(b) Explain the principal audit procedures to be performed during the final audit in respect of the estimatedwarranty provision in the balance sheet of Island Co as at 30 November 2007. (5 marks)

题目

(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)

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参考答案和解析
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.
更多“(b) Explain the principal audit procedures to be performed during the final audit in respect of the estimatedwarranty provision in the balance sheet of Island Co as at 30 November 2007. (5 marks)”相关问题

  • 第1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2题：

    (d) Briefly describe the principal audit work to be performed in respect of the carrying amount of the following

    items in the balance sheet:

    (i) trade receivables; and (3 marks)


    正确答案：
    (d) Principal audit work
    (i) Trade receivables
    ■ Review of agreements to determine the volume rebates terms. For example,
    – the % discounts;
    – the volumes to which they apply;
    – the period over which they accumulate;
    – settlement method (e.g. by credit note or other off-set or repayment).
    ■ Direct positive confirmation of a value-weighted sample of balances (i.e. larger amounts) to identify potential
    overstatement (e.g. due to discounts earned not being awarded).
    ■ Monitoring of after-date cash receipts and matching against amounts due as shortfalls may indicate disputed
    amounts.
    ■ Review of after-date credit notes to ensure adequate allowance (accrual) is made for discounts earned in the year
    to 30 June 2006.
    ■ Credit risk analysis of individually significant balances and assessment of impairment losses (where carrying value
    is less than the present value of the estimated cash flows discounted at the effective interest rate).

  • 第3题：

    (c) Briefly describe the principal audit work to be performed in respect of the carrying amount of the following

    items in the balance sheet:

    (i) development expenditure on the Fox model; (3 marks)


    正确答案：
    (c) Principal audit work
    (i) Development expenditure on the Fox model
    ■ Agree opening balance, $6·3 million, to prior year working papers.
    ■ Physically inspect assembly plant/factory where the Fox is being developed and any vehicles so far manufactured
    (e.g. for testing).
    ■ Substantiate costs incurred during the year, for example:
    – goods (e.g. components) and services (e.g. consultants) to purchase invoices;
    – labour (e.g. design engineers/technicians, mechanics, test drivers) to the payroll analysis;
    – overheads (e.g. depreciation of development buildings and equipment, power, consumables) to
    management’s calculation of overhead absorption and underlying cost accounts.
    ■ Review of internal trials/test drive results (e.g. in reports to management and video recordings of events).
    ■ Reperform. management’s impairment test of development expenditure. In particular recalculate value in use.
    Tutorial note: It is highly unlikely that a reasonable estimate of fair value less costs to sell could be made for so
    unique an asset.
    ■ Substantiate the key assumptions made by management in calculating value in use. For example:
    – the level of sales expected when the car is launched to advance orders (this may have fallen with the delay
    in the launch);
    – the discount rate used to Pavia’s cost of capital;
    – projected growth in sales to actual sales growth seen last time a new model was launched.

  • 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 the matters that should be considered when planning the nature and scope of the examination of

    Cusiter Co’s forecast balance sheet and income statement as prepared for the bank. (7 marks)


    正确答案：
    (b) Matters to be considered
    Tutorial note: Candidates at this level must appreciate that the matters to be considered when planning the nature and
    scope of the examination are not the same matters to be considered when deciding whether or not to accept an
    engagement. The scenario clearly indicates that the assignment is being undertaken by the current auditor rendering any
    ‘pre-engagement’/‘professional etiquette’ considerations irrelevant to answering this question.
    This PFI has been prepared to show an external user, the bank, the financial consequences of Cusiter’s plans to help the bank
    in making an investment decision. If Cusiter is successful in its loan application the PFI provides a management tool against
    which the results of investing in the plant and equipment can be measured.
    The PFI is unpublished rather than published. That is, it is prepared at the specific request of a third party, the bank. It will
    not be published to users of financial information in general.
    The auditor’s report on the PFI will provide only negative assurance as to whether the assumptions provide a reasonable basis
    for the PFI and an opinion whether the PFI is:
    ■ properly prepared on the basis of the assumptions; and
    ■ presented in accordance with the relevant financial reporting framework.
    The nature of the engagement is an examination to obtain evidence concerning:
    ■ the reasonableness and consistency of assumptions made;
    ■ proper preparation (on the basis of stated assumptions); and
    ■ consistent presentation (with historical financial statements, using appropriate accounting principles).
    Such an examination is likely to take the form. of inquiry, analytical procedures and corroboration.
    The period of time covered by the prospective financial information is two years. The assumptions for 2008 are likely to be
    more speculative than for 2007, particularly in relation to the impact on earnings, etc of the investment in new plant and
    equipment.
    The forecast for the year to 31 December 2007 includes an element of historical financial information (because only part of
    this period is in the future) hence actual evidence should be available to verify the first three months of the forecast (possibly
    more since another three-month period will expire at the end of the month).
    Cusiter management’s previous experience in preparing PFI will be relevant. For example, in making accounting estimates
    (e.g. for provisions, impairment losses, etc) or preparing cash flow forecasts (e.g. in support of the going concern assertion).
    The basis of preparation of the forecast. For example, the extent to which it comprises:
    ■ proforma financial information (i.e. historical financial information adjusted for the effects of the planned loan and capital
    expenditure transaction);
    ■ new information and assumptions about future performance (e.g. the operating capacity of the new equipment, sales
    generated, etc).
    The nature and scope of any standards/guidelines under which the PFI has been prepared is likely to assist the auditor in
    discharging their responsibilities to report on it. Also, ISAE 3400 The Examination of Prospective Financial Information,
    establishes standards and provides guidance on engagements to examine and report on PFI including examination
    procedures.
    The planned nature and scope of the examination is likely to take into account the time and fee budgets for the assignments
    as adjusted for any ‘overlap’ with audit work. For example, the examination of the PFI is likely to draw on the auditor’s
    knowledge of the business obtained in auditing the financial statements to 31 December 2006. Analytical procedures carried
    out in respect of the PFI may provide evidence relevant to the 31 December 2007 audit.

  • 第6题：

    (ii) Describe the procedures to verify the number of serious accidents in the year ended 30 November 2007.

