ACCA

Tuition Examination September 2021 – June 2022 exams

Audit and Assurance (AA)

Time allowed:
3 hours

This paper is divided into 2 sections:

Section A – All 15 questions are compulsory and MUST be attempted.

Section B – All THREE questions are compulsory and MUST be attempted.
You are strongly advised to carefully read ALL the question requirements before attempting the
question concerned (that is, all parts and/or sub-questions). The question requirements are at the end
of each question.

We are grateful to the Association of Chartered Certified Accountants for

permission to reproduce past examination questions and model answers.
© First Intuition Ltd, 2021
 2 Tuition Examination questions ACCA AA

Section A
These 15 questions are compulsory and MUST be attempted

SERENA VDW CO (DECEMBER 2011 AMENDED)

The following scenario relates to questions 1-5
Serena VDW Co has been trading for over 20 years and obtained a listing on a stock exchange five
years ago. It provides specialist training in accounting and finance.
Serena VDW Co’s board is comprised of six directors; there are four executives who originally set up
the company and two non-executive directors who joined Serena VDW Co just prior to the listing. Each
director has a specific area of responsibility and only the Finance Director reviews the financial
statements and budgets.
The Chief Executive Officer, Daniel Brown, set up the audit committee and he sits on this sub-
committee along with the Finance Director and the non-executive directors. As the board is relatively
small, and to save costs, Daniel Brown has recently taken on the role of Chairman of the board. It is the
Finance Director and the Chairman who make decisions on the appointment and remuneration of the
external auditors. Again, to save costs, no internal audit function has been set up to monitor internal
controls.
The executive directors’ remuneration is proposed by the Finance Director and approved by the
Chairman. They are paid an annual salary as well as a generous annual revenue related bonus.
Since the company listed, the directors have remained unchanged and none have been subject to re-
election by shareholders.

1 Corporate governance is the system by which companies are directed and controlled.
Which of the following is correct in relation to corporate governance?
A A strong system of corporate governance gives credibility to financial statements.
B All companies are required to have a mixture of executive and non-executive directors.
C A nominations committee appoints auditors and sets their remuneration.
D An audit committee liaises with the external auditor to plan the external audit (2 marks)

2 You have identified a number of aspects of corporate governance at Serena VDW relating to the
directors:
1 Serena VDW has non-executive directors
2 The finance director performs the final review of the financial statements
3 Directors have specific areas of responsibility
4 Daniel Brown is the chairman and the chief executive
Which of the following options correctly allocates the above as weaknesses or strengths of
the system?
Weakness Strength
A 1, 2 3, 4
B 3, 4 1, 2
C 2, 3 1, 4
D 2, 4 1, 3 (2 marks)
ACCA AA Tuition examination questions 3

3 In line with generally accepted corporate governance requirements, which of the following
items is a weakness in relation to the audit committee at Serena VDW?
A The non-executive directors sit on the committee
B The Chairman sits on the committee
C It does not propose executive remuneration
D It does not nominate directors to the board (2 marks)

4 Which of the following recommendations would MOST strengthen the corporate governance
arrangements at Serena VDW?
A Employ more executive directors.
B Appoint one of the non-executive directors as Chairman.
C Employ an internal audit department.
D Discontinue performance related pay for executive directors (2 marks)

5 You have identified four tasks which the board should undertake as part of its corporate
governance arrangements:
1 Suggest new directors to the board
2 Set executive pay and benefits
3 Review the financial statements
4 Monitor the control environment of the company
Which of the following options correctly identifies the sub-committee of the board that
should be responsible for each task?
Remuneration Nomination Audit
A (1), (2) (4) (3)
B (2) (1) (3), (4)
C (2), (3) (1), (4) (1)
D (4) (1), (2) (3) (2 marks)
 4 Tuition Examination questions ACCA AA

BLAKE CO (DECEMBER 2008 AMENDED)

The following scenario relates to questions 6-10
Blake Co is your audit client. It employs shift-workers on its specialist automobile assembly line.
Payment of wages
Details of hours worked each week are sent electronically to the payroll department, where hours
worked are allocated by the computerised wages system to each employee’s wages records. Staff in
the payroll department compare hours worked from the time recording system to the computerised
wages system, and enter a code word to confirm the accuracy of transfer. The code word also acts as
authorisation to calculate net wages. The code word is the name of a domestic cat belonging to the
department head and is therefore generally known around the department.
Each week the computerised wages system calculates:
 Gross wages, using the standard rate and overtime rates per hour for each employee,
 Statutory deductions from wages, and
 Net pay.
The list of net pay for each employee is sent over Blake’s internal network to the accounts
department. In the accounts department, an accounts clerk ensures that employee bank details are on
file. The clerk then authorises and makes payment to those employees using Blake’s online banking
systems.

