Audit & Assurance: Suggested Answers
Audit & Assurance: Suggested Answers
Suggested Answers
Certificate in Accounting and Finance – Mock Autumn- 22
Ans.01
(1 mark for each risk, total marks for risk are 8 and 0.5 marks for audit procedures wit total marks 8)
1. Understatement of provision for claim filed by the customers due to side effects developed from the use
of Prolia.
Audit Procedures:
Inquire management and where applicable others within the entity including in-house legal counsel
about any court notices issued.
Read BOD minutes and correspondence between the entity and its external legal counsel.
Review the legal confirmations to assess whether all liabilities have been appropriately disclosed.
Review legal expense accounts.
2. No provision or understatement of penalties imposed by the regulator due to product recall notice.
Audit Procedures:
Inquire management about any correspondence or notice received from regulator.
Check whether management has recorded any provision for penalties and review management
working to evaluate the reasonableness of provision.
3. Understatement of provision of penalties from SHL due to use of substandard raw material in
manufacturing of product Prolia.
Audit Procedures:
Review license agreement for clauses related to fines and penalties.
Read BOD minutes about discussion in this regard.
Review management correspondence with SHL.
4. Understatement of provision of sales return despite increase in gross sales and product recall.
Audit Procedures:
Inspect sales return ledger subsequent to year end.
Inquire management about the number of batches for which product recall notice was issued.
Verify through production records and gate inward notes that all the returned quantities have been
recorded as sales returns.
5. Overstatement of sales to depict better picture to secure working capital financing from bank.
Audit Procedures:
Obtain monthly sales break up from management to check any significant increase in sales close to
year end.
Obtain monthly sales report from distributor to get reliance on secondary sales to retailers’ / end
users.
Check collections from customers subsequent to year end.
Perform cut off testing of goods delivery note and sales invoices.
6. Understatement of selling expense despite sales growth and aggressive marketing strategy. In fact,
selling expenses are approximately the same as last year.
Audit Procedures:
Check vendor invoices subsequent to year end to ensure management accrued all the expenses in
current period.
Obtain the details of aggressive marketing campaign launched and how much has been expensed
out this year.
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Audit & Assurance
Suggested Answers
Certificate in Accounting and Finance – Mock Autumn- 22
7. Incorrect foreign exchange translation while recording import of raw material from foreign countries.
Audit Procedures:
Check that appropriate exchange rates used in translation of foreign currency.
Check on a sample basis that any gains/losses arising on the translation of foreign currency are
correctly recognized as per the requirements of IAS-21.
8. Impairment in intangible license fees due to recall of flagship product Prolia and a significant decrease
in its sales. Impairment in the value of plant and machinery due to decline in sales of flagship product.
Audit Procedures:
Check subsequent sales of product Prolia post year end to access whether sales affected due to
product recall.
Assess the reasonableness of assumptions taken by the management and discount rate used.
Review the source data used by the management for impairment testing.
Consider involving auditor’s expert.
9. Overstatement in the value of inventory of product Prolia for not being recorded at lower of cost or
NRV.
Audit Procedures:
Ask management to perform the NRV testing of finished goods of Prolia.
Check whether provision for obsolescence is recorded for entire lot of raw material held in stock, if
it is concluded that substandard raw material was procured.
Inquire from the management that whether the raw material can be retuned back to its supplier.
Inquire management whether it would dispose the entire inventory now or it can re-sell the
inventory after rework.
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Audit & Assurance
Suggested Answers
Certificate in Accounting and Finance – Mock Autumn- 22
Ans.02
(a)
PL Ltd (2.5)
Intangible assets are overstated and expenses are understated. 13.5% of PBT. Which is material. The audit
opinion should be modified opinion. This is a material misstatement of the financial statements. The
misstatement is not pervasive because it confined to specific elements, accounts or items in the financial
statements. The auditor shall express a qualified opinion. The auditor shall state ‘except for the possible
effects of the matter described in the Basis for Qualified Opinion section of our report…..’. The heading
“Basis for Opinion” paragraph is amended to “Basis for Qualified Opinion”. Immediately after the Opinion
paragraph. Within the “Basis for Qualified Opinion paragraph, the auditor shall include a description of the
matter giving rise to the modification.
