firm for several years and the forecast profit before tax is $28·9m. The audit manager has
attended a planning meeting with the finance director and has provided you with the following notes of the meeting.
Peony Co has an internal audit (IA) department which undertakes controls testing across the network of stores. Each
store is visited at least once every 18 months. The audit manager has discussed with the finance director that the
external audit team may rely on the controls testing which is undertaken by IA.
During the meeting, the finance director provided some forecast financial information. Revenue for the year is expected
to increase by 3% as compared to 20X8; the gross margin is expected to increase from 56% to 60%; and the operating
margin is predicted to decrease from 21% to 18%.
Peony Co values inventory in line with industry practice, which is to use selling price less average profit margin. The
directors consider this to be a close approximation to cost.
The company does not undertake a full year-end inventory count and instead undertakes monthly perpetual inventory
counts, each of which covers one-twelfth of all lines in stores and the warehouses. As part of the interim audit which
was completed in January, an audit junior attended a perpetual inventory count at one of the warehouses and noted
that there were a large number of exceptions where the inventory records showed a higher quantity than the physical
inventory which was present in the warehouse. When discussing these exceptions with the financial controller, the
audit junior was informed that this had been a recurring issue.
During the year, IA performed a review of the non-current assets physically present in around one-third of the company’s
stores. A number of assets which had not been fully depreciated were identified as obsolete by this review.
The company launched a significant TV advertising campaign in January 20X9 in order to increase revenue. The
directors have indicated that at the year end a current asset of $0·7m will be recognised, as they believe that the
advertisements will help to boost future sales in the next 12 months. The last advertisement will be shown on TV in
early May 20X9.
Peony Co decided to outsource its payroll function to an external service organisation. This service organisation handles
all elements of the payroll cycle and sends monthly reports to Peony Co which detail wages and salaries and statutory
obligations. Peony Co maintained its own payroll records until 31 December 20X8, at which point the records were
transferred to the service organisation.
Peony Co is planning to expand the company by opening three new stores during July 20X9 and in order to finance
this, in March 20X9 the company obtained a $3m bank loan. This is repayable in arrears over five years in quarterly
instalments. In preparation for the expansion, the company is looking to streamline operations in the warehouses and
is planning to make approximately 60 employees redundant after the year end. No decision has been made as to when
this will be announced, but it is likely to be in May 20X9.
Required:
(b) Describe EIGHT audit risks and explain the auditor’s response to each risk in planning the audit of Peony Co.
(16 marks)
(20 marks)
10
This is a blank page.
Question 18 begins on page 12.
11 [P.T.O.
18 Hyacinth Co develops and manufactures computer components and its year end was 31 December 20X8. The company
has a large factory, and two warehouses, one of which is off-site. You are an audit supervisor of Tulip & Co and the
final audit is due to commence shortly. Draft financial statements show total assets of $23·2m and profit before tax of
$6·4m. The following three matters have been brought to your attention:
Inventory valuation
Your firm attended the year-end inventory count for Hyacinth Co and confirmed that the controls and processes for
recording work in progress (WIP) and finished goods were acceptable. WIP and finished goods are both material to the
financial statements and the audit team was able to confirm both the quantity and stage of completion of WIP.
Before goods are dispatched, they are inspected by the company’s quality control department. Just prior to the inventory
count, it was noted that a batch of product line ‘Crocus’, which had been produced to meet a customer’s specific
technical requirements, did not meet that customer’s quality and technical standards. This inventory had a production
cost of $450,000. Upon discussions with the production supervisor, the finance director believes that the inventory
can still be sold to alternative customers at a discounted price of $90,000.
Research and development
Hyacinth Co includes expenditure incurred in developing new products within intangible assets once the recognition
criteria under IAS® 38 Intangible Assets have been met. Intangible assets are amortised on a straight line basis over
four years once production commences. The amortisation policy is based on past experience of the likely useful lives
of the products. The opening balance of intangible assets is $1·9m.
