AF304: AUDITING

Introduction and Assignments

Semester 1, 2014

School of Accounting and Finance Faculty of Business and Economics The University of the South Pacific

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Produced by the University of the South Pacific, Suva, Fiji, 2014. First produced February 2014 Introduction & Assignments team for semester 1,2014 Course coordinator Dr Arvind Patel Instructional designer Jane Kanas Educational technologist Kerishma Seth Electronic publisher Letila Fong Cover design Marketing, Development and Communications Office This material has been prepared by the University of the South Pacific for use by students enrolled in the course for which it was developed. It may contain copyright material copied under the provisions of the Fiji Copyright Act 1999 or under license from rights holders or their agents. Copyright in material prepared by USP is owned by USP. This material cannot be sold or copied for further distribution without the University’s permission. Where provided in electronic format, it can only be printed by or for the use of the student enrolled in the course.

AF304 IA 12014

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Contents

Calendar for semester 1, 2014 ...................................................................... iv

Your course coordinator ............................................................................... 5

Course introduction ...................................................................................... 6

Your learning materials ................................................................................ 7

Your learning support ................................................................................... 10

How to login to Moodle ............................................................................... 12

Study schedule .............................................................................................. 13

Assessment overview ................................................................................... 14

Grading Systems .......................................................................................... 15

Submission of assignments .......................................................................... 17

Plagiarism ..................................................................................................... 18

Assignment 1 ................................................................................................ 20

Past test paper ............................................................................................... 27

Past examination paper ................................................................................. 35

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C a lenda r f o r semes te r 1 , 2014

Beginning of semester 1 Laucala, Emalus and Alafua campus students - Final day for withdrawal with remission of tuition fees for semester 1 courses is 28 February 2014

Week 1 17–21 February

Week 2 24–28 February

Week 3 3–7 March

Other USP Campuses students: Final day for official withdrawal with remission of tuition fees for semester 1 courses* 28 March 2014

Week 4 10–14 March

Week 5 17–21 March

Week 6 24–28 March

Week 7 31 March–4 April

Mid-semester break 5–13 April

Final day for official withdrawal without remission of tuition fees for semester 1 courses is 25 April 2014

Week 8 14–18 April

Week 9 21 –25 April

Week 10 28 April–2 May

Week 11 5–9 May

Week 12 12–16 May

Week 13 19–23 May

Week 14 26 –30 May

Study break Week 15 31 May–8 June

Examinations Week 16 9–13 June

Examinations Week 17 16–20 June

* If you are considering withdrawal from your course, contact your lecturer, local

USP Campus or Centre first to see if they can help.

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Your c ours e coo rd ina to r

Your course coordinator will be a senior staff from the School of Accounting and Finance. You will get to meet the coordinator during your first Satellite Tutorial. During this tutorial you will be provided with the contact address of your coordinator. You should also visit the Moodle site for further information. If you have any questions, please post it on Moodle and someone will respond.

If you have any questions or concerns, feel free to contact us on Moodle.

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C ours e i n t r oduc t i on

This course is designed to introduce students to the general principles and processes of the audit and assurance function in an ever-changing audit environment. In this course the practice of auditing is explained in the context of auditing theory, concepts, and current practice with appropriate reference to the auditing standards. In addition, this auditing course considers the international perspective of auditing and the effect on the globalization of the auditing profession, with particular emphasis on the Pacific environment. The course will study in detail the practical process of auditing in the context of statutory and regulatory requirements and will emphasize on the development and practice of financial statement audits, with an authoritative insight into the fundamental role of auditors, the influence on audits, and related issues.

Learning outcomes On completion of this course, you should be able to:

1 Understand the assurance framework and appreciate the role of auditing standards;

2 Critically evaluate issues currently facing the profession, including the provision of expanded assurance and other services by the auditor to their clients, the impact of new audit methodologies on auditor-client relationships, and other issues concerning the independence of auditors;

3 Explain the nature and importance of professional ethics, independence, corporate governance, fraud, related parties, and appropriateness of the going concern basis;

4 Identify materiality and describe and explain the tests of controls;

5 Explain the purpose and steps involved in reviewing working papers and the financial report, including the summarization and evaluation of audit results, performance of analytical procedures in an overall review and the Auditor’s reporting obligations;

6 Understand assurance services required by specific legislation or regulations, including prospective financial information and reports on internal controls; and

7 Understand other applications of the audit function, including compliance auditing, performance auditing, comprehensive auditing, internal auditing, forensic auditing and the audit function in the public sector environment.

All the above outcomes should be understood in the overall framework of risk management

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Generic Attributes

In addition to learning outcomes, you should be able to acquire the following generic skills upon completion of this course: i. Cognitive Skills

a. Routine skills – computer skills , numerical skills, and report and essay writing

b. Analytic / design skills – initiate and conduct research, problem solving skills, construct

arguments, interpret data and reports, engage in ethical reasoning.

c. Appreciative skills – evaluate and react to new ideas, think and act critically, make

judgments from one’s own value framework, apply disciplinary and multidisciplinary perspective and appreciate processes of professional adaptation and behaviour.

ii. Behavioural skills

a. Personal skills – flexibility in different situations, act strategically, think and

act independently, focus on outcomes and think creatively. b. Interpersonal skills

– present, discuss and defend views, communication skills, collaborate with colleges and work in teams.

You r l ea rn ing ma te r i a l s

You should have already received the following materials a week before semester starts:

1. The Introduction and Assignments book, which you are reading now

2. Text Book *

3. Course Guide

4. A course Moodle page

Contact your USP Campus or Centre immediately if you are missing any of the materials mentioned above.

The prescribed textbook for the course is:

*Leung, P., Coram, P., Cooper, B., Richardson, P., 2011, Modern Auditing & Assurance Services, 5th Edition, John Wiley & Sons Limited, Australia.

You will need to purchase this separately in addition to those mentioned above.

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Suppl emen tary mater ia l s

Articles You are encouraged to refer to journals to increase your understanding of concepts and issues relating to the course. The following is a list of top accounting journals which feature articles in the area of auditing:

� Auditing: A Journal of Practice and Theory � Accountancy, CA Journal of New Zealand � Accounting and Finance � Accounting Review � Critical Perspectives on Accounting � Journal of Accounting Research � Accounting, Organization and Society � Journal of Accounting, Auditing and Finance � Review of Accounting Studies � The Australian CPA Journal Now called “In The Black” � Other professional journals held in the periodical section in the

Library. This list is not exhaustive and students are encouraged to refer to other journals which they believe are relevant. At the end of this course outline is a list of useful articles on auditing that students may wish to refer to. Library Sources There is a copy of the prescribed text book on reserve in the main library in Laucala Campus. You need to contact the Main Issue Desk of your respective Library on Campus. Internet Sources The course will be administered through Moodle. Students can access the AF304 Moodle website by going to the following address:

www.elearn.usp.ac.fj

All announcements and resources will be posted on Moodle. You are also encouraged to discuss issues or queries using Moodle forums.

Some useful articles: These will be posted on Moodle.

Abdel-khalik A. R., “Why Do Private Companies Demand Auditing? A Case for Organisational Loss of Control”, Journal of Accounting, Auditing and Finance, (Vol. 8, No. 1, Winter 1993), pp. 31-52.

Kinney Jr., W.R. 2005. Twenty-Five Years of Audit Deregulation and Re-Regulation: What Does it Mean for 2005 and Beyond? Auditing: A Journal of Practice & Theory (May Supplement): 89-110.

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Casterella, J.R.; J.R. Francis, B.L. Lewis, and P.L. Walker. 2004. Auditor Industry Specialization, Client Bargaining Power, and Audit Pricing. Auditing: A Journal of Practice & Theory (March): 123-140.

Benston, G.J., and A.L. Hartgraves. 2002. Enron: what happened and what we can learn from it. Journal of Accounting and Public Policy (Summer): 105-127.

