Chugalug Ltd has three subsidiary companies and is engaged in a joint venture with an
Italian company called Intervole. It has an agreement with one of its major suppliers
whereby they share information so they can arrange for materials deliveries on a
‘˜just-in-time’ basis.
The wife of the managing director , who runs her own furnishings business, won a
tender to supply and fit tables and chairs to the conference area in the head office.
Chugalug is also part of a business consortium which shares good practice and lobbies
the local Member of Parliament to make representations to the government on their
behalf. This is operated through the local Chamber of Commerce. Chugalug owns
shares in a rival company, Gluggit plc which it shows as an investment in its Statement
of Financial position.
a) What is meant by a ‘˜related party’
b) Which of the involvements of Chugalug shown above a not involvements with
related party
Banzai
a) Control objectives
(b) Risks
(c) Tests of control
(d) Substantive tests
Two types of computer-assisted audit techniques (CAAT) are test data and audit
software.
For each of the procedures listed below, select the type of CAAT which would be used
to perform that procedure.
a) Select all sales ledger accounts showing a credit balance for review
b) Input of inventory (stock) issues in excess of balance of inventory (stock) items
shown as held on inventory records
c) Select all accounts in receivables (sales ledger where balance exceeds credit limit
State whether the following are true or false
a) The purpose of a management letter is to provide good audit evidence about the state
of the company’s finances
b) A significant deficiency in internal control is one which must be reported to the
management or those charged with governance
c) A Type 2 report is useful when evaluating service providers where a company has
outsourced services but it is does not replace independent audit evidence
d) Auditors may rely on representations made by the directors in identifying related
parties as they are often very difficult to identify
Glub
(a) Identify four controls which should be in place to control the purchase of tangible
fixed assets and explain why they are necessary and the consequences to the company if
they are not in place
(b) Identify weaknesses in the system described above and, for each weakness, explain
the consequences that could result from it.
(c) In respect of the new packing line what evidence will the auditors need in order to
confirm that the expenditure has been correctly include in the financial statements.
Comment particularly on the inclusion of overheads and financing costs
To which of the following stakeholders do the auditors of Tesco plc have a legal as
opposed to a moral responsibility
a. The bank
b. The employees
c. HM Revenue and Customs
d. People intending to buy shares in the company
e. A supplier of goods to Tesco plc
f. The shareholders
g. The government of the United Kingdom
h. The council of the Stock Exchange
Which of these statements is true?
An audit benefits a company because
a) It reassures the shareholders that the accounts are accurate
b) Makes the management accountable to the shareholders
c) Guarantees that the accounts are free from fraud or error
d) Guarantees that the financial information shown is true and fair
Accounting systems have control objectives and control procedures to mitigate the risks
that the control objective is not met.
For each of the following, select whether they are a control objective, risk, or control
procedure.
a) Organisations sell goods or services to customers with poor credit ratings
b) Goods are purchased only from approved suppliers
c) All purchase invoices must be matched to purchase orders and goods received notes
State whether the following statements are true or false in respect of the rules governing
audit activity
A. The work of the auditing profession is governed solely by the
Companies Act 2006
B. The Auditing Practices Board has the power to discipline auditors who perform their
work poorly
As part of verification techniques in respect of revenues an auditor will inspect sales
invoices. The auditor will gain assurance about different assertions depending on the
information on the invoice.
In respect of the information below, select the assertion for which that information will
provide assurance.
a) Date of the invoice
b) Description of the item sold
c)Monetary amount
Auditors use samples in their audit testing. In which of the following situations is the
use of sampling not appropriate
a) When the population is homogenous
b) When all items in the population have an equal chance of being selected
c) When the population is very small and all the items are material
d) When the population consists of a large number of transactions
Tickit & Run is a firm of Chartered Certified Accountants is currently engaged in
finalising the audit of Bugle plc, a publicly quoted incorporated business. The audit
partner Hugo Sponge is reviewing the audit file for the year ended 31 October 2X10. At
the front of the file is a memo from the audit manager recommending the issue of a
qualified audit opinion. Bugle plc’s major customer is known to be in financial
difficulties yet no provision has been made against the material debt owed to Bugle.
Bugle’s financial director is arguing that their customer has nearly completed
development of a new product, sales of which will enable them to repay all their debts.
He claims to have consulted another firm of accountants who have indicated that a
provision might not be necessary.
Hugo is unhappy with the situation for the following reasons:
(a) He is reasonably certain that, if she issues a qualified opinion, the directors of Bugle
will recommend appointment of the other firm as auditors.
(b) His firm supplies many other non-audit services to Bugle such as tax and
consultancy which bring in twice as much revenue as the audit and are more profitable.
