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(c) Explain the possible impact of RBG outsourcing its internal audit services on the audit of the financialstatements by Grey & Co. (4 marks)
题目
(c) Explain the possible impact of RBG outsourcing its internal audit services on the audit of the financial
statements by Grey & Co. (4 marks)
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第1题：
(ii) Audit work on after-date bank transactions identified a transfer of cash from Batik Co. The audit senior has
documented that the finance director explained that Batik commenced trading on 7 October 2005, after
being set up as a wholly-owned foreign subsidiary of Jinack. No other evidence has been obtained.
(4 marks)
Required:
Identify and comment on the implications of the above matters for the auditor’s report on the financial
statements of Jinack Co for the year ended 30 September 2005 and, where appropriate, the year ending
30 September 2006.
NOTE: The mark allocation is shown against each of the matters.
正确答案：
(ii) Wholly-owned foreign subsidiary
■ The cash transfer is a non-adjusting post balance sheet event. It indicates that Batik was trading after the balance
sheet date. However, that does not preclude Batik having commenced trading before the year end.
■ The finance director’s oral representation is wholly insufficient evidence with regard to the existence (or otherwise)
of Batik at 30 September 2005. If it existed at the balance sheet date its financial statements should have been
consolidated (unless immaterial).
■ The lack of evidence that might reasonably be expected to be available (e.g. legal papers, registration payments,
etc) suggests a limitation on the scope of the audit.
■ If such evidence has been sought but not obtained then the limitation is imposed by the entity (rather than by
circumstances).
■ Whilst the transaction itself may not be material, the information concerning the existence of Batik may be material
to users and should therefore be disclosed (as a non-adjusting event). The absence of such disclosure, if the
auditor considered necessary, would result in a qualified ‘except for’, opinion.
Tutorial note: Any matter that is considered sufficiently material to be worthy of disclosure as a non-adjusting
event must result in such a qualified opinion if the disclosure is not made.
■ If Batik existed at the balance sheet date and had material assets and liabilities then its non-consolidation would
have a pervasive effect. This would warrant an adverse opinion.
■ Also, the nature of the limitation (being imposed by the entity) could have a pervasive effect if the auditor is
suspicious that other audit evidence has been withheld. In this case the auditor should disclaim an opinion. -
第2题：
4 (a) Explain the auditor’s responsibilities for other information in documents containing audited financial
statements. (5 marks)
正确答案：
4 HEGAS
(a) Auditor’s responsibilities for ‘other information’
■ The auditor has a professional responsibility to read other information to identify material inconsistencies with the
audited financial statements (ISA 720 ‘Other Information in Documents Containing Audited Financial Statements’).
■ A ‘material inconsistency’ arises when other information contradicts that which is contained in the audited financial
statements. It may give rise to doubts about:
– the auditor’s conclusions drawn from audit evidence; and
– the basis for the auditor’s opinion on the financial statements.
■ In certain circumstances, the auditor may have a statutory obligation (under national legislation) to report on other
information (e.g. Management Report).
■ Even where there is no such obligation (e.g. chairman’s statement), the auditor should consider it, as the credibility of
the financial statements may be undermined by any inconsistency.
■ The auditor must arrange to have access to the other information on a timely basis prior to dating the auditor’s report.
Material inconsistency
■ If a material inconsistency is identified, the auditor should determine whether it is the audited financial statements or
the other information which needs amending.
■ If an amendment to the audited financial statements is required but not made, there will be disagreement, resulting in
the expression of a qualified or adverse opinion. (Such a situation would be extremely rare.)
■ Where an amendment to other information is necessary, but refused, the auditor’s report may include an emphasis of
matter paragraph (since the audit opinion cannot be other than unqualified with respect to this matter).
Material misstatement of fact
■ A material misstatement of fact in other information exists when information which is not related to matters appearing
in the audited financial statements is incorrectly stated or presented in a misleading manner.
■ If management do not act on advice to correct a material misstatement the auditors should document their concerns to
those charged with corporate governance and obtain legal advice.
Tutorial note: Marks would be awarded here for the implications for the auditor’s report. However, such marks, which are
for the restatement of knowledge would NOT be awarded again if repeated in answers to (b). -
第3题：
(c) Explain the extent to which you should plan to place reliance on analytical procedures as audit evidence.
(6 marks)
正确答案：
(c) Extent of reliance on analytical procedures as audit evidence
Tutorial note: In the requirement ‘… reliance … as audit evidence’ is a direction to consider only substantive analytical
procedures. Answer points concerning planning and review stages were not asked for and earn no marks.
■ Although there is likely to be less reliance on analytical procedures than if this had been an existing audit client, the fact
that this is a new assignment does not preclude placing some reliance on such procedures.
■ Analytical procedures will not be relied on in respect of material items that require 100% testing. For example, additions
to property is likely to represent a very small number of transactions.
■ Analytical procedures alone may provide sufficient audit evidence on line items that are not individually material. For
example, inventory (less than 1/2% revenue and less than 1% total assets) may be shown to be materially correctly
stated through analytical procedures on consumable stores (i.e. fuel, lubricants, materials for servicing vehicles etc).
■ Substantive analytical procedures are best suited to large volume transactions (e.g. revenue, materials expense, staff
costs). If controls over the completeness, accuracy and validity of recording transactions in these areas are effective then
substantive analytical procedures showing that there are no unexpected fluctuations should reduce the need for
substantive detailed tests.
■ The extent of planned use will be dependent on the relationships expected between variables. (e.g. between items of
financial information and between items of financial and non-financial information). For example, if material costs rise
due to an increase in the level of business then a commensurate increase in revenue and staff costs might be expected
also.
■ ‘Proofs in total’ (or reasonableness tests) provide substantive evidence that income statement items are not materially
misstated. In the case of Yates these might be applied to staff costs (number of employees in each category ×
wage/salary rates, grossed up for social security, etc) and finance expense (interest rate × average monthly overdraft
balance).
■ However, such tests may have limited application, if any, if the population is not homogenous and cannot be subdivided.
For example, all the categories of non-current asset have a wide range of useful life. Therefore it would be
difficult/meaningless to apply an ‘average’ depreciation rate to all assets in the class to substantiate the total depreciation
expense for the year. (Although it might highlight a risk of potential over or understatement requiring further
investigation.)
■ Substantive analytical procedures are more likely to be used if there is relevant information available that is being used
by Yates. For example, as fuel costs will be significant, Yates may monitor consumption (e.g. miles per gallon (MPG)).
■ Analytical procedures may supplement alternative procedures that provide evidence regarding the same assertion. For
example, the review of after-date payments to confirm the completeness of trade payables may be supplemented by
calculations of average payment period on a monthly basis.
Tutorial note: Credit will be given for other relevant points drawn from the scenario. For example, the restructuring during
the previous year is likely to have caused fluctuations that may result in less reliance being placed on analytical procedures. -
第4题：
(ii) Briefly explain the implications of Parr & Co’s audit opinion for your audit opinion on the consolidated
financial statements of Cleeves Co for the year ended 30 September 2006. (3 marks)
正确答案：
(ii) Implications for audit opinion on consolidated financial statements of Cleeves
■ If the potential adjustments to non-current asset carrying amounts and loss are not material to the consolidated
financial statements there will be no implication. However, as Howard is material to Cleeves and the modification
appears to be ‘so material’ (giving rise to adverse opinion) this seems unlikely.
Tutorial note: The question clearly states that Howard is material to Cleeves, thus there is no call for speculation
on this.
■ As Howard is wholly-owned the management of Cleeves must be able to request that Howard’s financial statements
are adjusted to reflect the impairment of the assets. The auditor’s report on Cleeves will then be unmodified
(assuming that any impairment of the investment in Howard is properly accounted for in the separate financial
statements of Cleeves).
■ If the impairment losses are not recognised in Howard’s financial statements they can nevertheless be adjusted on
consolidation of Cleeves and its subsidiaries (by writing down assets to recoverable amounts). The audit opinion
on Cleeves should then be unmodified in this respect.
■ If there is no adjustment of Howard’s asset values (either in Howard’s financial statements or on consolidation) it
is most likely that the audit opinion on Cleeves’s consolidated financial statements would be ‘except for’. (It should
not be adverse as it is doubtful whether even the opinion on Howard’s financial statements should be adverse.)