Krishnan, J., H. Sami, and Y. Zhang. 2005 “Does the Provision of Nonaudit Services Affect Investor Perceptions of Auditor Independence?” Auditing: A Journal of Practice & Theory (Nov): 111-135.

Carcello, J.V., D.R.Hermanson and Z. Ye, 2011. Corporate Governance Research in Accounting and Auditing: Insights, Practice Implications, and Future Research Directions, Auditing: A Journal of Practice & Theory, Vol. 30 No.3, pp.1-31

Carcello J. V., R. H. Hermanson, and N. T. McGrath, 1992. “Audit Quality Attributes: The Perceptions of Audit Partners, Preparers and Financial Statement Users, Auditing: A Journal of Practice and Theory, (July), 1-15.

Fargher L. N., and Jiang L, 2008. “Changes in Audit Environment and Auditors’ Propensity to Issue Going-Concern Opinions”, Auditing: A Journal of Practice & Theory, (Vol. 27, No. 2, November), pp. 55 -78.

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Your l ea rn ing s uppo r t

Lo cal tu to r i a ls

To assist you with your studies, regular face-to-face sessions may be held with a tutor. You should check with your Campus or Centre at the start of semester to see if face-to-face tutorials will be held for your course.

Study g roup s

Most people find it easier to study in a group or with a friend, at least for part of the time. Working with others helps to motivate us. It provides a shared goal and reduces feelings of isolation or boredom. Your local Campus or Centre will be able to put you in touch with students doing this course and may help you get organised.

Lib rary serv i ces

Making good use of the library and its resources is vital for you to be a successful student. Learn about library support and services and the importance of information literacy at your Campus or Centre library.

Studen t Learn ing Suppo rt (SLS)

SLS supports you through e-mentoring which is giving you learning tips and advice through email.

You can email us at the following addresses:

Faculty of Arts, Law and Education: falesls@usp.ac.fj Faculty of Science, Technology and Environment: fstetutorsupport@usp.ac.fj Faculty of Business and Economics: fbe_sls@usp.ac.fj

You r REACT session

commonly known as satellite tutorials. You are encouraged to attend the scheduled sessions in the weeks shown in your study schedul Here are some suggestions for getting the most out of these REACT sessions: Note that before your REACT tutorial session begins your tutorial group will be advised as to who all the participants are (regional and ondown names of your colleagues and which Campuses or Centres they are listening from. Speak slowly and pronounce your words clearly so that your colleagues can understand what you are saying. Be courteous and try to maintain a polite tone of voice. When you want to address your tutorial group, press the "speak button", and aim to maintain a 6-inch distance between your mouth and the microphone whilst speaking. Please note that you may be using two different types of microphones as shown below.

1. If you have questsession you can do so by speaking to a microphone or through the chat tool in REACT.

2. Try not to "steal the show". Remember that each of you will have important points to add to discussions.

Contact your local USP Campus or Centre for further information on using the REACT facilities.

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You r REACT session

Apart from local tutorials, USP uses a system known as REACT which allows you to hear and see your course coordinator or tutor as well as your fellow students who are located in the various campuses in the USP region. You may get presentations and notes in addition to your scheduled session. These are

commonly known as satellite tutorials. You are encouraged to attend the scheduled sessions in the weeks shown in your study schedule.

Here are some suggestions for getting the most out of these REACT sessions:

Note that before your REACT tutorial session begins your tutorial group will be advised as to who all the participants are (regional and on-campus). Try to note

your colleagues and which Campuses or Centres they are

Speak slowly and pronounce your words clearly so that your colleagues can understand what you are saying.

Be courteous and try to maintain a polite tone of voice.

dress your tutorial group, press the "speak button", and aim inch distance between your mouth and the microphone whilst

speaking. Please note that you may be using two different types of microphones

If you have questions or comments to communicate during your tutorial session you can do so by speaking to a microphone or through the chat

Try not to "steal the show". Remember that each of you will have important points to add to discussions.

local USP Campus or Centre for further information on using the

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Apart from local tutorials, USP uses a system known as REACT which allows you to hear and see your course coordinator or tutor as well as your fellow students who are located in the various campuses in the USP region. You may get presentations and notes in addition to your scheduled session. These are

commonly known as satellite tutorials. You are encouraged to attend the

Here are some suggestions for getting the most out of these REACT sessions:

Note that before your REACT tutorial session begins your tutorial group will be campus). Try to note

your colleagues and which Campuses or Centres they are

Speak slowly and pronounce your words clearly so that your colleagues can

dress your tutorial group, press the "speak button", and aim inch distance between your mouth and the microphone whilst

speaking. Please note that you may be using two different types of microphones

ions or comments to communicate during your tutorial session you can do so by speaking to a microphone or through the chat

Try not to "steal the show". Remember that each of you will have

local USP Campus or Centre for further information on using the

O n l i ne l ea rn ing

Moodle is USP’s learning management system and will be used to support learning in some of your courses.

How to log in to Moodl e

If your course has a Moodle component, the instructions below will help you access the system.

You will need a computer connected to the Internet. The computer must have a Web browser such as Internet Explorer or Firefox. Such a computer should be available at your USP Campus You will also be given a username and password by your local USP Campus.

Step 1: Accessing Moodle

• Open your browser: Internet Explorer, Firefox, or other.Type in the following at the address bar: http://ele

• Press Enter.

• Alternatively, you can go to the USP website: http://www.usp.ac.fj/ and use the Quick Links drop down menu to the left of the page and select Online Learning (Moodle).

Step 2: Username and password

• You will come to a Type your student number in the Username box.

• Type your student email (webmail) password in the Password box.

• Click Login.

Step 3: Accessing your course

• You should now see a list of your courses. Click the Course Code and Title of the course

Lost or forgotten password

Contact your local ITS student Helpdesk or email: moodlehelp@usp.ac.fjPage

O n l i ne l ea rn ing

Moodle is USP’s learning management system and will be used to support learning in some of your courses.

How to log in to Moodl e

Moodle component, the instructions below will help you

You will need a computer connected to the Internet. The computer must have a Web browser such as Internet Explorer or Firefox. Such a computer should be available at your USP Campus (if you don’t already have one at home or work). You will also be given a username and password by your local USP Campus.

Step 1: Accessing Moodle

Open your browser: Internet Explorer, Firefox, or other. Type in the following at the address bar: http://elearn.usp.ac.fj/

Alternatively, you can go to the USP website: http://www.usp.ac.fj/ and use the Quick Links drop down menu to the left of the page and select Online Learning (Moodle).

Step 2: Username and password

You will come to a Login screen. Type your student number in the

Type your student email (webmail) password in the Password box.

Step 3: Accessing your course

You should now see a list of your courses. Click the Course Code and Title of the course that you are enrolled in to enter. For example:

Lost or forgotten password

Contact your local ITS student Helpdesk or email: moodlehelp@usp.ac.fjPage 12 of 49

Moodle is USP’s learning management system and will be used to support

Moodle component, the instructions below will help you

You will need a computer connected to the Internet. The computer must have a Web browser such as Internet Explorer or Firefox. Such a computer should be

(if you don’t already have one at home or work). You will also be given a username and password by your local USP Campus.

arn.usp.ac.fj/

Alternatively, you can go to the USP website: http://www.usp.ac.fj/ and use the Quick Links drop down menu to the left of the page and select

You should now see a list of your courses. Click the Course Code and that you are enrolled in to enter. For example:

Contact your local ITS student Helpdesk or email: moodlehelp@usp.ac.fj

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Study sc hedu le

To help you keep up with the course, we suggest you allocate at least 2.5 hours a day to study. Plan your time using this study schedule.