    (4 marks)


    正确答案：
    (ii) Procedures to verify the number of serious accidents during 2007 could include the following:
    Tutorial note: procedures should focus on the completeness of the disclosure as it is in the interest of Sci-Tech Co to
    understate the number of serious accidents.
    – Review the accident log book and count the total number of accidents during the year
    – Discuss the definition of ‘serious accident’ with the directors and clarify exactly what criteria need to be met to
    satisfy the definition
    – For serious accidents identified:
    ? review HR records to determine the amount of time taken off work
    ? review payroll records to determine the financial amount of sick pay awarded to the employee
    ? review correspondence with the employee regarding the accident.
    Tutorial note: the above will help to clarify that the accident was indeed serious.
    – Review board minutes where the increase in the number of serious accidents has been discussed
    – Review correspondence with Sci-Tech Co’s legal advisors to ascertain any legal claims made against the company
    due to accidents at work
    – Enquire as to whether any health and safety visits have been conducted during the year by regulatory bodies, and
    review any documentation or correspondence issued to Sci-Tech Co after such visits.
    Tutorial note: it is highly likely that in a regulated industry such as pharmaceutical research, any serious accident
    would trigger a health and safety inspection from the appropriate regulatory body.
    – Discuss the level of accidents with representatives of Sci-Tech Co’s employees to reach an understanding as to
    whether accidents sometimes go unreported in the accident log book.

  • 第7题：

    5 You are the audit manager for three clients of Bertie & Co, a firm of Chartered Certified Accountants. The financial

    year end for each client is 30 September 2007.

    You are reviewing the audit senior’s proposed audit reports for two clients, Alpha Co and Deema Co.

    Alpha Co, a listed company, permanently closed several factories in May 2007, with all costs of closure finalised and

    paid in August 2007. The factories all produced the same item, which contributed 10% of Alpha Co’s total revenue

    for the year ended 30 September 2007 (2006 – 23%). The closure has been discussed accurately and fully in the

    chairman’s statement and Directors’ Report. However, the closure is not mentioned in the notes to the financial

    statements, nor separately disclosed on the financial statements.

    The audit senior has proposed an unmodified audit opinion for Alpha Co as the matter has been fully addressed in

    the chairman’s statement and Directors’ Report.

    In October 2007 a legal claim was filed against Deema Co, a retailer of toys. The claim is from a customer who slipped

    on a greasy step outside one of the retail outlets. The matter has been fully disclosed as a material contingent liability

    in the notes to the financial statements, and audit working papers provide sufficient evidence that no provision is

    necessary as Deema Co’s lawyers have stated in writing that the likelihood of the claim succeeding is only possible.

    The amount of the claim is fixed and is adequately covered by cash resources.

    The audit senior proposes that the audit opinion for Deema Co should not be qualified, but that an emphasis of matter

    paragraph should be included after the audit opinion to highlight the situation.

    Hugh Co was incorporated in October 2006, using a bank loan for finance. Revenue for the first year of trading is

    $750,000, and there are hopes of rapid growth in the next few years. The business retails luxury hand made wooden

    toys, currently in a single retail outlet. The two directors (who also own all of the shares in Hugh Co) are aware that

    due to the small size of the company, the financial statements do not have to be subject to annual external audit, but

    they are unsure whether there would be any benefit in a voluntary audit of the first year financial statements. The

    directors are also aware that a review of the financial statements could be performed as an alternative to a full audit.

    Hugh Co currently employs a part-time, part-qualified accountant, Monty Parkes, who has prepared a year end

    balance sheet and income statement, and who produces summary management accounts every three months.

    Required:

    (a) Evaluate whether the audit senior’s proposed audit report is appropriate, and where you disagree with the

    proposed report, recommend the amendment necessary to the audit report of:

    (i) Alpha Co; (6 marks)


    正确答案：
    5 BERTIE & CO
    (a) (i) Alpha Co
    The factory closures constitute a discontinued operation per IFRS 5 Non-Current Assets Held for Sale and Discontinued
    Operations, due to the discontinuance of a separate major component of the business. It is a major component due to
    the 10% contribution to revenue in the year to 30 September 2007 and 23% contribution in 2006. It is a separate
    business component of the company due to the factories having made only one item, indicating a separate income
    generating unit.
    Under IFRS 5 there must be separate disclosure on the face of the income statement of the post tax results of the
    discontinued operation, and of any profit or loss resulting from the closures. The revenue and costs of the discontinued
    operation should be separately disclosed either on the face of the income statement or in the notes to the financial
    statements. Cash flows relating to the discontinued operation should also be separately disclosed per IAS 7 Cash Flow
    Statements.
    In addition, as Alpha Co is a listed company, IFRS 8 Operating Segments requires separate segmental disclosure of
    discontinued operations.
    Failure to disclose the above information in the financial statements is a material breach of International Accounting
    Standards. The audit opinion should therefore be qualified on the grounds of disagreement on disclosure (IFRS 5,
    IAS 7 and IFRS 8). The matter is material, but not pervasive, and therefore an ‘except for’ opinion should be issued.
    The opinion paragraph should clearly state the reason for the disagreement, and an indication of the financial
    significance of the matter.
    The audit opinion relates only to the financial statements which have been audited, and the contents of the other
    information (chairman’s statement and Directors’ Report) are irrelevant when deciding if the financial statements show
    a true and fair view, or are fairly presented.
    Tutorial note: there is no indication in the question scenario that Alpha Co is in financial or operational difficulty
    therefore no marks are awarded for irrelevant discussion of going concern issues and the resultant impact on the audit
    opinion.

  • 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：

    You are an audit manager responsible for providing hot reviews on selected audit clients within your firm of Chartered

    Certified Accountants. You are currently reviewing the audit working papers for Pulp Co, a long standing audit client,

    for the year ended 31 January 2008. The draft statement of financial position (balance sheet) of Pulp Co shows total

    assets of $12 million (2007 – $11·5 million).The audit senior has made the following comment in a summary of

    issues for your review:

    ‘Pulp Co’s statement of financial position (balance sheet) shows a receivable classified as a current asset with a value

    of $25,000. The only audit evidence we have requested and obtained is a management representation stating the

    following:

    (1) that the amount is owed to Pulp Co from Jarvis Co,

    (2) that Jarvis Co is controlled by Pulp Co’s chairman, Peter Sheffield, and

    (3) that the balance is likely to be received six months after Pulp Co’s year end.

    The receivable was also outstanding at the last year end when an identical management representation was provided,

    and our working papers noted that because the balance was immaterial no further work was considered necessary.

    No disclosure has been made in the financial statements regarding the balance. Jarvis Co is not audited by our firm

    and we have verified that Pulp Co does not own any shares in Jarvis Co.’

