（i) Describe FIVE types of procedures for obtaining audit evidence; and （ii) For each type

(a) Explain FOUR factors which influence the reliability of audit evidence. (4 marks)

Andromeda Industries Co (Andromeda) develops and manufactures a wide range of fast moving consumer goods. The company’s year end is 31 December 2015 and the forecast profit before tax is $8·3 million. You are the audit manager of Neptune & Co and the year-end audit is due to commence in January. The following information has been gathered during the planning process:

Inventory count

Andromeda’s raw materials and finished goods inventory are stored in 12 warehouses across the country. Each of these warehouses is expected to contain material levels of inventory at the year end. It is expected that there will be no significant work in progress held at any of the sites. Each count will be supervised by a member of Andromeda’s internal audit department and the counts will all take place on 31 December, when all movements of goods in and out of the warehouses will cease.

Research and development

Andromeda spends over $2 million annually on developing new product lines. This year it incurred expenditure on five projects, all of which are at different stages of development. Once they meet the recognition criteria under IAS 38 Intangible Assets for development expenditure, Andromeda includes the costs incurred within intangible assets. Once production commences, the intangible assets are amortised on a straight line basis over five years.

Required:

(b) Describe audit procedures you would perform. during the audit of Andromeda Industries Co:

(i) BEFORE and DURING the inventory counts; and (8 marks)

(ii) In relation to research and development expenditure. (4 marks)

(c) During the audit, the team discovers that one of the five development projects, valued at $980,000 and included within intangible assets, does not meet the criteria for capitalisation. The finance director does not intend to change the accounting treatment adopted as she considers this an immaterial amount.

Required:

Discuss the issue and describe the impact on the audit report, if any, if the issue remains unresolved. (4 marks)

s testing completed on the payroll cycle of Bronze Industries Co (Bronze), as well as preparing the audit programmes for the final audit.

Bronze operate several chemical processing factories across the country, it manufactures 24 hours a day, seven days a week and employees work a standard shift of eight hours and are paid for hours worked at an hourly rate. Factory employees are paid weekly, with approximately 80% being paid by bank transfer and 20% in cash; the different payment methods are due to employee preferences and Bronze has no plans to change these methods. The administration and sales teams are paid monthly by bank transfer.

Factory staff are each issued a sequentially numbered clock card which details their employee number and name. Employees swipe their cards at the beginning and end of the eight-hour shift and this process is not supervised. During the shift employees are entitled to a 30-minute paid break and employees do not need to clock out to access the dining area. Clock card data links into the payroll system, which automatically calculates gross and net pay along with any statutory deductions. The payroll supervisor for each payment run checks on a sample basis some of these calculations to ensure the system is operating effectively.

Bronze has a human resources department which is responsible for setting up new permanent employees and leavers. Appointments of temporary staff are made by factory production supervisors. Occasionally overtime is required of factory staff, usually to fill gaps caused by staff holidays. Overtime reports which detail the amount of overtime worked are sent out quarterly by the payroll department to production supervisors for their review.

To encourage staff to attend work on time for all shifts Bronze pays a discretionary bonus every six months to factory staff; the production supervisors determine the amounts to be paid. This is communicated in writing by the production supervisors to the payroll department and the bonus is input by a clerk into the system.

For employees paid by bank transfer, the payroll manager reviews the list of the payments and agrees to the payroll records prior to authorising the bank payment. If any changes are required, the payroll manager amends the records. For employees paid in cash, the pay packets are prepared in the payroll department and a clerk distributes them to employees; as she knows most of these individuals she does not require proof of identity.

Required:

(a) Identify and explain FIVE internal control STRENGTHS in Bronze Industries Co’s payroll system. (5 marks)

(b) Identify and explain SIX internal control DEFICIENCIES in Bronze Industries Co’s payroll system and provide a RECOMMENDATION to address each of these deficiencies. (12 marks)

(c) Describe substantive ANALYTICAL PROCEDURES you should perform. to confirm Bronze Industries Co’s payroll expense. (3 marks)

client, Venus Magnets Co (Venus) which manufactures decorative magnets. Its year end is 31 December 2015 and the forecast profit before tax is $9·6 million.

During the year, the directors reviewed the useful lives and depreciation rates of all classes of plant and machinery. This resulted in an overall increase in the asset lives and a reduction in the depreciation charge for the year.