Week no. and date Unit Assignments and tutorials

Week 1

17–21 February

Auditing An Introduction

Week 2

24–28 February

Governance and the Auditor

Satellite Tutorial Friday 28 February

12.00 – 2.00pm

Week 3

3–7 March

Professional Ethics, Independence and Audit Quality Other Assurance Engagements and Quality Standards

Week 4

10–14 March

The Auditor's Legal Liability

Satellite Tutorial Friday 14 March

12.00 – 2.00pm

Week 5

17–21 March

Overview of the Audit of Financial Statements Client Evaluation and Planning the Audit

Week 6

24–28 March

Audit Risk Assessment

Satellite Tutorial Friday 28 March

12.00 – 2.00pm

Week 7

31 March–4 April MID-TERM TEST

5–13 April MID SEMESTER BREAK

Week 8

14–18 April

Materiality and Audit Evidence

Satellite Tutorial Friday 18 April

12.00 – 2.00pm

Week 9

21–25 April

Test of Controls Designing Substantive Procedures

Assignment 1 Due

25th April, 2013

Week 10

28 April–2 May

Audit Sampling

Satellite Tutorial Friday 2 May

12.00 – 2.00pm Week 11

5–9 May Auditing Sales and Receivables

Week 12

12–16 May

Auditing Cash and Investments

Satellite Tutorial Friday 16 May

12.00 – 2.00pm Week 13

19–23 May Completing the Audit

Week 14

26–30 May

The Auditor’s Report

Satellite Tutorial Friday 30 May

12.00 – 2.00pm

Week 15

31 May–8 June STUDY BREAK

Weeks 16 & 17

9–20 June

EXAMINATIONS

Check with your USP Campus or Centre for the exact time and date of your examination.

* Fiji dates and times (GMT + 12hours)

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Ass es s men t ov e rv i ew

This course is assessed in 2 ways:

Continuous assessment 50%

Final examination 50%

Total value 100%

Cont inuous assessment

Continuous assessment makes up 50% of the final score and includes 1 assignments and a Mid-term test. It is weighted in the following way:

Assignment 1 15%

Mid-term Test 35%

Total value 50%

Assignment 1

This is worth 15% of your course mark and this included in this booklet. The due date for the assignment is 25th April, 2014. You will have to load your assignment on Moodle before mid-night on this date.

Mid-term Tests

You will be required to sit a mid-semester test in week 7 of the semester. This will account for 35% of your total course mark and will be 2 hours in duration. Please confirm the date and time with your Campus or Student Academic Services. A sample past test paper is available at the end of this book.

Final examination

The final examination will consist of a 3 hour paper at the end of your course. This will account for 50% of your final course mark. Please confirm the date and time with your Campus or Student Academic Services. A sample past final examination paper is available at the end of this book. You need to attain a minimum of 40% (20 marks) in the final exam to pass this course.

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G rad ing Sys tems

a) The following grading system will be used by all faculties in awarding final grades for academic performance in a course:

Pass Grades

Grades Percentage (%) Description

A+ 85+ Pass with Distinction

A 78 – 84 Pass with Distinction

B+ 71 – 77 Pass with Credit

B 64 – 70 Pass with Credit

C+ 57 – 63 Pass

C 50 – 56 Pass

Other Pass Grades

R Restricted Pass

Aeg Aegrotat Pass

Comp Compassionate

Pas Pass or Competent

S Satisfactory

Note: Pas and S are used in circumstances where graded passes are inappropriate such as in postgraduate thesis and Professional Diploma in Legal Practice.

Fail Grades

Grade Percentage (%) Description D 40 -49 Work below the standard required

for a pass E 40 (Less than) Very weak performance or failure to

complete to the satisfaction of the examiner such practical, field or other work as may be prescribed

NC Not completed NV Null and Void: This is awarded for

plagiarism or dishonest practice U Unsatisfactory Fail Not Competent 450 Note: Fail and U correspond with Pass and S above respectively.

Provisional Results:

I Incomplete IP In progress

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b) Students shall be awarded an Aegrotat or Compassionate Pass if they satisfy the conditions prescribed in Clauses 5.3 or 5.4 of these Regulations respectively.

c) Students may be awarded a Restricted Pass if they satisfy the conditions prescribed in Regulation 7.

d) Students who have been granted an extension of time past the last day of lectures to complete work required for the final assessment of their course shall be awarded the provisional grade of I (Incomplete) for an undergraduate or postgraduate course assessed by coursework, or IP (In progress) for a Supervised Research Project or thesis for a Master’s degree or a thesis for a PhD degree. At the end of the period of extension the School or Department Assessment Meeting shall determine a final grade.

e) Students who have not submitted their master’s or PhD thesis or Supervised

Research Project by the end of the maximum period of candidature prescribed in the regulations shall be awarded the grade of NC (Not completed).

[Extracted from 2013 Handbook & Calendar, pp 449-450]

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Submiss ion o f ass ignmen ts

Moodle

You should submit all your assignments by the dates given in your study schedule or on your course Moodle page. Please upload them in the correct assignment drop box.

It is very important that you keep to the study schedule and complete the assignments so that you get regular feedback on your progress through this course.

Correc t l abel l ing o f ass ignments

Please be very careful to correctly label your assignments. On each assignment e-copy file that you upload for marking, you should type:

• the full name you used to enrol in this course; • your student identification number; • the correct course code and title; and • the assignment number.

Correct labelling will help ensure that the marker receives your assignment on time, and that you get the credit for the work that you do. If your marker receives one of your assignments late because you did not label it correctly, you may lose marks.

L ate assign men ts

If you expect to be over two weeks late in submitting an assignment, write to your course coordinator. You should explain why you are late and suggest a revised schedule that will allow you to complete the remaining assignments on time.

Your course coordinator may mark a late assignment if there is a good reason for its delay. In deciding whether to mark late assignments, your course coordinator will give greater consideration to students in remote areas with little or no access to their USP Campus, Centre or tutorial help.

USP reserves the right to decide whether or not to mark late assignments. It is in your interest to send in your assignments on time. The assignment schedule gives your course coordinator time to provide you with regular feedback on your progress, before it is too late for you to use this information constructively in your studies.

Your course coordinator will not mark any assignment received after the final examination.

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P lag ia r i s m

Plagiarism is the copying of another person’s creative work and using it as one’s own – without explicitly giving credit to the original creator. Work copied without acknowledgement from a book, from another student’s work, from the internet or from any other source is plagiarism. Plagiarism includes the following:

a) Copying of the published or unpublished words of another writer without acknowledging the source using acceptable reference citation methods. Thus, to; ‘cut and paste’ from internet sources or ‘lift’ sentences, ideas and sections from a textual source qualifies as plagiarism.

b) Lifting or cutting and pasting extracts without quotation marks or

appropriate acknowledgement of sources.

c) Paraphrasing of content and ideas without proper acknowledgement of the source.

d) The use of images, diagrams, photographs and material from blogs and

social networks, without acknowledgement.

e) Copying part or all, of another student’s assignment. In this instance, ‘student assignment’ refers to a piece of academic work submitted for assessment purposes for any course, in past or current years at any educational institutional including USP or any other university.

i) Collusion Collusion means working with someone else to deceive or mislead to gain an unfair academic advantage. It includes;

a) Submission of a paper that has been written by an author other than the author credited for that piece of writing. This includes the use of paid services of a student, or any other person that has been solicited for that purpose.

b) Facilitating or enabling another student to plagiarise in any way. ii) Cheating Cheating involves acting in any way that directly contradicts the explicit rules and guiding principles of that form of assessment. It applies in any form of examination including short tests, quizzes and final examinations. Cheating includes (inter alia):

a) Doing anything to gain an unfair or illicit academic advantage in an examination;

b) Possessing, referring to or having access to any material, or to access the internet ‘crib’ notes or device containing information directly or indirectly related to the subject matter under examination other than what is explicitly approved for examination purposes;

c) Using a cell phone to communicate with any other student or person inside or outside the examination venue;

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d) Copying from another student in a test or examination; enabling another student to cheat in a test or examination;

e) Soliciting a person to sit a test or final examination in place of the student enrolled; sitting a test or final examination in the place of another student;

f) Manipulation of scores in tests or examination or in any other form of assessment; and

g) Enabling another student in any or a combination of any of the above.

