F8AA(Int)Mock1 Qs j08

8/9/2019 F8AA(Int)Mock1 Qs j08

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Fundamentals Skills Module Mock 1

Audit and Assurance(International)

F8AA-MK1-X08-Q

Time allowedReading and planning: 15 minutesWriting: 3 hours

All FIVE questions are compulsory and must be attempted

Do NOT open this paper until instructed by the supervisor.

During reading and planning time only the question papermay be annotated.

You must NOT write in your answer booklet until instructedby the supervisor.

Accountancy Tuition Centre Ltd

ATC

INTERNATIONAL


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Accountancy Tuition Centre (International Holdings) Ltd 2008 2

ALL FIVE questions are compulsory and MUST be attempted.

1 TopNotch4U supplies a wide range of high quality toys to foreign and domestic customers.Whilst the company only has one exclusive shop (including a small storage warehouse),approximately 50% of its sales are made via its award winning website to private customers.A further 25% of sales are to ten overseas franchises (commercial customers). Thecommercial customers place orders in writing, are issued sales invoices and allowed 60 dayscredit.

Internet customers view the companys website and place their orders using the industrystandard shopping basket approach. When a customer selects a toy on the website, thesystem transfers the product detail (eg description, product code, price) from the productdatabase to the checkout programme for the customer to view. On completing their order,customers proceed to the checkout to make a final confirmation of their order, completedelivery details and enter their credit card details. All of this data is taken directly from theweb screen by the program and stored in the orders file on TopNotch4Us secure server.

Once an order has been confirmed by the customer, the system prints out a two-part despatchnote used by the despatch manager to locate the toys within the shop and warehouse, packthem with the customers copy of the despatch note, and despatch the toys. At the end of eachday, the second copy of the note is sent to the accounts department. The despatch notes arenot pre-numbered by the system. Only the customers copy is signed by the manager.

Two years ago, because of the estimated cost to replace the companys legacy computersystem (an integrated sales, ordering, purchase and accounting system) the company haddecided to only develop a stand alone web based application. Therefore the sales data fromthe orders file is transferred to the legacy system via a Zip drive at the end of each day. TheZip disc is automatically formatted after the data has been transferred. No other action orcheck is taken on this data.

First thing each morning, a product sales report for the previous day is produced by the legacysystem. This report is used to manually update the inventory records maintained in a separate

programme on the shop managers laptop computer and then filed in date order by themanager. Inventory is counted only at the end of the financial period.

The second copy of the despatch note is used by the accounts department to initiate thecharging of the customers credit card via the legacy system. This is usually done by theretrieving the credit card details from the legacy system and manually entering those details

plus the sales value into the online credit terminal. When authorisation has been received, thelegacy system is flagged to indicate that the toys have been sent and payment will be receivedfrom the credit card company. The copy despatch note is filed in date order.

This is the first year that your firm has audited TopNotch4U. You have just completed yourinitial planning, which included a thorough business risk review and assessment of theinternal control system, and have decided that your audit approach will be fully substantive.

Required:

(a) In respect of the private customer sales system of TopNotch4U, prepare a draft

management (internal control weakness) report to the directors which:

(i) identifies and explains the weaknesses in that sales system;

(ii) explains the possible effect of each weakness; and

(iii) provides a recommendation to alleviate each weakness. (12 marks)


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(b) For the internet private customers, list and explain the audit procedures you

would carry out to obtain assurance that goods dispatched during the year

have been correctly recorded within the sales module of the legacy system, and

that the related receipt from the credit card company has been received.

(8 marks)

(c) Explain the audit procedures you would expect to carry out to confirm theexistence and collectibility of the commercial customers period end debts.

(7 marks)

(d) Explain the concept of cut-off. (3 marks)

(30 marks)

2 (a) The ACCA Code of Ethics and Conduct identifies five fundamental principles andprovides a conceptual framework to assist members in identifying, evaluating andresponding to threats to compliance with those principles.

Required:

List and briefly explain (giving examples) the five categories of threats to the

fundamental principles identified within the conceptual framework. (5 marks)

(b) ISA 315 Identifying and Assessing the Risks of Material Misstatement throughUnderstanding the Entity and its Environment makes clear that as well asunderstanding the business and its environment the auditor must also understandthe internal controls of the entity.

