ACCA noter answer paper f8 acca f8 int aa final assessment questions june09

All FIVE questions are compulsory and MUST be attempted QUESTION 1 a You are responsible for the audit of the tangible non-current assets of Bevs, a company engaged in the manufacture a

ACCA FINAL ASSESSMENT

Audit and Assurance

JUNE 2009

QUESTION PAPER

Do not open this paper until instructed by the supervisor

This question paper must not be removed from the examination

hall

Time allowed Reading time: 15 minutes Writing time: 3 hours

All FIVE questions are compulsory and MUST be attempted

Kaplan Publishing/Kaplan Financial

© Kaplan Financial Limited, 2008

All rights reserved No part of this examination may be reproduced or transmitted in any form

All FIVE questions are compulsory and MUST be attempted

QUESTION 1

(a) You are responsible for the audit of the tangible non-current assets of Bevs, a

company engaged in the manufacture and supply of soft drinks and other beverages

to the retail, catering and leisure industries The accountant has provided you with the

following schedule summarising the movements in tangible non-current assets during

the year ended 31 October 2008

Freehold

land and buildings

Plant and equipment

Asset in course of construction

Total

Cost

Disposals _ − _ (144) _ − (144)

At 31 October 2008 _ 4,117 _ 8,550 _ 2,040 14,707

Depreciation

Disposals _ − _ (102) _ − (102)

At 31 October 2008 _ 1,096 _ 4,057 _ − 5,153

Net book value at

31 October 2008 3,021

_ _ 4,493 _ 2,040 9,554

From your discussions with the finance director, you ascertain that a capital

expenditure budget is prepared annually Departmental managers can authorise

capital expenditure up to $5,000, as long as it is within their budget Board approval is

required for amounts above this threshold but the managing director, who is also the

major shareholder in the company, does not always adhere to this policy He often

commits the company to acquiring assets without considering how they are to be

financed, leaving the finance director to arrange the borrowings Capital expenditure

proposal forms are required to be completed but this is not always done, particularly

when items are required in an emergency, and there is no formal policy in respect of

obtaining quotes for major items of expenditure

There is a tangible non-current asset register which is reconciled to the nominal

ledger on a monthly basis No other checking procedures involving the non-current

asset register are undertaken

In July 2008, the company commenced construction of a new packing line The line is

due to be completed in January 2009 Costs recorded in the tangible non-current

asset register include materials, own and sub-contract labour, and overheads

Required:

Identify weaknesses in the system described above and, for each weakness, explain the consequences that could result from it (14 marks)

(b) You are the senior in charge of the audit of Adco, an advertising agency The

following significant points have been identified during the audit:

(i) The payables ledger clerk amends the payables’ master file with details of

new suppliers, on the oral authority of the financial controller A printout of amendments is not obtained

(ii) The payables ledger clerk reconciles payables ledger balances on the face of

supplier statements on a monthly basis, but the statements are not retained once the accounts have been reconciled

(iii) In 25% of the transactions examined, expense claims submitted by

employees were not supported by receipts, even though receipts are required

by company policy

Required:

Set out, in a manner suitable for inclusion in a report to management, the possible consequences of the above weaknesses and the recommendations to remedy the weaknesses Your recommendations should clearly describe how the control

(Total: 30 marks)

QUESTION 2

Fraud and error present risks to an entity Both internal and external auditors are required to deal with risks to the entity However, the responsibilities of internal and external auditors in relation to the risk of fraud and error differ

Required:

(a) Explain how the internal audit function helps an entity deal with the risk of fraud and

(b) Explain the responsibilities of external auditors in respect of the risk of fraud and error

(Total: 10 marks)

QUESTION 3

Richard Pine is a senior audit manager for Ratcliffe, Barnes and Soames, a firm with several offices around two large towns in different parts of the country These split locations have arisen from the merger two years previously of Barnes & Soames, a firm specialising in the audit of property and service companies, with Ratcliffe, whose fee income was based on the audit of farms and holiday resorts The merger was seen as an opportunity for both firms to break away from their restricted markets

Richard moved from the property and service division into the farms and resorts division, to take up a new portfolio of clients, including Golden Pond Fisheries This is a family business with John Carnes running the 80-acre farm, and his wife, Claire, taking responsibility for the holiday cottages, fishing lakes and completion of the books and records