Tutorial note: There is currently no requirement in ISA 600 to disclose that components have been audited by another
auditor unless the principal auditor is permitted to base their opinion solely upon the report of another auditor. -
第5题：
(b) Explain what effect the acquisition of Di Rollo Co will have on the planning of your audit of the consolidated
financial statements of Murray Co for the year ending 31 March 2008. (10 marks)
正确答案：
(b) Effect of acquisition on planning the audit of Murray’s consolidated financial statements for the year ending 31 March
2008
Group structure
The new group structure must be ascertained to identify all entities that should be consolidated into the Murray group’s
financial statements for the year ending 31 March 2008.
Materiality assessment
Preliminary materiality for the group will be much higher, in monetary terms, than in the prior year. For example, if a % of
total assets is a determinant of the preliminary materiality, it may be increased by 10% (as the fair value of assets acquired,
including goodwill, is $2,373,000 compared with $21·5m in Murray’s consolidated financial statements for the year ended
31 March 2007).
The materiality of each subsidiary should be re-assessed, in terms of the enlarged group as at the planning stage. For
example, any subsidiary that was just material for the year ended 31 March 2007 may no longer be material to the group.
This assessment will identify, for example:
– those entities requiring an audit visit; and
– those entities for which substantive analytical procedures may suffice.
As Di Rollo’s assets are material to the group Ross should plan to inspect the South American operations. The visit may
include a meeting with Di Rollo’s previous auditors to discuss any problems that might affect the balances at acquisition and
a review of the prior year audit working papers, with their permission.
Di Rollo was acquired two months into the financial year therefore its post-acquisition results should be expected to be
material to the consolidated income statement.
Goodwill acquired
The assets and liabilities of Di Rollo at 31 March 2008 will be combined on a line-by-line basis into the consolidated financial
statements of Murray and goodwill arising on acquisition recognised.
Audit work on the fair value of the Di Rollo brand name at acquisition, $600,000, may include a review of a brand valuation
specialist’s working papers and an assessment of the reasonableness of assumptions made.
Significant items of plant are likely to have been independently valued prior to the acquisition. It may be appropriate to plan
to place reliance on the work of expert valuers. The fair value adjustment on plant and equipment is very high (441% of
carrying amount at the date of acquisition). This may suggest that Di Rollo’s depreciation policies are over-prudent (e.g. if
accelerated depreciation allowed for tax purposes is accounted for under local GAAP).
As the amount of goodwill is very material (approximately 50% of the cash consideration) it may be overstated if Murray has
failed to recognise any assets acquired in the purchase of Di Rollo in accordance with IFRS 3 Business Combinations. For
example, Murray may have acquired intangible assets such as customer lists or franchises that should be recognised
separately from goodwill and amortised (rather than tested for impairment).
Subsequent impairment
The audit plan should draw attention to the need to consider whether the Di Rollo brand name and goodwill arising have
suffered impairment as a result of the allegations against Di Rollo’s former chief executive.
Liabilities
Proceedings in the legal claim made by Di Rollo’s former chief executive will need to be reviewed. If the case is not resolved
at 31 March 2008, a contingent liability may require disclosure in the consolidated financial statements, depending on the
materiality of amounts involved. Legal opinion on the likelihood of Di Rollo successfully defending the claim may be sought.
Provision should be made for any actual liabilities, such as legal fees.
Group (related party) transactions and balances
A list of all the companies in the group (including any associates) should be included in group audit instructions to ensure
that intra-group transactions and balances (and any unrealised profits and losses on transactions with associates) are
identified for elimination on consolidation. Any transfer pricing policies (e.g. for clothes manufactured by Di Rollo for Murray
and sales of Di Rollo’s accessories to Murray’s retail stores) must be ascertained and any provisions for unrealised profit
eliminated on consolidation.
It should be confirmed at the planning stage that inter-company transactions are identified as such in the accounting systems
of all companies and that inter-company balances are regularly reconciled. (Problems are likely to arise if new inter-company
balances are not identified/reconciled. In particular, exchange differences are to be expected.)
Other auditors
If Ross plans to use the work of other auditors in South America (rather than send its own staff to undertake the audit of Di
Rollo), group instructions will need to be sent containing:
– proforma statements;
– a list of group and associated companies;
– a statement of group accounting policies (see below);
– the timetable for the preparation of the group accounts (see below);
– a request for copies of management letters;
– an audit work summary questionnaire or checklist;
– contact details (of senior members of Ross’s audit team).
Accounting policies
Di Rollo may have material accounting policies which do not comply with the rest of the Murray group. As auditor to Di Rollo,
Ross will be able to recalculate the effect of any non-compliance with a group accounting policy (that Murray’s management
would be adjusting on consolidation).
Timetable
The timetable for the preparation of Murray’s consolidated financial statements should be agreed with management as soon
as possible. Key dates should be planned for:
– agreement of inter-company balances and transactions;
– submission of proforma statements;
– completion of the consolidation package;
– tax review of group accounts;
– completion of audit fieldwork by other auditors;
– subsequent events review;
– final clearance on accounts of subsidiaries;
– Ross’s final clearance of consolidated financial statements.
Tutorial note: The order of dates is illustrative rather than prescriptive. -
第6题：
(iii) Can internal audit services be undertaken for an audit client? (4 marks)
Required:
For each of the three questions, explain the threats to objectivity that may arise and the safeguards that
should be available to manage them to an acceptable level.
NOTE: The mark allocation is shown against each of the three questions above.
正确答案：(iii) Internal audit services
A self-review threat may be created when a firm, or network firm, provides internal audit services to a financial statement
audit client. Internal audit services may comprise:
■ an extension of the firm’s audit service beyond requirements of International Standards on Auditing (ISAs);
■ assistance in the performance of a client’s internal audit activities; or
■ outsourcing of the activities.
The nature of the service must be considered in evaluating any threats to independence. (For this purpose, internal audit
services do not include operational internal audit services unrelated to the internal accounting controls, financial systems
or financial statements.)
Services involving an extension of the procedures required to conduct a financial statement audit in accordance with
ISAs would not be considered to impair independence with respect to the audit client provided that the firm’s or network
firm’s personnel do not act or appear to act in a capacity equivalent to a member of audit client management.When the firm, or a network firm, provides an audit client with assistance in the performance of internal audit activities
or undertakes the outsourcing, any self-review threat created may be reduced to an acceptable level by a clear separation
of:
■ the management and control of the internal audit by client management;
■ the internal audit activities.
Performing a significant portion of an audit client’s internal audit activities may create a self-review threat. Appropriate
safeguards should include the audit client’s acknowledgement of its responsibilities for establishing, maintaining and
monitoring the system of internal controls.
Other safeguards include:
■ the audit client designating a competent employee, preferably within senior management, to be responsible for
internal audit activities;
■ the audit client, audit committee or supervisory body approving the scope, risk and frequency of internal audit
work;
■ the audit client being responsible for evaluating and determining which recommendations of the firm should be
implemented;
■ the audit client evaluating the adequacy of the internal audit procedures performed and the resultant findings by
obtaining and acting on reports from the firm; and
■ appropriate reporting of findings and recommendations resulting from the internal audit activities to the audit
committee or supervisory body.
Consideration should also be given to whether such non-assurance services should be provided only by personnel not
involved in the financial statement audit engagement and with different reporting lines within the firm. -
第7题：
4 You are an audit manager in Nate & Co, a firm of Chartered Certified Accountants. You are reviewing three situations,
which were recently discussed at the monthly audit managers’ meeting:
(1) Nate & Co has recently been approached by a potential new audit client, Fisher Co. Your firm is keen to take the
appointment and is currently carrying out client acceptance procedures. Fisher Co was recently incorporated by
Marcellus Fisher, with its main trade being the retailing of wooden storage boxes.
(2) Nate & Co provides the audit service to CF Co, a national financial services organisation. Due to a number of
errors in the recording of cash deposits from new customers that have been discovered by CF Co’s internal audit
team, the directors of CF Co have requested that your firm carry out a review of the financial information
technology systems. It has come to your attention that while working on the audit planning of CF Co, Jin Sayed,
one of the juniors on the audit team, who is a recent information technology graduate, spent three hours
providing advice to the internal audit team about how to improve the system. As far as you know, this advice has
not been used by the internal audit team.
