(a) Contrast the role of internal and external auditors. (8 marks)<br>(b) Conoy Co designs and manufactures luxury motor vehicles. The company employs 2,500 staff and consistently makes a net profit of between 10% and 15% of sales. Conoy Co is not listed; its shares are held by 15 individuals, most of them from the same family. The maximum shareholding is 15% of the share capital.<br>The executive directors are drawn mainly from the shareholders. There are no non-executive directors because the company legislation in Conoy Co’s jurisdiction does not require any. The executive directors are very successful in running Conoy Co, partly from their training in production and management techniques, and partly from their ‘hands-on’ approach providing motivation to employees.<br>The board are considering a significant expansion of the company. However, the company’s bankers are<br>concerned with the standard of financial reporting as the financial director (FD) has recently left Conoy Co. The board are delaying provision of additional financial information until a new FD is appointed.<br>Conoy Co does have an internal audit department, although the chief internal auditor frequently comments that the board of Conoy Co do not understand his reports or provide sufficient support for his department or the internal control systems within Conoy Co. The board of Conoy Co concur with this view. Anders & Co, the external auditors have also expressed concern in this area and the fact that the internal audit department focuses work on control systems, not financial reporting. Anders & Co are appointed by and report to the board of Conoy Co.<br>The board of Conoy Co are considering a proposal from the chief internal auditor to establish an audit committee.<br>The committee would consist of one executive director, the chief internal auditor as well as three new appointees.<br>One appointee would have a non-executive seat on the board of directors.<br>Required:<br>Discuss the benefits to Conoy Co of forming an audit committee. (12 marks)

Following a competitive tender, your audit firm Cal & Co has just gained a new audit client Tirrol Co. You are the manager in charge of planning the audit work. Tirrol Co’s year end is 30 June 2009 with a scheduled date to complete the audit of 15 August 2009. The date now is 3 June 2009.<br>Tirrol Co provides repair services to motor vehicles from 25 different locations. All inventory, sales and purchasing systems are computerised, with each location maintaining its own computer system. The software in each location is<br>the same because the programs were written specifically for Tirrol Co by a reputable software house. Data from each location is amalgamated on a monthly basis at Tirrol Co’s head office to produce management and financial accounts.<br>You are currently planning your audit approach for Tirrol Co. One option being considered is to re-write Cal & Co’s audit software to interrogate the computerised inventory systems in each location of Tirrol Co (except for head office)<br>as part of inventory valuation testing. However, you have also been informed that any computer testing will have to be on a live basis and you are aware that July is a major holiday period for your audit firm.<br>Required:<br>(a) (i) Explain the benefits of using audit software in the audit of Tirrol Co; (4 marks)<br>(ii) Explain the problems that may be encountered in the audit of Tirrol Co and for each problem, explain<br>how that problem could be overcome. (10 marks)<br>(b) Following a discussion with the management at Tirrol Co you now understand that the internal audit department are prepared to assist with the statutory audit. Specifically, the chief internal auditor is prepared to provide you with documentation on the computerised inventory systems at Tirrol Co. The documentation provides details of the software and shows diagrammatically how transactions are processed through the inventory system. This documentation can be used to significantly decrease the time needed to understand the computer systems and enable audit software to be written for this year’s audit.<br>Required:<br>Explain how you will evaluate the computer systems documentation produced by the internal audit<br>department in order to place reliance on it during your audit. (6 marks)

(a) List and explain FOUR methods of selecting a sample of items to test from a population in accordance with ISA 530 (Redrafted) Audit Sampling and Other Means of Testing. (4 marks)<br>(b) List and explain FOUR assertions from ISA 500 Audit Evidence that relate to the recording of classes of<br>transactions. (4 marks)<br>(c) In terms of audit reports, explain the term ‘modified’. (2 marks)