6 The auditor is required to gain an understanding of internal control relevant to the audit.
Which TWO of the following are reasons why that understanding is obtained in relation to a
private company?
1 To help identify risks of material misstatements.
2 To express an opinion that the internal controls are effective.
3 To meet corporate governance requirements.
4 To gain an impression if the control system is capable of producing financial statements.
A 1 and 2
B 1 and 4
C 2 and 3
D 2 and 4 (2 marks)

7 Your audit assistant has compiled a list of features of the system at Blake Co:
1 Payroll department compares hours worked to hours being paid
2 Authorisation code word is well known in the payroll department
3 Payroll system calculates gross pay, deductions and net pay
4 Payroll payments authorised by accounts clerk
Which of the following options correctly identifies these features as STRENGTHS and
DEFICIENCIES in the system?
Strengths Deficiencies
A 1, 3 2, 4
B 1, 2, 3, 4 -
C 1, 2 3, 4
D 1, 4 2, 3 (2 marks)
ACCA AA Tuition examination questions 5

8 You have identified as a deficiency in the system the fact that the total amount of net wages
transferred to employees is not agreed to the total of the list of wages produced by the payroll
department. This means that accounts department staff could add false employees to the net
pay list after the payroll has been run.
Which of the following recommendations would NOT improve this deficiency?
A Accounts clerk should reconcile net pay list with payroll totals.
B Financial controller should periodically compare the payroll per management accounts
with the payroll totals for the year.
C The net pay list should be authorised by the head of HR and the accounts clerk prior to
payment being made.
D Accounts clerk should cross check net pay list with list of employees in accounts
department. (2 marks)

Termination of employees
Occasionally, employees leave Blake. When this happens, the HR department sends an e-mail to the
payroll department detailing the employee’s termination date and any unclaimed holiday pay.

9 Which of the following is not a suitable control over this system?

A Read receipt function on the email sent by the payroll department
B Accounts clerk reviews names on net pay list against emails received from payroll
department
C After email receipt accounts clerk deletes terminated employee from banking master file
D Email copied to person responsible for authorising payroll payment (2 marks)

10 Which of the following is NOT a suitable test of controls designed to ensure employees are
not paid after they have left the company?
A Ask the employee
B Review sent mail of payroll department and inbox of accounts clerk for leavers emails
C Observe accounts clerk verify the net pay list to current employee files before payment
D Review payroll (2 marks)
 6 Tuition Examination questions ACCA AA

MERCURY MOTORING CO (DECEMBER 2015 AMENDED)

The following scenario relates to questions 11-15
Mercury Motoring Co (Mercury) specialises in manufacturing engine parts for motor cars and the
company has a diverse customer base but seven significant customers. The company’s year end was
30 September 20X5.
During the year, a number of the company’s significant customers have experienced a fall in sales, and
consequently they have purchased fewer items from Mercury. As a result, Mercury has paid a number
of its suppliers later than usual and some of them have withdrawn credit terms meaning the company
must pay cash on delivery. One of Mercury’s main suppliers is threatening legal action to recover the
sums owing. Mercury has produced a cash flow forecast to 30 June 20X6 and this shows net cash
outflows until May 20X6. Mercury has a loan of $2·3 million which is due for repayment in full by 30
September 20X6.
The finance director has just informed the audit manager that there is a possible change in legislation
which will result in one of Mercury’s top product lines becoming obsolete as it will not comply with the
proposed law. The prepared cash flow forecasts do not reflect this possible event.

11 Your audit assistant has made a list of factors which might indicate that Mercury is not a going
concern:
1 Mercury has seven main customers
2 Suppliers are demanding cash on delivery
3 A key supplier is threatening legal action
4 A possible change in legislation would result in Mercury’s top product becoming obsolete
Which of the following options correctly identifies the indicators of going concern and which
of them will be relevant to this year’s audit?
Going concern indicators Relevant in current audit
A 1, 2, 3, 4 1, 2, 3
B 3, 4 2, 3
C 2, 3, 4 2, 3, 4
D 3 3 (2 marks)

