(a) ISA 300 Planning an Audit of Financial Statements provides guidance to auditors. Planning an audit involves establishing the overall audit strategy for the engagement and developing an audit plan. Adequate planning benefits the audit of financial statements in several ways.<br>Required:<br>Explain the importance of audit planning. (5 marks)<br>(b) You are the audit senior in charge of the audit of Swandive Co (Swandive), and have been informed by your audit manager that during the year a fraud occurred at the client. A payroll clerk set up fictitious employees and the wages were paid into the clerk’s own bank account. This clerk has subsequently left the company, but the audit manager is concerned that additional frauds have taken place in the wages department.<br>Required:<br>Describe procedures which should be undertaken during the audit of wages as a result of the manager’s assessment of the increased risk of fraud. (5 marks)

(a) ISA 700 Forming an Opinion and Reporting on Financial Statements requires auditors to produce an audit report. This report should contain a number of consistent elements so that users are able to understand what the audit report means.<br>Required:<br>Describe FOUR elements of an unmodified auditor’s report and for each explain why they are included. (4 marks)<br>(b) Bullfinch.com is a website design company whose year end was 31 October 2014. The audit is almost complete and the financial statements are due to be signed shortly. Revenue for the year is $11·2 million and profit before tax is $3·8 million. A key customer, with a receivables balance at the year end of $283,000, has just notified Bullfinch.com that they are experiencing cash flow difficulties and so are unable to make any payments for the foreseeable future. The finance director has notified the auditor that he will write this balance off as an irrecoverable debt in the 2015 financial statements.<br>Required:<br>(i) Explain whether or not the 2014 financial statements require amendment; and<br>(ii) Describe audit procedures which should be performed in order to form. a conclusion on any required amendment.<br>Note: The total marks will be split equally between each part. (6 marks)

Which of the following is a DISADVANTAGE of recording accounting and control systems using

A. They may contain a large number of irrelevant controls
B. It can be difficult to identify missing controls
C. They are time consuming to complete

Clarinet Co (Clarinet) is a computer hardware specialist and has been trading for over five years. The company is funded partly through overdrafts and loans and also by several large shareholders; the year end is 30 April 2014.<br>Clarinet has experienced significant growth in previous years; however, in the current year a new competitor, Drums Design Co (Drums), has entered the market and through competitive pricing has gained considerable market share from Clarinet. One of Clarinet’s larger customers has stopped trading with them and has moved its business to Drums. In addition, a number of Clarinet’s specialist developers have left the company and joined Drums. Clarinet has found it difficult to replace these employees due to the level of their skills and knowledge. Clarinet has just received notification that its main supplier who provides the company with specialist electrical equipment has ceased to trade.<br>Clarinet is looking to develop new products to differentiate itself from the rest of its competitors. It has approached its shareholders to finance this development; however, they declined to invest further in Clarinet. Clarinet’s loan is long term and it has met all repayments on time. The overdraft has increased significantly over the year and the directors have informed you that the overdraft facility is due for renewal next month, and they are confident it will be renewed.<br>The directors have produced a cash flow forecast which shows a significantly worsening position over the coming 12 months. They are confident with the new products being developed, and in light of their trading history of significant growth, believe it is unnecessary to make any disclosures in the financial statements regarding going concern.<br>At the year end, Clarinet received notification from one of its customers that the hardware installed by Clarinet for the customers’ online ordering system has not been operating correctly. As a result, the customer has lost significant revenue and has informed Clarinet that they intend to take legal action against them for loss of earnings. Clarinet has investigated the problem post year end and discovered that other work-in-progress is similarly affected and inventory should be written down. The finance director believes that as this misstatement was identified after the year end, it can be amended in the 2015 financial statements.<br>Required:<br>(a) Describe the procedures the auditors of Clarinet Co should undertake in relation to the uncorrected inventory misstatement identified above. (4 marks)<br>(b) Explain SIX potential indicators that Clarinet Co is not a going concern. (6 marks)<br>(c) Describe the audit procedures which you should perform. in assessing whether or not Clarinet Co is a going concern. (6 marks)<br>(d) The auditors have been informed that Clarinet’s bankers will not make a decision on the overdraft facility until after the audit report is completed. The directors have now agreed to include some going concern disclosures.<br>Required:<br>Describe the impact on the audit report of Clarinet Co if the auditor believes the company is a going concern but that this is subject to a material uncertainty. (4 marks)