(3) LA Shots Co is a manufacturer of bottled drinks, and has been an audit client of Nate & Co for five years. Two
audit juniors attended the annual inventory count last Monday. They reported that Brenda Mangle, the new
production manager of LA Shots Co, wanted the inventory count and audit procedures performed as quickly as
possible. As an incentive she offered the two juniors ten free bottles of ‘Super Juice’ from the end of the
production line. Brenda also invited them to join the LA Shots Co office party, which commenced at the end of
the inventory count. The inventory count and audit procedures were completed within two hours (the previous
year’s procedures lasted a full day), and the juniors then spent four hours at the office party.
Required:
(a) Define ‘money laundering’ and state the procedures specific to money laundering that should be considered
before, and on the acceptance of, the audit appointment of Fisher Co. (5 marks)
正确答案：
4 NATE & CO
(a) – Money laundering is the process by which criminals attempt to conceal the true origin and ownership of the proceeds
of criminal activity, allowing them to maintain control over the proceeds, and ultimately providing a legitimate cover for
their sources of income. The objective of money laundering is to break the connection between the money, and the crime
that it resulted from.
– It is widely defined, to include possession of, or concealment of, the proceeds of any crime.
– Examples include proceeds of fraud, tax evasion and benefits of bribery and corruption.
Client procedures should include the following:
– Client identification:
? Establish the identity of the entity and its business activity e.g. by obtaining a certificate of incorporation
? If the client is an individual, obtain official documentation including a name and address, e.g. by looking at
photographic identification such as passports and driving licences
? Consider whether the commercial activity makes business sense (i.e. it is not just a ‘front’ for illegal activities)
? Obtain evidence of the company’s registered address e.g. by obtaining headed letter paper
? Establish the current list of principal shareholders and directors.
– Client understanding:
? Pre-engagement communication may be considered, to explain to Marcellus Fisher and the other directors the
nature and reason for client acceptance procedures.
? Best practice recommends that the engagement letter should also include a paragraph outlining the auditor’s
responsibilities in relation to money laundering. -
第8题：
(ii) Identify and explain the principal audit procedures to be performed on the valuation of the investment
properties. (6 marks)
正确答案：
(ii) Additional audit procedures
Audit procedures should focus on the appraisal of the work of the expert valuer. Procedures could include the following:
– Inspection of the written instructions provided by Poppy Co to the valuer, which should include matters such as
the objective and scope of the valuer’s work, the extent of the valuer’s access to relevant records and files, and
clarification of the intended use by the auditor of their work.
– Evaluation, using the valuation report, that any assumptions used by the valuer are in line with the auditor’s
knowledge and understanding of Poppy Co. Any documentation supporting assumptions used by the valuer should
be reviewed for consistency with the auditor’s business understanding, and also for consistency with any other
audit evidence.
– Assessment of the methodology used to arrive at the fair value and confirmation that the method is consistent with
that required by IAS 40.
– The auditor should confirm, using the valuation report, that a consistent method has been used to value each
property.
– It should also be confirmed that the date of the valuation report is reasonably close to the year end of Poppy Co.
– Physical inspection of the investment properties to determine the physical condition of the properties supports the
valuation.
– Inspect the purchase documentation of each investment property to ascertain the cost of each building. As the
properties were acquired during this accounting period, it would be reasonable to expect that the fair value at the
year end is not substantially different to the purchase price. Any significant increase or decrease in value should
alert the auditor to possible misstatement, and lead to further audit procedures.
– Review of forecasts of rental income from the properties – supporting evidence of the valuation.
– Subsequent events should be monitored for any additional evidence provided on the valuation of the properties.
For example, the sale of an investment property shortly after the year end may provide additional evidence relating
to the fair value measurement.
– Obtain a management representation regarding the reasonableness of any significant assumptions, where relevant,
to fair value measurements or disclosures. -
第9题：
(ii) State the principal audit procedures to be performed on the consolidation schedule of the Rosie Group.
(4 marks)
正确答案：
(ii) Audit procedures on the consolidation schedule of the Rosie Group:
– Agree correct extraction of individual company figures by reference to individual company audited financial
statements.
– Cast and cross cast all consolidation schedules.
– Recalculate all consolidation adjustments, including goodwill, elimination of pre acquisition reserves, cancellation
of intercompany balances, fair value adjustments and accounting policy adjustments.
– By reference to prior year audited consolidated accounts, agree accounting policies have been consistently applied.
– Agree brought down figures to prior year audited consolidated accounts and audit working papers (e.g. goodwill
figures for Timber Co and Ben Co, consolidated reserves).
– Agree that any post acquisition profits consolidated for Dylan Co arose since the date of acquisition by reference to
date of control passing per the purchase agreement.
– Reconcile opening and closing group reserves and agree reconciling items to group financial statements. -
第10题：
(ii) From the information provided above, recommend the matters which should be included as ‘findings
from the audit’ in your report to those charged with governance, and explain the reason for their
inclusion. (7 marks)
正确答案：
(ii) Control weakness
ISA 260 contains guidance on the type of issues that should be communicated. One of the matters identified is a control
weakness in the capital expenditure transaction cycle. The assets for which no authorisation was obtained amount to
0·3% of total assets (225,000/78 million x 100%), which is clearly immaterial. However, regardless of materiality, the
auditor should ensure that the weakness is brought to the attention of the management, with a clear indication of the
implication of the weakness, and recommendations as to how the control weakness should be eliminated.
The auditor is providing information to help those charged with governance improve the internal systems and controls
and ultimately reduce business risk. In this case there is a high risk of fraud, as the lack of authorisation for purchase
of office equipment could allow expenditure on assets not used for bona fide business purposes.
Disagreement with accounting treatment of brand
Audit procedures have revealed a breach of IAS 38 Intangible Assets, in which internally generated brand names are
specifically prohibited from being recognised. Blod Co has recognised an internally generated brand name which is
material to the statement of financial position (balance sheet) as it represents 12·8% of total assets (10/78 x 100%).
The statement of financial position (balance sheet) therefore contains a material misstatement.
The report to those charged with governance should clearly explain the rules on recognition of internally generated brand
names, to ensure that the management has all relevant technical facts available. In the report the auditors should
request that the financial statements be corrected, and clarify that if the brand is not derecognised, then the audit opinion
will be qualified on the grounds of a material disagreement – an ‘except for’ opinion would be provided. Once the breach
of IAS 38 is made clear to the management in the report, they then have the opportunity to discuss the matter and
decide whether to amend the financial statements, thereby avoiding a qualified audit opinion.
Audit inefficiencies
Documentation relating to inventories was not always made readily available to the auditors. This seems to be due to
poor administration by the client rather than a deliberate attempt to conceal information. The report should contain a
brief description of the problems encountered by the audit team. The management should be made aware that
significant delay to the receipt of necessary paperwork can cause inefficiencies in the audit process. This may seem a
relatively trivial issue, but it could lead to an increase in audit fee. Management should react to these comments by
ensuring as far as possible that all requested documentation is made available to the auditors in a timely fashion. -
第11题：
Following a competitive tender, your audit firm Cal & Co has just gained a new audit client Tirrol Co. You are the manager in charge of planning the audit work. Tirrol Co’s year end is 30 June 2009 with a scheduled date to complete the audit of 15 August 2009. The date now is 3 June 2009.
Tirrol Co provides repair services to motor vehicles from 25 different locations. All inventory, sales and purchasing systems are computerised, with each location maintaining its own computer system. The software in each location is
the same because the programs were written specifically for Tirrol Co by a reputable software house. Data from each location is amalgamated on a monthly basis at Tirrol Co’s head office to produce management and financial accounts.
You are currently planning your audit approach for Tirrol Co. One option being considered is to re-write Cal & Co’s audit software to interrogate the computerised inventory systems in each location of Tirrol Co (except for head office)
as part of inventory valuation testing. However, you have also been informed that any computer testing will have to be on a live basis and you are aware that July is a major holiday period for your audit firm.
Required:
(a) (i) Explain the benefits of using audit software in the audit of Tirrol Co; (4 marks)
(ii) Explain the problems that may be encountered in the audit of Tirrol Co and for each problem, explain
how that problem could be overcome. (10 marks)
(b) Following a discussion with the management at Tirrol Co you now understand that the internal audit department are prepared to assist with the statutory audit. Specifically, the chief internal auditor is prepared to provide you with documentation on the computerised inventory systems at Tirrol Co. The documentation provides details of the software and shows diagrammatically how transactions are processed through the inventory system. This documentation can be used to significantly decrease the time needed to understand the computer systems and enable audit software to be written for this year’s audit.