Background information<br>B-Star is a theme park based on a popular series of children’s books. Customers pay a fixed fee to enter the park,where they can participate in a variety of activities such as riding roller-coasters, playing on slides and purchasing themed souvenirs from gift shops.<br>The park is open all year and has been in operation for the last seven years. It is located in a country which has very little rainfall – the park is open-air so poor weather such as rain results in a significant fall in the number of customers for that day (normally by 50%). During the last seven years there have been on average 30 days each year with rain.<br>B-Star is now very successful; customer numbers are increasing at approximately 15% each year.<br>Ticket sales<br>Customers purchase tickets to enter the theme park from ticket offices located outside the park. Tickets are only valid on the day of purchase. Adults and children are charged the same price for admission to the park. Tickets are preprinted and stored in each ticket office.<br>Tickets are purchased using either cash or credit cards.<br>Each ticket has a number comprising of two elements – two digits relating to the ticket office followed by six digits to identify the ticket. The last six digits are in ascending sequential order.<br>Cash sales<br>1. All ticket sales are recorded on a computer showing the amount of each sale and the number of tickets issued.<br>This information is transferred electronically to the accounts office.<br>2. Cash is collected regularly from each ticket office by two security guards. The cash is then counted by two<br>accounts clerks and banked on a daily basis.<br>3. The total cash from each ticket office is agreed to the sales information that has been transferred from each office.<br>4. Total cash received is then recorded in the cash book, and then the general ledger.<br>Credit card sales<br>1. Payments by credit cards are authorised online as the customers purchase their tickets.<br>2. Computers in each ticket office record the sales information which is transferred electronically to the accounts office.<br>3. Credit card sales are recorded for each credit card company in a receivables ledger.<br>4. When payment is received from the credit card companies, the accounts clerks agree the total sales values to the amounts received from the credit card companies, less the commission payable to those companies. The receivables ledger is updated with the payments received.<br>You are now commencing the planning of the annual audit of B-Star. The date is 3 June 2009 and B-Star’s year end is 30 June 2009.<br>Required:<br>(a) List and explain the purpose of the main sections of an audit strategy document and for each section, provide an example relevant to B-Star. (8 marks)<br>(b) (i) For the cash sales system of B-Star, identify the risks that could affect the assertion of completeness of sales and cash receipts; (4 marks)<br>(ii) Discuss the extent to which tests of controls and substantive procedures could be used to confirm the<br>assertion of completeness of income in B-Star. (6 marks)<br>(c) (i) List the substantive analytical procedures that may be used to give assurance on the total income from<br>ticket sales for one day in B-Star;<br>(ii) List the substantive analytical procedures that may be used to give assurance on the total income from<br>ticket sales in B-Star for the year. (8 marks)<br>(d) List the audit procedures you should perform. on the credit card receivables balance. (4 marks)

As part of Tye Co’s service contract with the government, it is required to hold an emergency inventory reserve of 6,000 barrels of aviation fuel. The inventory is to be used if the supply of aviation fuel is interrupted due to unforeseen events such as natural disaster or terrorist activity.<br>This fuel has in the past been valued at its cost price of $15 a barrel. The current value of aviation fuel is $120 a barrel. Although the audit work is complete, as noted above, the directors of Tye Co have now decided to show the ‘real’ value of this closing inventory in the financial statements by valuing closing inventory of fuel at market value, which does not comply with relevant accounting standards. The draft financial statements of Tye Co currently show a profit of approximately $500,000 with net assets of $170 million.<br>Required:<br>(a) List the audit procedures and actions that you should now take in respect of the above matter. (6 marks)<br>(b) For the purposes of this section assume from part (a) that the directors have agreed to value inventory at<br>$15/barrel.<br>Having investigated the matter in part (a) above, the directors present you with an amended set of financial<br>statements showing the emergency reserve stated not at 6,000 barrels, but reported as 60,000 barrels. The final financial statements now show a profit following the inclusion of another 54,000 barrels of oil in inventory. When queried about the change from 6,000 to 60,000 barrels of inventory, the finance director stated that this change was made to meet expected amendments to emergency reserve requirements to be published in about six months time. The inventory will be purchased this year, and no liability will be shown in the financial statements for this future purchase. The finance director also pointed out that part of Tye Co’s contract with the government requires Tye Co to disclose an annual profit and that a review of bank loans is due in three months. Finally the finance director stated that if your audit firm qualifies the financial statements in respect of the increase in inventory, they will not be recommended for re-appointment at the annual general meeting. The finance director refuses to amend the financial statements to remove this ‘fictitious’ inventory.<br>Required:<br>(i) State the external auditor’s responsibilities regarding the detection of fraud; (4 marks)<br>(ii) Discuss to which groups the auditors of Tye Co could report the ‘fictitious’ aviation fuel inventory;<br>(6 marks)<br>(iii) Discuss the safeguards that the auditors of Tye Co can use in an attempt to overcome the intimidation<br>threat from the directors of Tye Co. (4 marks)