[Extracted from 2013 Handbook & Calendar, pp 457-458]

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Ass ignmen t 1

Due date: Friday 25th April, 2013 at 12.00 am.

Value: 15 marks

Audi t Ev id ence and Pro cedu res

You are the audit senior assigned to the audit of ABC Pty Ltd, a wholly owned subsidiary of a US parent. You have been requested by your partner to prepare an audit plan for the statutory audit of the company for the year ended 31 December 2011. The following information has been provided to you: i) The principal activities of ABC Pty Ltd are the importation and distribution

of modems and personal computers (PCs). It has offices in all capital cities around Australia.

ii) All inventory is purchased either from its US parent or related companies in

Hong Kong and Taiwan. iii) ABC Pty Ltd was incorporated in 1984 and had operated profitably until

1989 when significant losses were incurred, principally due to the downturn in the economy, competition from other manufacturers and the availability of cheaper clones.

iv) The company is well established in the modem market, however it has not

been doing well in the PC market for the reasons given above and has conse-quently decided to 'get out' of the PC market and concentrate on enhancing its position in the modem market. This decision has been communicated to the public via computer journals and publications.

v) The stock level of PCs, modems and spares as at 30 October 2011 was as follows:

vi) Your manager has advised you that two of the largest debtors have gone into

liquidation and the client has provided 50 per cent of these debts as they are covered by credit insurance. There is no correspondence from the insurance company regarding whether or when the claim in respect of these debts will be settled. The insurance company has requested ABC to provide evidence that the company has fulfilled all the conditions of the insurance policy before it will settle. In view of previous experiences by the company with such insurance claims, it is unlikely that any notification on recovery will be

$'000 Modems 4,426 PCs 3,142 Spares 1,563 Total 9,131

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received before year end. The financial controller has assured your manager that they have complied with all the conditions of the insurance agreement.

vii) The company maintains fully computerised accounting systems for sales/

debtors, inventories and general ledger functions. Audit testing in prior years has shown that controls over these systems appear to be strong. The sales/ debtors system matches cash receipts to outstanding items, and maintains back order details where customer orders cannot be filled immediately.

viii) ABC has a wholly owned subsidiary in New Zealand which has been

making losses since its incorporation in 1988. As a result, the subsidiary has a large deficiency in shareholders' funds. The New Zealand company figures have not been consolidated in the attached financial information.

ix) A large stock of 486 PCs at a cost of $600,000 was ordered and is currently

in transit from the overseas parent. These PCs are the latest 4th generation machines which have been brought to Australia for the first time. However, since ABC has resolved to concentrate on the modem market, it has decided not to release the 486 machines into Australia. The parent company from which these stocks were purchased will not accept them back, but the company's directors are looking to on-sell them to another related company in Hong Kong.

x) Initial discussions with management have revealed that the company has sig-

nificant tax losses which management is keen to carry forward as an asset in the year-end balance sheet.

xi) All modems and PCs sold by the company have a warranty of 12 months

from the date of sale. xii) One modem stock item (XPIOOO) which was released in early 2010 was

found to have a factory fault. This defect only occurs in modems which are used excessively. ABC had established a provision of $480,000 for returns of this item, but only $80,000 of this provision had been utilised up to October 2011. The returns of this item have slowed down to only one a month. There are 100 units of this item still on hand.

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ABC Pty Ltd Profit & loss Accounts

Unaudited 10 Months

Audited 12 Months

Note 31/10/2011 31/12/2010 $’000 $’000 Operating revenue 1 47,787 72,007 Operating profit (loss) (3,652) (5,561) Abnormal items 2 - (1,583) Income tax expense - - Operating loss after income tax

(3,652) (7,144)

Accumulated losses-at beginning of financial year

(23,816) (16,672)

Accumulated losses at end of financial period

(27,468) (23,816)

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ABC PTY LTD Balance Sheets

Unaudited 10 Months

Audited 12 Months

Note

31/10/2011

31/12/2010 $'000 $'000 Current Assets

Cash 153 1,107 Receivables 3 10,353 14,310 Inventories 4 7,723 18,073 Other 5 - 40 Total Current Assets 18,229 33,530 Non-Current Assets

Investments 6 1 1 Fixed assets 7 1,800 2,166 Total Non-Current Assets 1,800 2,167 Total Assets 20,030 35,697 Current Liabilities Creditors and borrowings 8 16,537 27,177 Provisions 9 890 1,672 Total Current Liabilities 17,427 28,849 Non-Current Liabilities

Creditors and borrowings 10 29,034 29,634 Provisions 11 37 30 Total Non-Current Liabilities 29,071 29,664 Total Liabilities 46,498 58,513 Net Assets (26,468) (22,816) Shareholders' Equity

Share capital 12 1,000 1,000 Accumulated losses (27,468)

(23,816)

Total Shareholders' Equity (26,468) (22,816)

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Unaudited

10 months Audited

12 months 31/10/2011 31/12/2010 Notes to Accounts Note 1 - Operating Revenue Modem sales 28,702 41,313 Personal computer sales 16,448 26,369 Other (spare parts) 2,637 4,325 47,787 72,007 Note 2 - Abnormal Items Bad and doubtful debts expense - (1,743) Applicable income tax - - - (1,743) Inventory obsolescence provision - 160 Applicable income tax - - - 160 Abnormal items after income tax - (1,583) Note 3 - Receivables Trade debtors 5,687 9,133

Provision for doubtful debts (549) (505) 5,138 8,628 Amount owing by a controlled entity payable in NZ dollars

5,031 5,540

Sundry debtors 184 142 5,215 5,682 10,353 14,310 Note 4 - Inventories Finished goods 9,131 15,378 Provision for obsolescence (1,538) (1,899) 7,593 13,479 Goods in transit 130 4,667 Provision for obsolescence - (73) 130 4,594 7,723 18,073 Note 5 – Other Prepayments - 40 Note 6 – Investment Investment in New Zealand subsidiary at cost 1 1 Note 7 - Fixed Assets Plant and equipment - cost 2,668 2,688 Accumulated depreciation (1,830) (1,574) 838 1,114

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Leased assets – cost 1,517 1,517 Accumulated amortisation (555) (465) 962 1,052 Net Fixed assets 1,800 2,166 Note 8 - Creditors and Borrowings Trade creditors and accruals 4,169 4,76l Amounts owing to parent entity 11,144 21,081 Amounts owing to related entities 949 1,027 Lease liability 275 308 16,537 27,177 Note 9 – Provisions Annual leave 121 137 Warranty and returns 769 785 Research and development - 400 Legal - 350 890 1,672 Note 10 - Creditors and Borrowings Bank loans - guaranteed by US parent 28,450 28,800 Lease liability 584 834 29,034 29,634 Note 11 –Provisions Long service leave 37 30 Note 12 - Share Capital Authorised 1,000,000 ordinary shares of $1 each Issued and fully paid 1,000,000 ordinary shares of $1 each

1,000 1,000

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REQUIRED

1 a) What are the key factors that indicate that the company may have a going concern problem?

[word limit 250; 5 marks]

b) What additional information would you obtain to evaluate this problem?

[word limit 250; 5 marks]

2. Assume the audit partner has concluded that the company is likely to remain a going concern. Describe the substantive procedures to be performed to address the key audit assertions for the following balances:

a) trade debtors

b) PC inventory

c) returns provision

d) operating revenue

e) amounts owing to parent entity

[word limit 200 for each of a, b, c, d, and e; total 5 marks]

Adopted and modified from: Trotman, K. and P. Roebuck. 1998. Case Studies in Auditing, Butterworths, Second Edition.

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Samp le M id -Te rm Pape r Sem 2 , 2013

You are given the following past test paper to help you to prepare for your test. However, remember that the test paper that you will take this semester may not

follow exactly the same structure, format or content as this one.

The University of the South Pacific Serving the Cook Islands, Fiji, Kiribati, Marshall Islands, Nauru, Niue, Samoa, Solomon Islands, Tokelau, Tonga, Tuvalu, and Vanuatu.