Required:
Explain how you will evaluate the computer systems documentation produced by the internal audit
department in order to place reliance on it during your audit. (6 marks)
正确答案：
(a)(i)BenefitsofusingauditsoftwareStandardsystemsatclientThesamecomputerisedsystemsandprogramsasusedinall25branchesofTirrolCo.Thismeansthatthesameauditsoftwarecanbeusedineachlocationprovidingsignificanttimesavingscomparedtothesituationwhereclientsystemsaredifferentineachlocation.UseactualcomputerfilesnotcopiesorprintoutsUseofauditsoftwaremeansthattheTirrolCo’sactualinventoryfilescanbetestedratherthanhavingtorelyonprintoutsorscreenimages.Thelattercouldbeincorrect,byaccidentorbydeliberatemistake.Theauditfirmwillhavemoreconfidencethatthe‘real’fileshavebeentested.TestmoreitemsUseofsoftwarewillmeanthatmoreinventoryrecordscanbetested–itispossiblethatallproductlinescouldbetestedforobsolescenceratherthanasampleusingmanualtechniques.Theauditorwillthereforegainmoreevidenceandhavegreaterconfidencethatinventoryisvaluedcorrectly.CostTherelativecostofusingauditsoftwaredecreasesthemoreyearsthatsoftwareisused.Anycostoverrunsthisyearcouldbeoffsetagainsttheauditfeesinfutureyearswhentheactualexpensewillbeless.(ii)ProblemsontheauditofTirrolTimescale–sixweekreportingdeadline–auditplanningTheauditreportisduetobesignedsixweeksaftertheyearend.Thismeansthattherewillbeconsiderablepressureontheauditortocompleteauditworkwithoutcompromisingstandardsbyrushingprocedures.Thisproblemcanbeovercomebycarefulplanningoftheaudit,useofexperiencedstaffandensuringotherstaffsuchassecondpartnerreviewsarebookedwellinadvance.Timescale–sixweekreportingdeadline–softwareissuesTheauditreportisduetobesignedaboutsixweeksaftertheyearend.Thismeansthatthereislittletimetowriteandtestauditsoftware,letaloneusethesoftwareandevaluatetheresultsoftesting.Thisproblemcanbealleviatedbycarefulplanning.AccesstoTirrolCo’ssoftwareanddatafilesmustbeobtainedassoonaspossibleandworkcommencedontailoringCal&Co’ssoftwarefollowingthis.Specialistcomputerauditstaffshouldbebookedassoonaspossibletoperform.thiswork.FirstyearauditcostsTherelativecostsofanauditinthefirstyearataclienttendtobegreaterduetotheadditionalworkofascertainingclientsystems.ThismeansthatCal&Comayhavealimitedbudgettodocumentsystemsincludingcomputersystems.Thisproblemcanbealleviatedtosomeextentagainbygoodauditplanning.Themanagermustalsomonitortheauditprocesscarefully,ensuringthatanyadditionalworkcausedbytheclientnotprovidingaccesstosystemsinformationincludingcomputersystemsisidentifiedandaddedtothetotalbillingcostoftheaudit.StaffholidaysMostoftheauditworkwillbecarriedoutinJuly,whichisalsothemonthwhenmanyofCal&Costafftaketheirannualholiday.Thismeansthattherewillbeashortageofauditstaff,particularlyasauditworkforTirrolCoisbeingbookedwithlittlenotice.Theproblemcanbealleviatedbybookingstaffassoonaspossibleandthenidentifyinganyshortages.Wherenecessary,staffmaybeborrowedfromotherofficesorevendifferentcountriesonasecondmentbasiswhereshortagesareacute.Non-standardsystemsTirrolCo’scomputersoftwareisnon-standard,havingbeenwrittenspecificallyfortheorganisation.Thismeansthatmoretimewillbenecessarytounderstandthesystemthanifstandardsystemswereused.Thisproblemcanbealleviatedeitherbyobtainingdocumentationfromtheclientorbyapproachingthesoftwarehouse(withTirrolCo’spermission)toseeiftheycanassistwithprovisionofinformationondatastructuresfortheinventorysystems.ProvisionofthisinformationwilldecreasethetimetakentotailorauditsoftwareforuseinTirrolCo.IssuesoflivetestingCal&Cohasbeeninformedthatinventorysystemsmustbetestedonalivebasis.Thisincreasestheriskofaccidentalamendmentordeletionofclientdatasystemscomparedtotestingcopyfiles.Tolimitthepossibilityofdamagetoclientsystems,Cal&CocanconsiderperforminginventorytestingondayswhenTirrolCoisnotoperatinge.g.weekends.Attheworst,backupsofdatafilestakenfromthepreviousdaycanbere-installedwhenCal&Co’stestingiscomplete.ComputersystemsTheclienthas25locations,witheachlocationmaintainingitsowncomputersystem.Itispossiblethatcomputersystemsarenotcommonacrosstheclientduetoamendmentsmadeatthebranchlevel.Thisproblemcanbeovercometosomeextentbyaskingstaffateachbranchwhethersystemshavebeenamendedandfocusingauditworkonmaterialbranches.UsefulnessofauditsoftwareTheuseofauditsoftwareatTirrolCodoesappeartohavesignificantproblemsthisyear.Thismeansthateveniftheauditsoftwareisready,theremaystillbesomeriskofincorrectconclusionsbeingderivedduetolackoftesting,etc.Thisproblemcanbealleviatedbyseriouslyconsideringthepossibilityofusingamanualauditthisyear.Themanagermayneedtoinvestigatewhetheramanualauditisfeasibleandifsowhetheritcouldbecompletedwithinthenecessarytimescalewithminimalauditrisk.(b)RelianceoninternalauditdocumentationTherearetwoissuestoconsider;theabilityofinternalaudittoproducethedocumentationandtheactualaccuracyofthedocumentationitself.Theabilityoftheinternalauditdepartmenttoproducethedocumentationcanbedeterminedby:–Ensuringthatthedepartmenthasstaffwhohaveappropriatequalifications.Provisionofarelevantqualificatione.g.membershipofacomputerrelatedinstitutewouldbeappropriate.–Ensuringthatthisandsimilardocumentationisproducedusingarecognisedplanandthatthedocumentationistestedpriortouse.Theuseofdifferentstaffintheinternalauditdepartmenttoproduceandtestdocumentationwillincreaseconfidenceinitsaccuracy.–Ensuringthatthedocumentationisactuallyusedduringinternalauditworkandthatproblemswithdocumentationarenotedandinvestigatedaspartofthatwork.Beinggivenaccesstointernalauditreportsontheinventorysoftwarewillprovideappropriateevidence.Regardingtheactualdocumentation:–Reviewingthedocumentationtoensurethatitappearslogicalandthattermsandsymbolsareusedconsistentlythroughout.Thiswillprovideevidencethattheflowcharts,etcshouldbeaccurate.–Comparingthedocumentationagainstthe‘live’inventorysystemtoensureitcorrectlyreflectstheinventorysystem.Thiscomparisonwillincludetracingindividualtransactionsthroughtheinventorysystems.–UsingpartofthedocumentationtoamendCal&Co’sauditsoftware,andthenensuringthatthesoftwareprocessesinventorysystemdataaccurately.However,thisstagemaybelimitedduetotheneedtouselivefilesatTirrolCo. -
第12题：
You are the audit manager of Chestnut & Co and are reviewing the key issues identified in the files of two audit clients.
Palm Industries Co (Palm)
Palm’s year end was 31 March 2015 and the draft financial statements show revenue of $28·2 million, receivables of $5·6 million and profit before tax of $4·8 million. The fieldwork stage for this audit has been completed.
A customer of Palm owed an amount of $350,000 at the year end. Testing of receivables in April highlighted that no amounts had been paid to Palm from this customer as they were disputing the quality of certain goods received from Palm. The finance director is confident the issue will be resolved and no allowance for receivables was made with regards to this balance.
Ash Trading Co (Ash)
Ash is a new client of Chestnut & Co, its year end was 31 January 2015 and the firm was only appointed auditors in February 2015, as the previous auditors were suddenly unable to undertake the audit. The fieldwork stage for this audit is currently ongoing.