Required:

Describe the five components of internal control. (5 marks)

(10 marks)

3 You have been the audit manager of Okalas Inc, a company listed on a stock exchange, forthe last five years. The company manufactures military tank engines. You are currently

planning the audit for the year ended 31 March 2008.

Okalas supplies tank engines to Australasia, Middle-Eastern countries and NATO. Threetypes of engine are manufactured:

(1) Thunderflash a very recent development;

(2) Fox has been in service for the last five years;

(3) Snooper was designed and put into production twenty years ago.

Okalas is currently tendering for a $200m contract with NATO to sell Thunderflash enginesfor a new NATO tank. However, stiff competition is being received from Thorn Inc, a UScompany.

A $25 million warranty claim has just been received from a Middle East government for 30

Fox engines, supplied in April 2007, which have become clogged with sand. The faultyengine parts concerned were purchased from Young Co, a limited liability company.


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The inventory ledger is maintained on a mid-ware computer system. The software waswritten in-house five years ago.

A continuous stock-checking system is operated on the 25,000 individual product linescarried. The internal audit manager is closely monitoring this years physical checking resultsas counting discrepancies are at a higher than expected level and the overall counting

programme is behind schedule.

The reporting partner for the last ten years has just retired and you are due to meet with thenew reporting partner to discuss with her the forthcoming Okalas audit.

Required:

(a) Describe the areas of financial statement risk particular to Okalas. (12 marks)

(b) Explain the audit work you will perform in relation to:

(i) the warranty claim; and

(ii) inventory. (8 marks)

(20 marks)

4 EduChar is a charity whose constitution requires that it raises funds for educational projects.These projects seek to educate children and support teachers in certain countries. Charities inthe country from which EduChair operates have recently become subject to new audit andaccounting regulations. Charity income consists of cash collections at fund raising events,telephone appeals, and bequests (money left to the charity by deceased persons). The charityis small and the trustees do not consider that the charity can afford to employ a qualifiedaccountant. The charity employs a part-time bookkeeper and relies on volunteers for fund

raising. Your firm has been appointed as accountants and auditors to this charity because ofthe new regulations. Accounts have been prepared (but not audited) in the past by a volunteerwho is a recently retired Chartered Certified Accountant.

Required:

(a) Describe the risks associated with the audit of EduChar under the headings

inherent risk, control risk and detection risk and explain the implications of

these risks for overall audit risk. (10 marks)

(b) List and explain the audit tests to be performed on income and expenditure

from fund raising events. (10 marks)

NB: In part (a) you may deal with inherent risk and control risk together. You are not

required to deal with the detail of accounting for charities in either part of the question.

(20 marks)


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5 You are the audit manager of Paradise Meltdown, a limited liability company. Thecompanys annual turnover is over $50 million.

Required:

(a) Compare the responsibilities of the directors and auditors, regarding the

published financial statements of Paradise Meltdown, in the areas of preparing

the financial statements, fraud & error and going concern. (6 marks)

(b) An extract from the draft audit report is given below:

Auditors Responsibility

We conducted our audit in accordance with the principles of Auditing Standards.An audit includes examination, on a test basis, of evidence relevant to the amountsand disclosures in the financial statements. It also includes an assessment of all theestimates and judgements made by the directors in the preparation of the financialstatements, and of whether the accounting policies are appropriate to the companyscircumstances, consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain as much information andexplanation as possible given the time available for the audit. We confirm that thefinancial statements are free from material misstatement, whether caused by fraudor other irregularity or error. The directors however are wholly responsible for theaccuracy of the financial statements and no liability for errors can be accepted bythe auditor. In forming our opinion we also evaluated the overall adequacy of the

presentation of information in the companys annual report.

Required:

(i) Explain the requirements of IAS 700 The Independent Auditors

Report on a Complete Set of General Purpose Financial Statements

covering the two basic reporting elements of the auditors

responsibility and the scope of their work. (5 marks)

(ii) Identify and explain the errors and omissions in the above extract.

NOTE you are not required to redraft the report. (9 marks)

(20 marks)

End of Question Paper

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F8AA(Int)Mock1 Qs j08