    Required:

    (b) In relation to the receivable recognised on the statement of financial position (balance sheet) of Pulp Co as

    at 31 January 2008:

    (i) Comment on the matters you should consider. (5 marks)


    正确答案：
    (b) (i) Matters to consider
    Materiality
    The receivable represents only 0·2% (25,000/12 million x 100) of total assets so is immaterial in monetary terms.
    However, the details of the transaction could make it material by nature.
    The amount is outstanding from a company under the control of Pulp Co’s chairman. Readers of the financial statements
    would be interested to know the details of this transaction, which currently is not disclosed. Elements of the transaction
    could be subject to bias, specifically the repayment terms, which appear to be beyond normal commercial credit terms.
    Paul Sheffield may have used his influence over the two companies to ‘engineer’ the transaction. Disclosure is necessary
    due to the nature of the transaction, the monetary value is irrelevant.
    A further matter to consider is whether this is a one-off transaction, or indicative of further transactions between the two
    companies.
    Relevant accounting standard
    The definitions in IAS 24 must be carefully considered to establish whether this actually constitutes a related party
    transaction. The standard specifically states that two entities are not necessarily related parties just because they have
    a director or other member of key management in common. The audit senior states that Jarvis Co is controlled by Peter
    Sheffield, who is also the chairman of Pulp Co. It seems that Peter Sheffield is in a position of control/significant influence
    over the two companies (though this would have to be clarified through further audit procedures), and thus the two
    companies are likely to be perceived as related.
    IAS 24 requires full disclosure of the following in respect of related party transactions:
    – the nature of the related party relationship,
    – the amount of the transaction,
    – the amount of any balances outstanding including terms and conditions, details of security offered, and the nature
    of consideration to be provided in settlement,
    – any allowances for receivables and associated expense.
    There is currently a breach of IAS 24 as no disclosure has been made in the notes to the financial statements. If not
    amended, the audit opinion on the financial statements should be qualified with an ‘except for’ disagreement. In
    addition, if practicable, the auditor’s report should include the information that would have been included in the financial
    statements had the requirements of IAS 24 been adhered to.
    Valuation and classification of the receivable
    A receivable should only be recognised if it will give rise to future economic benefit, i.e. a future cash inflow. It appears
    that the receivable is long outstanding – if the amount is unlikely to be recovered then it should be written off as a bad
    debt and the associated expense recognised. It is possible that assets and profits are overstated.
    Although a representation has been received indicating that the amount will be paid to Pulp Co, the auditor should be
    sceptical of this claim given that the same representation was given last year, and the amount was not subsequently
    recovered. The $25,000 could be recoverable in the long term, in which case the receivable should be reclassified as
    a non-current asset. The amount advanced to Jarvis Co could effectively be an investment rather than a short term
    receivable. Correct classification on the statement of financial position (balance sheet) is crucial for the financial
    statements to properly show the liquidity position of the company at the year end.
    Tutorial note: Digressions into management imposing a limitation in scope by withholding evidence are irrelevant in this
    case, as the scenario states that the only evidence that the auditors have asked for is a management representation.
    There is no indication in the scenario that the auditors have asked for, and been refused any evidence.

  • 第10题：

    4 You are an audit manager in Smith & Co, a firm of Chartered Certified Accountants. You have recently been made

    responsible for reviewing invoices raised to clients and for monitoring your firm’s credit control procedures. Several

    matters came to light during your most recent review of client invoice files:

    Norman Co, a large private company, has not paid an invoice from Smith & Co dated 5 June 2007 for work in respect

    of the financial statement audit for the year ended 28 February 2007. A file note dated 30 November 2007 states

    that Norman Co is suffering poor cash flows and is unable to pay the balance. This is the only piece of information

    in the file you are reviewing relating to the invoice. You are aware that the final audit work for the year ended

    28 February 2008, which has not yet been invoiced, is nearly complete and the audit report is due to be issued

    imminently.

    Wallace Co, a private company whose business is the manufacture of industrial machinery, has paid all invoices

    relating to the recently completed audit planning for the year ended 31 May 2008. However, in the invoice file you

    notice an invoice received by your firm from Wallace Co. The invoice is addressed to Valerie Hobson, the manager

    responsible for the audit of Wallace Co. The invoice relates to the rental of an area in Wallace Co’s empty warehouse,

    with the following comment handwritten on the invoice: ‘rental space being used for storage of Ms Hobson’s

    speedboat for six months – she is our auditor, so only charge a nominal sum of $100’. When asked about the invoice,

    Valerie Hobson said that the invoice should have been sent to her private address. You are aware that Wallace Co

    sometimes uses the empty warehouse for rental income, though this is not the main trading income of the company.

    In the ‘miscellaneous invoices raised’ file, an invoice dated last week has been raised to Software Supply Co, not a

    client of your firm. The comment box on the invoice contains the note ‘referral fee for recommending Software Supply

    Co to several audit clients regarding the supply of bespoke accounting software’.

    Required:

    Identify and discuss the ethical and other professional issues raised by the invoice file review, and recommend

    what action, if any, Smith & Co should now take in respect of:

    (a) Norman Co; (8 marks)


    正确答案：
    4 Smith & Co
    (a) Norman Co
    The invoice is 12 months old and it appears doubtful whether the amount outstanding is recoverable. The fact that such an
    old debt is unsettled indicates poor credit control by Smith & Co. Part of good practice management is to run a profitable,
    cash generating audit function. The debt should not have been left outstanding for such a long period. It seems that little has
    been done to secure payment since the file note was attached to the invoice in November 2007.
    There is also a significant ethical issue raised. Overdue fees are a threat to objectivity and independence. Due to Norman Co
    not yet paying for the 2007 year end audit, it could be perceived that the audit has been performed for free. Alternatively the
    amount outstanding could be perceived as a loan to the client, creating a self-interest threat to independence.
    The audit work for the year ended 28 February 2008 should not have been carried out without some investigation into the
    unpaid invoice relating to the prior year audit. This also represents a self-interest threat – if fees are not collected before the
    audit report is issued, an unmodified report could be seen as enhancing the prospect of securing payment. It seems that a
    check has not been made to see if the prior year fee has been paid prior to the audit commencing.
    It is also concerning that the audit report for the 2008 year end is about to be issued, but no invoice has been raised relating
    to the work performed. To maximise cash inflow, the audit firm should invoice the client as soon as possible for work
    performed.
    Norman Co appears to be suffering financial distress. In this case there is a valid commercial reason why payment has not
    been made – the client simply lacks cash. While this fact does not eliminate the problems noted above, it means that the
    auditors can continue so long as adequate ethical safeguards are put in place, and after the monetary significance of the
    amount outstanding has been evaluated.
    It should also be considered whether Norman Co’s financial situation casts any doubt over the going concern of the company.
    Continued cash flow problems are certainly a financial indicator of going concern problems, and if the company does not
    resolve the cash flow problem then it may be unable to continue in operational existence.
    Action to be taken:
    – Discuss with the audit committee (if any) or those charged with governance of Norman Co:
    The ethical problems raised by the non-payment of invoices, and a payment programme to secure cash payment in
    stages if necessary, rather than demanding the total amount outstanding immediately.
    – Notify the ethics partner of Smith & Co of the situation – the ethics partner should evaluate the ethical threat posed by
    the situation and document the decision to continue to act for Norman Co.
    – The documentation should include an evaluation of the monetary significance of the amount outstanding, as it will be
    more difficult to justify the continuance of the audit appointment if the amount is significant.
    – The ethics partner should ensure that a firm-wide policy is communicated to all audit managers requiring them to check
    the payment of previous invoices before commencing new client work. This check should be documented.
    – Consider an independent partner review of the working papers prepared for the 28 February 2008 audit.
    – The audit working papers on going concern should be reviewed to ensure that sufficient evidence has been gathered to
    support the audit opinion. Further procedures may be found to be necessary given the continued cash flow problems.
    – Smith & Co have already acted to improve credit control by making a manager responsible for reviewing invoices and
    monitoring subsequent cash collection. It is important that credit control procedures are quickly put into place to prevent
    similar situations arising.