It is highly unlikely the firm would continue to be asked to provide these services if the
audit is lost. In total, fees paid by Bugle for the audit and these other services amount to
9% of the audit firm’s revenues.
(c) He has been the engagement partner for ten years and has no reason to doubt the
integrity of the finance director with whom he has worked closely over that period of
time. He is prepared to believe his assertion that the debt will be repaid. However, he
also accepts that evidence in the audit file is equally persuasive that the customer is,
currently, in financial difficulty.
He calls the finance director to advise him that he will have no option
but to issue a qualified opinion if the financial statements do not contain a provision
against the debt.
The scenario raises the issue of providing non-audit services to audit clients.
a. Outline the general rules of ethical conduct which might be relevant relating to the
supply of non-audit services to public company audit clients.
b. Explain why the provision of non-audit services to audit clients might be seen as a
problem and why it is sometimes suggested that auditors should not provide such
services.
ISA 230 ‘˜Audit documentation states:
‘˜The objective of the auditor is to prepare documentation that provides:
(a) A sufficient and appropriate record of the basis for the auditor’s report; and
(b) Evidence that the audit was planned and performed in accordance with ISAs (UK
and Ireland)
and applicable legal and regulatory requirements.’
Briefly indicate what should be included as part of audit documentation and outline the
implications for the audit team as to what to include and what to exclude
Which of the following would increase, decrease or have no effect on the auditors’
estimation of inherent risk
a) A new computer system had been installed in the year
b) The company has set up an internal audit department (decrease)
c) The new financial director was previously the production manager
d) The financial controller has been with the company for twenty years
State whether the following are true or false in relation to computer assisted audit
techniques
a) The use of CAAT’s enables auditors to examine large populations of data
b) Auditors use test data to test controls within the client’s computer system
c) Modern software makes the use of CAATs cheap and easy to do so audit staff don’t
need any special training
d) Embedded software can provide continuous monitoring of client data
The audit team at Harmonium Ltd , a manufacturer of toys and games, have noted
several points which they have brought to the attention of you, the audit partner. These
include
‘¢ Harmonium’s product range hasn’t changed in five years and newer products are
appearing in the market in direct competition
‘¢ The management of Harmonium have not replaced their Head of Marketing who has
left the company to join a competitor
‘¢ The bank has refused to increase Harmonium’s overdraft and turned down an
application for as loan for new equipment
‘¢ Orders from two key customers have declined steadily over the year and turnover
volume is dropping. The directors point out that revenues are equivalent to those of the
previous year but the auditors point out that this is due to price rises not to volumes of
goods sold
‘¢ The audit team reviewed the future budgets and cash flows of Harmonium prepared
by the directors and stated that, whilst some of the assumptions were optimistic the
projections were not completely unreasonable
There are no other points which give any indication that the financial statements are
incorrectly stated and the audit process was satisfactory.
You have to decide whether any of these issues affect your audit opinion for the year
and which course of action is the most appropriate
a) The company is likely to be in trouble so issue a qualified auditors’ report on the
financial statements on the basis that it is not a going concern
b) None of these points are of significance to the financial report for the current year
and it is not for the auditors to tell the directors what to do so no action is required
c) None of these points are of significance to the financial report for the current
financial year. However they indicate a worrying trend which it might be appropriate to
discuss with the directors after the audit is finalised.
d) The audit team should go back to the company and try to discover further evidence
that the company is not a going concern so the audit report can be modified
Which of these is not the function of a Recognised Supervisory Body
a) Admission of members
b) Disciplining members
c) Setting ethical standards
d) Investigating complaints
e) Reviewing audits of public limited companies to maintain auditing standards
Tickit & Run is a firm of Chartered Certified Accountants is currently engaged in
finalising the audit of Bugle plc, a publicly quoted incorporated business. The audit
partner Hugo Sponge is reviewing the audit file for the year ended 31 October 2X10. At
the front of the file is a memo from the audit manager recommending the issue of a
qualified audit opinion. Bugle plc’s major customer is known to be in financial
difficulties yet no provision has been made against the material debt owed to Bugle.
Bugle’s financial director is arguing that their customer has nearly completed
development of a new product, sales of which will enable them to repay all their debts.
He claims to have consulted another firm of accountants who have indicated that a
provision might not be necessary.
Hugo is unhappy with the situation for the following reasons:
(a) He is reasonably certain that, if she issues a qualified opinion, the directors of Bugle
will recommend appointment of the other firm as auditors.
(b) His firm supplies many other non-audit services to Bugle such as tax and
consultancy which bring in twice as much revenue as the audit and are more profitable.
It is highly unlikely the firm would continue to be asked to provide these services if the
audit is lost. In total, fees paid by Bugle for the audit and these other services amount to
9% of the audit firm’s revenues.