School of Accounting & Finance

AF304: AUDITING

MID-SEMESTER EXAM – SEMESTER 2, 2013 Face to Face Mode

Time Allowed 2 hours plus 10 minutes reading

70 Marks (30% of final grade)

I N S T R U C T I O N S

1. There are 4 Questions in this exam paper. Attempt ALL questions.

2. Write your answers in the answer booklet provided. 3. Handwriting must be legible. 4. Use blue or black pen only. 5. This is a closed book examination. You are not permitted to

access any books, notes or other written materials.

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QUESTION ONE (25 marks in total…25 Multiple Choice Questions) Circle the best answer in the multiple-choice grid provided in the answer booklet. Each question carries 1 mark. 1. Users of the audit report can reasonably expect the audited financial

statements to be: a. complete, contain all necessary information and contain all financial

disclosures b. a true and fair view of the organisation’s financial results c. free from all errors d. all of these choices

2. Management of a company is responsible for: a. hiring the auditor b. preparing the financial statements c. the audit work papers d. independence and obtaining evidence

3. The audit committee has oversight responsibilities for: a. outside reporting b. internal auditing c. external auditing d. all of these choices 4. The lead engagement and review partner must rotate every: a. two years b. three years c. four years d. five years 5. Which one of the following is an example of a conflict of interest for a

professional accountant? a. performing tax services and a compilation engagement for a client b. serving as legal counsel and an auditor for a client c. providing an audit on internal financial controls and financial statements for a

client d. being employed as a chief financial officer while serving as a member of the

board of directors for the same company 6. Which of the following is included in the APES 110 Code of Ethics for

Professional Accountants? a. principles, rules of conduct and rulings b. rules of conduct, interpretations and principles c. principles, rules of conduct and rulings d. principles and examples

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7. Thomas Lee, auditor, purposely omitted the confirmation of accounts receivable because of his knowledge that management had grossly overstated this account. Accounts receivable are material to the balance sheet. Lee is most likely guilty of which of the following?

a. Fraud b. a civil tort c. Negligence d. criminal liability 8. The case that led to auditors being able to argue that damages may be at least

in part caused by management’s carelessness was: a. Caparo case b. AWA case c. Pacific Acceptance case d. London case 9. Who may sue an auditor under common law? a. clients b. foreseeable parties c. foreseen parties d. anyone with grounds

10. The Pacific Acceptance Case highlighted that the auditor’s duty includes all

of the following except: a. report and audit, using due care and skill b. promptly report fraud and warn of suspected fraud c. supervise and review the work of inexperienced staff d. audit just end-of-year balances 11. The failure to use due care and skill in the conduct of the audit is called: a. diligence b. negligence c. fraud d. Scienter

12. When the client and the auditor are both sued and judgement is rendered

against both, the auditor will be required to settle the entire judgement if the client is bankrupt. Which of the following is a representation of the above?

a. private litigation reform b. joint and several liability statutes c. comparative fraud d. the Securities Acts 13. The risk that financial statements are likely to be misstated materially without

regard to the effectiveness of internal control is which type of risk? a. inherent risk b. audit risk c. client risk d. control risk

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14. An auditor compares year-to-year account balances in order to perform analytical procedures. This is an example of:

a. ratio analysis b. trend analysis c. internal control analysis d. vertical analysis

15. What is the most important purpose that is achieved by having an auditor

write a formal engagement letter that is signed by the client? a. documented proof of auditor responsibility for financial statements in

accordance with accounting standards b. multiple degrees of legal separation of the client from the auditor c. a locking-in of fees and timetable that must be adhered to by the client d. a communication and clarification of the responsibilities and expectations

of the auditor and the client 16. Which of the following is typically not a significant risk factor that an auditor

will consider in the client acceptance of Stitch Magee Co.? a. Brad Stitch, the president and 50% owner of Stitch Magee was investigated

for securities violations four years earlier b. Stitch Magee Co. is a public company in the high technology industry c. Stitch Magee Co. is a manufacturing company that procures much of its

raw materials from the Suva area d. Stitch Magee Co. sells 25% of its inventory to Nani Inc. which is owned

primarily by Nani Magee, the father of Stitch Magee’s accountant, director of finance and 50% owner

17. Financial reporting risks are those risks that relate directly to the recording of

transactions and the presentation of financial data in an organisation’s financial statements. Which of the following factors is not one of the key factors affecting financial reporting risk?

a. the competence and integrity of management b. the complexity of the company’s transactions and financial reporting c. the quality of the company’s internal controls d. an economic downturn

18. In the audit risk model, which of the risk components can be assessed by the

auditor? a. Inherent risk b. control risk c. detection risk d. both inherent risk and control risk 19. Internal control objectives are designed to assist the organisation in assuring

which of the following: a. the organisation has effective and efficient operations related to its

overall strategy b. the monitoring activities of the organisation are in compliance with applicable

laws and regulations c. the assets of the organisation are maintained d. the control environment is not impacted by the tone at the top

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20. Which of the following is not a reason that the auditor must gain an understanding of the client’s internal control system? a. to better understand the client, its risks, and how it manages those risks b. to assess control risk and identify the types of financial statement

misstatements that are most likely to occur c. to plan direct tests of account balances to determine if misstatements have

occurred d. all are reasons why auditors must gain an understanding of the client’s

internal control system

21. Computer controls that are pervasive and affect every computerised system are known as:

a. overall computer controls b. general computer controls c. application controls d. processing controls

22. If the auditor of financial statements understands internal control and assesses

control risk as low, it is assumed that internal control: a. will be tested to support the assessment b. is not required to be tested as it is considered strong c. is considered relatively weak and will not be tested d. has been assessed erroneously by the auditor 23. Which is clearly a test of control?

a. confirmation to a customer of an accounts receivable balance b. examination of a sample of purchase order records for electronic,

authenticated, authorisation c. observing the controller’s use of company owned equipment d. sending a letter to the client’s lawyer to determine litigation that is pending

between plaintiff and the defendant 24. The responsibility for operating an enterprise is delegated to the:

a. auditor b. audit committee c. management d. board of directors

25. Auditing is important in a free market society because:

a. the public requires auditors to function as divisions of regulatory bodies b. auditors detect all errors and fraud made by company employees c. it provides reliable information based upon which to judge economic

performance d. the auditor is an amiable insurance policy for investors

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QUESTION TWO (15 marks in total…2 parts to the question) Part A The following are independent situations:

1. Mike and Davis were recently awarded the audit of Farms Foods Ltd for the year ended 31 August 2013. Billy Fox, senior-in-charge, and an assistant observed the inventory on 31 August. Upon completion of the inventory observation, Walis Warp, Farms Foods Ltd’s controller, informed Fox that the shipping supervisor had a small gift for him and the assistant. Fox asked Warp what the gift was for, and Warp responded that they had always given small gifts of food items to their previous auditors upon completion of the inventory observation. Fox estimates that the value of the food is less than $200.

2. Steve Racky has been asked by his audit client, Peter Plumbing Supply Pty Ltd, to help implement a new internal control system. Racky will arrange interviews for Peter Plumbing Supply Pty Ltd’s hiring of new personnel and instruct and oversee the training of current client personnel.

3. Bob Lanzy is the partner-in-charge of the audit of Flee Ltd. Over the years, he has become a golfing buddy of Flee Ltd’s CEO, Jim Hardy. During the current year Lanzy and Hardy jointly purchased an exclusive vacation home at Denarau. The vacation home represents more than 10 per cent of Lanzy’s personal wealth.