  • 第11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12题：

    You are an audit manager at Rockwell & Co, a firm of Chartered Certified Accountants. You are responsible for the audit of the Hopper Group, a listed audit client which supplies ingredients to the food and beverage industry worldwide.

    The audit work for the year ended 30 June 2015 is nearly complete, and you are reviewing the draft audit report which has been prepared by the audit senior. During the year the Hopper Group purchased a new subsidiary company, Seurat Sweeteners Co, which has expertise in the research and design of sugar alternatives. The draft financial statements of the Hopper Group for the year ended 30 June 2015 recognise profit before tax of $495 million (2014 – $462 million) and total assets of $4,617 million (2014: $4,751 million). An extract from the draft audit report is shown below:

    Basis of modified opinion (extract)

    In their calculation of goodwill on the acquisition of the new subsidiary, the directors have failed to recognise consideration which is contingent upon meeting certain development targets. The directors believe that it is unlikely that these targets will be met by the subsidiary company and, therefore, have not recorded the contingent consideration in the cost of the acquisition. They have disclosed this contingent liability fully in the notes to the financial statements. We do not feel that the directors’ treatment of the contingent consideration is correct and, therefore, do not believe that the criteria of the relevant standard have been met. If this is the case, it would be appropriate to adjust the goodwill balance in the statement of financial position.

    We believe that any required adjustment may materially affect the goodwill balance in the statement of financial position. Therefore, in our opinion, the financial statements do not give a true and fair view of the financial position of the Hopper Group and of the Hopper Group’s financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards.

    Emphasis of Matter Paragraph

    We draw attention to the note to the financial statements which describes the uncertainty relating to the contingent consideration described above. The note provides further information necessary to understand the potential implications of the contingency.

    Required:

    (a) Critically appraise the draft audit report of the Hopper Group for the year ended 30 June 2015, prepared by the audit senior.

    Note: You are NOT required to re-draft the extracts from the audit report. (10 marks)

    (b) The audit of the new subsidiary, Seurat Sweeteners Co, was performed by a different firm of auditors, Fish Associates. During your review of the communication from Fish Associates, you note that they were unable to obtain sufficient appropriate evidence with regard to the breakdown of research expenses. The total of research costs expensed by Seurat Sweeteners Co during the year was $1·2 million. Fish Associates has issued a qualified audit opinion on the financial statements of Seurat Sweeteners Co due to this inability to obtain sufficient appropriate evidence.

    Required:

    Comment on the actions which Rockwell & Co should take as the auditor of the Hopper Group, and the implications for the auditor’s report on the Hopper Group financial statements. (6 marks)

    (c) Discuss the quality control procedures which should be carried out by Rockwell & Co prior to the audit report on the Hopper Group being issued. (4 marks)


    正确答案：

    (a) Critical appraisal of the draft audit report

    Type of opinion

    When an auditor issues an opinion expressing that the financial statements ‘do not give a true and fair view’, this represents an adverse opinion. The paragraph explaining the modification should, therefore, be titled ‘Basis of Adverse Opinion’ rather than simply ‘Basis of Modified Opinion’.

    An adverse opinion means that the auditor considers the misstatement to be material and pervasive to the financial statements of the Hopper Group. According to ISA 705 Modifications to Opinions in the Independent Auditor’s Report, pervasive matters are those which affect a substantial proportion of the financial statements or fundamentally affect the users’ understanding of the financial statements. It is unlikely that the failure to recognise contingent consideration is pervasive; the main effect would be to understate goodwill and liabilities. This would not be considered a substantial proportion of the financial statements, neither would it be fundamental to understanding the Hopper Group’s performance and position.

    However, there is also some uncertainty as to whether the matter is even material. If the matter is determined to be material but not pervasive, then a qualified opinion would be appropriate on the basis of a material misstatement. If the matter is not material, then no modification would be necessary to the audit opinion.

    Wording of opinion/report

    The auditor’s reference to ‘the acquisition of the new subsidiary’ is too vague; the Hopper Group may have purchased a number of subsidiaries which this phrase could relate to. It is important that the auditor provides adequate description of the event and in these circumstances it would be appropriate to name the subsidiary referred to.

    The auditor has not quantified the amount of the contingent element of the consideration. For the users to understand the potential implications of any necessary adjustments, they need to know how much the contingent consideration will be if it becomes payable. It is a requirement of ISA 705 that the auditor quantifies the financial effects of any misstatements, unless it is impracticable to do so.

    In addition to the above point, the auditor should provide more description of the financial effects of the misstatement, including full quantification of the effect of the required adjustment to the assets, liabilities, incomes, revenues and equity of the Hopper Group.

    The auditor should identify the note to the financial statements relevant to the contingent liability disclosure rather than just stating ‘in the note’. This will improve the understandability and usefulness of the contents of the audit report.

    The use of the term ‘we do not feel that the treatment is correct’ is too vague and not professional. While there may be some interpretation necessary when trying to apply financial reporting standards to unique circumstances, the expression used is ambiguous and may be interpreted as some form. of disclaimer by the auditor with regard to the correct accounting treatment. The auditor should clearly explain how the treatment applied in the financial statements has departed from the requirements of the relevant standard.

    Tutorial note: As an illustration to the above point, an appropriate wording would be: ‘Management has not recognised the acquisition-date fair value of contingent consideration as part of the consideration transferred in exchange for the acquiree, which constitutes a departure from International Financial Reporting Standards.’

    The ambiguity is compounded by the use of the phrase ‘if this is the case, it would be appropriate to adjust the goodwill’. This once again suggests that the correct treatment is uncertain and perhaps open to interpretation.

    If the auditor wishes to refer to a specific accounting standard they should refer to its full title. Therefore instead of referring to ‘the relevant standard’ they should refer to International Financial Reporting Standard 3 Business Combinations.

    The opinion paragraph requires an appropriate heading. In this case the auditors have issued an adverse opinion and the paragraph should be headed ‘Adverse Opinion’.