12 Your audit assistant has asked you to clarify responsibilities in respect of the going concern basis
of financial statements.
Which of the following statements in relation to going concern responsibilities is TRUE?
A Management is responsible for ensuring that the company is a going concern and
preparing financial statements accordingly.
B Auditors must be sure that the going concern basis is appropriate before signing the
auditor’s report.
C If management believe the company may not be a going concern but don’t want to alert
customers and suppliers it is reasonable to give the company the benefit of the doubt for
twelve months.
D Auditors will draw attention to uncertainties about going concern appropriately disclosed
in the financial statements by using a going concern paragraph titled ‘material
uncertainty related to going concern’. (2 marks)
ACCA AA Tuition examination questions 7

13 You have compiled the following list of audit procedures to carry out in relation to going
concern:
1 Review management forecasts in light of auditor knowledge and perform sensitivity
analysis on them to ensure they are reasonable.
2 Inquire with company’s legal advisers whether any legal action has been taken against
the company.
3 Review payments to suppliers in post year-end period to ensure that suppliers are being
paid on time.
4 Discuss the proposed legislation with the directors to consider its impact and monitor the
progress of the legislation to see if it becomes law before the auditor’s report is signed.
Which of the following statements concerning these procedures is NOT TRUE?
A Performing all the listed procedures will enable the auditors to conclude whether the
basis for the financial statements is appropriate but not any related disclosures.
B The tests are insufficient because they do not include a review of the financial statements
for relevant disclosures concerning going concern.
C Management should be asked to extend the forecasts until 31 September 20X6 and
should extend testing to cover the extra months of forecasting.
D The auditors should also test the director’s plans for future action by reading board
minutes and obtaining written representations from the directors. (2 marks)

After carrying out audit procedures you have concluded that the forecasts support the directors view
that the company can continue as a going concern but that the potential change in the legislation
creates uncertainty.

14 Which TWO of the following statements concerning this uncertainty are correct?
A The auditors should not sign the auditor’s report while there is uncertainty over the
company’s going concern status.
B Management must disclose any uncertainty about going concern in the financial
statements.
C If management discloses the uncertainty, the audit opinion will be unmodified.
D If there is uncertainty over going concern at Mercury, the auditor’s report should contain
a paragraph highlighting that fact. (2 marks)

15 Which of the following cannot be appropriate in these circumstances?

A Unmodified report
B Qualified opinion, ‘except for’
C Adverse opinion
D Unmodified opinion (2 marks)

(30 marks)
 8 Tuition Examination questions ACCA AA

Section B
All THREE questions to be attempted

16 SYCAMORE (Q5, JUNE 2015, AMENDED)

You are the audit supervisor of Maple & Co and are currently planning the audit of an existing client,
Sycamore Science Co (Sycamore), whose year end was 30 April 20X5. Sycamore is a pharmaceutical
company, which manufactures and supplies a wide range of medical supplies. The draft financial
statements show revenue of $35·6 million and profit before tax of $5·9 million.
Sycamore’s previous finance director left the company in December 20X4 after it was discovered that
he had been claiming fraudulent expenses from the company for a significant period of time. A new
finance director was appointed in January 20X5 who was previously a financial controller of a bank,
and she has expressed surprise that Maple & Co had not uncovered the fraud during last year’s audit.
During the year Sycamore has spent $1·8 million on developing several new products. These projects
are at different stages of development and the draft financial statements show the full amount of
$1·8 million within intangible assets. In order to fund this development, $2·0 million was borrowed
from the bank and is due for repayment over a ten-year period. The bank has attached minimum profit
targets as part of the loan covenants.
The new finance director has informed the audit partner that since the year end there has been an
increased number of sales returns and that in the month of May over $0·5 million of goods sold in
April were returned.
Maple & Co attended the year-end inventory count at Sycamore’s warehouse. The auditor present
raised concerns that during the count there were movements of goods in and out the warehouse and
this process did not seem well controlled.
During the year, a review of plant and equipment in the factory was undertaken and surplus plant was
sold, resulting in a profit on disposal of $210,000.
Required:
(a) Describe factors an audit partner should consider prior to commencing planning procedures on
a new audit of an existing audit client. (4 marks)
(b) State Maple & Co’s responsibilities in relation to the prevention and detection of fraud and
error. (5 marks)
(c) Describe SEVEN audit risks, and explain the auditor’s response to each risk, in planning the audit
of Sycamore Science Co. (14 marks)
(d) Sycamore’s new finance director has read about review engagements and is interested in the
possibility of Maple & Co undertaking these in the future. However, she is unsure how these
engagements differ from an external audit and how much assurance would be gained from this
type of engagement.
Required:
(i) Explain the purpose of review engagements, how these differ from external audits and
how they might be relevant to Sycamore. (3 marks)
(ii) Describe the level of assurance provided by external audits and review engagements.
(2 marks)
(iii) Explain factors relevant to the decision whether Maple & Co should provide review
engagements to Sycamore Science Co. (2 marks)