Required For each situation, indicate whether any Code of Ethics for Professional Accountants has been breached. Give reasons. (9 marks) Part B Required a) Outline three benefits of an effective audit committee. (3 marks)

b) Outline three limitations of a financial statement audit. (3 marks)

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QUESTION THREE (15 marks in total…2 parts to the question) You have been the auditor of Shally Pty Limited (SPL) for several years. The audit report for the year ended 30 June 2012 was unqualified. In August 2012 SPL obtained a large loan from a finance company, RB Limited (RB), to provide additional working capital. The company experienced severe trading problems and was placed in receivership in May 2013. Your firm has been notified by legal representatives of RB that they are taking action against your firm based on the audit of the 30 June 2012 accounts. They claim that the cause of SPL’s failure related to both the inadequate recognition of revenues and a fall in the value of inventories on hand, and that these problems were apparent earlier than June 2012, but had not been adequately dealt with in the financial statements. They also claim that they would not have given the loan to SPL had those accounts been qualified. Required a) Outline your defence to this action taken by RB. Provide specific references to case laws and auditing standards to support your answer. (10 marks) b) Would your answer to (a) change if RB had written to your firm telling you that they intend to make a loan to SPL and were relying on the audited financial statements to assist them in making their decision? Explain. (5 marks) QUESTION FOUR (15 marks in total…2 parts to the question) Part A Your audit firm has been approached by a potential client. Rexo Entertainment Pty Ltd, which recently made news in the financial press when its board of directors reinstated the chief executive officer who had misappropriated cheques totalling $15 000 (an amount that was immaterial to Rexo and the CEO’s annual salary). The board said the CEO was essential to operations and that his theft was the result of mental problems rather than a sign of dishonesty. Required a) What procedure(s) would your audit firm use to investigate this client? (3 marks) b) Explain the considerations of your audit firm in deciding whether to accept the client. (3 marks) Part B Your client is Nolin Limited, a listed company that manufactures a wide range of products used in the building industry. One range of products is manufactured in Indonesia for sale in South-East Asian markets, while another range is manufactured in Fiji for Fijian and New Zealand markets.

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You are completing the planning phase of the audit for the year ending 30 June 2013 and have the following information (consider each situation independently). 1. In the past few months, there has been increasing civil unrest in Indonesia. At present, the accounting records at the Indonesian branch office appear to be intact. However, your Indonesian branch office has received reliable advice that at least half the stock has been burnt in a fire. The fire was caused by rioting and therefore is not covered by insurance. 2. Rainaway roof tiles, sold mostly to large Fijian building companies, comprise around 2% of total revenues. Over the last couple of months, several reports have been received that the tiles are disintegrating in heavy rain, causing leakage and property damage. 3. In accordance with current business practice, the board has approved a new management compensation scheme. In future, the entire senior management team (comprising 40 people and including the Finance Director) will receive a bonus based on the increase in Nolin Limited’s net profit from year to year. Required Draft a work paper for review by the audit manager, explaining how each of your allocated situations will affect the audit plan. (9 marks)

THE END

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Samp le F ina l Ex am Pape r Sem 2 , 2013

You are given the following past examination paper to help you to prepare for your final examination. However, remember that the examination paper that you will take this semester may not follow exactly the same structure, format or

content as this one.

The University of the South Pacific Serving the Cook Islands, Fiji, Kiribati, Marshall Islands, Nauru, Niue, Samoa, Solomon Islands, Tokelau, Tonga, Tuvalu, and Vanuatu.

School of Accounting & Finance

AF304: AUDITING FINAL EXAM – SEMESTER 2, 2013

Face to Face Mode

Time Allowed 3 hours plus 10 minutes reading

100 Marks (50% of final grade)

I N S T R U C T I O N S

6. There are 44 Questions in this exam paper. Attempt ALL questions.

7. Write your answers in the answer booklet provided. 8. Handwriting must be legible. 9. Use blue or black pen only. 10. This is a closed book examination. You are not permitted to

access any books, notes or other written materials. 11. Weighting toward final exam is 50%. Minimum mark for final

exam is 20/50. 12. Total number of pages- 16

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QUESTION 1 to 40 (40 marks in total…40 Multiple Choice Questions) Circle the best answer in the multiple-choice grid provided in the answer booklet. Each question carries 1 mark.

1. In determining the appropriate sample size an auditor does not need to make judgments about:

A. sampling risk B. expected failure rate C. staff experience D. tolerable failure rate

2. Auditors use sampling to gather evidence to:

A. test controls for the purpose of assessing control risk B. test for compliance with company policies and government regulation C. test individual items in account balances as a basis for determining whether

material misstatement exists D. test all the transactions

3. Non-sampling risk deals with:

A. carrying out the appropriate audit procedure B. drawing an incorrect inference from the sample results C. inappropriately diagnosing client’s problems D. none of these choices

4. Which of the following circumstances would not be the appropriate

approach to use monetary unit sampling (MUS)?

A. the need to select a sample based on an item’s dollar amount B. tolerable misstatement C. sampling interval D. tainting percentage

5. Which of the following most likely would not be considered an inherent limitation of the potential effectiveness of an entity’s internal control? A. Incompatible duties. B. Management override. C. Mistakes in judgment. D. Collusion among employees. 6. Internal control can provide only reasonable assurance of achieving entity control objectives. One factor limiting the likelihood of achieving those objectives is that A. The auditor’s primary responsibility is the detection of fraud. B. The board of directors is active and independent. C. The cost of internal control should not exceed its benefits. D. Management monitors internal control.

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7. An entity should consider the cost of a control in relationship to the risk. Which of the following controls best reflects this philosophy for a large dollar investment in heavy machine tools? A. Conducting a weekly physical inventory. B. Placing security guards at every entrance 24 hours a day. C. Imprinting a controlled identification number on each tool. D. Having all dispositions approved by the vice president of sales. 8. A proper segregation of duties requires A. That an individual authorizing a transaction records it. B. That an individual authorizing a transaction maintain custody of the asset that resulted from the transaction. C. That an individual maintaining custody of an asset be entitled to access the accounting records for the asset. D. That an individual recording a transaction not compare the accounting record of the asset with the asset itself. 9. A company operates its own truck fleet. Rising operating costs have caused the company to reassess its internal control. Which one of the following controls may help to lower operating costs? A. Preventive maintenance is performed independently of driver-requested maintenance. B. Each driver has a control card for fuel use at the self-service diesel fuel dock. C. Maintenance and repair part orders are determined and placed by using an EOQ system. D. Parts and hand tools must be requisitioned from the parts department. 10. Which of the following is a step in an auditor’s decision to assess control risk below the maximum? A. Apply analytical procedures to both financial data and nonfinancial information to detect conditions that may indicate weak controls. B. Perform tests of details of transactions and account balances to identify potential errors and fraud. C. Identify specific controls that are likely to detect or prevent material misstatements. D. Document that the additional audit effort to perform tests of controls exceeds the potential reduction in substantive testing.

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11. Which of the following is a false statement about audit objectives? A. There should be a one-to-one relationship between audit objectives and procedures. B. Audit objectives should be developed in light of management assertions about the financial statement components. C. Selection of tests to meet audit objectives should depend upon the understanding of internal control. D. The auditor should resolve any substantial doubt about any of management’s material financial statement assertions. 12. Which of the following statements concerning audit evidence is true? A. To be competent, audit evidence should be either persuasive or relevant, but need not be both. B. The measure of the validity of audit evidence lies in the auditor’s judgment. C. The difficulty and expense of obtaining audit evidence concerning an account balance is a valid basis for omitting the test. D. A client’s accounting data can be sufficient audit evidence to support the financial statements. 13. Which of the following is the best explanation of the difference, if any, between engagement objectives and procedures? A. Procedures establish broad general goals; objectives specify the detailed work to be performed. B. Objectives are tailor-made for each engagement; procedures are generic in application. C. Objectives define specific desired accomplishments; procedures provide the means of achieving objectives. D. Procedures and objectives are essentially the same. 14. The relationship between the required understanding of the internal control

structure and the preliminary audit strategy is that: A. normally, greater understanding is required when the lower assessed level of

control risk approach is used. B. normally, greater understanding is required when the primarily substantive

approach is used. C. no understanding is required in the planning stage unless tests of controls are

a planned part of the strategy. D. normally, less understanding is required when the lower assessed level of

control risk approach is used. 15. The primary difference between an audit of the balance sheet and an audit of the income statement is that the audit of the income statement addresses the verification of