Introduction and client background<br>You are an audit senior in Staple and Co and you are commencing the planning of the audit of Smoothbrush Paints Co for the year ending 31 August 2010.<br>Smoothbrush Paints Co is a paint manufacturer and has been trading for over 50 years, it operates from one central site, which includes the production facility, warehouse and administration ffices.<br>Smoothbrush sells all of its goods to large home improvement stores, with 60% being to one large chain store Homewares. The company has a one year contract to be the sole supplier of paint to Homewares. It secured the contract through signifi cantly reducing prices and offering a four-month credit period, the company’s normal credit period is one month.<br>Goods in/purchases<br>In recent years, Smoothbrush has reduced the level of goods directly manufactured and instead started to import paint from South Asia. Approximately 60% is imported and 40% manufactured. Within the production facility is a large amount of old plant and equipment that is now redundant and has minimal scrap value. Purchase orders for overseas paint are made six months in advance and goods can be in transit for up to two months. Smoothbrush accounts for the inventory when it receives the goods.<br>To avoid the disruption of a year end inventory count, Smoothbrush has this year introduced a continuous/perpetual inventory counting system. The warehouse has been divided into 12 areas and these are each to be counted once over the year. The counting team includes a member of the internal audit department and a warehouse staff member. The following procedures have been adopted;<br>1. The team prints the inventory quantities and descriptions from the system and these records are then compared to the inventory physically present.<br>2. Any discrepancies in relation to quantities are noted on the inventory sheets, including any items not listed on the sheets but present in the warehouse area.<br>3. Any damaged or old items are noted and they are removed from the inventory sheets.<br>4. The sheets are then passed to the fi nance department for adjustments to be made to the records when the count has fi nished.<br>5. During the counts there will continue to be inventory movements with goods arriving and leaving the warehouse.<br>At the year end it is proposed that the inventory will be based on the underlying records. Traditionally Smoothbrush has maintained an inventory provision based on 1% of the inventory value, but management feels that as inventory is being reviewed more regularly it no longer needs this provision.<br>Finance Director<br>In May 2010 Smoothbrush had a dispute with its fi nance director (FD) and he immediately left the company. The company has temporarily asked the fi nancial controller to take over the role while they recruit a permanent replacement. The old FD has notifi ed Smoothbrush that he intends to sue for unfair dismissal. The company is not proposing to make any provision or disclosures for this, as they are confi dent the claim has no merit.<br>Required:<br>(a) Identify and explain the audit risks identifi ed at the planning stage of the audit of Smoothbrush Paints Co. (10 marks)<br>(b) Discuss the importance of assessing risks at the planning stage of an audit. (4 marks)<br>(c) List and explain suitable controls that should operate over the continuous/perpetual inventory counting system, to ensure the completeness and accuracy of the existing inventory records at Smoothbrush Paints Co. (10 marks)<br>(d) Describe THREE substantive procedures the auditor of Smoothbrush Paints Co should perform. at the year end in confi rming each of the following:<br>(i) The valuation of inventory; (3 marks)<br>(ii) The completeness of provisions or contingent liabilities. (3 marks)