HL Ltd (2.5)
The matter is appropriately disclosed in the financial statements. The audit opinion is unmodified. The
matter is of such importance that it is fundamental to users’ understanding of the financial statements. An
emphasis of matter paragraph is included in the auditor’s report. Included within the paragraph is a clear
reference to where relevant disclosures that fully describe the matter can be found in the financial
statements. Indicate that the audit opinion is not modified in respect of the matter.
(b)
Points regarding BL to be included in the Key Audit Matters section (4 Marks, 3 marks for point ii, all
other points have 0.5 mark)
i. Why the matter was considered to be one of most significance in the audit and therefore determined
to be a key audit matter.
ii. A description of the key audit matter, being the acquisition of a subsidiary, including:
The percentage shareholding acquired.
The acquisition date.
That the acquisition of LL has been accounted for as a subsidiary and consolidated in the group
financial statements.
The consideration payable, consisting of the initial payment of Rs. 18m and the contingent
payment of up to Rs. 30m.
The financial performance criteria for the contingent payment
iii. A summary of the auditor’s response to the risk.
iv. The key observations arising with respect to those risks.
v. A clear reference to the relevant disclosures in the financial statements.
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Audit & Assurance
Suggested Answers
Certificate in Accounting and Finance – Mock Autumn- 22
Ans.03
The firm have resigned from the non-assurance service on the appointment, but those services were
provided for a significant part of the period covered by the financial statements. (01)
Provision of these services during the period covered by the financial statements might create self-review
and familiarity threat because records prepared by the firm’s staff will be checked and reviewed as part of
the audit procedures. If any of these staff are engaged in the audit, they would have developed some close
association with the audit client staff and would be accepting their work. (1.5)
Since generating original data for the preparation of financial statements by raising purchase orders and
customer orders are not permitted to be provided during the engagement period, threat to independence
would be created. Because preparing source documents or originating data, whether in electronic or any
other form, evidencing the occurrence of a transaction would have resulted in the personnel assuming
management responsibilities. This would create significant threat and the firm should adopt appropriate
safeguards. (1.5)
Course of action (04)
Conducting an additional review of the work performed by the loaned personnel might address a self-
review threat.
Not giving the loaned personnel audit responsibility for any function or activity that the personnel
performed during the loaned personnel assignment might address a self-review threat.
Not including the loaned personnel as an audit team member might address a familiarity threat.
Engaging another firm to evaluate the results of the non-assurance service to enable the other firm to
take responsibility for the service.
A self-interest or a familiarity threat may arise if the person being hired is related to the individual
shortlisting them. However, the positions for which hiring is being done is not for a role of senior
executive, therefore, the services may be provided subject to the following conditions: (02)
The firm may assist GCL in shortlisting candidates but this assistance should be based on qualifications
and results of interviews. (01)
The firm needs to ensure that the client takes the responsibility to make all management decisions with
respect to hiring the candidate and ensure that GCL makes all the decision. (01)
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Audit & Assurance
Suggested Answers
Certificate in Accounting and Finance – Mock Autumn- 22
Ans.04
a.
1. The firm has already accepted his appointment as auditor of SL and as per Companies Act 2017, If,
after appointment, an auditor becomes subject to any of the disqualifications due to any reason
mentioned, he will be deemed to have vacated his office as auditor with effect from the date of
disqualification. So, the firm will be deemed to have vacated his office on 20th December-21. The
disclosure and disposal of shares is irrelevant in this case. (02)
2. As per Companies Act 2017, a person who is a partner of, or in the employment of, a director, officer
or employee of the company cannot be appointed as auditor. The Act states further that, a person will
not be qualified for appointment as auditor of a company if he is due to any mentioned
disqualifications has been disqualified for appointment as auditor of any other company which is that
company’s subsidiary or holding company or a subsidiary of that holding company. So, the firm
cannot accept appointment of ZL. (02)
3. The firm cannot be appointed as auditor of LL because of employment of Kaleem in LL during
preceding three year. However, employment and partnership with director was before this
appointment and only current employment and partnership are not allowed. (02)
b.
i. Substantive Procedures for verification of Long-Term Bank Loan: (Maximum 6 Marks, 1 Mark for
each bullet)
a. Check approval of board of directors.
b. Study loan agreement and make relevant extracts.
c. Check calculation of interest paid/ accrued.
d. Obtain bank confirmation and confirm the particulars of security deposited with the bank as
security for the loans or charge created on an asset or assets of the client.
e. Ensure that the particulars mentioned in the bank confirmation are same as mentioned in the loan
agreement.
f. If the loan is secured against mortgage or charge, check the mortgage deed or any other related
document.
g. If there is any default in the payment of installments, check the related implications of the default
and ensure they are properly reflected in the financial statements.
h. Prepare a movement schedule during the year and match the opening and closing balances, and
also confirm that loan balance is appropriately reduced by the amount paid during the year.
i. Ensure proper disclosure is made in the financial statements.
ii. (5 Marks, 0.5 Mark for each bullet)
Review working papers for previous years, to look for names of known related parties.