The inventory count at Ash’s warehouse was undertaken on 31 January 2015 and was overseen by the company’s internal audit department. Neither Chestnut & Co nor the previous auditors attended the count. Detailed inventory records were maintained but it was not possible to undertake another full inventory count subsequent to the year end.
The draft financial statements show a profit before tax of $2·4 million, revenue of $10·1 million and inventory of $510,000.
Required:
For each of the two issues:
(i) Discuss the issue, including an assessment of whether it is material;
(ii) Recommend ONE procedure the audit team should undertake to try to resolve the issue; and
(iii) Describe the impact on the audit report if the issue remains UNRESOLVED.
Notes:
1 The total marks will be split equally between each of the two issues.
2 Audit report extracts are NOT required.
正确答案：Audit reports
Palm Industries Co (Palm)
(i) A customer of Palm’s owing $350,000 at the year end has not made any post year-end payments as they are disputing the quality of goods received. No allowance for receivables has been made against this balance. As the balance is being disputed, there is a risk of incorrect valuation as some or all of the receivable balance is overstated, as it may not be paid.
This $350,000 receivables balance represents 1·2% (0·35/28·2m) of revenue, 6·3% (0·35/5·6m) of receivables and 7·3% (0·35/4·8m) of profit before tax; hence this is a material issue.
(ii) A procedure to adopt includes:
– Review whether any payments have subsequently been made by this customer since the audit fieldwork was completed.
– Discuss with management whether the issue of quality of goods sold to the customer has been resolved, or whether it is still in dispute.
– Review the latest customer correspondence with regards to an assessment of the likelihood of the customer making payment.
(iii) If management refuses to provide against this receivable, the audit report will need to be modified. As receivables are overstated and the error is material but not pervasive a qualified opinion would be necessary.
A basis for qualified opinion paragraph would be needed and would include an explanation of the material misstatement in relation to the valuation of receivables and the effect on the financial statements. The opinion paragraph would be qualified ‘except for’.
Ash Trading Co (Ash)
(i) Chestnut & Co was only appointed as auditors subsequent to Ash’s year end and hence did not attend the year-end inventory count. Therefore, they have not been able to gather sufficient and appropriate audit evidence with regards to the completeness and existence of inventory.
Inventory is a material amount as it represents 21·3% (0·51/2·4m) of profit before tax and 5% (0·51/10·1m) of revenue; hence this is a material issue.
(ii) A procedure to adopt includes:
– Review the internal audit reports of the inventory count to identify the level of adjustments to the records to assess the reasonableness of relying on the inventory records.
– Undertake a sample check of inventory in the warehouse and compare to the inventory records and then from inventory records to the warehouse, to assess the reasonableness of the inventory records maintained by Ash.
(iii) The auditors will need to modify the audit report as they are unable to obtain sufficient appropriate evidence in relation to inventory which is a material but not pervasive balance. Therefore a qualified opinion will be required.
A basis for qualified opinion paragraph will be required to explain the limitation in relation to the lack of evidence over inventory. The opinion paragraph will be qualified ‘except for’.
-
第13题：
6 Discuss how developments in each of the following areas has affected the scope of the audit and the audit work
undertaken:
(a) fair value accounting; (6 marks)
正确答案：
6 DEVELOPMENTS
General comments
Tutorial note: The following comments, that could be made in respect of any of the three areas of development, will be given
credit only once.
■ Audit scope – the scope of a statutory audit should be as necessary to form. an audit opinion (i.e. unlimited).
■ Audit work undertaken – the nature, timing and extent of audit procedures should be as necessary to implement the overall
audit plan.
(a) Fair value accounting
■ Different definitions of fair value exist (among financial reporting frameworks or for different assets and liabilities within
a particular framework). For example, under IFRS it is ‘the amount for which an asset could be exchanged (or a liability
settled) between knowledgeable, willing parties in an arm’s length transaction’.
■ The term ‘fair value accounting’ is used to describe the measurement and disclosure of assets and/or liabilities at fair
value and the charging to profit and loss (or directly to equity) of any changes in fair value measurements.
■ Fair value accounting concerns measurements and disclosures but not initial recognition of assets and liabilities in
financial statements. It does not then, for example, affect the nature, timing and extent of audit procedures to confirm
the existence and completeness of rights and obligations.
■ Fair value may be determined with varying degrees of subjectivity. For example, there will be little (if any) subjectivity
for assets bought and sold in active and open markets that readily provide reliable information on the prices at which
exchange transactions occur. However, the valuation of assets with unique characteristics (or entity-specific assets) often
requires the projection and discounting of future cash flows.
■ The audit of estimates of fair values based on valuation models/techniques can be approached like other accounting
estimates (in accordance with ISA 540 ‘Audit of Accounting Estimates’). However, although the auditor should be able
to review and test the process used by management to develop the estimate, there may be:
? a much greater need for an independent estimate (and hence greater reliance on the work of experts in accordance
with ISA 620);
? no suitable subsequent events to confirm the estimate made (e.g. for assets that are held for use and not for
trading).
Tutorial note: Consider, for example, how the audit of ‘in-process research and development’ might compare with that
for an allowance for slow-moving inventory.
■ Different financial reporting frameworks require or permit a variety of fair value measures and disclosures in financial
statements. They also vary in the level of guidance provided (to preparers of the financial statements – and hence their
auditors). Under IFRS, certain fair values are based on management intent and ‘reasonable supportable assumptions’.
■ The audit of management intent potentially increases the auditor’s reliance on management representations. The auditor
must obtain such representations from the highest level of management and exercise an appropriate degree of
professional scepticism, being particularly alert to the implications of any conflicting evidence.
■ A significant development in international financial reporting is that it is no longer sufficient to report transactions and
past and future events that may only be possible. IAS 1 ‘Presentation of Financial Statements’ (Revised) requires that
key assumptions (and other key sources of estimation uncertainty) be disclosed. This requirement gives rise to yet
another area on which auditors may qualify their audit opinion, on grounds of disagreement, where such disclosure is
incorrect or inadequate.
■ Perhaps one of the most significant impacts of fair value accounting on audit work is that it necessarily increases it.
Consider for example, that even where the fair value of an asset is as easily vouched as original cost, fair value is
determined at least annually whereas historic cost is unchanged (and not re-vouched to original purchase
documentation). -
第14题：
(b) Identify and explain the financial statement risks to be taken into account in planning the final audit.
(12 marks)
正确答案：
(b) Financial statement risks
Tutorial note: Note the timeframe. Financial statements for the year to 30 June 2006 are draft. Certain misstatements
may therefore exist due to year-end procedures not yet having taken place.
Revenue/(Receivables)
■ Revenue has increased by 11·8% ((161·5 – 144·4)/144·4 × 100). Overstatement could arise if rebates due to customers
have not yet been accounted for in full (as they are calculated in arrears). If rebates have still to be accounted for trade
receivables will be similarly overstated.
Materials expense
■ Materials expense has increased by 17·8% ((88.0 – 74·7)/74·7 × 100). This is more than the increase in revenue. This
could be legitimate (e.g. if fuel costs have increased significantly). However, the increase could indicate misclassification
of:
– revenue expenditure (see fall in other expenses below);
– capital expenditure (e.g. on overhauls or major refurbishment) as revenue;
– finance lease payments as operating lease.
Depreciation/amortisation
■ This has fallen by 10·5% ((8·5 – 9·5)/9·5 × 100). This could be valid (e.g. if Yates has significant assets already fully
depreciated or the asset base is lower since last year’s restructuring). However, there is a risk of understatement if, for
example:
– not all assets have been depreciated (or depreciated at the wrong rates, or only for 11 months of the year);
– cost of non-current assets is understated (e.g. due to failure to recognise capital expenditure)1;
– impairment losses have not been recognised (as compared with the prior year).
Tutorial note: Depreciation on vehicles and transport equipment represents only 7% of cost. If all items were being
depreciated on a straight-line basis over eight years this should be 12·5%. The depreciation on other equipment looks more
reasonable as it amounts to 14% which would be consistent with an average age of vehicles of seven years (i.e. in the middle
of the range 3 – 13 years).
Other expenses
■ These have fallen by 15·5% ((19·6 – 23·2)/23·2 × 100). They may have fallen (e.g. following the restructuring) or may be
understated due to:
– expenses being misclassified as materials expense;
– underestimation of accrued expenses (especially as the financial reporting period has not yet expired).
