Audit Exam Ans 0910

8/3/2019 Audit Exam Ans 0910

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Edinburgh Napier University

School of Accounting, Economics & Statistics

Auditing (ACC09919)

April/May 2009/10Section A

1. D

2. B

3. B

4. A

5. B

6. D

7. A

8. C

9. A

10. D

Section B

11.

a.

Salaries are paid only to genuine employees (no dummy)

Salaries are paid only for work done, hours worked or other agreed

criteria

Salaries are paid at authorized rates of pay

Payments correctly calculated

Deductions correctly calculated

All payments made on a timely basis

All transactions correctly and promptly recorded

b.

Segregation of duties: updating separate from processing or payment

read: access should be available to responsible officials who need to

access data

amend access restricted to senior officials only

Authorization procedures for addition of starters and deletion of

leavers and amendment of pay rate

Procedures for adding starters immediately on commencement and

deleting leavers immediately after leaving

Computer log which registers date and time of access; such log to be

reviewed regularly by senior officials.

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c. Weakness 1

Weakness: Production manager sole authority for recruitment

Implication: Dummy employees?

Recommendation:

Recruitment by production manager and personnel

Weakness 2

Weakness: Payroll clerks have amend access to payroll master file

Implication: May manipulate so that their associates may benefit

Recommendation: Amend access should be given to payroll

manager; payroll clerks can read access

Weakness 3

Weakness: Payroll master file is updated prior to commencement of

employment

Implication: Unauthorized salaries may be paid prior to

commencement

Recommendation: New employee details should be entered after

commencement

Weakness 4

Weakness: Production manager issues swipe card to new employees

Implication: Dummy employees?

Recommendation: Issue of swipe cards should be controlled by

officials independent of payroll and production functions

Weakness 5

Weakness: Production manager can amend employee details

Implication: Fraudulent salary payments?

Recommendation: Amendment should be made only by official

independent of payroll and production

Weakness 6

Weakness: Entry / exit terminals of time-recording system not

monitored Implications: Attendance records may be falsified

Recommendation: Should be monitored

Weakness 7

Weakness: Payroll program does not produce exemption reports

Implication: Unauthorized payments may not be picked up

Recommendation: Monthly exception reports should be produced and

reviewed by payroll manager and accountant

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Weakness 8

Weakness: Payroll summary not checked by independent official prior

to sending credit transfer instructions to bank; all summaries are filed

by payroll manager without any further checking

Implication: Unauthorized payment?

Recommendation: All monthly summaries should be checked and

signed by accountant prior to filing

d.

Inherent risk high due to potential for misappropriation of funds

Discuss with management as to why recommendations are not adopted

Access potential impact on FS and consider materiality levels

Consider issuing except for audit opinion

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12.

a. Potential sources of knowledge

Previous experience

Other auditors, legal advisors

Volunteers, previous accountant

Related publications

Relevant legislation & regulations

Last years accounts

Guidance for audit of charities

b. Overall audit strategy

Financial reporting requirements e.g. mandatory reporting to

regulators?

Number of locations to be visited

Use of IT? Any test data available? CCAT?

Trustees to answer audit queries?

Timetable for reporting FS

Need to update trustees with status of audit work, arrange meetings to

discuss nature, extent and timing of work

Need to communicate with third parties

c.

High inherent risk as managed by non-professionals and more

susceptible to fraud

Funds raised from public or private donors; how funds are to be

applied? Any violations of constitutions? Other charities and regulatory

bodies may object

Accounts prepared by retired accountant, will this lower inherent risk?

High control risk as usually no formal internal controls; donations

susceptible to misappropriation as rely on honesty of volunteers

Detection risks: auditor may draw wrong conclusions, misinterpretaudit results since being new auditor and unfamiliar with clients

business

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13.

a. Sufficient appropriate audit evidence

Sufficient quantity

Appropriate quality & reliability

Different sources needed as persuasive not conclusive

Sample must be sufficient and appropriate to reach an opinion

b. Difference between tests of controls and substantive audit procedures

Tests of control: test that internal control procedures are being applied

as prescribed

Substantive audit procedures: tests of transactions and balances as to

the completeness, accuracy and validity of info in accounting records

and FS

c. Materiality

Materiality: relative significance of a particular matter in FS

An item is material if its omission or misstatement would reasonably

influence the decisions of an addressee of the auditors report

Part of audit testing: help to choose sample sizes and conclude on

results of audit tests.

d. Refer to Tutorial 4 Question 2

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14.

a.

For risk assessment, understanding of entity and environment and for

overall review at end of audit

Performed at planning stage, during audit testing and at review stage

Results help direct audit effort and identify areas for further testing

b.

Revenues

Expected to increase by 5.3 %

Per accounts, increased by 26%, why?

Explanation needed for large increase

Given inventory increased by 37.5%, does it mean a better sales

position? Explanation required

Gross Profit

Increased by 4 %

Given there was an increase of 26% in sales, this is low return

Any error?

Plant and machinery

Increased by 20% - lower than anticipated

Since expect some P&M will be replaced, so expect to have larger

increase in P&M; explanation needed

Total non-current asset expected to be 8M, but total per accounts is

10.84M; any error in recording?

Inventory

Expected to increase by 200,000 but per accounts, increased by

600,000, why?

Any problems with sales leading to higher than expected closing

inventory?

Receivables Expected to increase by not more than 10%, but per accounts,

increased by 50%; why?

Debt management policy not successful causing liquidity problems

Payables

Expected to increase in line with inventory, i.e. by 12.5%

Per accounts, increased by 75%; why?

Any problems paying bills? Potential liquidity problems

Bank balances

From +320,000 to bank OD 900,000

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Need to identify OD limit and banks attitude toward this

Dividend payable

Increased by 27%

High increase given increase in net profit was only 12%

Why pay so much dividend when there is liquidity problem, any

pressure from shareholders?

Tax payable

Increased by 50%

Higher than expected given net profit increased by 12% only

Explanation required

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15.

a. Potential problems / issues for auditors

Lack of practical computer audit experience

Audit team lacks expertise in computer audit

Client able to supply limited info to answer auditors queries as lacks

expertise

Client lacks computer documentation

Have to tackle both computerized and manual systems

Auditors testing on a live basis likely to disrupt clients operations

b. Auditing through the computer

Follows the audit trail through the computer operations

Verify processing controls are functioning properly

Tests computer controls

Verifies accuracy of computer-based processing of input data

Auditing around the computer

The internal software of the computer system is not audited

Calculate expected results from transactions input into computer,

compare these calculations to the output results

If they agree, assume system of controls is effective

c. General controls

Software acquisition; change and maintenance; access security; backup

procedures; segregation of duties etc

Application controls

Arithmetic checks, range checks, validation checks, data

reasonableness tests etc

d. Functions of audit software

See handout

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Audit Exam Ans 0910