Recorder Communications Co (Recorder) is a large mobile phone company which operates a network of stores in countries across Europe. The company’s year end is 30 June 2014. You are the audit senior of Piano & Co. Recorder is a new client and you are currently planning the audit with the audit manager. You have been provided with the following planning notes from the audit partner following his meeting with the finance director.<br>Recorder purchases goods from a supplier in South Asia and these goods are shipped to the company’s central warehouse. The goods are usually in transit for two weeks and the company correctly records the goods when received. Recorder does not undertake a year-end inventory count, but carries out monthly continuous (perpetual) inventory counts and any errors identified are adjusted in the inventory system for that month.<br>During the year the company introduced a bonus based on sales for its sales persons. The bonus target was based on increasing the number of customers signing up for 24-month phone line contracts. This has been successful and revenue has increased by 15%, especially in the last few months of the year. The level of receivables is considerably higher than last year and there are concerns about the creditworthiness of some customers.<br>Recorder has a policy of revaluing its land and buildings and this year has updated the valuations of all land and buildings.<br>During the year the directors have each been paid a significant bonus, and they have included this within wages and salaries. Separate disclosure of the bonus is required by local legislation.<br>Required:<br>(a) Describe FIVE audit risks, and explain the auditor’s response to each risk, in planning the audit of Recorder Communications Co. (10 marks)<br>(b) Explain the audit procedures you should perform. in order to place reliance on the continuous (perpetual) counts for year-end inventory. (3 marks)<br>(c) Describe substantive procedures you should perform. to confirm the directors’ bonus payments included in the financial statements. (3 marks)<br>The finance director of Recorder informed the audit partner that the reason for appointing Piano & Co as auditors was because they audit other mobile phone companies, including Recorder’s main competitor. The finance director has asked how Piano & Co keeps information obtained during the audit confidential.<br>Required: (d) Explain the safeguards which your firm should implement to ensure that this conflict of interest is properly managed. (4 marks)

(a) Define the ‘three Es’ of a value for money audit. (3 marks)<br>(b) ISA 230 Audit Documentation requires auditors to prepare audit documentation for an audit of financial statements on a timely basis.<br>Required:<br>Describe FOUR benefits of documenting audit work. (4 marks)<br>(c) ISA 530 Audit Sampling applies when the auditor has decided to use sampling to obtain sufficient and appropriate audit evidence.<br>Required:<br>Define what is meant by ‘audit sampling’ and explain the need for this. (3 marks)

(a) Explain the purpose of, and procedures for, obtaining written representations. (5 marks)<br>(b) The directors of a company have provided the external audit firm with an oral representation confirming that the bank overdraft balances included within current liabilities are complete.<br>Required:<br>Describe the relevance and reliability of this oral representation as a source of evidence to confirm the completeness of the bank overdraft balances. (3 marks)<br>(c) You are the audit manager of Violet & Co and you are currently reviewing the audit files for several of your clients for which the audit fieldwork is complete. The audit seniors have raised the following issues:<br>Daisy Designs Co (Daisy)<br>Daisy’s year end is 30 September, however, subsequent to the year end the company’s sales ledger has been corrupted by a computer virus. Daisy’s finance director was able to produce the financial statements prior to this occurring; however, the audit team has been unable to access the sales ledger to undertake detailed testing of revenue or year-end receivables. All other accounting records are unaffected and there are no backups available for the sales ledger. Daisy’s revenue is $15·6m, its receivables are $3·4m and profit before tax is $2m.<br>Fuchsia Enterprises Co (Fuchsia)<br>Fuchsia has experienced difficult trading conditions and as a result it has lost significant market share. The cash flow forecast has been reviewed during the audit fieldwork and it shows a significant net cash outflow. Management are confident that further funding can be obtained and so have prepared the financial statements on a going concern basis with no additional disclosures; the audit senior is highly sceptical about this. The prior year financial statements showed a profit before tax of $1·2m; however, the current year loss before tax is $4·4m and the forecast net cash outflow for the next 12 months is $3·2m.<br>Required:<br>For each of the two issues:<br>(i) Discuss the issue, including an assessment of whether it is material;<br>(ii) Recommend procedures the audit team should undertake at the completion stage to try to resolve the issue; and<br>(iii) Describe the impact on the audit report if the issue remains unresolved.<br>Notes: 1 The total marks will be split equally between each issue.<br>2 Audit report extracts are NOT required. (12 marks)

(a) Identify and explain each of the FIVE fundamental principles contained within ACCA’s Code of Ethics and Conduct.<br>(b) Rose Leisure Club Co (Rose) operates a chain of health and fitness clubs. Its year end was 31 October 2012. 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.<br>(i) Trade payables and accruals<br>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 2013 year-end purchase ledger.<br>(ii) Receivables<br>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.<br>(iii) Reorganisation<br>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.<br>Required:<br>Describe substantive procedures you would perform. to obtain sufficient and appropriate audit evidence in relation to the above three matters.<br>Note: The mark allocation is shown against each of the three matters above.

