SECTION A (ALL 15 questions are compulsory and MUST be attempted)

Each question is worth 2 marks.

The following scenario relates to questions 1 – 5:

Your firm has been asked to tender for the audit of a potential new client, Mobile                Accessories Limited (Mobile). Mobile sells accessories for phones e.g. chargers and car   holders. It sells its products through online marketplaces and has grown significantly since its establishment only two years ago. It is now so large that it requires an audit and, if it     became a client, would represent your firm’s largest single fee.

Despite the additional cost, Mobile’s CEO Michael Jennings is actually happy an audit will now be conducted as he has stated:

“potential investors will be more willing to invest in Mobile now that we will have an audit report confirming the accounts are correct. ”

You are discussing accepting the potential engagement with your audit partner and how to plan such an audit.

1.  The primary ethical threat that exists in the above scenario is:

(a) Advocacy as you would be expected as auditor to represent Mobile in any legal disputes it may be involved in

(b) Self-interest as the fact Mobile would be your largest fee may mean you firm is too dependent on them

(c) Familiarity as you would be expected to be familiar with their products

(d) Management as you would expect in such a client to assist those charged with governance to make operational decisions

2.  The most appropriate course of action would be:

(a) Consider if the level of fees exceeds the limits in Section 4 of the Ethical Standard and if so, decline the opportunity.

(b) Document the potential threat and decline the opportunity to provide audit

services to Mobile

(c) Only accept the client if you accept that you may no longer purchase any products from Mobile

(d) No action is required, you may accept the audit if you wish

3.  The CEO’s statement is incorrect because:

(a) Potential investors are not likely to be impacted by an auditor’s report (b) Auditor’s reports cannot be provided to third parties such as investors (c)  Investors are not permitted to rely on auditor’s reports

(d) An audit does not ‘confirm the accounts are correct’

4.   It would be important that, in the case of Mobile, they are clear on the purpose of an audit and its inherent limitations. This is best achieved by:

(a) The auditor attending a formal board meeting and explaining the audit process to those charged with governance

(b) Requesting the client reads ISA (UK) 200 on the objectives of an audit (c) The preparation, and agreement of, an audit engagement letter

(d) Emailing the client setting out the inherent limitations of an audit

5.  The auditor’s report is primarily written for:

(a) The members of a company, which are usually the company’s shareholders, as they require assurance on the financial statements prepared by the directors

(b) Suppliers to the company as they require assurance on the financial statements before doing business with that company

(c) Potential investors as they require assurance on the financial statements as a basis for making investment decisions

(d) Banks and other credit institutions as they require assurance on the financial statements before extending credit facilities to companies

The following scenario relates to questions 6 – 10:

You are commencing the planning of the audit of Punchers Limited (Punchers), a wholesaler of office stationery products. Punchers has been a long-standing client of your firm and their financial statement are notorious for containing errors as they refuse to employ qualified       accounting staff, relying instead on their financial director who has no formal training in         financial reporting.

Their draft financial statements for the year ended 31 March 2019 contain the following extracts:

You are discussing your approach to the audit and relevant planning considerations during a ‘kick-off’ meeting with the engagement partner and the audit team.

6.   Overall materiality should primarily be based on:

(a) The auditor’s assessment of the figure that could influence the economic decisions of users of the financial statements

(b) The auditor’s assessment of audit risk

(c) The auditor’s assessment of the figure that represents the mostly commonly discussed metric in any given industry

(d) The auditor’s assessment of sample sizes appropriate to the client

7.  A suitable calculation for overall materiality would be:

(a) £2.5m being 10% of revenue

(b) £1.5m being 10% of total assets

(c) £250,000 being 1% of revenue

(d) £50,000 being 10% of profit

8.   Performance materiality could be assessed at:

(a) 10% of overall materiality due to the high risk nature of the client (b) 50% of overall materiality due to the high risk nature of the client (c) 90% of overall materiality due to the high risk nature of the client

(d) 90% of overall materiality due to the low risk nature of the client

9.   In the audit of Punchers the following could be deemed to be a ‘significant risk’:

(a) Going concern as the company is clearly experiencing financial difficulty (b) Cost of sales as gross profit appears unusually high

(c) Assets as total assets is the same as last year

(d) Trade receivables as they have unusually increased

10. In addition to the specific risk assessment discussed at the planning meeting, the engagement partner stated that revenue should also be considered a         significant risk. This is because:

(a) It is the largest balance

(b) There is a presumed risk of fraud in respect of revenue recognition in every audit (c) Revenue is a difficult balance to gain audit evidence on

(d) Punchers may have deficient internal control

The following scenario relates to questions 11 – 15:

You are reviewing the audit work performed on the year ended 31 March 2019 draft financial statements of SuperM Limited (SuperM), a supermarket. SuperM is a new client of your firm and you were appointed in June 2019.

All matters have been resolved with the exception of the following two issues:

1)  SuperM invested heavily in a store re-fit during the year which cost £1,000,000. Your audit junior is unsure how to obtain sufficient appropriate evidence on this                  acquisition.

2)  You did not attend the inventory count at 31 March 2019 as you were not in post as auditor on that date. The net book value of the inventory at 31 March 2019 was       £2,000,000.

Total assets of SuperM as at 31 March 2019 stood at £5,000,000.

11. In relation to matter 1), to gain reliable audit evidence over the store re-fit costs we could:

i.      Inspect supplier invoices

ii.      Physically inspect the new store fit-out

iii.     Attend an inventory count

iv.      Obtain a management representation confirming the acquisition

(a) i. and ii.

