ACCA noter answer paper f8 acca f8 int aa interim assessment questions

All FIVE questions are compulsory and MUST be attempted QUESTION 1 Accounts receivable confirmations are a useful method of obtaining audit evidence relating to accounts receivables.. T

ACCA INTERIM 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

Accounts receivable confirmations are a useful method of obtaining audit evidence relating to

accounts receivables

Required:

(a) In relation to accounts receivables confirmations:

(i) explain the difference between a positive and a negative confirmation

(ii) explain the two different types of positive confirmation and the advantages

and disadvantages of each

(iii) give some examples of reconciling items highlighted by accounts receivables

confirmations

(b) Describe the principal risks associated with financial statement assertions relating to

(c) Goodfoot is a small company which manufactures high quality shoes and sells them

to small retailers This is your first year as auditor Goodfoot has a receivables ledger

with approximately 750 accounts A number of the accounts are old, some have nil or

credit balances and some should probably be written off The company’s client base

is mixed Bad accounts have generally represented about 2% of the total accounts

receivable figure and a general provision of 1.5% has been made in the past in addition to any specific provisions Most of the bad receivables relate to smaller customers but there are some very slow-moving larger accounts in the current year

The total value of accounts receivable is $750,000, 60% of which comprises some 30

large accounts and 40% of which comprises a large number of small accounts

You have tested the system of internal controls over receivables and it appears to be

working adequately In your experience accounts receivable confirmations in this sector generally have a response rate of just over 50%

Required:

(i) Describe the audit work you will perform on accounts receivable and bad

(ii) Develop a lead schedule for the receivables section of your audit working

Note: You are not required to perform numerical calculations in this question

(Total: 30 marks)

QUESTION 2

'The auditor should obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the audit opinion.'

ISA 500 para 2

Required:

Discuss what is meant by sufficient appropriate audit evidence

(10 marks)

QUESTION 3

Collins Cosmetics is a long-established family company that manufactures perfumes These are sold to customers who re-package and market them under their own brand names The company has five manufacturing units spread across its home country

Fred Goodwin, who had been managing director for 21 years, died just over a year ago Mike Barlow has been promoted from sales director to take over as managing director, and a new sales director has been brought in from outside the company

The finance director, Ben Vashilli, has recently moved from a full-time to a part-time role, as

he wishes to spend more time with his family He has announced his intention to leave within the next 12 months, and the company is seeking a full-time replacement

Profits have been falling over the last three years The company wishes to gain a listing on the Stock Exchange, and all efforts are being focused on reversing the alarming profit trend A bonus scheme has recently been introduced, where certain managers and directors are paid

a lump sum if production exceeds a certain level

You are the auditor of Collins Cosmetics, and are about to commence the planning for the forthcoming audit

Required:

(a) Explain what is meant by the following terms:

(i) Audit risk

(ii) Inherent risk

(iii) Control risk

(b) List and explain the factors specific to Collins Cosmetics that you would consider

(c) Explain how an auditor's approach might be affected if he concludes that there is high

(Total: 20 marks)

QUESTION 4

(a) You work for a firm of auditors which has seven offices throughout England and

Wales The firm’s largest client, in terms of fee income, is Mart, a company which has grown steadily through a mixture of organic growth and acquisition of companies in the same industry sector

Your firm has acted for this client since its incorporation 20 years ago and, in addition

to the statutory audit, provides a range of non-audit services including tax planning (for the company and its individual directors) and consultancy work in respect of Mart’s acquisition policy

Earlier this year, the finance director of Mart retired and was succeeded by a former member of your firm’s staff who had managed the audit of Mart for the preceding four years

Required:

Discuss the ethical and professional issues raised by the situation described above, and identify the measures that should be implemented by your firm in order to mitigate any threats to objectivity which might arise (10 marks)

(b) You work for a medium-sized firm of Chartered Certified Accountants with seven

offices and 150 employees You firm has been asked to tender for the provision of statutory audit and other services to Billington Travel, a private company providing discounted package holiday services in the Mediterranean

The company is growing fast and would represent a substantial amount of fee income for your firm The finance director has explained to you that the company would like the successful firm to provide a number of different services These include the statutory audit and assistance with the preparation of the financial statements The company is also struggling with a new computer system and the finance director considers that a systems review by your firm may be helpful Your firm does not have much experience in the travel sector

Required:

With reference to the ACCA’s Code of Ethics and Conduct, describe the ethical matters that should be considered in deciding on whether your firm should tender for: (i) the statutory audit of Billington Travel (5 marks)

(ii) the provision of other services to Billington Travel (5 marks)

(Total: 20 marks)

QUESTION 5

The directors of Lopit, a newly-formed company, have written to you with a view to securing your services as auditor Within their letter, you note the following comments:

'Your duties and rights as auditor will be determined by the board of our company In the main, these duties are in line with the usual legal requirements, but in the event of conflict or exclusion we will indemnify you against any legal action brought as a consequence of the position adopted The board also retains the right to dismiss you at any time without necessarily disclosing the reasons for their action.'

Required:

(a) Describe your understanding of your duties as auditor of Lopit (5 marks)

(b) What is your relationship as the auditor to the directors of Lopit? (2 marks)

(c) Outline your usual legal rights as auditor of a limited company (6 marks)

(d) Would you agree with the directors that they have the authority to dismiss you?

(2 marks)

(e) What steps would you take prior to accepting the appointment as auditor to the

(Total: 20 marks)