Assess the adequacy of the company’s procedures for identifying related parties.
Review minutes of shareholder meetings and board of directors meeting.
Review shareholder records for the names of major shareholders.
Review the regulatory returns and the information supplied by the entity to the regulatory
authorities.
Inspect non-routine and unusual transactions.
Inspect significant contracts and agreements not in the ordinary course of business.
Review significant contracts renegotiated by the entity during the period.
Identify all employee benefit plans and the names of officers and trustees.
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Audit & Assurance
Suggested Answers
Certificate in Accounting and Finance – Mock Autumn- 22
Review internal audit reports.
iii. (5 Marks, 1 Mark for each bullet)
Recording fictitious journal entries, particularly close to the end of an accounting period, to
manipulate operating results or achieve other objectives.
Inappropriately adjusting assumptions and changing judgments used to estimate account
balances.
Omitting, advancing or delaying recognition in the financial statements of events and
transactions that have occurred during the reporting period.
Concealing, or not disclosing, facts that could affect the amounts recorded in the financial
statements.
Engaging in complex transactions that are structured to misrepresent the financial position or
financial performance of the entity.
Altering records and terms related to significant and unusual transactions.
iv. (5 Marks, 1 Mark for each bullet)
During the count, the auditor should consider:
whether or not the count is being conducted in accordance with the written instructions of the
client’s management
the condition of the inventory, in order to identify items where NRV might be below cost (and in
particular, inventory that seems to have deteriorated in condition)
whether or not inventory not owned by the client entity is properly identified and labelled (for
example, inventory owned by customers but held on the entity’s premises)
whether or not, during the count, production of new inventory and the movement of inventory are
controlled and properly documented, in accordance with management’s instructions for the count
At the end of the count, whether or not all inventory items have been counted and tagged
accordingly.
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Audit & Assurance
Suggested Answers
Certificate in Accounting and Finance – Mock Autumn- 22
Ans.05
a. It is not advisable to use the work of internal audit for external audit purposes due to following reasons:
1. The Internal Audit department is headed by a Chartered Accountant whereas the chairman of the audit
committee is an independent director. These two factors are positive and consequently are evident of
strong control environment. However, at the same time, it should also be kept in consideration that:
a. NOL is a family-owned enterprise and family members of the company are actively involved in the
management of the company. This may lead to the possibility of management override of controls.
b. The commitment to competence of management may appear to be weak as the major positions in
the company are assigned to the family members instead of hiring professionals from the market.
4. It seems that internal audit staff is under the influence of the family members as their reports contain no
serious issues or problems identified. (03)
5. The failure to approve internal audit plans means that there is no independent scrutiny in advance of
planned internal audit work. This may mean that the scope of internal audit work does not cover all of
the NOL’s operations or that inappropriate internal audit work is undertaken. There is an increased risk
that deficiencies in internal control may not be identified resulting in a higher risk of fraud and error.
All of these consequences may be indicative of a weak control environment. (02)
6. The failure to monitor the effectiveness of the internal audit function may mean that the function is
ineffective or represents poor value for money. The internal audit function may be under or over
resourced and planned internal audit work may not be completed. (01)
7. The internal audit staff’s responsibilities for verifying final settlements employees as part of financial
controls is in conflict with their responsibilities as the member of the internal audit function.(01)
b. (i) The client does not have Disaster recovery (DR) and Business Continuity Plan (BCP): (02)
The above deficiency might impact business operations but do not have any direct impact on the financial
statements. The auditor is not expected to alter audit strategy or audit plan due to this deficiency.
(ii) Program changes without approval but change log is maintained:
There is a risk that unauthorized changes may have been made. This deficiency shall impact audit strategy
and plan. (1.5)
The auditor may perform the following procedures to mitigate the risk of unauthorized program changes
that may result in material misstatements in the financial statements: (1.5 Marks for each procedure,
maximum 3 marks)
Understand the process of program changes such as initiation of change management request,
authorization of request, validation of changes made etc. to see if there are any mitigating controls
which can be relied upon.