(30 marks)
ACCA AA Tuition examination questions 9

17 HUMMINGBIRD SCENTS CO (Q5, DECEMBER 2014)

Hummingbird Scents Co (Hummingbird) manufactures and sells luxury toiletries; they have been
trading for over 20 years and the company’s year end is 30 September 20X4. Hummingbird sells
products to trade customers via its own website; this represents 60% of revenue. Remaining revenue
is generated by contracts to supply toiletries to hotels. Below is a description of the sales system.
Hotel revenue
The hotel revenue is made up of four key customers. Hummingbird has one sales clerk, Brenda, who
maintains all aspects of this revenue stream; Brenda receives customer orders, raises sales invoices
and processes payments. In raising invoices, the sales system automatically inserts the online trade
customer prices for products. However, each hotel customer has contracted prices which are lower
than the online prices and hence Brenda manually edits the invoices prior to despatch.
Online revenue
New trade customers are set up in the sales ledger master file upon passing suitable credit checks, and
a credit limit is set at this stage by the finance director. Customers place online orders up to their pre-
set credit limit; they receive an email confirmation and the sales order interfaces into the despatch
system. The order number is linked to the customer account number. Goods are despatched daily with
a goods despatched note which is referenced to the sales order number but are not sequentially
numbered. Hummingbird used to despatch goods via a reliable national courier company. However, to
reduce costs they have changed to a cheaper local courier and some orders have been delivered to
customers late.
Trade customers’ sales invoices are automatically generated by the system on the day the online order
is placed. The prices are inserted in accordance with the website rates. Occasionally Hummingbird
makes special offers or discounts sales; when this occurs the master file data has to be amended to
ensure that the correct prices are used on invoices. This task is usually performed by a senior sales
ledger clerk.
Revenue and receivables records
On a monthly basis statements are sent to the hotel customers; a number of trade customers have
been requesting monthly statements and Hummingbird is considering this request. The company only
reconciles the sales ledger control account at the end of September in order to verify the year-end
balance.
Required:
(a) As the external auditor of Hummingbird Co, write a report to management in respect of the
sales system described above which:
(i) Identifies and explains SEVEN deficiencies in the sales system; and
(ii) Provides a recommendation to address each of these deficiencies. A covering letter IS
required.
Note: Up to two marks will be awarded within this requirement for presentation and the
remaining marks will be split equally between each part. (16 marks)
(b) Describe substantive procedures the auditor should perform to confirm Hummingbird Co’s
revenue. (4 marks)

(20 marks)
10 T u i t i o n E x a m i n a t i o n q u e s t i o n s ACCA AA

18 ROSE LEISURE CLUB (Q5 DECEMBER 2012, AMENDED)

(a) ISA 500 Audit Evidence requires audit evidence to be reliable.
Required:
List FIVE factors that influence the reliability of audit evidence. (5 marks)
(b) Rose Leisure Club Ltd (Rose) operates a chain of health and fitness clubs. Its year end was
31 October 20X2.
You are the audit manager and the year-end audit is due to commence shortly. The following
three matters have been brought to your attention.
(i) Trade payables and accruals
Rose’s finance director has notified you that an error occurred in the closing of the
purchase ledger at the year end.
Rather than it closing on 1 November, it accidentally closed one week earlier on
25 October. All purchase invoices received between 25 October and the year end have
been posted to the 20X3 year-end purchase ledger. (6 marks)
(ii) Receivables
Rose’s trade receivables have historically been low as most members pay monthly in
advance. However, during the year a number of companies have taken up group
memberships at Rose and hence the receivables balance is now material. The audit
senior has undertaken a receivables circularisation for the balances at the year end;
however, there are a number who have not responded and a number of responses with
differences. (5 marks)
(iii) Reorganisation
The company recently announced its plans to reorganise its health and fitness clubs. This
will involve closing some clubs for refurbishment, retraining some existing staff and
disposing of some surplus assets. These plans were agreed at a board meeting in October
and announced to their shareholders on 29 October. Rose is proposing to make a
reorganisation provision in the financial statements. (4 marks)
Required:
Describe substantive procedures you would perform to obtain sufficient and appropriate audit
evidence in relation to the above three matters.
Note: The mark allocation is shown against each of the three matters above.

(20 marks)