(a) In order for auditors to operate effectively and to provide an opinion on an entity’s financial statements, they are given certain rights.<br>Required:<br>State THREE rights of an auditor, excluding those related to resignation and removal. (3 marks)<br>(b) ISA 315 Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment requires auditors to obtain an understanding of control activities relevant to the audit.<br>Control activities are the policies and procedures that help ensure that management directives are carried out; and which are designed to prevent and detect fraud and error occurring. An example of a control activity is the maintenance of a control account.<br>Required:<br>Apart from maintenance of a control account, explain FOUR control activities a company may undertake to prevent and detect fraud and error. (4 marks)<br>(c) Describe THREE limitations of external audits. (3 marks)

Lily Window Glass Co (Lily) is a glass manufacturer, which operates from a large production facility, where it undertakes continuous production 24 hours a day, seven days a week. Also on this site are two warehouses, where the company’s raw materials and finished goods are stored. Lily’s year end is 31 December.<br>Lily is finalising the arrangements for the year-end inventory count, which is to be undertaken on 31 December 2012. The finished windows are stored within 20 aisles of the first warehouse. The second warehouse is for large piles of raw materials, such as sand, used in the manufacture of glass. The following arrangements have been made for the inventory count:<br>The warehouse manager will supervise the count as he is most familiar with the inventory. There will be ten teams of counters and each team will contain two members of staff, one from the finance and one from the manufacturing department. None of the warehouse staff, other than the manager, will be involved in the count.<br>Each team will count an aisle of finished goods by counting up and then down each aisle. As this process is systematic, it is not felt that the team will need to flag areas once counted. Once the team has finished counting an aisle, they will hand in their sheets and be given a set for another aisle of the warehouse. In addition to the above, to assist with the inventory counting, there will be two teams of counters from the internal audit department and they will perform. inventory counts.<br>The count sheets are sequentially numbered, and the product codes and descriptions are printed on them but no quantities. If the counters identify any inventory which is not on their sheets, then they are to enter the item on a separate sheet, which is not numbered. Once all counting is complete, the sequence of the sheets is checked and any additional sheets are also handed in at this stage. All sheets are completed in ink.<br>Any damaged goods identified by the counters will be too heavy to move to a central location, hence they are to be left where they are but the counter is to make a note on the inventory sheets detailing the level of damage.<br>As Lily undertakes continuous production, there will continue to be movements of raw materials and finished goods in and out of the warehouse during the count. These will be kept to a minimum where possible.<br>The level of work-in-progress in the manufacturing plant is to be assessed by the warehouse manager. It is likely that this will be an immaterial balance. In addition, the raw materials quantities are to be approximated by measuring the height and width of the raw material piles. In the past this task has been undertaken by a specialist; however, the warehouse manager feels confident that he can perform. this task.<br>Required:<br>(a) For the inventory count arrangements of Lily Window Glass Co:<br>(i) Identify and explain SIX deficiencies; and<br>(ii) Provide a recommendation to address each deficiency.<br>The total marks will be split equally between each part (12 marks)<br>You are the audit senior of Daffodil & Co and are responsible for the audit of inventory for Lily. You will be attending the year-end inventory count on 31 December 2012.<br>In addition, your manager wishes to utilise computer-assisted audit techniques for the first time for controls and substantive testing in auditing Lily Window Glass Co’s inventory.<br>Required:<br>(b) Describe the procedures to be undertaken by the auditor DURING the inventory count of Lily Window Glass Co in order to gain sufficient appropriate audit evidence. (6 marks)<br>(c) For the audit of the inventory cycle and year-end inventory balance of Lily Window Glass Co:<br>(i) Describe FOUR audit procedures that could be carried out using computer-assisted audit techniques (CAATS);<br>(ii) Explain the potential advantages of using CAATs; and<br>(iii) Explain the potential disadvantages of using CAATs.<br>The total marks will be split equally between each part (12 marks)