    As with the basis paragraph, the opinion paragraph lacks authority; suggesting that the required adjustments ‘may’ materially affect the financial statements implies that there is a degree of uncertainty. This is not the case; the amount of the contingent consideration will be disclosed in the relevant purchase agreement, so the auditor should be able to determine whether the required adjustments are material or not. Regardless, the sentence discussing whether the balance is material or not is not required in the audit report as to warrant inclusion in the report the matter must be considered material. The disclosure of the nature and financial effect of the misstatement in the basis paragraph is sufficient.

    Finally, the emphasis of matter paragraph should not be included in the audit report. An emphasis of matter paragraph is only used to draw attention to an uncertainty/matter of fundamental importance which is correctly accounted for and disclosed in the financial statements. An emphasis of matter is not required in this case for the following reasons:

    – Emphasis of matter is only required to highlight matters which the auditor believes are fundamental to the users’ understanding of the business. An example may be where a contingent liability exists which is so significant it could lead to the closure of the reporting entity. That is not the case with the Hopper Group; the contingent liability does not appear to be fundamental.

    – Emphasis of matter is only used for matters where the auditor has obtained sufficient appropriate evidence that the matter is not materially misstated in the financial statements. If the financial statements are materially misstated, in this regard the matter would be fully disclosed by the auditor in the basis of qualified/adverse opinion paragraph and no emphasis of matter is necessary.

    (b) Communication from the component auditor

    The qualified opinion due to insufficient evidence may be a significant matter for the Hopper Group audit. While the possible adjustments relating to the current year may not be material to the Hopper Group, the inability to obtain sufficient appropriate evidence with regard to a material matter in Seurat Sweeteners Co’s financial statements may indicate a control deficiency which the auditor was not aware of at the planning stage and it could indicate potential problems with regard to the integrity of management, which could also indicate a potential fraud. It could also indicate an unwillingness of management to provide information, which could create problems for future audits, particularly if research and development costs increase in future years. If the group auditor suspects that any of these possibilities are true, they may need to reconsider their risk assessment and whether the audit procedures performed are still appropriate.

    If the detail provided in the communication from the component auditor is insufficient, the group auditor should first discuss the matter with the component auditor to see whether any further information can be provided. The group auditor can request further working papers from the component auditor if this is necessary. However, if Seurat Sweeteners has not been able to provide sufficient appropriate evidence, it is unlikely that this will be effective.

    If the discussions with the component auditor do not provide satisfactory responses to evaluate the potential impact on the Hopper Group, the group auditor may need to communicate with either the management of Seurat Sweeteners or the Hopper Group to obtain necessary clarification with regard to the matter.

    Following these procedures, the group auditor needs to determine whether they have sufficient appropriate evidence to draw reasonable conclusions on the Hopper Group’s financial statements. If they believe the lack of information presents a risk of material misstatement in the group financial statements, they can request that further audit procedures be performed, either by the component auditor or by themselves.

    Ultimately the group engagement partner has to evaluate the effect of the inability to obtain sufficient appropriate evidence on the audit opinion of the Hopper Group. The matter relates to research expenses totalling $1·2 million, which represents 0·2% of the profit for the year and 0·03% of the total assets of the Hopper Group. It is therefore not material to the Hopper Group’s financial statements. For this reason no modification to the audit report of the Hopper Group would be required as this does not represent a lack of sufficient appropriate evidence with regard to a matter which is material to the Group financial statements.

    Although this may not have an impact on the Hopper Group audit opinion, this may be something the group auditor wishes to bring to the attention of those charged with governance. This would be particularly likely if the group auditor believed that this could indicate some form. of fraud in Seurat Sweeteners Co, a serious deficiency in financial reporting controls or if this could create problems for accepting future audits due to management’s unwillingness to provide access to accounting records.

    (c) Quality control procedures prior to issuing the audit report

    ISA 220 Quality Control for an Audit of Financial Statements and ISQC 1 Quality Control for Firms that Perform. Audits and Reviews of Historical Financial Information, and Other Assurance and Related Services Agreements require that an engagement quality control reviewer shall be appointed for audits of financial statements of listed entities. The audit engagement partner then discusses significant matters arising during the audit engagement with the engagement quality control reviewer.

    The engagement quality control reviewer and the engagement partner should discuss the failure to recognise the contingent consideration and its impact on the auditor’s report. The engagement quality control reviewer must review the financial statements and the proposed auditor’s report, in particular focusing on the conclusions reached in formulating the auditor’s report and consideration of whether the proposed auditor’s opinion is appropriate. The audit documentation relating to the acquisition of Seurat Sweeteners Co will be carefully reviewed, and the reviewer is likely to consider whether procedures performed in relation to these balances were appropriate.

    Given the listed status of the Hopper Group, any modification to the auditor’s report will be scrutinised, and the firm must be sure of any decision to modify the report, and the type of modification made. Once the engagement quality control reviewer has considered the necessity of a modification, they should consider whether a qualified or an adverse opinion is appropriate in the circumstances. This is an important issue, given that it requires judgement as to whether the matters would be material or pervasive to the financial statements.

    The engagement quality control reviewer should ensure that there is adequate documentation regarding the judgements used in forming the final audit opinion, and that all necessary matters have been brought to the attention of those charged with governance.

    The auditor’s report must not be signed and dated until the completion of the engagement quality control review.

    Tutorial note: In the case of the Hopper Group’s audit, the lack of evidence in respect of research costs is unlikely to be discussed unless the audit engagement partner believes that the matter could be significant, for example, if they suspected the lack of evidence is being used to cover up a financial statements fraud.

  • 第13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14题：

    (b) Illustrate how you might use analytical procedures to provide audit evidence and reduce the level of detailed

    substantive procedures. (7 marks)