Intangibles
■ Intangible assets have increased by $1m (16% on the prior year). Although this may only just be material to the
financial statements as a whole (see (a)) this is the net movement, therefore additions could be material.
■ Internally-generated intangibles will be overstated if:
– any of the IAS 38 recognition criteria cannot be demonstrated;
– any impairment in the year has not yet been written off in accordance with IAS 36 ‘Impairment of Assets’.
Tangible assets
■ The net book value of property (at cost) has fallen by 5%, vehicles are virtually unchanged (increased by just 2·5%)
and other equipment (though the least material category) has fallen by 20·4%.
■ Vehicles and equipment may be overstated if:
– disposals have not been recorded;
– depreciation has been undercharged (e.g. not for a whole year);
– impairments have not yet been accounted for.
■ Understatement will arise if finance leases are treated as operating leases.
Receivables
■ Trade receivables have increased by just 2·2% (although sales increased by 11·8%) and may be understated due to a
cutoff error resulting in overstatement of cash receipts.
■ There is a risk of overstatement if sufficient allowances have not been made for the impairment of individually significant
balances and for the remainder assessed on a portfolio or group basis.
Restructuring provision
■ The restructuring provision that was made last year has fallen/been utilised by 10·2%. There is a risk of overstatement
if the provision is underutilised/not needed for the purpose for which it was established.
Finance lease liabilities
■ Although finance lease liabilities have increased (by $1m) there is a greater risk of understatement than overstatement
if leased assets are not recognised on the balance sheet (i.e. capitalised).
■ Disclosure risk arises if the requirements of IAS 17 ‘Leases’ (e.g. in respect of minimum lease payments) are not met.
Trade payables
■ These have increased by only 5·3% compared with the 17·8% increase in materials expense. There is a risk of
understatement as notifications (e.g. suppliers’ invoices) of liabilities outstanding at 30 June 2006 may have still to be
received (the month of June being an unexpired period).
Other (employee) liabilities
■ These may be understated as they have increased by only 7·5% although staff costs have increased by 14%. For
example, balances owing in respect of outstanding holiday entitlements at the year end may not yet be accurately
estimated.
Tutorial note: Credit will be given to other financial statements risks specific to the scenario. For example, ‘time-sensitive
delivery schedules’ might give rise to penalties or claims, that could result in understated provisions or undisclosed
contingent liabilities. Also, given that this is a new audit and the result has changed significantly (from loss to profit) might
suggest a risk of misstatement in the opening balances (and hence comparative information).
1 Tutorial note: This may be unlikely as other expenses have fallen also. -
第15题：
4 (a) The purpose of ISA 250 Consideration of Laws and Regulations in an Audit of Financial Statements is to
establish standards and provide guidance on the auditor’s responsibility to consider laws and regulations in an
audit of financial statements.
Explain the auditor’s responsibilities for reporting non-compliance that comes to the auditor’s attention
during the conduct of an audit. (5 marks)
正确答案：
4 CLEEVES CO
(a) Reporting non-compliance
Non-compliance refers to acts of omission or commission by the entity being audited, either intentional or unintentional, that
are contrary to the prevailing laws or regulations.
To management
Regarding non-compliance that comes to the auditor’s attention the auditor should, as soon as practicable, either:
■ communicate with those charged with governance; or
■ obtain audit evidence that they are appropriately informed.
However, the auditor need not do so for matters that are clearly inconsequential or trivial and may reach agreement1 in
advance on the nature of such matters to be communicated.
If in the auditor’s judgment the non-compliance is believed to be intentional and material, the auditor should communicate
the finding without delay.
If the auditor suspects that members of senior management are involved in non-compliance, the auditor should report the
matter to the next higher level of authority at the entity, if it exists (e.g. an audit committee or a supervisory board). Where
no higher authority exists, or if the auditor believes that the report may not be acted upon or is unsure as to the person to
whom to report, the auditor would consider seeking legal advice.
To the users of the auditor’s report on the financial statements
If the auditor concludes that the non-compliance has a material effect on the financial statements, and has not been properly
reflected in the financial statements, the auditor expresses a qualified (i.e. ‘except for disagreement’) or an adverse opinion.
If the auditor is precluded by the entity from obtaining sufficient appropriate audit evidence to evaluate whether or not noncompliance
that may be material to the financial statements has (or is likely to have) occurred, the auditor should express a
qualified opinion or a disclaimer of opinion on the financial statements on the basis of a limitation on the scope of the audit.
Tutorial note: For example, if management denies the auditor access to information from which he would be able to assess
whether or not illegal dumping had taken place (and, if so, the extent of it).
If the auditor is unable to determine whether non-compliance has occurred because of limitations imposed by circumstances
rather than by the entity, the auditor should consider the effect on the auditor’s report.
Tutorial note: For example, if new legal requirements have been announced as effective but the detailed regulations are not
yet published.
To regulatory and enforcement authorities
The auditor’s duty of confidentiality ordinarily precludes reporting non-compliance to a third party. However, in certain
circumstances, that duty of confidentiality is overridden by statute, law or by courts of law (e.g. in some countries the auditor
is required to report non-compliance by financial institutions to the supervisory authorities). The auditor may need to seek
legal advice in such circumstances, giving due consideration to the auditor’s responsibility to the public interest. -
第16题：
(iii) Can audit teams cross sell services to their clients? (4 marks)
Required:
For EACH of the three FAQs, explain the threats to objectivity that may arise and the safeguards that should
be available to manage them to an acceptable level.
NOTE: The mark allocation is shown against each of the three questions.
正确答案：
(iii) Cross selling services
The practice of cross selling is intended to give incentives to members of audit teams to concentrate their efforts on the
selling of non-audit services to audit clients.
It is not inappropriate for an audit firm to cross sell or for members of the audit team to recognise on an ongoing basis
the need of a client to have non audit services. However it should not be an aim of the audit team member to seek out
such opportunities.
Boleyn should have policies and procedures to ensure that, in relation to each audit client:
■ the objectives of the members of the audit team do not include selling of non-audit services to the audit client;
■ the criteria for evaluating the performance of members of the audit team do not include success in selling nonaudit
services to the audit client;
■ no specific element of remuneration of a member of the audit team and no decision concerning promotion within
the audit firm is based on his or her success in selling non-audit services to the audit client; and
■ the ethics partner being available for consultation when needed.
Therefore objectives such as the following are inappropriate:
■ to meet a quota of opportunities;
■ to specifically make time to discuss with clients which non-audit services they should consider;
■ to develop identified selling opportunities.
An audit engagement partner’s performance should be judged on the quality and integrity of the audit only. There are
no restrictions on normal partnership profit-sharing arrangements.
-
第17题：
(ii) If a partner, who is an actuary, provides valuation services to an audit client, can we continue with the audit?
(3 marks)
Required:
For each of the three questions, explain the threats to objectivity that may arise and the safeguards that
should be available to manage them to an acceptable level.
NOTE: The mark allocation is shown against each of the three questions above.
正确答案：
(ii) Actuarial services to an audit client
IFAC’s ‘Code of Ethics for Professional Accountants’ does not deal specifically with actuarial valuation services but with
valuation services in general.
A valuation comprises:
■ making assumptions about the future;
■ applying certain methodologies and techniques;
■ computing a value (or range of values) for an asset, a liability or for a business as a whole.
A self-review threat may be created when a firm or network firm2 performs a valuation for a financial statement audit
client that is to be incorporated into the client’s financial statements.
As an actuarial valuation service is likely to involve the valuation of matters material to the financial statements (e.g. the
present value of obligations) and the valuation involves a significant degree of subjectivity (e.g. length of service), the
self-review threat created cannot be reduced to an acceptable level of the application of any safeguard. Accordingly:
■ such valuation services should not be provided; or
■ the firm should withdraw from the financial statement audit engagement.
