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ACCT3000 Mock Final Exam Paper

ANSWER ALL FOUR (4) QUESTIONS.

[Total marks = 60 Marks]

QUESTION 1 (15 Marks)

You are the external auditor for ABCM Pty Ltd, a merchandising company. You have performed the following audit procedures:

(a) A random sample of creditors was selected from the invoices and reconciliations

(where appropriate) and agreed to the accounts payable ledger. (3 Marks)

(b) Developed a simple spreadsheet model to enable the recalculation of wages expenses.

(3 Marks)

(c) Attended each monthly stock-take, selecting a sample of 130 items from the stock- sheets and agreeing them to the physical stock in the warehouse. (3 Marks)

(d) Gathered external confirmation from the financial controllers of two debtors of ABCM Pty Ltd, regarding a total outstanding amount of $60,000 at balance date.

(3 Marks) (e) Asked one of your assistants to vouch the legal title documents pertaining to ABCM

Pty Ltd’s machineries in the factory. (3 Marks)

Identify the key assertion that you are most likely testing with each of the above procedures and provide an explanation for your answer.

Solution:

	Key tested	assertion		Reason
(a)	Completeness			The auditor is tracing from the underlying source documents to the accounting records to check for any potential understatement issues. Tracing is likely being used to make sure, whether all the creditors that should have been recorded, have been recorded. Hance, the assertion of completeness.
(b)	Accuracy			The recalculation being performed here is to check the dollar value (accuracy assertion) of the payroll expenses recorded in the income statement.
(c)	Existence			Selected a sample of items from the stock sheets and physically verified their existence in the warehouse to confirm that the respective items of inventory which have been recorded actually exist. This audit procedure of conducting the audit trail from financial records to the source is called vouching and is conducted to test for overstatement issues.
(d)	Existence			External confirmation from the debtors is to verify and confirm that the both the outstanding debtors exist at balance date.
(e)	Rights Obligations		and	Verifying whether the entity has legal title or equivalent ownership rights to the machineries.

QUESTION 2

(15 Marks)

The head office of Bright Lights Ltd, wholesalers of electrical equipment, has asked you to review the system of control over cash collection at the Victorian branch because it suspects that irregularities are taking place. The branch is the largest single outlet of the company and has substantial annual sales invoiced by the branch.

Enquiries reveal the following procedures for invoicing sales and collecting cash. (Cash refers to currency and cheques).

1. There are two invoice sets that are used for cash sales and credit sales respectively.

2. When payment for cash sales is received by the cashier, one copy ofthe invoice is stamped as paid and filed alphabetically, and the other is given to the customer.

3. Credit sales invoices are sent to the customers.

4. Mail is opened by the secretary to the credit controller, who passes any cheques to the credit controller for his review, without recording the amounts received.

5. The credit controller gives the cheques to the cashier by depositing them in a tray on the cashier’s desk.

6. The cashier then makes a listing of the cheques, which is used by the credit controller for posting to the accounts receivable ledger.

7. The cheques from credit customers and receipts from cash sales are banked daily by the cashier, except for once a week when sufficient money is retained to reimburse petty cash.

8. The credit controller posts remittances to accounts receivable using a computerised accounting system and verifies the cash discount allowable.

9. The credit controller obtains approval from head office to write off bad debts. Any subsequent remittances received in respect of these accounts are credited to ‘sundry income’ .

Required

(a) Describe control weaknesses in the accounting for cash receipts. (7 Marks)

(b) Suggest improvements in internal control to prevent irregularities in the

collection of cash. (8 Marks)

(Total 15 Marks)

Solution:

Weakness	Improvement
There is no control over receipts from cash sales. Money from cash sales could be misappropriated before being banked.	Cash sales invoices should be checked for numerical continuity and totalled daily by a person with no access to cash. The amount should be recorded in the sales journal, included in the total credit to sales and debited to a cash sales account in the accounts receivable ledger.
There is a breakdown in segregation in that the credit controller could misappropriate cash from customers and conceal the theft by writing off the account or adjusting the discounts allowed.	Mail should be opened by persons wholly unconnected with cash and accounts receivable.
Only one person opens the mail. That person could misappropriate cash.	Two persons should be present at the mail opening requiring them to be in collusion if either is to misappropriate cash unobserved.
No record is made of cash at the point of opening the mail. Cash could subsequently be misappropriated, such as by the cashier, as there is no record of it having been received.	All cash should be recorded by those opening the mail. This rough cashbook should be checked against cash banked by an independent person such as the credit controller.
Cash is not deposited intact daily. There is a possibility of error arising if cash receipts are used directly for petty cash. In particular, neither the cash receipt nor the petty cash expenditure may be recorded.	All cash should be deposited intact daily. A separate cheque should be written to reimburse petty cash supported by petty cash vouchers.
A further lack of segregation is allowing the credit controller to post accounts receivable and write off bad debts. The credit controller could collude with customers to cancel amounts owing and conceal the fact by writing off the debt.	The accounts receivable ledger should be maintained by a person with no responsibility for handling or recording cash or for writing off bad debts.

QUESTION 3

(15 Marks)

Consider each of the following independent and material situations. In each c a s e , assume that the financial report has been prepared and audited for the year ended 30 June 2010.

(a) Range Ltd, (Range) holds several parcels of land in suburban Sydney that are currently zoned non-residential. Range has valued land on a fair value basis under AASB 116 Property, Plant and Equipment. This year, however, Range revalued the land by adopting a registered valuer's estimate of the market value of the land. This estimate included a substantial increase in value based on the general community expectation that the land will soon be rezoned for residential use.

(b) A part of Prize Ltd.'s operations are in South America. Recent government changes have made it impossible for you to verify the key accounts of inventory, property, plant and equipment and cash and related income statement balances.

(c) Stonehouse Ltd.'s annual report includes a detailed graph showing sales and profit figures for the past 10 years. However, there are some inconsistencies between the graph and the figures in the audited financial report. Management does not want to change the graph because it would involve increased printing costs.

(d) Connect Ltd. (Connect) is a subsidiary of a Hong-Kong-based telecommunications company, Link Ltd. (Link). Connect has suffered significant losses during its five years of operation. In previous years this did not pose a problem from an audit point of view, as Link pledged sufficient cash each year to cover Connect's annual reporting costs. However, Link is only able to pledge cash to cover three months of Connect's 2010 operating costs. Connect has no realistic prospect of obtaining finance from any other source. However, the directors are still hopeful of finding a financier and so have not mentioned the problem in the financial report.

Question 3 continued over the page

Question 3 continued

(e) The audit of Jones Ltd. Was extremely difficult, as the client did not maintain appropriate books and records during the year. Although the statutory registers were maintained, the accounting records were not updated for the first nine months of the year, as the company was without an accountant during this period. An accountant was employed in April and has tried to reconstruct records from the details of receipts and payments available. However, the accountant has been unable to reconcile the bank account and you are not satisfied that all transactions that occurred during the year are reflected in the

financial report.

Required:

Assume that no adjustments are made. For each situation, identify the type of audit opinion required and explain the basis of your answers. (Total Marks: 5 X 3 Marks = 15 Marks)

Solution:

(a) Qualified opinion

Sufficient and appropriate audit evidence has been obtained (ASA 500.6). Valuing the land as though it had already been rezoned residential does not appear to represent its fair value (AASB 116). This uncorrected misstatement reflects on a disagreement with management. The effect of this is material, but not so material and pervasive as to require an adverse opinion (ASA 705.5). Hence, a qualified opinion must be issued (ASA 705.7a).