(c) He has been the engagement partner for ten years and has no
reason to doubt the integrity of the finance director with whom he has worked closely
over that period of time. He is prepared to believe his assertion that the debt will be
repaid. However, he also accepts that evidence in the audit file is equally persuasive
that the customer is, currently, in financial difficulty.
He calls the finance director to advise him that he will have no option
but to issue a qualified opinion if the financial statements do not contain a provision
against the debt.
a) describe actions auditors can take when being threatened with removal by the
directors.
b) explain how an audit committee can provide additional safeguards to audit
independence in such a situation.
The external auditor should undertake analytical procedures as part of the planning
process in order to identify the risk of a possible misstatement of figures in the financial
statements. The results of the analytical procedures conducted on the financial
statements of an audit client are listed below.
Select whether the results indicate that cash and bank balances and trade receivables
might have been under or overstated.
The results show that, compared to the previous year:
a) Inventory has reduced by 5%, trade payables have increased by 7% and trade
receivables have reduced by 10%. Cash and bank balances have reduced by 11%
b) There has been no change in credit control procedures or length of credit given to
customers. Sales revenues have increased by 9%. Trade receivables have increased by
15%.
The external auditor may seek to place reliance on internal controls in order to restrict
substantive testing.
In each of the following circumstances, select whether the external auditor is likely to
place reliance or place no reliance on internal controls.
a) A company with an independent internal audit department
b) A family company where the financial director is related to the chief executive
c) A company where a fraud committed by the purchasing manager has been uncovered
Which of the following is not a test using sampling?
a) Select every tenth goods received note and match to the purchase invoice
b) Randomly pick a number of disposals of non ‘“current (fixed) assets from the
non-current assets register and inspect authorisation for sale documents and sales
invoices
c) Select all payables (purchase) ledger balances in excess of £15,000 and reconcile to
suppliers statements
d) Test all calculations of wages paid and deductions from payroll in week 31
State whether the following statements are true or false in respect of external auditors’
responsibilities
A. Auditors are responsible for the financial content of the annual accounts
B. Auditors do not have to have absolute assurance that the figures they audit are
correct
Bludger Ltd’s auditors were appointed after the end of the financial year and discovered
that the company had also changed banks shortly after the year end. The directors
refused permission for the auditors to contact the previous bankers for confirmation of
the year end bank balance without giving any good reason. The total of net current
assets was £1.2m of which the bank balance amounted to £123,000 overdrawn.
Which of the following options should the auditors take when considering their audit
report?
Explain, in not more than 500 words the auditors’ duties with regard to Money
Laundering and the steps they must take in respect of client activity
Which one of the following best describes the role of the International Auditing and
Assurance Board (IAASB)?
The IAASB is responsible for:
a) Setting auditing standards which are compulsory throughout the world
b) Monitoring auditors to ensure that they comply with auditing standards
c) Investigating and disciplining auditors who fail to comply with auditing standards
d) Setting auditing standards which facilitate the convergence of national and
international auditing standards
You are auditing Twinkles Ltd which runs a chain of jewellery shops and you are
responsible for the audit of inventory. Counting and indentifying the items of jewellery
is not a difficulty but verifying the value of the inventory is a major planning issue.
How would you gather sufficient appropriate evidence to validate the value of
inventories in this case?
You are the audit manager in charge of the audit of Gorilla plc. You are about to brief
junior members of the audit team prior to the audit of the Statement of Financial
Position. Write some notes in preparation for your meeting with the audit juniors to
explain the assertions in relation to current assets and what each of the assertions
means.
Which of the following statements are true
Describe the advantages and disadvantages of the external auditors providing an
internal audit service to their clients.
Demand for increased regulation of the audit profession has come from audit firms
themselves, particularly medium sized firms that find it difficult to secure audit
contracts for public limited companies (PLCs) given the predominance of the ‘˜Big
Four’ firms. One medium sized firm has written to the House of Lords inquiry asking
for a cap on the number of big audit contracts any one firm can have.
Set out in not more than 500 words the effect of increased regulation to compel Big 4
audit firms to give up large multinational audits.
Mautz and Sharaf set out a series of postulates and assumptions on which their theory
of auditing was based. Set out in not more than
500words the basis of their approach and the problems which subsequent commentators
have indicated with their approach. Note it is not necessary for you to set out the
postulates in detail merely use them to indicate points in your answer where necessary.
Explain the differences between
‘¢ an accrual
‘¢ a provision
‘¢ a contingent liability
Explain the audit objectives, including the assertions to be validated, in the audit of
provisions and how an auditor might approach the process of evidence gathering.