ACCT3000 - Marking Guide - Mock Final Exam Paper - Semester 2 - 2020
ACCT3000 - Marking Guide - Mock Final Exam Paper - Semester 2 - 2020
ACCT3000 - Marking Guide - Mock Final Exam Paper - Semester 2 - 2020
Part A consists of ten (10) multiple-choice questions. Please indicate the answer
you believe to the best response to each multiple-choice question.
2. Which of the following bodies monitors the operation of the Auditing and
Assurance Standards Board?
a. Financial Reporting Council.
b. Companies Auditors and Liquidators Disciplinary Board.
c. Australian Securities Exchange.
d. All of the given answers are correct.
3. Your audit client is under intense pressure to meet an earnings target. Which
transaction assertion for purchases are you most concerned with?
a. Occurrence.
b. Completeness.
c. Classification.
d. Accuracy.
4. The audit test that would normally be regarded as a test of control is:
a. enquiries of third parties.
b. test of the specific items making up the balance in a given general ledger
account.
c. test of the additions to property, plant, and equipment by physical
inspections.
d. test of the signatures on purchase orders to a list of approved
signatories.
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9. The risk of concluding control risk is higher than it actually is, is also known as:
a. risk of overreliance
b. risk of underreliance
c. risk of incorrect acceptance.
d. risk of incorrect rejection.
10. The auditor has assessed control risk as high. Which of the following is not true?
a. A predominantly substantive approach will be used.
b. The extent of substantive procedures will result in a costly audit.
c. The auditor will conduct extensive tests of controls.
d. The auditor is not placing reliance on the internal controls.
END OF PART A
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You are the external auditor for ABCM Pty Ltd, a merchandising company. You have
performed the following audit procedures:
(a) A random sample of creditors was selected from the invoices and reconciliations
(where appropriate) and agreed to the accounts payable ledger. (3 Marks)
(d) Gathered external confirmation from the financial controllers of two debtors of
ABCM Pty Ltd, regarding a total outstanding amount of $60,000 at balance date.
(3 Marks)
(e) Asked one of your assistants to vouch the legal title documents pertaining to ABCM
Pty Ltd’s machineries in the factory. (3 Marks)
Identify the key assertion that you are most likely testing with each of the above
procedures and provide an explanation for your answer.
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Solution:
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QUESTION 2 (15 Marks)
Ulysses Polytropos Ltd is an Australian company which manufactures travel products
including suitcases, backpacks, wallets, hiking gear, clothing and other sundry travel-
related items. The market for these products is characterised by fashion conscious
customers, innovation in design, high levels of competition and product costs pressure
from cheaper but high quality-products from a variety of manufacturers around Asia. The
market continues to grow which creates new opportunities but also attracts new entrants
into the market. Ulysses Polytropos operates at the high quality, and high price, end of the
market and has in recent years seen a decline in demand for its products despite the overall
buoyant market. This has been attributed to demand for cheaper products as well as
domestic customers buying online from around the world. In order to address this decline,
the company has tried to change its research and development division but has struggled
to attract employees with the vision to take the company forward.
In order to reduce production costs, the organisation invested in new manufacturing plant
and reorganised the factory layout to create more efficient processes. This required a
significant investment, only some of which was able to be financed by long-term bank
loans. Ulysses Polytropos has fully drawn down on its bank overdraft facility, the banks
are unwilling to provide further funds and, in order to manage cash flows, creditor
payment days have extended, leading to difficult relations with some key suppliers who
will no longer do business with the company.
The forecast for the coming 12 months shows the cash position worsening so additional
funds will be required to allow the company to continue meeting its obligations. The
directors believe that it will take another 18 to 24 months to turn the business around and
move back into profitability. The bank overdraft is being reviewed in two months’ time
and the directors are confident that additional funds will be made available to allow the
company to continue to trade for the next two years and then they will see the business
become successful again.
Required:
1. Identify and explain any indicators that there are doubts about Ulysses Polytropos
Ltd’s ability to continue as a going concern. (7.5 Marks)
2. Audit risk is said to be a function of inherent risk, control risk and detection risk.
Explain audit risk. Define and differentiate between each of its components.