(b) i. and iv.

(c) ii. and iii.

(d) ii. and iv.

12. In relation to matter 2), why is attendance at the inventory count so important to the auditor?

(a) ISA (UK) 501 requires that inventory count attendance is mandatory for all audits

(b) ISA (UK) 580 states we are required to obtain management representations

regarding inventory counts

(c)  ISA (UK) 580 states that for inventory testing the auditor cannot rely on substantive testing alone

(d) ISA (UK) 501 requires the auditor to attend the inventory count where inventory is material, unless impracticable.

13. The most appropriate course of action in respect of matter 2) would be:

(a) To attend the next inventory count which will provide evidence that inventories were correctly stated at 31 March 2019

(b) To obtain supplier invoices for a sample of inventory purchases in stock as at 31

March 2019

(c) To attend the next inventory count and perform a ‘roll back’ to gain assurance on inventory as at 31 March 2019

(d) No further action is necessary

14. In the event that no further testing can be performed on either matter,

(a) We have two material misstatements that would impact our audit opinion            (b) We have two material gaps in audit evidence that would impact our audit opinion (c) We have two issues however they are immaterial

(d) We have two material uncertainties that would impact our audit opinion

15. Further to your answer to question 14, the most appropriate audit opinion is therefore:

(a) A disclaimer of opinion due to an inability to obtain sufficient, appropriate audit evidence

(b) A qualified opinion due to an inability to obtain sufficient, appropriate audit evidence

(c) An adverse opinion due to material misstatements

(d) A qualified opinion due to material misstatements

SECTION B (ALL 3 questions are compulsory and MUST be attempted)

QUESTION 16

Zoom Limited (Zoom) design and manufacture drones for use in the private hobby and light commercial markets. You are Des Gibson, an audit senior in Finegan Chartered                  Accountants assigned to the Zoom engagement for the year ended 31 December 2018.

Zoom was established in 2015 when two mechanical engineering graduates, Joe Brown and Tom White seen the potential in the market for drones and moved to exploit it. They obtained initial funding via a loan from Ventures Equity, a private finance group specialising in funding technology start-ups. The funding received from Ventures is due to be repaid by the end of   2019.

Zoom’s draft Statement of Financial Position is set out below:

Assets

Non-current assets

Property, plant and equipment

Current assets

Bank and Cash

Trade receivables

Inventories

Total assets

Equity and liabilities

Equity

Share capital

Retained earnings

Total equity

Liabilities

Non-current liabilities

Loan from Ventures Equity

Current liabilities

Trade and other payables

Total liabilities

Total equity and liabilities

100

3,400

Zoom brought their first drone to market in 2016 and since then experienced rapid growth as demand for drones has, quite literally, taken off. Performance in 2018 however has not been as strong. Competition from cheap foreign imports, and online retailers moving into the         market has reduced demand and eroded margins. On a more positive note, 2018 seen         Zoom bring online new production machines and processes which resulted in a significant    increase in the number of drones produced.

You are aware from other engagements that your audit partner, Jim Strong, has a preference to gather substantive audit evidence via analytical procedures.

Requirement

a)  With respect to Jim’s preference for analytical procedures:

i)   Set out the circumstances when this form of audit evidence provides reliable  substantive audit evidence and the circumstances when this form of evidence is not appropriate; and

5 marks

ii)  Evaluate the appropriateness of employing analytical procedures to provide  substantive audit evidence for Zoom. Include in your answer consideration of the specific account balances in Zoom

6 marks

b)  Draft a memo to your audit partner that includes the following:

i)   Outline any FOUR audit risks for Zoom, including your assessment of why they are an audit risk and the relevant financial statement assertions where appropriate;

12 marks

ii)  Detail audit procedures you should undertake to gain assurance on Zoom’s ability to continue as a going concern;

7 marks

Total   30 marks

QUESTION 17

You are continuing your audit of Zoom and have progressed to the audit fieldwork stage.      You have concluded that, if possible, you would like to rely on the internal control                 environment of the company to gain assurance on the balances of revenue and receivables.

To enable reliance to be placed on controls in this area you requested your audit junior firstly document the control environment implemented by Zoom. They have provided you with the  following description:

Extract from description of the revenue and receivables process.

1)  Orders are taken by sales staff who create pre-numbered sales orders (‘SOs’).

2)  On creation, SOs appear automatically on the warehouse inventory control system. Warehouse staff pick the products identified on the SO and make up the order.

3)  Zoom use their own vehicles and delivery drivers. When goods are loaded onto the vehicles for transportation, a goods dispatched note (‘GDN’) is created by the         warehouse staff on the inventory control system.

4)  The inventory control system automatically links to Zoom’s accounting system and on creation of a GDN, entries are automatically posted to reduce inventory, increase       revenue & receivables and increase cost of sales.

5)   Invoices generated by the process described in point 4) are sent to customers by sales ledger staff at the end of each week.

6)  Credit control consists of sending out monthly statements to customers who have balances overdue of greater than 30 days, the standard terms.

7)  On a monthly basis, finance department staff review any SOs that remain unfulfilled and remove any that are older than one week as they expect orders to be fulfilled    within this timescale.

Requirement:

Identify  FIVE deficiencies  in the system described above, the  risk associated with each deficiency and an appropriate recommendation on how to deal with each deficiency.

20 marks