问答题
(a) Explain the purpose of a value for money audit. (4 marks)<br>(b) Bluesberry hospital is located in a country where healthcare is free, as the taxpayers fund the hospitals which are owned by the government. Two years ago management reviewed all aspects of hospital operations and instigated a number of measures aimed at improving overall ‘value for money’ for the local community. Management have asked that you, an audit manager in the hospital’s internal audit department, perform. a review over the measures which have been implemented.<br>Bluesberry has one centralised buying department and all purchase requisition forms for medical supplies must be forwarded here. Upon receipt the buying team will research the lowest price from suppliers and a purchase order is raised. This is then passed to the purchasing director, who authorises all orders. The small buying team receive in excess of 200 forms a day.<br>The human resources department has had difficulties with recruiting suitably trained staff. Overtime rates have been increased to incentivise permanent staff to fill staffing gaps, this has been popular, and reliance on expensive temporary staff has been reduced. Monitoring of staff hours had been difficult but the hospital has implemented time card clocking in and out procedures and these hours are used for overtime payments as well.<br>The hospital has invested heavily in new surgical equipment, which although very expensive, has meant that more operations could be performed and patient recovery rates are faster. However, currently there is a shortage of appropriately trained medical staff. A capital expenditure committee has been established, made up of senior managers, and they plan and authorise any significant capital expenditure items.<br>Required:<br>(i) Identify and explain FOUR STRENGTHS within Bluesberry’s operating environment; and (6 marks)<br>(ii) For each strength identified, describe how Bluesberry might make further improvements to provide the best value for money. (4 marks)<br>(c) Describe TWO substantive procedures the external auditor of Bluesberry should adopt to verify EACH of the following assertions in relation to an entity’s property, plant and equipment;<br>(i) Valuation;<br>(ii) Completeness; and<br>(iii) Rights and obligations.<br>Note: Assume that the hospital adopts International Financial Reporting Standards. (6 marks)
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(a) Auditors have a responsibility under ISA 265 Communicating Deficiencies in Internal Control to those Charged with Governance and Management, to communicate deficiencies in internal controls. In particular SIGNIFICANT deficiencies in internal controls must be communicated in writing to those charged with governance.<br>Required:<br>Explain examples of matters the auditor should consider in determining whether a deficiency in internal controls is significant. (5 marks)<br>Greystone Co is a retailer of ladies clothing and accessories. It operates in many countries around the world and has expanded steadily from its base in Europe. Its main market is aimed at 15 to 35 year olds and its prices are mid to low range. The company’s year end was 30 September 2010.<br>In the past the company has bulk ordered its clothing and accessories twice a year. However, if their goods failed to meet the key fashion trends then this resulted in significant inventory write downs. As a result of this the company has recently introduced a just in time ordering system. The fashion buyers make an assessment nine months in advance as to what the key trends are likely to be, these goods are sourced from their suppliers but only limited numbers are initially ordered.<br>Greystone Co has an internal audit department but at present their only role is to perform. regular inventory counts at the stores.<br>Ordering process<br>Each country has a purchasing manager who decides on the initial inventory levels for each store, this is not done in conjunction with store or sales managers. These quantities are communicated to the central buying department at the head office in Europe. An ordering clerk amalgamates all country orders by specified regions of countries, such as Central Europe and North America, and passes them to the purchasing director to review and authorise.<br>As the goods are sold, it is the store manager’s responsibility to re-order the goods through the purchasing manager; they are prompted weekly to review inventory levels as although the goods are just in time, it can still take up to four weeks for goods to be received in store.<br>It is not possible to order goods from other branches of stores as all ordering must be undertaken through the purchasing manager. If a customer requests an item of clothing, which is unavailable in a particular store, then the customer is provided with other branch telephone numbers or recommended to try the company website.<br>Goods received and Invoicing<br>To speed up the ordering to receipt of goods cycle, the goods are delivered directly from the suppliers to the individual stores. On receipt of goods the quantities received are checked by a sales assistant against the supplier’s delivery note, and then the assistant produces a goods received note (GRN). This is done at quiet times of the day so as to maximise sales. The checked GRNs are sent to head office for matching with purchase invoices.<br>As purchase invoices are received they are manually matched to GRNs from the stores, this can be a very time consuming process as some suppliers may have delivered to over 500 stores. Once the invoice has been agreed then it is sent to the purchasing director for authorisation. It is at this stage that the invoice is entered onto the purchase ledger.<br>Required:<br>(b) As the external auditors of Greystone Co, write a report to management in respect of the purchasing system which:<br>(i) Identifies and explains FOUR deficiencies in that system;<br>(ii) Explains the possible implication of each deficiency;<br>(iii) Provides a recommendation to address each deficiency.<br>A covering letter is required.<br>Note: Up to two marks will be awarded within this requirement for presentation. (14 marks)<br>(c) Describe substantive procedures the auditor should perform. on the year-end trade payables of Greystone Co. (5 marks)<br>(d) Describe additional assignments that the internal audit department of Greystone Co could be asked to perform. by those charged with governance. (6 marks)
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(a) IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors contains guidance on the use of accounting policies and accounting estimates.<br>Required:<br>Explain the basis on which the management of an entity must select its accounting policies and distinguish, with an example, between changes in accounting policies and changes in accounting estimates. (5 marks)<br>(b) The directors of Tunshill are disappointed by the draft profi t for the year ended 30 September 2010. The company’s assistant accountant has suggested two areas where she believes the reported profi t may be improved:<br>(i) A major item of plant that cost $20 million to purchase and install on 1 October 2007 is being depreciated on a straight-line basis over a fi ve-year period (assuming no residual value). The plant is wearing well and at the beginning of the current year (1 October 2009) the production manager believed that the plant was likely to last eight years in total (i.e. from the date of its purchase). The assistant accountant has calculated that, based on an eight-year life (and no residual value) the accumulated depreciation of the plant at 30 September 2010 would be $7·5 million ($20 million/8 years x 3). In the fi nancial statements for the year ended 30 September 2009, the accumulated depreciation was $8 million ($20 million/5 years x 2). Therefore, by adopting an eight-year life, Tunshill can avoid a depreciation charge in the current year and instead credit $0·5 million ($8 million – $7·5 million) to the income statement in the current year to improve the reported profi t. (5 marks)<br>(ii) Most of Tunshill’s competitors value their inventory using the average cost (AVCO) basis, whereas Tunshill uses the fi rst in fi rst out (FIFO) basis. The value of Tunshill’s inventory at 30 September 2010 (on the FIFO basis) is $20 million, however on the AVCO basis it would be valued at $18 million. By adopting the same method (AVCO) as its competitors, the assistant accountant says the company would improve its profi t for the year ended 30 September 2010 by $2 million. Tunshill’s inventory at 30 September 2009 was reported as $15 million, however on the AVCO basis it would have been reported as $13·4 million. (5 marks)<br>Required:<br>Comment on the acceptability of the assistant accountant’s suggestions and quantify how they would affect the fi nancial statements if they were implemented under IFRS. Ignore taxation.<br>Note: the mark allocation is shown against each of the two items above.
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