(7.5 Marks)
(Total 15 Marks)
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Solution:
1. Identify and explain any indicators that there are doubts about Ulysses
Polytropos Ltd’s ability to continue as a going concern.
o There has been a decline in demand for the company’s products, if this continues then
it will be difficult to generate sufficient cash to survive as an organisation.
o The company is unable to recruit new research and development staff, this will make
it difficult to develop new innovative products to meet the changing demands of
customers.
o The company was unable to obtain the funds required to invest in new manufacturing
plant, this would indicate that either the company has insufficient assets to provide the
necessary security required by the bank or that the bank was not sufficiently confident
in the company’s prospects to lend further funds. The prospects of obtaining new
additional funds might be more difficult than the directors believe.
o The company is at its overdraft limit indicating immediate financial problems, the fact
that some suppliers are not getting paid on time suggests that the company is unable
to pay its debts today, it may be insolvent.
o The loss of key suppliers, the cash flow problems have meant that suppliers are no
longer trading with the organisation which may mean difficulty in getting supplies
leading to production problems.
o The forecast indicates continuing problems with cash flows for at least 12 months and
possibly as long as 24 months; this will place greater difficulty on paying suppliers.
All these difficulties indicate that the organisation is going to have difficulty convincing
the bank to provide additional funds. Without these funds, it would appear that the
company is unlikely to survive 12 months never mind the possibility of 24 months that
may be needed before things start to get better.
2. ASA 200 describes audit risk and its components. Audit risk (AR) is the risk that the
auditor gives an inappropriate opinion on financial statements that are materially
misstated.
Inherent risk (IR) is the possibility that a material misstatement could occur in the absence
of related internal controls. This risk exists independently of the audit of a financial report.
The auditor cannot change the actual level of inherent risk.
Control risk (CR) is the risk that a material misstatement could occur and not be prevented
or detected on a timely basis by the entity’s internal control structure. Control risk is a
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function of the effectiveness of the client’s internal control structure policies and
procedures.
Detection risk (DR) is the risk that any remaining misstatements will not be detected by
the auditor’s substantive procedures. Detection risk is a function of the effectiveness of
audit procedures and their application by the auditor.
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QUESTION 3 (30 Marks)
During your subsequent events review you noted the following independent and
material items:
2. On 10th July one of Queenscorp’s major product lines developed a fault that
rendered the product unusable. Queenscorp became aware of the fault on 30
July. Although the fault posed no safety risks to consumers, Queenscorp
decided to launch a full product recall on the following day.
Required
(1) Describe your obligations as the auditor to each of the above subsequent events.
(5 X 2 Mark = 10 Marks)
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Question 3 continued
(2) For each of the events described above, select the appropriate action from the list
below and justify your response:
A Adjust the 30 June 2011 financial report.
B Disclose the information in a note to the 30 June 2011 financial
report.
C Request the client recall the 30 June 2011 financial report for
revision.
D No action is required.
(5 X 2 Marks = 10 Marks)
(3) What additional information would you obtain in relation to each of the events
described above?
(5 X 2 Marks = 10 Marks)
(Total 30 Marks)
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Solution:
Period 1 events: Events after balance sheet date (30 June 2011) but before the date
of the audit report (31 July 2011).
Period 2 events: Events after the audit report date (31 July 2011) but before the date
the client issues financial statements (14 August 2011).
Period 3 events: Events after the client issues financial statements (14 August 2011).
Balance Sheet Date Audit Report Financials Issued
1.
Requirements (1) & (2): A. This is a post balance date event relating to conditions
existing at balance date i.e. it is an adjusting event. Any loss or costs payable that
can be verified should be recorded as litigation costs or liability in the accounts. As
the dispute has been there for a number of years, the company would have a
contingent liability account for this dispute. This would have been transferred to
liability account which is incorporated within the financial statements as the legal
dispute has been resolved. This is a period 1 event (ASA 560. 6, 7, 8) wherein the
auditor has proactive responsibility. Hence, the auditor must request management to
adjust the 30 June 2011 financial report.
Requirement (3): The auditor will need to discuss with management regarding the
settlement of the legal dispute and review the evidence of what amounts have been
agreed upon to be paid etc. The auditor should also contact the audit client’s solicitor
about a solicitor’s representation letter regarding this before the audit report is due to
be signed so as to establish any loss that should be recorded in the accounts.
2.