A. Transactions. B. Authorizations. C. Costs. D. Cutoffs.

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16. The competence of evidence available to an auditor is least likely to be affected by A. The relevance of such evidence to the financial statement assertion being investigated. B. The relationship of the preparer of such evidence to the entity being audited. C. The timeliness of such audit evidence. D. The sampling method employed by the auditor to obtain a sample of such evidence. 17. Which of the following statements concerning evidence is true? A. Competent evidence supporting management’s assertions should be convincing rather than merely persuasive. B. Effective internal control contributes little to the reliability of the evidence created within the entity. C. The cost of obtaining evidence is not an important consideration to an auditor in deciding what evidence should be obtained. D. A client’s accounting data cannot be considered sufficient audit evidence to support the financial statements. 18. Which of the following elements ultimately determines the specific auditing procedures that are necessary in the circumstances to afford a reasonable basis for an opinion? A. Auditor judgment. B. Materiality. C. Audit risk. D. Reasonable assurance. 19. Assuming a low assessed level of control risk, which of the following audit procedures is least likely to be performed? A. Physical inspection of a sample of inventory. B. Search for unrecorded cash receipts. C. Obtainment of a client representation letter. D. Confirmation of accounts receivable. 20. Each of the following might, by itself, form a valid basis for an auditor to decide to omit a test except for the A. Difficulty and expense involved in testing a particular item. B. Assessment of control risk at a low level. C. Inherent risk involved. D. Relationship between the cost of obtaining evidence and its usefulness.

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21. In evaluating an entity’s accounting estimates, one of an auditor’s objectives is to determine whether the estimates are A. Not subject to bias. B. Consistent with industry guidelines. C. Based on objective assumptions. D. Reasonable in the circumstances. 22. During the audit of fair value measurements and disclosures (FVMD), the auditor must A. Understand the components of internal control, but need not specifically obtain an understanding of the entity’s process for determining FVMD. B. Use the understanding of the audited entity’s process for determining FVMD to assess the risk of material misstatement. C. Determine that the entity has measured fair values using discounted cash flows whenever feasible. D. Address only the initial recording of transactions. 23. Analytical procedures can best be categorized as A. Substantive tests. B. Tests of controls. C. Qualitative tests. D. Budget comparisons. 24. Analytical procedures enable the auditor to predict the balance or quantity of an item under audit. Information to develop this estimate can be obtained from all of the following except A. Tracing transactions through the system to determine whether procedures are being applied as prescribed. B. Comparison of financial data with data for comparable prior periods, anticipated results (e.g. budgets and forecasts), and similar data for the industry in which the entity operates. C. Study of the relationships of elements of financial data that would be expected to conform to a predictable pattern based upon the entity’s experience. D. Study of the relationships of financial data with relevant nonfinancial data. 25. For all audits of financial statements made in accordance with generally accepted auditing standards, the use of analytical procedures is required to some extent In the As a In the Planning Substantive Review Stage Test Stage A. Yes No Yes B. No Yes No C. No Yes Yes D. Yes No No

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26. Auditors are often concerned with the possibility of overstatement of sales and receivables. However, management may also have reasons for understating these balances. Which of the following would explain understatement of sales and receivables? A. To window-dress the financial statements. B. To avoid paying taxes. C. To meet budgets and forecasts. D. All of the answers are correct. 27. Tracing bills of lading to sales invoices provides evidence that A. Shipments to customers were invoiced. B. Shipments to customers were recorded as sales. C. Recorded sales were shipped. D. Invoiced sales were shipped. 28. An auditor observed that a client mails monthly statements to customers. Subsequently, the auditor reviewed evidence of follow-up on the errors reported by the customers. This test of controls was most likely performed to support management’s financial statement assertion(s) of

Presentation and Rights and Disclosure Obligations A. Yes Yes B. Yes No C. No Yes D. No No 29. A company’s sales cutoff is December 31. All goods sold are shipped FOB destination, and the company records sales 3 days after shipment. The following sales were recorded as indicated: (Amounts In Thousands) Date Month Selling Shipped Recorded Price Cost

December 28 December $182 $190 December 29 December 60 50 December 30 January 144 145 January 2 December 230 215 January 5 January 182 174 Ignoring tax effects, the net effect on income for the month ended December 31 of any failures to observe a proper cutoff was A. $(1,000) B. $15,000 C. $24,000 D. $25,000

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30. An auditor observed the auditee’s annual physical inventory on December 15. The auditee adjusted the inventory balance and detailed perpetual inventory records to agree with the count. Goods are shipped FOB shipping point. Listed below are four material items discovered when the auditor tested the sales cutoff as of the client’s fiscal year-end at December 31. Which item does not require an adjusting entry on the auditee’s books? Recorded Credited to Shipped as Sale Inventory A. 1/1 12/31 12/31 B. 12/31 1/3 12/31 C. 12/14 12/16 12/16 D. 12/9 12/20 12/12 31. The negative request form of accounts receivable confirmation may be used when the Combined Assessment Level Number of Consideration of Inherent and Small by the Control Risk Is Balances Is Recipient Is A. Low Many Likely B. Low Few Unlikely C. High Few Likely D. High Many Likely 32. During the process of confirming receivables as of December 31, 20X1, a positive confirmation was returned indicating the “balance owed as of December 31 was paid on January 9, 20X2.” The auditor would most likely A. Determine whether there were any changes in the account between January 1 and January 9, 20X2. B. Determine whether a customary trade discount was taken by the customer. C. Reconfirm the zero balance as of January 10, 20X2. D. Verify that the amount was received. 33. Which of the following procedures will an auditor most likely perform for year-end accounts receivable confirmations when the auditor did not receive replies to second requests? A. Review the cash receipts journal for the month prior to year-end. B. Intensify the study of internal control concerning the revenue cycle. C. Increase the assessed level of detection risk for the existence assertion. D. Inspect the shipping records documenting the merchandise sold to the debtors.

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34. Which of the following procedures can be performed only in the subsequent period? A. Examination of data to determine that a proper cutoff has been made. B. Tests of the details of balances. C. Tests of the details of transactions. D. Reading of the minutes of the board of directors’ meetings. 35. Which of the following statements best expresses the auditor’s responsibility with respect to events occurring after the balance-sheet date? A. The auditor has no responsibility for events occurring in the subsequent period unless these events affect transactions recorded on or before the balance-sheet date. B. The auditor’s responsibility is to determine that transactions recorded on or before the balance-sheet date actually occurred. C. The auditor is fully responsible for events occurring in the subsequent period and should extend all detailed procedures through the last day of field work. D. The auditor is responsible for determining that a proper cutoff has been made and for performing a general review of events occurring in the subsequent period. 36.Which of the following procedures should an auditor ordinarily perform regarding subsequent events? A. Compare the latest available interim financial statements with the financial statements being audited. B. Send second requests to the client’s customers who failed to respond to initial accounts receivable confirmation requests. C. Communicate material weaknesses in internal control to the client’s audit committee. D. Review the cutoff bank statements for several months after the year-end. 37. After an audit report containing an unqualified opinion on a nonpublic client’s financial statements was dated and the financial statements issued, the client decided to sell the shares of a subsidiary that accounts for 30% of its revenue and 25% of its net income. The auditor should A. Determine whether the information is reliable and, if determined to be reliable, request that revised financial statements be issued. B. Notify the entity that the auditor’s report may no longer be associated with the financial statements. C. Describe the effects of this subsequently discovered information in a communication with persons known to be relying on the financial statements. D. Take no action because the auditor has no obligation to make any further inquiries.