    正确答案：
    (b) Illustration of use of analytical procedures as audit evidence
    Tutorial note: Note that ‘as audit evidence’ requires consideration of substantive analytical procedures rather that the
    identification of risks (relevant to part (a)).
    Revenue
    Analytical procedures may be used in testing revenue for completeness of recording (‘understatement’). The average selling
    price of a vehicle in 2005 was $68,830 ($526·0 million ÷ 7,642 vehicles). Applying this to the number of vehicles sold
    in 2006, might be projected to generate $698·8 million ($68,830 × 10,153) revenue from the sale of vehicles. The draft
    financial statements therefore show a potential shortfall of $110·8 million ($(698·8 – 588·0) million) that is, 15·6%.
    This should be investigated and substantiated through more detailed analytical procedures. For example, the number of
    vehicles sold should be analysed into models and multiplied by the list price of each for a more accurate estimate of potential
    revenue. The impact of discounts and other incentives (e.g. 0% finance) on the list prices should then be allowed for. If
    recorded revenue for 2006 (as per draft income statement adjusted for cutoff and consignment inventories) is materially lower
    than that calculated, detailed substantive procedures may be required in order to show that there is no material error.
    ‘Proof in total’/reasonableness tests
    The material correctness, or otherwise, of income statement items (in particular) may be assessed through appropriate ‘proof
    in total’ calculations (or ‘reasonableness’ tests). For example:
    ■ Employee benefits costs: the average number of employees by category (waged/salaried/apprenticed) × the average pay
    rate for each might prove that in total $91·0 million (as adjusted to actual at 31 December 2006) is not materially
    misstated. The average number of employees needs to be checked substantively (e.g. recalculated based on the number
    of employees on each payroll) and the average pay rates (e.g. to rates agreed with employee representatives).
    Tutorial note: An alternative reasonableness might be to take last year’s actual adjusted for 2006 numbers of
    employees grossed-up for any pay increases during the year (pro-rated as necessary).
    ■ Depreciation: the cost (or net book value) of each category of asset × by the relevant straight-line (or reducing balance)
    depreciation rate. If a ‘ballpark’ calculation for the year is materially different to the annual charge a more detailed
    calculation can be made using monthly depreciation calculations. The cost (or net book value) on which depreciation
    is calculated should be substantively tested, for example by agreeing brought forward balances to prior year working
    papers and additions to purchase invoices (costings in respect of assets under construction).
    Tutorial note: Alternatively, last year’s depreciation charge may be reconciled to this year’s by considering depreciation
    rates applied to brought forward balances with adjustments for additions/disposals.
    ■ Interest income: an average interest rate for the year can be applied to the monthly balance invested (e.g. in deposit
    accounts) and compared with the amount recognised for the year to 31 December 2006 (as adjusted for any accrued
    interest per the bank letter for audit purposes). The monthly balances (or averages) on which the calculation is
    performed should be substantiated to bank deposit statements.
    ■ Interest expense: if the cash balances do not go into overdraft then this may be similar expenses (e.g. prompt payment
    discounts to customers). If this is to particular dealers then a proof in total might be to apply the discount rate to the
    amounts invoiced to the dealer during the period.
    Immaterial items
    For immaterial items analytical procedures alone may provide sufficient audit evidence that amounts in the financial
    statements are not materially misstated so that detailed substantive procedures are not required. For example, a comparison
    of administration and distribution, maintenance and insurance costs for 2006 compared with 2005 may be sufficient to show
    that material error is highly unlikely. If necessary, further reasonableness tests could be performed. For example, considering
    insurance costs to value of assets insured or maintenance costs to costs of assets maintained.
    Ratio analysis
    Ratio analysis can provide substantive evidence that income statement and balance sheet items are not materially misstated
    by considering their inter-relationships. For example:
    ■ Asset turnover: Based on the draft financial statements property, plant and equipment has turned over 5·2 times
    ($645·5/124·5) compared with 5·9 times in 2005. This again highlights that income may be overstated, or assets
    overstated (e.g. if depreciation is understated).
    ■ Inventory turnover: Using cost of materials adjusted for changes in inventories this has remained stable at 10·9 times.
    Tutorial note: This is to be expected as in (a) the cost in the income statement has increased by 9% and the value of
    inventories by 8·5%.
    Inventories represent the smallest asset value on the balance sheet at 31 December 2006 (7·8% of total assets).
    Therefore substantive procedures may be limited to agreeing physical count of material items (vehicles) and agreeing
    cutoff.
    ■ Average collection period: This has increased to 41 days (73·1/645·5 × 365) from 30 days. Further substantive analysis
    is required, for example, separating out non-current amounts (for sales on 0% finance terms). Substantive procedures
    may be limited to confirmation of amounts due from dealers (and/or receipt of after-date cash) and agreeing cutoff of
    goods on consignment.
    ■ Payment periods: This has remained constant at 37 days (2005 – 38 days). Detailed substantive procedures may be
    restricted to reconciling only major suppliers’ statements and agreeing the cutoff on parts purchased from them.

  • 第15题：

    (c) Explain the possible impact of RBG outsourcing its internal audit services on the audit of the financial

    statements by Grey & Co. (4 marks)


    正确答案：
    (c) Impact on the audit of the financial statements
    Tutorial note: The answer to this part should reflect that it is not the external auditor who is providing the internal audit
    services. Thus comments regarding objectivity impairment are not relevant.
    ■ As Grey & Co is likely to be placing some reliance on RBG’s internal audit department in accordance with ISA 610
    Considering the Work of Internal Auditing the degree of reliance should be reassessed.
    ■ The appointment will include an evaluation of organisational risk. The results of this will provide Grey with evidence,
    for example:
    – supporting the appropriateness of the going concern assumption;
    – of indicators of obsolescence of goods or impairment of other assets.
    ■ As the quality of internal audit services should be higher than previously, providing a stronger control environment, the
    extent to which Grey may rely on internal audit work could be increased. This would increase the efficiency of the
    external audit of the financial statements as the need for substantive procedures should be reduced.
    ■ However, if internal audit services are performed on a part-time basis (e.g. fitting into the provider’s less busy months)
    Grey must evaluate the impact of this on the prevention, detection and control of fraud and error.
    ■ The internal auditors will provide a body of expertise within RBG with whom Grey can consult on contentious matters.
    Tutorial note: Appropriate credit will be given for arguing that less reliance may be placed on internal audit in this year of
    change of provider.

  • 第16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17题：

    1 Your client, Island Co, is a manufacturer of machinery used in the coal extraction industry. You are currently planning

    the audit of the financial statements for the year ended 30 November 2007. The draft financial statements show

    revenue of $125 million (2006 – $103 million), profit before tax of $5·6 million (2006 – $5·1 million) and total

    assets of $95 million (2006 – $90 million). Your firm was appointed as auditor to Island Co for the first time in June

    2007.

    Island Co designs, constructs and installs machinery for five key customers. Payment is due in three instalments: 50%

    is due when the order is confirmed (stage one), 25% on delivery of the machinery (stage two), and 25% on successful

    installation in the customer’s coal mine (stage three). Generally it takes six months from the order being finalised until

    the final installation.

    At 30 November, there is an amount outstanding of $2·85 million from Jacks Mine Co. The amount is a disputed

    stage three payment. Jacks Mine Co is refusing to pay until the machinery, which was installed in August 2007, is

    running at 100% efficiency.

    One customer, Sawyer Co, communicated in November 2007, via its lawyers with Island Co, claiming damages for

    injuries suffered by a drilling machine operator whose arm was severely injured when a machine malfunctioned. Kate

    Shannon, the chief executive officer of Island Co, has told you that the claim is being ignored as it is generally known

    that Sawyer Co has a poor health and safety record, and thus the accident was their fault. Two orders which were

    placed by Sawyer Co in October 2007 have been cancelled.