Requirements (1) and (2): B. This is a post balance date event relating to conditions
existing after the balance date i.e. it is a non-adjusting event. This event occurred after
the balance date but before the audit report date. This is a period 1 event (ASA 560. 6,
7, 8) wherein the auditor has proactive responsibility. The appropriate action for the
auditor is to request that management disclose the facts in the financial report.
Requirement (3): The auditor should discuss with management about the faulty product
lines and the launch of a full product recall. The further evidence to be obtained
would be documentation to ensure that the dates given by the management were correct.
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3.
Requirements (1) and (2): B. This event occurred after the balance date but before the
audit report date. This is a period 1 event (ASA 560. 6, 7, 8) wherein the auditor has
proactive responsibility. The auditor should recommend the management to disclose
the event and its implications within the notes of the financial statements as
Queenscorp has invested significant funds in developing the new type of margarine.
The application has just been lodged and there is uncertainty about the results so there
isn’t a need for adjust in the financial report.
Requirement (3): The auditor should confirm the dates on which Queenscorp has
applied for a patent for a new type of margarine. The auditor should also confirm
with the patent registration office or discuss with a patent expert on the probability of
the granting of Queenscorp’s application as well as discuss with management the
implications of this event.
4.
Requirements (1) and (2): D. This event occurred after the financials were mailed
out to shareholders. This is a period 3 event (ASA 560.14) wherein the auditor has a
reactive responsibility. In period 3 events, auditors have a responsibility to examine
only events that come to their attention and that existed at the date of the auditor’s
report. Since the event i.e. a breach in one of the ratios for a 24-hour period occurred
after the audit report date, no action recommended for this year’s accounts.
Requirement (3): This event occurred after the financial reports have been mailed did
not exist at the date of the mailing of the financial reports; therefore it is of no concern
to you for this year’s accounts. The further evidence the auditor would seek would
be documentation and contracts to ensure that the dates given to you by the general
manager were correct.
5.
Requirements (1) and (2): A. This is a post balance date event relating to conditions
existing at balance date i.e. it is an adjusting event. In early June, the debtor has
informed Queenscorp that it has been experiencing serious financial difficulties and
it had gone into receivership on 5 July. This is a period 1 event (ASA 560. 6, 7, 8)
wherein the auditor has proactive responsibility. The auditor should request
management to adjust the provision for bad debts account or the trade receivables
account based on the preliminary reports that only 10% of the receivables are
recoverable.
Requirement (3): The auditor should obtain an external confirmation from that
particular debtor to ensure that it had gone into receivership and the amount that would
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be recoverable. The auditor should also confirm the date of receivership was in fact
before the date of the audit report.
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Consider each of the following independent and material situations. In each case ,
assume that the financial report has been prepared and audited for the year ended
30 June 2010.
(a) Range Ltd, (Range) holds several parcels of land in suburban Sydney that are
currently zoned non-residential. Range has valued land on a fair value basis
under AASB 116 Property, Plant and Equipment. This year, however, Range
revalued the land by adopting a registered valuer's estimate of the market value
of the land. This estimate included a substantial increase in value based on the
general community expectation that the land will soon be rezoned for residential
use.
(b) A part of Prize Ltd.'s operations are in South America. Recent government
changes have made it impossible for you to verify the key accounts of
inventory, property, plant and equipment and cash and related income statement
balances.
(c) Stonehouse Ltd.'s annual report includes a detailed graph showing sales and
profit figures for the past 10 years. However, there are some inconsistencies
between the graph and the figures in the audited financial report. Management
does not want to change the graph because it would involve increased printing
costs.
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Question 4 continued
(e) The audit of Jones Ltd. Was extremely difficult, as the client did not maintain
appropriate books and records during the year. Although the statutory registers
were maintained, the accounting records were not updated for the first nine
months of the year, as the company was without an accountant during this
period. An accountant was employed in April and has tried to reconstruct
records from the details of receipts and payments available. However, the
accountant has been unable to reconcile the bank account and you are not
satisfied that all transactions that occurred during the year are reflected in the
financial report.
Required:
Assume that no adjustments are made. For each situation, identify the type of audit opinion
required and explain the basis of your answers. (Total Marks: 5 X 6 Marks = 30 Marks)
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Solution:
END OF PART B
END OF EXAMINATION
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