Inventory is held in five warehouses and on 28 and 29 December a full inventory count will be held with adjustments for movements to the year end. This is due to a lack of available staff on 31 December. In October, there was a fire in one of the warehouses; inventory of $0·9 million was damaged and this has been written down to its scrap value of $0·2 million. An insurance claim has been submitted for the difference of $0·7 million. Venus is still waiting to hear from the insurance company with regards to this claim, but has included the insurance proceeds within the statement of profit or loss and the statement of financial position.

The finance director has informed the audit manager that the October and November bank reconciliations each contained unreconciled differences; however, he considers the overall differences involved to be immaterial.

A directors’ bonus scheme was introduced during the year which is based on achieving a target profit before tax. In order to finalise the bonus figures, the finance director of Venus would like the audit to commence earlier so that the final results are available earlier this year.

Required:

Describe FIVE audit risks, and explain the auditor’s response to each risk, in planning the audit of Venus Magnets Co.

the company has a diverse customer base but seven significant customers. The company’s year end was 30 September 2015.

During the year, a number of the company’s significant customers have experienced a fall in sales, and consequently they have purchased fewer items from Mercury. As a result, Mercury has paid a number of its suppliers later than usual and some of them have withdrawn credit terms meaning the company must pay cash on delivery. One of Mercury’s main suppliers is threatening legal action to recover the sums owing. As a result of the increased level of payables, the company’s current ratio has fallen below 1 to 0·9 for the first time.

Mercury has produced a cash flow forecast to 30 June 2016 and this shows net cash outflows until May 2016. Mercury has a loan of $2·3 million which is due for repayment in full by 30 September 2016.

The finance director has just informed the audit manager that there is a possible change in legislation which will result in one of Mercury’s top product lines becoming obsolete as it will not comply with the proposed law. The prepared cash flow forecasts do not reflect this possible event.

Required:

(a) Explain FIVE potential indicators that Mercury Motoring Co is NOT a going concern. (5 marks)

(b) Describe the audit procedures which you should perform. in assessing whether or not Mercury Motoring Co is a going concern. (5 marks)

engagement with those charged with governance and formalise these in an engagement letter.

Required:

(a) Identify and explain TWO factors which would indicate that an engagement letter for an existing audit client should be revised. (2 marks)

(b) List SIX matters which should be included within an audit engagement letter. (3 marks)

(c) Your audit firm has just won a new audit client, Milky Way Technologies Co (Milky Way), and you have been asked by the audit engagement partner to gain an understanding about the new client as part of the planning process.

Required:

Identify FIVE sources of information relevant to gaining an understanding of Milky Way Technologies Co and describe how this information will be used by the auditor. (5 marks)

Section A暂缺

Section B – ALL SIX questions are compulsory and MUST be attempted

You are an audit manager of Pink Partners & Co (Pink) and are planning the audit of Golden Finance Co (Golden), a banking institution which provides a range of financial services including loans. Your firm has audited Golden for four years and the company’s year end is 30 September 2015.

At the end of August, Golden’s financial controller left and the new replacement is not due to start until approximately two months after the year end. The finance director, who is the sister-in-law of the audit engagement partner, has asked if a member of the audit team can be seconded to Golden for three months to act as the temporary financial controller.

You are aware that a number of the audit team members currently bank with Golden and two team members have significant loans owing to the company.

Pink’s taxation department also provides services to Golden. They have been approached by Golden to represent them in negotiations to resolve some outstanding issues with the taxation authorities, for which the fees quoted are substantial.

The finance director has informed the audit engagement partner that when the audit is complete, she would like the whole team to attend an evening watching the national football team play a match followed by a luxury meal.

Required:

Using the information above:

(i) Identify and explain FIVE ethical threats which may affect the independence of Pink Partners & Co’s audit of Golden Finance Co; and

(ii) For each threat, explain how it might be reduced to an acceptable level.

Note: The total marks will be split equally between each part.

January 2015. You are the audit supervisor of Puffin & Co and are currently preparing the audit programmes for the year-end audit of Jackdaw. You have had a meeting with your audit manager and he has notified you of a number of issues identified during the audit risk assessment process.

Land and buildings

Jackdaw have a policy of revaluing land and buildings, this is undertaken on a rolling basis over a five-year period. During the year Jackdaw requested an external valuer to revalue a number of properties, including a warehouse purchased in May 2014. Depreciation is charged on a pro rata basis.

Work in progress

Jackdaw undertakes continuous production of cars, 24 hours a day, seven days a week. An inventory count is to be undertaken at the year end and Puffin & Co will attend. You are responsible for the audit of work in progress (WIP) and will be part of the team attending the count as well as the final audit. WIP constitutes the partly assembled cars at the year end and this balance is likely to be material. Jackdaw values WIP according to percentage of completion, and standard costs are then applied to these percentages.