Understand the application which is impacted by above deficiency and the financial statements areas
that are impacted by that application.
(iii) IDs of employees who have left the organization are not deleted/deactivated on a timely basis:
This deficiency possesses a risk that unauthorized changes may be made through IDs of ex-employees
which may result in material misstatements in the financial statements. (1.5 Marks) To address the risk, the
auditor needs to alter the audit strategy/plan and may perform the following procedures: (1 Marks for each
procedure, maximum 3 marks)
Check the current status of active IDs of ex-employees and request management to deactivate these
Review system logs to identify any changes that have been made through these IDs during the time of
severance of employees and deactivation of their IDs
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Audit & Assurance
Suggested Answers
Certificate in Accounting and Finance – Mock Autumn- 22
If any changes are identified, follow the complete trail and understand the rationale and impact of the
change.
Ans. 6
a. Headings and structure (01)
The report should not have the opinion and basis for opinion combined in one paragraph. The report should
start with the opinion paragraph, which is then followed by the basis for opinion, in this case the title
‘Qualified opinion’ seems most appropriate. The basis for opinion paragraph should be headed ‘Basis for
qualified opinion’.
Qualified opinion (01)
The qualified opinion paragraph should be worded differently as ‘except for the effects of the matter(s)
described in the Basis for Qualified Opinion section, the accompanying financial statements present fairly,
in all material respects (or give a true and fair view of)…’.
The draft opinion paragraph uses different wording, in particular, using the phrase ‘the financial statements
are likely to be materially misstated’ does not indicate that a firm conclusion has been reached, and could
give users of the report some doubt as to the credibility of the auditor’s opinion.
Basis for qualified opinion (01)
This paragraph should contain further information on the reasons for the modification including a
description and quantification of the financial effects of the material misstatement. In this case, the
paragraph should refer to the overstatement of trade receivables and the overstatement of profit by the same
amount.
Emphasis of matter paragraph (03)
The draft auditor’s report includes an EOM which is being used to discuss two matters, neither of which are
appropriate for inclusion in an EOM. First, the EOM describes the fraud which has taken place during the
year. This matter is immaterial in monetary terms and therefore is not likely to be considered to be
fundamental to users’ understanding of the financial statements.
Second, the EOM refers to the difficulties encountered in the audit of trade receivables due to THL finance
director refusing to allow full access to necessary sources of evidence. This matter should not be reported
to shareholders in the auditor’s report. Related to this, stating that it is THL finance director personally who
is responsible for the material misstatement and hence the modification of the auditor’s opinion is not
appropriate.
In addition, referring to the potential resignation of the audit firm anywhere in the auditor’s report is not
appropriate
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Audit & Assurance
Suggested Answers
Certificate in Accounting and Finance – Mock Autumn- 22
b. (Total 12 Mark, each deficiency has 1 mark allocation, 0.5 Mark for each deficiency and 0.5 for each
recommendation)
Deficiencies Recommendation(s)
i. Clients are reliant on WRL to select Contracts should reflect the client’s responsibility
appropriate temps (temps are not always for selecting temps.
interviewed by the client). WRL should interview all temps if the client does
not do so.
References should be obtained for new temps and
qualifications verified.
ii. The timesheet is submitted by the temp Authorised timesheets should be submitted by the
themself. client line manager or centrally by the client.
iii. New temps are set up by the payroll clerk. Set up/authorisation of new temps should be
There is a lack of segregation of duty as performed by a different person, ideally by a
the payroll clerk inputs new temp data separate human resources function.
and also manages payments.
iv. Hours input by the payroll clerk are not Reconcile total hours per timesheets to total hours
checked by another party. entered.
Introduce a check of hours input by another party
before they are accepted.
v. Standing data may be out of date or Standing data should be reviewed for changes and
become corrupted as they are only updated, if necessary, frequently (eg, at least
reviewed annually. monthly).
vi. The data used by the sales clerk for Only extract the data once the payroll has been
billing is extracted from payroll records signed off.
before sign-off by the payroll manager.
vii. A spreadsheet with unprotected fields is Protect/lock certain spreadsheet fields, eg, mark-up
used for creating invoices. for each client and sales tax rates, with passwords
only known by the sales manager so they cannot be
altered without authorisation.
Invest in an automated system which creates
invoices automatically based on payroll data.
(THE END)
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