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38. Which of the following best describes why an independent auditor is asked to express an opinion on the fair presentation of financial statements? A. It is difficult to prepare financial statements that fairly present a company’s financial position, results of operations, and cash flows without the expertise of an independent auditor. B. It is management’s responsibility to seek available independent aid in the appraisal of the financial information shown in its financial statements. C. The opinion of an independent party is needed because a company may not be objective with respect to its own financial statements. D. It is a customary courtesy that all shareholders receive an independent report on management’s stewardship in managing the affairs of the business. 39. On January 2, 20X1, the Retail Auto Parts Co. received a notice from its primary suppliers that effective immediately all wholesale prices would be increased 10%. On the basis of the notice, Retail Auto Parts Co. revalued its December 31, 20X0 inventory to reflect the higher costs. The inventory constituted a material proportion of total assets; however, the effect of the revaluation was material to current assets but not to total assets or net income. In reporting on the company’s financial statements for the year ended December 31, 20X0, in which inventory is valued at the adjusted amounts, the auditor would most likely A. Express an unqualified opinion provided the nature of the adjustment and the amounts involved are disclosed in notes. B. Express a qualified opinion. C. Disclaim an opinion. D. Express an adverse opinion. 40. The following explanatory paragraph was included in an auditor’s report to indicate a lack of consistency: As discussed in note T to the financial statements, the company changed its method of computing depreciation in 2001. How should the auditor report on this matter if the auditor concurred with the change? Type of Location of Opinion Explanatory Paragraph A. Unqualified Before opinion paragraph B. Unqualified After opinion paragraph C. Qualified Before opinion paragraph D. Qualified After opinion paragraph

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Question 41 (15 marks) Field is auditing the financial statements of Miller Mailorder Ltd (MMI) for the year ended 30 June 2011. Field has compiled a list of possible risks, including both errors and fraud, which may result in the misstatement of MMI’s financial report and a corresponding list of internal controls that, if properly designed and implemented, could assist MMI in preventing or detecting the errors and fraud. REQUIRED For each possible risk (possible errors and fraud) numbered 1 through 15, select one internal control procedure from the following answer list that, if properly designed and implemented, most likely could assist MMI in preventing or detecting the errors and irregularities. Each response in the list of controls may be selected once, more than once or not at all. (1 mark each). POSSIBLE ERRORS AND FRAUD

Invoices for goods sold are posted to incorrect customer accounts. 1. Goods ordered by customers are shipped but are not billed to anyone. 2. Invoices are sent for shipped goods but are not recorded in the sales

journal. 3. Invoices are sent for shipped goods and are recorded in the sales journal

but are not posted to any customer account. 4. Credit sales are made to individuals with unsatisfactory credit ratings. 5. Credit sales are made for over the credit limit amount. 6. Goods are removed from inventory for unauthorized orders. 7. Goods shipped to customers do not agree with goods ordered by

customers. 8. Invoices are sent to allies in a fraudulent scheme, and sales are recorded

for fictitious transactions. 9. Customers’ cheques are received for less than the customers’ full account

balances, but the customers’ full account balances are credited. 10. Customers’ cheques are misappropriated before being forwarded to the

cashier for deposit. 11. Customers’ cheques are credited to incorrect customer accounts. 12. Different customer accounts are each credited for the same cash receipt. 13. Customers’ cheques are properly credited to customer accounts and are

properly deposited, but errors are made in recording receipts in the cash receipts journal.

14. Customers’ cheques are misappropriated after being forwarded to the cashier for deposit.

15. Invalid transactions granting credit for sales returns are recorded.

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INTERNAL CONTROL PROCEDURES

a) Shipping clerks compare goods received form the warehouse with the details on the shipping documents.

b) Approved sales orders are required for goods to be released from the warehouse.

c) Monthly statements are mailed to all customers with outstanding balances.

d) Shipping clerks compare goods received from the warehouse with approved sales orders.

e) Customer orders are compared with the inventory master file to determine whether items ordered are in stock.

f) Apply credit limit to each sale. g) Daily sales summaries are compared with control totals of invoices. h) Shipping documents are compared with sales invoices when goods are

shipped. i) Sales invoices are compared with the master price file. j) Customer orders are compared with an approved customer list. k) Sales orders are prepared for each customer order. l) Control amounts posted to the accounts receivable ledger are compared

with control totals of invoices. m) Sales invoices are compared with shipping documents and approved

customer orders before invoices are mailed. n) Pre-numbered credit memos are used for granting credit for goods

returned. o) Goods returned for credit are approved by the supervisor of the sales

department. p) Remittance advices are separated from the cheques in the mailroom and

forwarded to the accounting department. q) Total amounts posted to the accounts receivable ledger from remittance

advices are compared with the validated bank deposit slip. r) The cashier examines each cheque for proper endorsement. s) Validated deposit slips are compared with the cashier’s daily cash

summaries. t) An employee, other than the bookkeeper, periodically prepares a bank

reconciliation. u) The same employee who issues receiving reports evidencing actual return

of goods approves sales returns.

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Question 42 (20 marks) The following client- prepared bank reconciliation is being examined by Kautz during an examination of the financial report of Concrete Products Ltd:

CONCRETE PRODUCTS LTD

BANK RECONCILIATION 31 DECEMBER 2012

Balance per bank (a) $18 375.91

Deposits in transit (b): 30 December 1471.10 31 December 2840.69 4311.79

Outstanding cheques ( c ): 837 6000.00 1941 671.80 1966 320.00 1984 1855.42 1985 3621.22 1986 2576.89 1991 4420.88 (19 466.21) Subtotal 3221.49

NSF cheque returned 29 Dec. (d) 200.00 Bank charges 5.50 Error cheque no. 1932 148.10 Customer note collected by the bank

($2750 plus $275 interest) (e) (3025.00)

Balance per books (f) $ 550.09

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REQUIRED Identify one or more audit procedures that should be performed by Kautz in gathering evidence in support of each of the items (a) through (f) in this bank reconciliation. (Equal marks).

Question 43 (5 marks) Subsequent events/post-audit discovery of facts The financial year Hadrian Ltd ended on 30th June 2009. Your auditor’s report was signed on 25th August 2009 and the financial statements were issued on 10th September 2009. Listed below are events that occurred or are discovered after the end of the financial year. Assume that each has a material effect on the financial statements.

1. 1 August 2009 – A Lawsuit was filed against Hadrian for damages that allegedly occurred before 30 June 2009. In the opinion of Hadrian’s Lawyers, there is a danger of a significant loss.

2. 15 August 2009– You discovered that debtor A of Hadrian went bankrupt on 10 August 2009. The most recent sale had taken place on 25 May 2009 and no transactions had occurred since that date.

3. 1 September 2009– You discovered that a legal action commenced against Hadrian in relation to a faulty product sold in May 2009.

4. 30 September 2009– You discovered that debtor B of Hadrian went bankrupt on 15 July 2009. Sales associated with this debtor occurred before the end of the financial year.

5. 30 September 2009 – You discovered that debtor C of Hadrian went bankrupt on 25 September 2009. The sale had taken place before the end of the financial year, but the amount had appeared collectable at the date on which the auditor’s report was signed.

Required a) Indicate your responsibilities for each of the above events. 1 mark each)

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Question 44 (20 marks) Preparation of the author’s report- various circumstances Hillgrove Ltd engaged Lucy Chow to perform its audit for the year ended 31 December 2009. The financial statements for the previous year were audited by Charles Brown, who expressed an unqualified opinion. Lucy Chow’s audit working papers contain the following information that does not appear in the 31 December 2009 financial statements of Hillgrove:

1. During the year, Hillgrove changed its method of valuing inventory to the first- in- first out method from the weighted average method. Management made this change because it believes first in-first out more clearly reflects net income by providing a closer matching of costs and revenues. The change had the effect of reducing inventory at 31 December 2009 by $65 000. The effect of the change on previous years was immaterial. Lucy firmly supports the company’s position.

2. The company refused to capitalize certain lease obligations for equipment acquired in 2009. Capitalisation of the leases in accordance with IAS 17 would have increased assets and liabilities by $500 000 and $650 000 respectively. Lucy concludes that the leases should have been capitalized.

Required: Prepare the auditor’s report that Lucy Chow should issue for the year ended 31 December 2009. Marks will awarded for appropriateness of audit report.

THE END