    Work in progress is valued at $8·5 million at 30 November 2007. A physical inventory count was held on

    17 November 2007. The chief engineer estimated the stage of completion of each machine at that date. One of the

    major components included in the coal extracting machinery is now being sourced from overseas. The new supplier,

    Locke Co, is located in Spain and invoices Island Co in euros. There is a trade payable of $1·5 million owing to Locke

    Co recorded within current liabilities.

    All machines are supplied carrying a one year warranty. A warranty provision is recognised on the balance sheet at

    $2·5 million (2006 – $2·4 million). Kate Shannon estimates the cost of repairing defective machinery reported by

    customers, and this estimate forms the basis of the provision.

    Kate Shannon owns 60% of the shares in Island Co. She also owns 55% of Pacific Co, which leases a head office to

    Island Co. Kate is considering selling some of her shares in Island Co in late January 2008, and would like the audit

    to be finished by that time.

    Required:

    (a) Using the information provided, identify and explain the principal audit risks, and any other matters to be

    considered when planning the final audit for Island Co for the year ended 30 November 2007.

    Note: your answer should be presented in the format of briefing notes to be used at a planning meeting.

    Requirement (a) includes 2 professional marks. (13 marks)


    正确答案：
    1 ISLAND CO
    (a) Briefing Notes
    Subject: Principal Audit Risks – Island Co
    Revenue Recognition – timing
    Island Co raises sales invoices in three stages. There is potential for breach of IAS 18 Revenue, which states that revenue
    should only be recognised once the seller has the right to receive it, in other words the seller has performed its contractual
    obligations. This right does not necessarily correspond to amounts falling due for payment in accordance with an invoice
    schedule agreed with a customer as part of a contract. Island Co appears to receive payment from its customers in advance
    of performing any obligation, as the stage one invoice is raised when an order is confirmed i.e. before any work has actually
    taken place. This creates the potential for revenue to be recognised too early, in advance of any performance of contractual
    obligation. When a payment is received in advance of performance, a liability should be recognised equal to the amount
    received, representing the obligation under the contract. Therefore a significant risk is that revenue is overstated and liabilities
    understated.
    Tutorial note: Equivalent guidance is also provided in IAS 11 Construction Contracts and credit will be awarded where
    candidates discuss revenue recognition under IAS 11 as Island Co is providing a single substantial asset for a customer
    under the terms of a contract.
    Disputed receivable
    The amount owed from Jacks Mine Co is highly material as it represents 50·9% of profit before tax, 2·3% of revenue, and
    3% of total assets. The risk is that the receivable is overstated if no impairment of the disputed receivable is recognised.
    Legal claim
    The claim should be investigated seriously by Island Co. The chief executive officer’s (CEO) opinion that the claim will not
    result in any financial consequence for Island Co is na?ve and flippant. Damages could be awarded against Island Co if it is
    found that the machinery is faulty. The recurring high level of warranty provision implies that machinery faults are fairly
    common and therefore the accident could be the result of a defective machine being supplied to Sawyer Co. The risk is that
    no provision is created for the potential damages under IAS 37 Provisions, Contingent Liabilities and Contingent Assets, if the
    likelihood of paying damages is considered probable. Alternatively, if the likelihood of damages being paid to Sawyer Co is
    considered a possibility then a disclosure note should be made in the financial statements describing the nature and possible
    financial effect of the contingent liability. As discussed below, the CEO, Kate Shannon, has an incentive not to make a
    provision or disclose a contingent liability due to the planned share sale post year end.
    A further risk is that any legal fees associated with the claim have not been accrued within the financial statements. As the
    claim has arisen during the year, the expense must be included in this year’s income statement, even if the claim is still ongoing
    at the year end.
    The fact that the legal claim is effectively being ignored may cast doubts on the overall integrity of senior management, and
    on the integrity of the financial statements. Management representations should be approached with a degree of professional
    scepticism during the audit.
    Sawyer Co has cancelled two orders. If the amounts are still outstanding at the year end then it is highly likely that Sawyer
    Co will not pay the invoiced amounts, and thus receivables are overstated. If the stage one payments have already been made,
    then Sawyer Co may claim a refund, in which case a provision should be made to repay the amount, or a contingent liability
    disclosed in a note to the financial statements.
    Sawyer Co is one of only five major customers, and losing this customer could have future going concern implications for
    Island Co if a new source of revenue cannot be found to replace the lost income stream from Sawyer Co. If the legal claim
    becomes public knowledge, and if Island Co is found to have supplied faulty machinery, then it will be difficult to attract new
    customers.
    A case of this nature could bring bad publicity to Island Co, a potential going concern issue if it results in any of the five key
    customers terminating orders with Island Co. The auditors should plan to extend the going concern work programme to
    incorporate the issues noted above.
    Inventories
    Work in progress is material to the financial statements, representing 8·9% of total assets. The inventory count was held two
    weeks prior to the year end. There is an inherent risk that the valuation has not been correctly rolled forward to a year end
    position.
    The key risk is the estimation of the stage of completion of work in progress. This is subjective, and knowledge appears to
    be confined to the chief engineer. Inventory could be overvalued if the machines are assessed to be more complete than they
    actually are at the year end. Absorption of labour costs and overheads into each machine is a complex calculation and must
    be done consistently with previous years.
    It will also be important that consumable inventories not yet utilised on a machine, e.g. screws, nuts and bolts, are correctly
    valued and included as inventories of raw materials within current assets.
    Overseas supplier
    As the supplier is new, controls may not yet have been established over the recording of foreign currency transactions.
    Inherent risk is high as the trade payable should be retranslated using the year end exchange rate per IAS 21 The Effects of
    Changes in Foreign Exchange Rates. If the retranslation is not performed at the year end, the trade payable could be
    significantly over or under valued, depending on the movement of the dollar to euro exchange rate between the purchase date
    and the year end. The components should remain at historic cost within inventory valuation and should not be retranslated
    at the year end.
    Warranty provision
    The warranty provision is material at 2·6% of total assets (2006 – 2·7%). The provision has increased by only $100,000,
    an increase of 4·2%, compared to a revenue increase of 21·4%. This could indicate an underprovision as the percentage
    change in revenue would be expected to be in line with the percentage change in the warranty provision, unless significant
    improvements had been made to the quality of machines installed for customers during the year. This appears unlikely given
    the legal claim by Sawyer Co, and the machines installed at Jacks Mine Co operating inefficiently. The basis of the estimate
    could be understated to avoid charging the increase in the provision as an expense through the income statement. This is of
    special concern given that it is the CEO and majority shareholder who estimates the warranty provision.
    Majority shareholder
    Kate Shannon exerts control over Island Co via a majority shareholding, and by holding the position of CEO. This greatly
    increases the inherent risk that the financial statements could be deliberately misstated, i.e. overvaluation of assets,
    undervaluation of liabilities, and thus overstatement of profits. The risk is severe at this year end as Kate Shannon is hoping
    to sell some Island Co shares post year end. As the price that she receives for these shares will be to a large extent influenced
    by the balance sheet position of the company at 30 November 2007, she has a definite interest in manipulating the financial
    statements for her own personal benefit. For example:
    – Not recognising a provision or contingent liability for the legal claim from Sawyer Co
    – Not providing for the potentially irrecoverable receivable from Jacks Mines Co
    – Not increasing the warranty provision
    – Recognising revenue earlier than permitted by IAS 18 Revenue.
    Related party transactions
    Kate Shannon controls Island Co and also controls Pacific Co. Transactions between the two companies should be disclosed
    per IAS 24 Related Party Disclosures. There is risk that not all transactions have been disclosed, or that a transaction has
    been disclosed at an inappropriate value. Details of the lease contract between the two companies should be disclosed within
    a note to the financial statements, in particular, any amounts owed from Island Co to Pacific Co at 30 November 2007 should
    be disclosed.
    Other issues
    – Kate Shannon wants the audit to be completed as soon as possible, which brings forward the deadline for completion
    of the audit. The audit team may not have time to complete all necessary procedures, or there may not be time for
    adequate reviews to be carried out on the work performed. Detection risk, and thus audit risk is increased, and the
    overall quality of the audit could be jeopardised.
    – This is especially important given that this is the first year audit and therefore the audit team will be working with a
    steep learning curve. Audit procedures may take longer than originally planned, yet there is little time to extend
    procedures where necessary.
    – Kate Shannon may also exert considerable influence on the members of the audit team to ensure that the financial
    statements show the best possible position of Island Co in view of her share sale. It is crucial that the audit team
    members adhere strictly to ethical guidelines and that independence is beyond question.
    – Due to the seriousness of the matters noted above, a final matter to be considered at the planning stage is that a second
    partner review (Engagement Quality Control Review) should be considered for the audit this year end. A suitable
    independent reviewer should be indentified, and time planned and budgeted for at the end of the assignment.
    Conclusion
    From the range of issues discussed in these briefing notes, it can be seen that the audit of Island Co will be a relatively high
    risk engagement.