In the current year, Hyacinth Co spent $0·8m developing three new products which are all at different stages of
development.
Sales tax liability
Hyacinth Co is required by the relevant tax authority in the country in which it operates to charge sales tax at 15% on
all products which it sells. This sales tax is payable to the tax authority. When purchasing raw materials and incurring
expenses in the manufacturing process, the company pays 15% sales tax on any items purchased and this can be
reclaimed from the tax authority. The company is required to report the taxes charged and incurred by completing a tax
return on a quarterly basis, and the net amount owing to the tax authority must be remitted within four weeks of the
quarter end. The draft financial statements contain a $1·1m liability for sales tax for the quarter ended 31 December
20X8.
Required:
in relation to the VALUATION of Hyacinth Co’s inventory. (6 marks)
in relation to Hyacinth Co’s research and development expenditure. (4 marks)
(c) Describe substantive procedures the auditor should perform to obtain sufficient and appropriate audit evidence
in relation to Hyacinth Co’s year-end sales tax liability. (4 marks)
The audit is now almost complete and the auditor’s report is due to be signed shortly. The following matter has been
brought to your attention:
On 3 February 20X9, a flood occurred at the off-site warehouse. This resulted in some damage to inventory and
property, plant and equipment. However, there have been no significant delays to customer deliveries or complaints
from customers. Hyacinth Co’s management has investigated the cause of the flooding and believes that the company
is unlikely to be able to claim on its insurance. The finance director of Hyacinth Co has estimated that the value of
damaged inventory and property, plant and equipment was $0·7m and that it now has no scrap value.
12
Required:
(d) (i) Explain whether the 20X8 financial statements of Hyacinth Co require amendment in relation to the
flood; and
(ii) Describe audit procedures which should be performed in order to form a conclusion on any required
amendment.
(20 marks)
13
Audit and Assurance
Sample Questions – September/December 2019
Get to know your exam
These graphical representations are intended to give an indication of past exam requirements and associated question
content.
Please note that you will not be able to complete answers within these documents and in isolation they will not sufficiently
prepare you for your exam.
We encourage you to visit the ACCA Practice Platform in order to attempt up to date practice exams within the computer-
based exam environment.
Introduction screen
2
Instruction screens
3
Instruction screens (continued)
4
5
6
Exam summary screen
7
Sample exam questions
Scenario 1
8
Note: See page 15 for example view of full CBE constructed response workspace
Scenario 1: requirements
9
Scenario 1: requirements continued
10
Scenario 2
11
Requirements for Scenario 2
12
Scenario 3
13
14
Example view of full CBE constructed response workspace
15
Audit and Assurance
Sample Questions – March / July 2020
Get to know your exam
These graphical representations are intended to give an indication of past exam requirements and associated question
content.
Please note that you will not be able to complete answers within these documents and in isolation they will not sufficiently
prepare you for your exam.
We encourage you to visit the ACCA Practice Platform in order to attempt up to date practice exams within the computer-
based exam environment.
Introduction screen
2
Instruction screens
3
4
5
6
Exam summary screen
7
Sample exam questions
Scenario 1
8
Scenario 1 (continued)
9
Scenario 1: requirements
10
11
Scenario 2
12
Scenario 2 (continued)
13
14
15
Scenario 3
16
17
18
Example view of full CBE constructed response workspace
19

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Fundamentals Level – Skills Module

Time allowed: 3 hours 15 minutes

This question paper is divided into two sections:

Section A – ALL 15 questions are compulsory and MUST be attempted

Do NOT open this question paper until instructed by the supervisor.

Excluding procedures included in part (a):

End of Question Paper

Time allowed: 3 hours 15 minutes

This question paper is divided into two sections:

Do NOT open this question paper until instructed by the supervisor.

End of Question Paper

Time allowed: 3 hours 15 minutes

This question paper is divided into two sections:

Do NOT open this question paper until instructed by the supervisor.

End of Question Paper

Audit and Assurance

Time allowed: 3 hours 15 minutes

This question paper is divided into two sections:

Do NOT open this question paper until instructed by the supervisor.

End of Question Paper

Audit and Assurance

Time allowed: 3 hours 15 minutes

This question paper is divided into two sections:

Do NOT open this question paper until instructed by the supervisor.

The following scenario relates to questions 1–5

End of Question Paper

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