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Sim-Ge: Q1) Suggested Answers
Sim-Ge: Q1) Suggested Answers
Q1)
Cherry Blossom Co (Cherry) manufactures custom made furniture and its year end is
30 April. The company purchases its raw materials from a wide range of suppliers.
Below is a description of Cherry’s purchasing system.
When production supervisors require raw materials, they complete a requisition form
and this is submitted to the purchase ordering department. Requisition forms do not
require authorisation and no reference is made to the current inventory levels of the
materials being requested. Staff in the purchase ordering department use the
requisitions to raise sequentially numbered purchase orders based on the approved
suppliers list, which was last updated 24 months ago. The purchasing director
authorises the orders prior to these being sent to the suppliers.
When the goods are received, the warehouse department verifies the quantity to the
suppliers despatch note and checks that the quality of the goods received are
satisfactory. They complete a sequentially numbered goods received note (GRN) and
send a copy of the GRN to the finance department.
Purchase invoices are sent directly to the purchase ledger clerk, who stores them in a
manual file until the end of each week. He then inputs them into the purchase ledger
using batch controls and gives each invoice a unique number based on the supplier
code. The invoices are reviewed and authorised for payment by the finance director,
but the actual payment is only made 60 days after the invoice is input into the system.
Required:
Deficiencies Controls
Requisition forms are completed by Requisition forms should be
production supervisors but are not authorised by the production manager
authorised. This increases the risk of or director prior to being sent to the
fraudulent purchases, or of goods purchase ordering department. This
being ordered which are not department should not process any
required, leading to unnecessary unauthorised requisitions.
cash outflows.
Orders are being placed for goods The inventory system should be
without the inventory levels being updated to record
checked first. This could result in minimum/maximum required levels
goods being ordered which are not of raw materials. When completing
required, leading to unnecessary the purchase order, the ordering clerk
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SIM-GE AC3093 – Auditing and Assurance
Lecture 21 – Revision Q&A
In addition, as the company does not The company should set minimum
currently monitor inventory levels, authorised reorder levels for
it could experience stock-outs inventory items.
resulting in the company being
unable to meet customer orders.
Goods are being received without A copy of the authorised order form
any checks being made against should be sent to the warehouse
purchase orders. This could result in department. This should then be
Cherry receiving and subsequently checked to the goods when received.
paying for goods it did not order.
Purchase invoices are manually The purchase ledger clerk should record
filed by the purchase ledger clerk the invoices in the ledger on a daily
and only updated to the ledger on a rather than weekly basis. If this is not
weekly basis. Until the invoices are practical, then upon receipt of the
input into the system, there is a risk invoices, each should be attributed a
that they may be misplaced and not sequential number and filed. When these
entered. This would result in an are logged into the ledger, the clerk
understatement of trade payables should check that there are no breaks in
and Cherry failing to make payment the sequence.
to the suppliers on time.
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SIM-GE AC3093 – Auditing and Assurance
Lecture 21 – Revision Q&A
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SIM-GE AC3093 – Auditing and Assurance
Lecture 21 – Revision Q&A
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SIM-GE AC3093 – Auditing and Assurance
Lecture 21 – Revision Q&A
Due to staff availability, the company is During the final audit the year-end
planning to undertake a full year-end inventory adjustments schedule should
inventory count days before the year end be reviewed in detail and supporting
and then adjust for movements to the documentation obtained for all adjusting
year end. items.
If the adjustments are not completed The audit team should increase the
accurately, then the year-end inventory extent of inventory cut-off testing at the
could be under or overstated. year end.
An insurance claim for $0·7m has been Discuss with management whether any
submitted and the proceeds included response has been received from the
within profit or loss. insurance company and review the
related correspondence.
However, the company has not received
a reply from the insurance company and If virtually certain, the treatment
this would therefore represent a possible adopted is correct. If not, management
contingent asset. To comply with IAS 37 should be requested to remove it from
Provisions, Contingent Liabilities and profit and receivables.
Contingent Assets, this should not be If the receipt is probable, the auditor
recognised until the receipt is virtually should request management include a
certain. With no response to date, the contingent asset disclosure note.
inclusion of this sum overstates profit
and receivables.
The bank reconciliations for October Discuss this issue with the finance
and November both contain director and request that the December
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SIM-GE AC3093 – Auditing and Assurance
Lecture 21 – Revision Q&A
Q2)
You are an audit supervisor of Pluto & Co and are currently planning the audit of your
client, Venus Magnets Co (Venus) which manufactures decorative magnets. Its year
end is 31 December 2015 and the forecast profit before tax is $9·6 million.
During the year, the directors reviewed the useful lives and depreciation rates of all
classes of plant and machinery. This resulted in an overall increase in the asset lives
and a reduction in the depreciation charge for the year.
The finance director has informed the audit manager that the October and November
bank reconciliations each contained unreconciled differences; however, he considers
the overall differences involved to be immaterial.
A directors’ bonus scheme was introduced during the year which is based on
achieving a target profit before tax. In order to finalise the bonus figures, the finance
director of Venus would like the audit to commence earlier so that the final results are
available earlier this year.
Required:
Describe FIVE audit risks, and explain the auditor’s response to each risk, in
planning the audit of Venus Magnets Co.
(15 marks)
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SIM-GE AC3093 – Auditing and Assurance
Lecture 21 – Revision Q&A
Q3)
You are an audit manager of Pink Partners & Co (Pink) and are planning the audit of
Golden Finance Co (Golden), a banking institution which provides a range of
financial services including loans. Your firm has audited Golden for four years and the
company’s year end is 30 September 2015.