  • 第18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19题：

    (b) Describe the principal audit procedures to be carried out in respect of the following:

    (i) The measurement of the share-based payment expense; (6 marks)


    正确答案：
    (b) (i) Principal audit procedures – measurement of share-based payment expense
    – Obtain management calculation of the expense and agree the following from the calculation to the contractual
    terms of the scheme:
    – Number of employees and executives granted options
    – Number of options granted per employee
    – The official grant date of the share options
    – Vesting period for the scheme
    – Required performance conditions attached to the options.
    – Recalculate the expense and check that the fair value has been correctly spread over the stated vesting period.
    – Agree fair value of share options to specialist’s report and calculation, and evaluate whether the specialist report is
    a reliable source of evidence.
    – Agree that the fair value calculated is at the grant date.
    Tutorial note: A specialist such as a chartered financial analyst would commonly be used to calculate the fair value
    of non-traded share options at the grant date, using models such as the Black-Scholes Model.
    – Obtain and review a forecast of staffing levels or employee turnover rates for the duration of the vesting period, and
    scrutinise the assumptions used to predict level of staff turnover.
    – Discuss previous levels of staff turnover with a representative of the human resources department and query why
    0% staff turnover has been predicted for the next three years.
    – Check the sensitivity of the calculations to a change in the assumptions used in the valuation, focusing on the
    assumption of 0% staff turnover.
    – Obtain written representation from management confirming that the assumptions used in measuring the expense
    are reasonable.
    Tutorial note: A high degree of scepticism must be used by the auditor when conducting the final three procedures
    due to the management assumption of 0% staff turnover during the vesting period.

  • 第20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：

    5 You are the manager responsible for the audit of Blod Co, a listed company, for the year ended 31 March 2008. Your

    firm was appointed as auditors of Blod Co in September 2007. The audit work has been completed, and you are

    reviewing the working papers in order to draft a report to those charged with governance. The statement of financial

    position (balance sheet) shows total assets of $78 million (2007 – $66 million). The main business activity of Blod

    Co is the manufacture of farm machinery.

    During the audit of property, plant and equipment it was discovered that controls over capital expenditure transactions

    had deteriorated during the year. Authorisation had not been gained for the purchase of office equipment with a cost

    of $225,000. No material errors in the financial statements were revealed by audit procedures performed on property,

    plant and equipment.

    An internally generated brand name has been included in the statement of financial position (balance sheet) at a fair

    value of $10 million. Audit working papers show that the matter was discussed with the financial controller, who

    stated that the $10 million represents the present value of future cash flows estimated to be generated by the brand

    name. The member of the audit team who completed the work programme on intangible assets has noted that this

    treatment appears to be in breach of IAS 38 Intangible Assets, and that the management refuses to derecognise the

    asset.

    Problems were experienced in the audit of inventories. Due to an oversight by the internal auditors of Blod Co, the

    external audit team did not receive a copy of inventory counting procedures prior to attending the count. This caused

    a delay at the beginning of the inventory count, when the audit team had to quickly familiarise themselves with the

    procedures. In addition, on the final audit, when the audit senior requested documentation to support the final

    inventory valuation, it took two weeks for the information to be received because the accountant who had prepared

    the schedules had mislaid them.

    Required:

    (a) (i) Identify the main purpose of including ‘findings from the audit’ (management letter points) in a report

    to those charged with governance. (2 marks)


    正确答案：
    5 Blod Co
    (a) (i) A report to those charged with governance is produced to communicate matters relating to the external audit to those
    who are ultimately responsible for the financial statements. ISA 260 Communication of Audit Matters With Those
    Charged With Governance requires the auditor to communicate many matters, including independence and other ethical
    issues, the audit approach and scope, the details of management representations, and the findings of the audit. The
    findings of the audit are commonly referred to as management letter points. By communicating these matters, the auditor
    is confident that there is written documentation outlining all significant matters raised during the audit process, and that
    such matters have been formally notified to the highest level of management of the client. For the management, the
    report should ensure that they fully understand the scope and results of the audit service which has been provided, and
    is likely to provide constructive comments to help them to fulfil their duties in relation to the financial statements and
    accounting systems and controls more effectively. The report should also include, where relevant, any actions that
    management has indicated they will take in relation to recommendations made by the auditors.

  • 第23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.

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