If the net liability was not material to the financial statements the self-review threat may be reduced to an acceptable
level by the application of safeguards such as:
■ involving an additional professional accountant who was not a member of the audit team to review the work done
by the actuary;
■ confirming with the audit client their understanding of the underlying assumptions of the valuation and the
methodology to be used and obtaining approval for their use;
■ obtaining the audit client‘s acknowledgement of responsibility for the results of the work performed by the firm; and
■ making arrangements so that the partner providing the actuarial services does not participate in the audit
engagement. -
第18题：
(b) Explain the principal audit procedures to be performed during the final audit in respect of the estimated
warranty provision in the balance sheet of Island Co as at 30 November 2007. (5 marks)
正确答案：
(b) ISA 540 Audit of Accounting Estimates requires that auditors should obtain sufficient audit evidence as to whether an
accounting estimate, such as a warranty provision, is reasonable given the entity’s circumstances, and that disclosure is
appropriate. One, or a combination of the following approaches should be used:
Review and test the process used by management to develop the estimate
– Review contracts or orders for the terms of the warranty to gain an understanding of the obligation of Island Co
– Review correspondence with customers during the year to gain an understanding of claims already in progress at the
year end
– Perform. analytical procedures to compare the level of warranty provision year on year, and compare actual to budgeted
provisions. If possible disaggregate the data, for example, compare provision for specific types of machinery or customer
by customer
– Re-calculate the warranty provision
– Agree the percentage applied in the calculation to the stated accounting policy of Island Co
– Review board minutes for discussion of on-going warranty claims, and for approval of the amount provided
– Use management accounts to ascertain normal level of warranty rectification costs during the year
– Discuss with Kate Shannon the assumptions she used to determine the percentage used in her calculations
– Consider whether assumptions used are consistent with the auditors’ understanding of the business
– Compare prior year provision with actual expenditure on warranty claims in the accounting period
– Compare the current year provision with prior year and discuss any fluctuation with Kate Shannon.
Review subsequent events which confirm the estimate made
– Review any work carried out post year end on specific faults that have been provided for. Agree that all costs are included
in the year end provision.
– Agree cash expended on rectification work in the post balance sheet period to the cash book
– Agree cash expended on rectification work post year end to suppliers’ invoices, or to internal cost ledgers if work carried
out by employees of Island Co
– Read customer correspondence received post year end for any claims received since the year end. -
第19题：
(b) Describe the potential benefits for Hugh Co in choosing to have a financial statement audit. (4 marks)
正确答案：
(b) There are several benefits for Hugh Co in choosing a voluntary financial statement audit.
An annual audit will ensure that any material mistakes made by the part-qualified accountant in preparing the year end
financial statements will be detected. This is important as the directors will be using the year end accounts to review their
progress in the first year of trading and will need reliable figures to assess performance. An audit will give the directors comfort
that the financial statements are a sound basis for making business decisions.
Accurate first year figures will also enable more effective budgeting and forecasting, which will be crucial if rapid growth is to
be achieved.
The auditors are likely to use the quarterly management accounts as part of normal audit procedures. The auditors will be
able to advise Monty Parkes of any improvements that could be made to the management accounts, for example, increased
level of detail, more frequent reporting. Better quality management accounts will help the day-to-day running of the business
and enable a speedier response to any problems arising during the year.
As a by-product of the audit, a management letter (report to those charged with governance) will be produced, identifying
weaknesses and making recommendations on areas such as systems and controls which will improve the smooth running of
the business.
It is likely that Hugh Co will require more bank funding in order to expand, and it is likely that the bank would like to see
audited figures for review, before deciding on further finance. It will be easier and potentially cheaper to raise finance from
other providers with an audited set of financial statements.
As the business deals in cash sales, and retails small, luxury items there is a high risk of theft of assets. The external audit
can act as both a deterrent and a detective control, thus reducing the risk of fraud and resultant detrimental impact on the
financial statements.
Accurate financial statements will be the best basis for tax assessment and tax planning. An audit opinion will enhance the
credibility of the figures.
If the business grows rapidly, then it is likely that at some point in the future, the audit exemption limit will be exceeded and
thus an audit will become mandatory.
Choosing to have an audit from the first year of incorporation will reduce potential errors carried down to subsequent periods
and thus avoid qualifications of opening balances. -
第20题：
(c) Identify and discuss the implications for the audit report if:
(i) the directors refuse to disclose the note; (4 marks)
正确答案：
(c) (i) Audit report implications
Audit procedures have shown that there is a significant level of doubt over Dexter Co’s going concern status. IAS 1
requires that disclosure is made in the financial statements regarding material uncertainties which may cast significant
doubt on the ability of the entity to continue as a going concern. If the directors refuse to disclose the note to the financial
statements, there is a clear breach of financial reporting standards.
In this case the significant uncertainty is caused by not knowing the extent of the future availability of finance needed
to fund operating activities. If the note describing this uncertainty is not provided, the financial statements are not fairly
presented.
The audit report should contain a qualified or an adverse opinion due to the disagreement. The auditors need to make
a decision as to the significance of the non-disclosure. If it is decided that without the note the financial statements are
not fairly presented, and could be considered misleading, an adverse opinion should be expressed. Alternatively, it could
be decided that the lack of the note is material, but not pervasive to the financial statements; then a qualified ‘except
for’ opinion should be expressed.
ISA 570 Going Concern and ISA 701 Modifications to the Independent Auditor’s Report provide guidance on the
presentation of the audit report in the case of a modification. The audit report should include a paragraph which contains
specific reference to the fact that there is a material uncertainty that may cast significant doubt about the entity’s ability
to continue as a going concern. The paragraph should include a clear description of the uncertainties and would
normally be presented immediately before the opinion paragraph. -
第21题：
(ii) Recommend further audit procedures that should be carried out. (4 marks)
正确答案：
(ii) Further audit procedures:
Request from Peter Sheffield a written representation detailing:
– the exact nature of his control over Jarvis Co, i.e. if he is a shareholder then state his percentage shareholding, if
he is a member of senior management then state his exact position within the entity,
– a comment on whether in his opinion the balance is recoverable,
– a specific date by which the amount should be expected to be repaid, and
– a confirmation that there are no further balances outstanding from Jarvis Co, or any further transactions between
Jarvis Co and Pulp Co.
Tutorial note: Reference to the Exposure Draft ISA 550 Related Parties (Revised and Redrafted) requirement for both
general and specific management representations will be awarded credit.
Review the terms of any written confirmation of the amount, such as a signed agreement or invoice, checking whether
any interest is due to Pulp Co. The terms should be reviewed for details of any security offered, and the nature of the
consideration to be provided in settlement.
From discussion with Peter Sheffield, develop an understanding of the business purpose of the transaction, particularly
to understand whether the balance is a trade receivable or an investment.
Review the board minutes for evidence of any discussion of the transaction and the recoverability of the balance
outstanding.
Obtain the most recent audited financial statements of Jarvis Co and:
– ascertain whether Peter Sheffield is disclosed as the ultimate controlling party or disclosed as a member of key
management personnel,
– scrutinise the disclosure notes to find any disclosure of the transaction, where it should be described as a related
party liability, and
– perform. a liquidity analysis to establish whether the amount can be repaid from liquid assets. -
第22题：
(a) List and explain FOUR methods of selecting a sample of items to test from a population in accordance with ISA 530 (Redrafted) Audit Sampling and Other Means of Testing. (4 marks)
(b) List and explain FOUR assertions from ISA 500 Audit Evidence that relate to the recording of classes of
transactions. (4 marks)
(c) In terms of audit reports, explain the term ‘modified’. (2 marks)
正确答案：
(a)SamplingmethodsMethodsofsamplinginaccordancewithISA530AuditSamplingandOtherMeansofTesting:Randomselection.Ensureseachiteminapopulationhasanequalchanceofselection,forexamplebyusingrandomnumbertables.Systematicselection.Inwhichanumberofsamplingunitsinthepopulationisdividedbythesamplesizetogiveasamplinginterval.Haphazardselection.Theauditorselectsthesamplewithoutfollowingastructuredtechnique–theauditorwouldavoidanyconsciousbiasorpredictability.Sequenceorblock.Involvesselectingablock(s)ofcontinguousitemsfromwithinapopulation.Tutorialnote:Othermethodsofsamplingareasfollows:MonetaryUnitSampling.Thisselectionmethodensuresthateachindividual$1inthepopulationhasanequalchanceofbeingselected.Judgementalsampling.Selectingitemsbasedontheskillandjudgementoftheauditor.(b)Assertions–classesoftransactionsOccurrence.Thetransactionsandeventsthathavebeenrecordedhaveactuallyoccurredandpertaintotheentity.Completeness.Alltransactionsandeventsthatshouldhavebeenrecordedhavebeenrecorded.Accuracy.Theamountsandotherdatarelatingtorecordedtransactionsandeventshavebeenrecordedappropriately.Cut-off.Transactionsandeventshavebeenrecordedinthecorrectaccountingperiod.Classification.Transactionsandeventshavebeenrecordedintheproperaccounts.(c)AuditreporttermModified.Anauditormodifiesanauditreportinanysituationwhereitisinappropriatetoprovideanunmodifiedreport.Forexample,theauditormayprovideadditionalinformationinanemphasisofmatter(whichdoesnotaffecttheauditor’sopinion)orqualifytheauditreportforlimitationofscopeordisagreement. -
第23题：
(a) Contrast the role of internal and external auditors. (8 marks)
(b) Conoy Co designs and manufactures luxury motor vehicles. The company employs 2,500 staff and consistently makes a net profit of between 10% and 15% of sales. Conoy Co is not listed; its shares are held by 15 individuals, most of them from the same family. The maximum shareholding is 15% of the share capital.