At the end of August, Golden’s financial controller left and the new replacement is not
due to start until approximately two months after the year end. The finance director,
who is the sister-in-law of the audit engagement partner, has asked if a member of the
audit team can be seconded to Golden for three months to act as the temporary
financial controller.
You are aware that a number of the audit team members currently bank with Golden
and two team members have significant loans owing to the company.
Pink’s taxation department also provides services to Golden. They have been
approached by Golden to represent them in negotiations to resolve some outstanding
issues with the taxation authorities, for which the fees quoted are substantial.
The finance director has informed the audit engagement partner that when the audit is
complete, she would like the whole team to attend an evening watching the national
football team play a match followed by a luxury meal.
Required:
Using the information above:
(i) Identify and explain FIVE ethical threats which may affect the
independence of Pink Partners & Co’s audit of Golden Finance Co; and
(ii) For each threat, explain how it might be reduced to an acceptable level.
(15 marks)
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SIM-GE AC3093 – Auditing and Assurance
Lecture 21 – Revision Q&A
Due to staff availability, the company is During the final audit the year-end
planning to undertake a full year-end inventory adjustments schedule should
inventory count days before the year end be reviewed in detail and supporting
and then adjust for movements to the documentation obtained for all adjusting
year end. items.
If the adjustments are not completed The audit team should increase the
accurately, then the year-end inventory extent of inventory cut-off testing at the
could be under or overstated. year end.
An insurance claim for $0·7m has been Discuss with management whether any
submitted and the proceeds included response has been received from the
within profit or loss. insurance company and review the
related correspondence.
However, the company has not received
a reply from the insurance company and If virtually certain, the treatment
this would therefore represent a possible adopted is correct. If not, management
contingent asset. To comply with IAS 37 should be requested to remove it from
Provisions, Contingent Liabilities and profit and receivables.
Contingent Assets, this should not be If the receipt is probable, the auditor
recognised until the receipt is virtually should request management include a
certain. With no response to date, the contingent asset disclosure note.
inclusion of this sum overstates profit
and receivables.
The bank reconciliations for October Discuss this issue with the finance
and November both contain director and request that the December
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SIM-GE AC3093 – Auditing and Assurance
Lecture 21 – Revision Q&A
and the firm could become overly reliant significant, additional consideration
on Golden. should be given as to whether the
taxation and/or non-audit assignments
should be undertaken by the firm.
The finance director has invited the As it is unlikely the football tickets and
whole team to attend an evening out luxury meal for the whole team has an
watching the national football team play insignificant value, then this offer
a match followed by a luxury meal. should be politely declined.
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SIM-GE AC3093 – Auditing and Assurance
Lecture 21 – Revision Q&A
In addition, unreconciled amounts in the Throughout the audit, the team should
bank could have arisen due to fraud. be alert to the risk of fraud and maintain
professional scepticism.
A directors’ bonus scheme was Throughout the audit, the team will need
introduced which is based on achieving to be alert to this risk and maintain
a target profit before tax. There is a risk professional scepticism.
the directors might feel under pressure
to manipulate the results through the Detailed review and testing on
judgements taken or through the use of judgemental decisions, including
provisions. treatment of provisions, and compare
treatment against prior years. Any
journal adjustments affecting profit
should be tested in detail.
The finance director has requested that The timetable should be confirmed with
the audit commence earlier than normal the finance director. If it is to be
as he wishes to report results earlier. A reduced, then consideration should be
reduction in the audit timetable will given to performing an interim audit in
increase detection risk and place late December or early January; this
additional pressure on the team in would then reduce the pressure on the
obtaining sufficient and appropriate final audit.
evidence.
The team needs to maintain professional
In addition, the finance team will have scepticism and be alert to the increased
less time to prepare the financial risk of errors occurring.
information leading to an increased risk
of errors in the fin statements.
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SIM-GE AC3093 – Auditing and Assurance
Lecture 21 – Revision Q&A
2014 2013
Operating margin 4·5/23 = 19·6% 4/18 = 22·2%
Inventory days 2·1/11 * 365 = 70 days 1·6/10 * 365 = 58 days
Payable days 1·6/11 * 365 = 53 days 1·2/10 * 365 = 44 days
Current ratio 6·6/2·5 = 2·6 6·9/1·2 = 5·8
Quick ratio (6·6 – 2·1)/2·5 = 1·8 (6·9 – 1·6)/1·2 = 4·4
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SIM-GE AC3093 – Auditing and Assurance
Lecture 21 – Revision Q&A
Q3)
You are an audit manager of Pink Partners & Co (Pink) and are planning the audit of
Golden Finance Co (Golden), a banking institution which provides a range of
financial services including loans. Your firm has audited Golden for four years and the
company’s year end is 30 September 2015.
At the end of August, Golden’s financial controller left and the new replacement is not
due to start until approximately two months after the year end. The finance director,
who is the sister-in-law of the audit engagement partner, has asked if a member of the
audit team can be seconded to Golden for three months to act as the temporary
financial controller.
You are aware that a number of the audit team members currently bank with Golden
and two team members have significant loans owing to the company.
Pink’s taxation department also provides services to Golden. They have been
approached by Golden to represent them in negotiations to resolve some outstanding
issues with the taxation authorities, for which the fees quoted are substantial.
The finance director has informed the audit engagement partner that when the audit is
complete, she would like the whole team to attend an evening watching the national
football team play a match followed by a luxury meal.
Required:
Using the information above:
(i) Identify and explain FIVE ethical threats which may affect the
independence of Pink Partners & Co’s audit of Golden Finance Co; and
(ii) For each threat, explain how it might be reduced to an acceptable level.
(15 marks)
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