Answers
Fundamentals Level – Skills Module, Paper F8
Audit and Assurance December 2014 Answers
Section A
Question Answer See Note
1 B 1
2 D2
3 C 3
4 C 4
5 C 5
6 B 6
7 A 7
8D 8
9 A 9
10 B 10
11 B11
12 D 12
Notes:
1 Results of previous audits and the need to maintain professional scepticism should be included in an audit strategy as opposed to
an audit engagement letter.
2 In the case of situations 1 and 4, the auditor has an obligation to disclose details of their clients’ affairs to third parties. Situations
2 and 3 are ones where voluntary disclosure should be made.
3 When the accounting records are unavailable, it is not acceptable to obtain a written representation as this represents an inability
to obtain sufficient and appropriate audit evidence and if material would result in a modified audit report.
4 Substantive procedure 1 provides evidence over the assertion of completeness as the direction of the test is from source documents
to accounting records. Substantive procedure 4 provides evidence over valuation and allocation rather than existence.
5 Auditors do not have a responsibility to formally report on the going concern status. ISA 570 Going Concern requires auditors to
obtain sufficient appropriate audit evidence about the appropriateness of management’s use of the going concern assumption in
the preparation of the financial statements and to conclude whether there is a material uncertainty about the entity’s ability to
continue as a going concern.
6 Procedures 2 and 3 are substantive procedures rather than tests of control.
7 Costs may reduce if the internal audit function is outsourced; however, this would not always be the case as redundancies of the
company’s existing internal audit function may increase the overall costs.
8 Entering dummy data into the company’s own computer system is a test data technique as it involves the use of the company’s
system rather than the auditor’s own computer programs.
9 Internal control questionnaires can sometimes contain a large number of irrelevant controls; hence this is a disadvantage. B relates
to disadvantages of using narrative notes and C is incorrect as questionnaires are quick to prepare.
10 Statement 1 is not correct as internal audit (IA) should not report to the finance director as this would impact on their
independence. Some of the internal controls and functions IA review are the responsibility of the finance director and they may not
act on any recommendations which appear to criticise their department. Statement 2 is correct as companies are not required to
implement and maintain an IA function. Corporate governance principles recommend that listed companies maintain an IA function
and annually consider the need for such a function; however, they do not require it.
11 Audit risk is made up of two components being risk of material misstatement; inherent risk and control risk and also the risk that
the auditor will not detect material misstatements being detection risk.
12 If management are unwilling to make their assessment of going concern this would result in a modified opinion with a qualified
or disclaimer opinion. If the going concern basis is not appropriate, then an adverse opinion should be provided rather than a
qualified opinion as the matter is material and pervasive.
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Section B
1 (a) Importance of audit planning
– It helps the auditor to devote appropriate attention to important areas of the audit.
– It helps the auditor to identify and resolve potential problems on a timely basis.
– It helps the auditor to properly organise and manage the audit engagement so that it is performed in an effective and
efficient manner.
– It assists in the selection of engagement team members with appropriate levels of capabilities and competence to
respond to anticipated risks and the proper assignment of work to them.
– It facilitates the direction and supervision of engagement team members and the review of their work.
– It assists, where applicable, in the coordination of work done by experts.
(b) Procedures due to increased risk of fraud
The audit senior should consider undertaking the following procedures as a result of the increased risk of the payroll fraud.
– Discuss with management and those charged with governance as to whether they are aware of any other payroll frauds
or potential frauds.
– Review board minutes for evidence of management discussion of the materiality of the payroll fraud and to the existence
of any additional frauds or suspected frauds.
– Discuss with the payroll manager the nature of the payroll fraud, how it occurred and the financial impact of amounts
incorrectly paid into the payroll clerk’s bank account.
– Review the supporting documentation to confirm the total of the fraudulent payments made and assess the materiality
of this misstatement.