The executive directors are drawn mainly from the shareholders. There are no non-executive directors because the company legislation in Conoy Co’s jurisdiction does not require any. The executive directors are very successful in running Conoy Co, partly from their training in production and management techniques, and partly from their ‘hands-on’ approach providing motivation to employees.
The board are considering a significant expansion of the company. However, the company’s bankers are
concerned with the standard of financial reporting as the financial director (FD) has recently left Conoy Co. The board are delaying provision of additional financial information until a new FD is appointed.
Conoy Co does have an internal audit department, although the chief internal auditor frequently comments that the board of Conoy Co do not understand his reports or provide sufficient support for his department or the internal control systems within Conoy Co. The board of Conoy Co concur with this view. Anders & Co, the external auditors have also expressed concern in this area and the fact that the internal audit department focuses work on control systems, not financial reporting. Anders & Co are appointed by and report to the board of Conoy Co.
The board of Conoy Co are considering a proposal from the chief internal auditor to establish an audit committee.
The committee would consist of one executive director, the chief internal auditor as well as three new appointees.
One appointee would have a non-executive seat on the board of directors.
Required:
Discuss the benefits to Conoy Co of forming an audit committee. (12 marks)
正确答案：
(a)Roleofinternalandexternalauditors–differencesObjectivesThemainobjectiveofinternalauditistoimproveacompany’soperations,primarilyintermsofvalidatingtheefficiencyandeffectivenessoftheinternalcontrolsystemsofacompany.Themainobjectiveoftheexternalauditoristoexpressanopiniononthetruthandfairnessofthefinancialstatements,andotherjurisdictionspecificrequirementssuchasconfirmingthatthefinancialstatementscomplywiththereportingrequirementsincludedinlegislation.ReportingInternalauditreportsarenormallyaddressedtotheboardofdirectors,orotherpeoplechargedwithgovernancesuchastheauditcommittee.Thosereportsarenotpubliclyavailable,beingconfidentialbetweentheinternalauditorandtherecipient.Externalauditreportsareprovidedtotheshareholdersofacompany.Thereportisattachedtotheannualfinancialstatementsofthecompanyandisthereforepubliclyavailabletotheshareholdersandanyreaderofthefinancialstatements.ScopeofworkTheworkoftheinternalauditornormallyrelatestotheoperationsoftheorganisation,includingthetransactionprocessingsystemsandthesystemstoproducetheannualfinancialstatements.Theinternalauditormayalsoprovideotherreportstomanagement,suchasvalueformoneyauditswhichexternalauditorsrarelybecomeinvolvedwith.Theworkoftheexternalauditorrelatesonlytothefinancialstatementsoftheorganisation.However,theinternalcontrolsystemsoftheorganisationwillbetestedastheseprovideevidenceonthecompletenessandaccuracyofthefinancialstatements.RelationshipwithcompanyInmostorganisations,theinternalauditorisanemployeeoftheorganisation,whichmayhaveanimpactontheauditor’sindependence.However,insomeorganisationstheinternalauditfunctionisoutsourced.Theexternalauditorisappointedbytheshareholdersofanorganisation,providingsomedegreeofindependencefromthecompanyandmanagement.(b)BenefitsofauditcommitteeinConoyCoAssistancewithfinancialreporting(nofinanceexpertise)TheexecutivedirectorsofConoyCodonotappeartohaveanyspecificfinancialskills–asthefinancialdirectorhasrecentlyleftthecompanyandhasnotyetbeenreplaced.ThismaymeanthatfinancialreportinginConoyCoislimitedorthattheothernon-financialdirectorsspendasignificantamountoftimekeepinguptodateonfinancialreportingissues.AnauditcommitteewillassistConoyCobyprovidingspecialistknowledgeoffinancialreportingonatemporarybasis–atleastoneofthenewappointeesshouldhaverelevantandrecentfinancialreportingexperienceundercodesofcorporategovernance.ThiswillallowtheexecutivedirectorstofocusonrunningConoyCo.EnhanceinternalcontrolsystemsTheboardofConoyCodonotnecessarilyunderstandtheworkoftheinternalauditor,ortheneedforcontrolsystems.ThismeansthatinternalcontrolwithinConoyComaybeinadequateorthatemployeesmaynotrecognisetheimportanceofinternalcontrolsystemswithinanorganisation.TheauditcommitteecanraiseawarenessoftheneedforgoodinternalcontrolsystemssimplybybeingpresentinConoyCoandbyeducatingtheboardontheneedforsoundcontrols.Improvingtheinternalcontrol‘climate’willensuretheneedforinternalcontrolsisunderstoodandreducecontrolerrors.RelianceonexternalauditorsConoyCo’sinternalauditorscurrentlyreporttotheboardofConoyCo.Aspreviouslynoted,thelackoffinancialandcontrolexpertiseontheboardwillmeanthatexternalauditorreportsandadvicewillnotnecessarilybeunderstood–andtheboardmayrelytoomuchonexternalauditorsIfConoyCoreporttoanauditcommitteethiswilldecreasethedependenceoftheboardontheexternalauditors.Theauditcommitteecantaketimetounderstandtheexternalauditor’scomments,andthenviathenon-executivedirector,ensurethattheboardtakeactiononthosecomments.AppointmentofexternalauditorsAtpresent,theboardofConoyCoappointtheexternalauditors.Thisraisesissuesofindependenceastheboardmaybecometoofamiliarwiththeexternalauditorsandsoappointonthisfriendshipratherthanmerit.Ifanauditcommitteeisestablished,thenthiscommitteecanrecommendtheappointmentoftheexternalauditors.Thecommitteewillhavethetimeandexpertisetoreviewthequalityofserviceprovidedbytheexternalauditors,removingtheindependenceissue.Corporategovernancerequirements–bestpracticeConoyCodonotneedtofollowcorporategovernancerequirements(thecompanyisnotlisted).However,notfollowingthoserequirementsmaystarttohaveadverseeffectsonConoy.Forexample,ConoyCo’sbankisalreadyconcernedaboutthelackoftransparencyinreporting.EstablishinganauditcommitteewillshowthattheboardofConoyCoarecommittedtomaintainingappropriateinternalsystemsinthecompanyandprovidingthestandardofreportingexpectedbylargecompanies.Obtainingthenewbankloanshouldalsobeeasierasthebankwillbesatisfiedwithfinancialreportingstandards.Givennonon-executives–independentadvicetoboardCurrentlyConoyCodoesnothaveanynon-executivedirectors.Thismeansthatthedecisionsoftheexecutivedirectorsarenotbeingchallengedbyotherdirectorsindependentofthecompanyandwithlittleornofinancialinterestinthecompany.Theappointmentofanauditcommitteewithonenon-executivedirectorontheboardofConoyCowillstarttoprovidesomenon-executiveinputtoboardmeetings.Whilenotsufficientintermsofcorporategovernancerequirements(aboutequalnumbersofexecutiveandnon-executivedirectorsareexpected)itdoesshowtheboardofConoyCoareattemptingtoestablishappropriategovernancesystems.AdviceonriskmanagementFinally,thereareothergeneralareaswhereConoyCowouldbenefitfromanauditcommittee.Forexample,lackofcorporategovernancestructuresprobablymeansConoyCodoesnothaveariskmanagementcommittee.Theauditcommitteecanalsoprovideadviceonriskmanagement,helpingtodecreasetheriskexposureofthecompany.