The farming operation has been significantly curtailed in recent years and now comprises a small herd of cows and, as a recent addition, two geese sheds These birds are fed on a chemical-free diet to offer a high quality alternative to turkeys over the Christmas period John supplements the farm revenue by renting out pastures on a rotational basis to neighbouring farms for sheep grazing

John is also considering the introduction of rare breeds (pigs and goats) to provide an additional attraction to holidaymakers with young families

Claire Carnes trained as a bookkeeper before her marriage 30 years ago, and has informed Richard that the accounts are now maintained to a ‘high standard’ on her son’s personal computer This has apparently saved a lot of time, and much of the previous paperwork is now not considered necessary

Five years previously the family borrowed a substantial sum to convert three derelict barns into luxury holiday cottages, and these have proved to be a huge success, being fully booked from late May to November During this period two extra helpers are employed on a part-time basis to assist with cleaning and maintenance Both are paid in cash at the end of each week

Most of the visitors are fishermen and their families, as the farm boasts excellent fishing John Carnes is keen to maintain this quality and is always on the lookout for big fish to stock

He has recently become interested in the possibility of introducing from China some 30kg blue carp, which could be ‘sneaked in’ with a batch of koi carp being imported for a local garden centre

A good relationship has always existed with the auditors and the Carnes are confident that this will be another quick audit

Required:

(a) State what you understand by audit risk and explain why it is an important factor for

an auditor to consider when conducting an audit (6 marks)

(b) Identify, from the information above, the potential audit risks, and for each risk explain

(Total: 20 marks)

QUESTION 4

(a) Outline the auditor's responsibility in relation to going concern (5 marks)

(b) You are a partner of Heaton & Partners in charge of the audit of Caffyn, a public listed

company; the audit manager has completed the audit for the financial year October 20X8 to September 20X9 and has given you the draft financial statements and audit file containing all the working papers You are conducting your final review prior to signing the audit report and have identified that Caffyn currently has borrowings of

$10 million which are due for repayment on 1 November 20X9 but it is currently trying

to extend the due date; in addition it also has an overdraft of $250,000 which is

$50,000 over the authorised limit; this was not identified as a cause for concern by the audit manager

Required:

(i) Identify ten issues that you think the audit manager should have considered

when assessing whether or not Caffyn is a going concern (10 marks)

(ii) Detail typical types of evidence that you would have expected the audit

manager to have considered when performing her going concern review

(5 marks)

(Total: 20 marks)

QUESTION 5

(a) What is the difference between positive and negative assurance? (5 marks)

(b) Described below are situations which have arisen in three audits The year-end in

each case is 31 March 2008

Mercury

On 21 March 2008, the tax authorities commenced a major inquiry into all aspects of

the tax affairs of the company Until the inquiry is completed it is not possible to

estimate, with any reasonable degree of certainty, any ultimate liability which may fall

upon the company Consequently, no liability in respect of this matter has been

included in the financial statements The directors have included a note to the

accounts explaining the situation

Pluto

Included in the balance sheet at 31 March 2008 are non-current assets at cost of $2.5

million which have been constructed by the company during the year The costs

include own labour capitalised of $180,000 The labour costs are based on the

directors’ estimates of time spent by employees on the construction work, which are

unsupported by time records There are no satisfactory audit procedures to confirm

that labour costs have been appropriately capitalised

The pre-tax profit of Pluto for the year ended 31 March 2008 is $650,000

Neptune

In January 2008, the company received a government cash grant of $1.6 million in

respect of assistance with the acquisition of tangible non-current assets which have

estimated useful economic lives of between five and ten years The $1.6 million has

been credited directly to the income statement for the year ended 31 March 2008

The directors insist on continuing with this treatment despite having been informed

that this is not in accordance with the relevant accounting standard, which requires

such grants to be credited to income statement over the useful economic lives of the

assets to which the grant relates

The pre-tax profit of Neptune for the year ended 31 March 2008 is $950,000

Required:

In respect of each of the situations outlined above, reach a conclusion on whether or

not you would qualify your audit report Give reasons for your conclusion, and

(Total: 20 marks)