– Review and test the internal controls surrounding setting up of and payments to new joiners to assess whether further
frauds may have occurred.
– Consider whether other information obtained by the audit team indicates risks of additional material misstatements with
regards to payroll fraud.
– Obtain a written representation from management acknowledging that they have disclosed to the auditors all knowledge
of actual and suspected payroll frauds.
2Audit risks and responses
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Audit risk Auditors response
Eagle Heating Co (Eagle) has decreased the selling price of
products significantly since September 2014 and there are
increased levels of inventory expected at the year end.
It is possible that the selling price may have fallen so that the
net realisable value (NRV) of inventory is below cost.
IAS 2 Inventory requires inventory to be stated at the lower of
cost and NRV. Hence it is possible that inventory is overvalued.
The auditor should undertake detailed cost and NRV testing to
assess whether inventory is overvalued and requires write
down.
A key customer of Eagle has been experiencing financial
difficulties and Eagle has agreed a six-month payment break;
however, the finance director does not believe an allowance is
required.
If the customer is experiencing difficulties, there is an increased
risk that the receivable is not recoverable and hence is
overvalued.
If the six-months payment break has now ended, review after
date cash receipts for this customer to assess whether any
payments have been made.
Discuss with the finance director why he feels an allowance is
not required. Review whether any general allowance for
uncollectable accounts is sufficient to cover the amount of this
receivable.
In light of the increased competition, reduction in selling price
and financial difficulties of a key customer, there is an
increased risk that Eagle is facing going concern difficulties.
The auditor should undertake detailed going concern testing.
They should review the cash flow forecast for the foreseeable
future to assess whether the going concern basis is appropriate
or whether additional going concern disclosures are required in
the financial statements.
The financial controller of Eagle was dismissed in October and
is threatening to sue the company for unfair dismissal.
If it is probable that Eagle will make payment to the financial
controller, a provision for unfair dismissal is required. If the
payment is possible rather than probable, a contingent liability
disclosure would be necessary. If Eagle has not done this, there
is a risk over the completeness of any provisions or contingent
liabilities.
The audit team should write to the company’s lawyers to
enquire of the existence and likelihood of success of any claim
from the former financial controller.
3 (a) Benefits of audit committee for Bluebird Enterprises Co
Appointing an audit committee will benefit Bluebird in the following ways:
– Bluebird does not currently have any non-executive directors, hence once appointed, they will bring considerable
external experience to the board as well as challenging the decisions of executive directors and contributing to
independent judgements.
– The finance director will benefit in that he will be able to raise concerns and discuss accounting issues with the audit
committee.
– It will help to improve the quality of the financial reporting of Bluebird; whilst the company already has a finance director,
Audit risk Auditors response
The financial controller has been dismissed and his tasks have
been allocated between the finance department team, this has
increased their workload.
This increases the inherent and control risk within Eagle as
errors may have been made within the accounting records by
the overworked finance team members and there is no one
working in a supervisory capacity.
The team should remain alert throughout the audit for
additional errors within the finance department.
In addition, discuss with the finance director whether he will be
able to provide the team with assistance for any audit issues as
there is no financial controller available.
The purchase ledger supervisor left in August and no
reconciliations of supplier statements and purchase ledger
control account have been performed. There is an increased
risk of errors within trade payables and the year-end payable
may be under or overstated.
The audit team should increase their testing on trade payables
at the year end, with a particular focus on completeness of
payables. A detailed review of the year-end purchase ledger
control account reconciliation should be performed with a focus
on any unusual reconciling items.
Preliminary analytical review of the draft statement of profit or
loss has identified a significant fall in administration expenses.
Administration expenses tend to be fixed costs and hence
would be unlikely to fluctuate significantly with changes in
sales volumes. Hence there is a risk that administration
expenses are understated.
Update the analytical review with the full year results and if
significant fluctuations on prior year remain, discuss these with
management. Obtain supporting evidence to verify
management explanations.