Trombone Co (Trombone) operates a chain of hotels across the country. Trombone employs in excess of 250 permanent employees and its year end is 31 August 2014. You are the audit supervisor of Viola & Co and are currently reviewing the documentation of Trombone’s payroll system, detailed below, in preparation for the interim audit.<br>Trombone’s payroll system<br>Permanent employees work a standard number of hours per week as specified in their employment contract. However, when the hotels are busy, staff can be requested by management to work additional shifts as overtime. This can either be paid on a monthly basis or taken as days off.<br>Employees record any overtime worked and days taken off on weekly overtime sheets which are sent to the payroll department. The standard hours per employee are automatically set up in the system and the overtime sheets are entered by clerks into the payroll package, which automatically calculates the gross and net pay along with relevant deductions. These calculations are not checked at all. Wages are increased by the rate of inflation each year and the clerks are responsible for updating the standing data in the payroll system.<br>Employees are paid on a monthly basis by bank transfer for their contracted weekly hours and for any overtime worked in the previous month. If employees choose to be paid for overtime, authorisation is required by department heads of any overtime in excess of 30% of standard hours. If employees choose instead to take days off, the payroll clerks should check back to the ‘overtime worked’ report; however, this report is not always checked.<br>The ‘overtime worked’ report, which details any overtime recorded by employees, is run by the payroll department weekly and emailed to department heads for authorisation. The payroll department asks department heads to only report if there are any errors recorded. Department heads are required to arrange for overtime sheets to be authorised by an alternative responsible official if they are away on annual leave; however, there are instances where this arrangement has not occurred.<br>The payroll package produces a list of payments per employee; this links into the bank system to produce a list of automatic payments. The finance director reviews the total list of bank transfers and compares this to the total amount to be paid per the payroll records; if any issues arise then the automatic bank transfer can be manually changed by the finance director.<br>Required:<br>(a) In respect of the payroll system of Trombone Co:<br>(i) Identify and explain FIVE deficiencies;<br>(ii) Recommend a control to address each of these deficiencies; and<br>(iii) Describe a test of control Viola & Co should perform. to assess if each of these controls is operating effectively.<br>Note: The total marks will be split equally between each part. (15 marks)<br>(b) Explain the difference between an interim and a final audit. (5 marks)<br>(c) Describe substantive procedures you should perform. at the final audit to confirm the completeness and accuracy of Trombone Co’s payroll expense. (6 marks)<br>Trombone deducts employment taxes from its employees’ wages on a monthly basis and pays these to the local taxation authorities in the following month. At the year end the financial statements will contain an accrual for income tax payable on employment income. You will be in charge of auditing this accrual. Required:<br>(d) Describe the audit procedures required in respect of the year end accrual for tax payable on employment income. (4 marks)

Bluebird Enterprises Co (Bluebird) is a retail company planning to list on a stock exchange within the next six months, and management has been advised by the company’s auditors about the need for compliance with corporate governance provisions. In particular, the finance director is looking to recruit non-executive directors as he understands that Bluebird will need to establish an audit committee.<br>The finance director has two potential non-executive directors whom he is considering approaching to join the board of Bluebird. Antony Goldfinch is currently an executive sales director of a listed multi-national banking company; he sits on an audit committee of another company as a non-executive director and is agreeable to being paid a fixed fee which is not related to profits. Jacob Mallard is currently a finance director of a small retail company, which does not compete with Bluebird; he has expressed an interest in a fixed seven year contract and he is the brother of Bluebird’s chief executive.<br>Required<br>(a) Explain the benefits to Bluebird Enterprises Co of establishing an audit committee. (4 marks)<br>(b) Discuss the advantages and disadvantages of appointing:<br>(i) Anthony Goldfinch; and<br>(ii) Jacob Mallard<br>as non-executive directors of Bluebird Enterprises Co.<br>Note: The total marks will be split equally between each part. (6 marks)

Grains 4U Co (Grains) manufactures breakfast cereals and has three factories, four warehouses and three distribution depots spread across North America. The audit for the year ended 31 December 2015 is almost complete and the financial statements and audit report are due to be signed shortly. Profit before taxation is $7·9 million. The following events have occurred subsequent to the year end and no amendments or disclosures have been made in the financial statements.<br>Event 1 – Fire<br>On 15 February 2016, a fire occurred at the largest of the distribution depots. The fire resulted in extensive damage to 40% of the company’s vehicles used for dispatching goods to customers; however, there have been no significant delays to customer deliveries. The company estimates the level of damage to the vehicles to be in excess of $650,000. Only a minimal level of inventory, approximately $25,000, was damaged. Grain’s insurance company has started to investigate the fire to assess the likelihood and level of payment, however, there are concerns the fire was started deliberately, and if true, would invalidate any insurance cover.<br>Event 2 – Inventory<br>On 18 February 2016, it was discovered that a large batch of Grain’s new cereal brand ‘Loopy Green Loops’ held in inventory at the year end was defective, as the cereal contained too much green food colouring. To date no sales of this new cereal have been made. The cost of the defective batch of inventory is $915,000 and the defects cannot be corrected. However, the scrapped cereal can be utilised as a raw material for an alternative cereal brand at a value of $50,000.<br>Required:<br>For each of the two subsequent events described above:<br>(i) Based on the information provided, explain whether the financial statements require amendment; and<br>(ii) Describe audit procedures which should now be performed in order to form. a conclusion on any required amendment.<br>Note: The total marks will be split equally between each event.

(1) Good despatched notes are matched to sales invoices<br>(2) Sales invoices are sequentially numbered<br>(3) Sales invoices are matched to customer orders<br>(4) Regular review of unfulfilled orders

A. 1 and 2
B. 2 and 4
C. 2 and 3
D. 1 and 4