Required:

(a) Explain the factors Puffin & Co should consider when placing reliance on the work of the independent valuer. (5 marks)

(b) Describe the substantive procedures the auditor should perform. to obtain sufficient and appropriate audit evidence in relation to:

(i) The revaluation of land and buildings and the recently purchased warehouse; and (6 marks)

(ii) The valuation of work in progress. (4 marks)

(c) During the audit, your team has identified an error in the valuation of work in progress, as a number of the assumptions contain out of date information. The directors of Jackdaw have indicated that they do not wish to amend the financial statements.

Required:

Explain the steps Puffin & Co should now take and the impact on the audit report in relation to the directors’ refusal to amend the financial statements. (5 marks)

en trading for over 20 years and the company’s year end is 30 September 2014. Hummingbird sells products to trade customers via its own website; this represents 60% of revenue. Remaining revenue is generated by contracts to supply toiletries to hotels. Below is a description of the sales system.

Hotel revenue

The hotel revenue is made up of four key customers. Hummingbird has one sales clerk, Brenda, who maintains all aspects of this revenue stream; Brenda receives customer orders, raises sales invoices and processes payments. In raising invoices, the sales system automatically inserts the online trade customer prices for products. However, each hotel customer has contracted prices which are lower than the online prices and hence Brenda manually edits the invoices prior to despatch.

Online revenue

New trade customers are set up in the sales ledger master file upon passing suitable credit checks, and a credit limit is set at this stage by the finance director. Customers place online orders up to their pre-set credit limit; they receive an email confirmation and the sales order interfaces into the despatch system. The order number is linked to the customer account number. Goods are despatched daily with a goods despatched note which is referenced to the sales order number but are not sequentially numbered. Hummingbird used to despatch goods via a reliable national courier company. However, to reduce costs they have changed to a cheaper local courier and some orders have been delivered to customers late.

Trade customers’ sales invoices are automatically generated by the system on the day the online order is placed. The prices are inserted in accordance with the website rates. Occasionally Hummingbird makes special offers or discounts sales; when this occurs the master file data has to be amended to ensure that the correct prices are used on invoices. This task is usually performed by a senior sales ledger clerk.

Revenue and receivables records

On a monthly basis statements are sent to the hotel customers; a number of trade customers have been requesting monthly statements and Hummingbird is considering this request. The company only reconciles the sales ledger control account at the end of September in order to verify the year-end balance.

Required:

(a) As the external auditor of Hummingbird Co, write a report to management in respect of the sales system described above which:

(i) Identifies and explains SEVEN deficiencies in the sales system; and

(ii) Provides a recommendation to address each of these deficiencies.

A covering letter IS required.

Note: Up to two marks will be awarded within this requirement for presentation and the remaining marks will be split equally between each part. (16 marks)

(b) Describe substantive procedures the auditor should perform. to confirm Hummingbird Co’s revenue. (4 marks)

produce an audit report. This report should contain a number of consistent elements so that users are able to understand what the audit report means.

Required:

Describe FOUR elements of an unmodified auditor’s report and for each explain why they are included. (4 marks)

(b) Bullfinch.com is a website design company whose year end was 31 October 2014. The audit is almost complete and the financial statements are due to be signed shortly. Revenue for the year is $11·2 million and profit before tax is $3·8 million. A key customer, with a receivables balance at the year end of $283,000, has just notified Bullfinch.com that they are experiencing cash flow difficulties and so are unable to make any payments for the foreseeable future. The finance director has notified the auditor that he will write this balance off as an irrecoverable debt in the 2015 financial statements.

Required:

(i) Explain whether or not the 2014 financial statements require amendment; and

(ii) Describe audit procedures which should be performed in order to form. a conclusion on any required amendment.

Note: The total marks will be split equally between each part. (6 marks)

e within the next six months, and management has been advised by the company’s auditors about the need for compliance with corporate governance provisions. In particular, the finance director is looking to recruit non-executive directors as he understands that Bluebird will need to establish an audit committee.

The finance director has two potential non-executive directors whom he is considering approaching to join the board of Bluebird. Antony Goldfinch is currently an executive sales director of a listed multi-national banking company; he sits on an audit committee of another company as a non-executive director and is agreeable to being paid a fixed fee which is not related to profits. Jacob Mallard is currently a finance director of a small retail company, which does not compete with Bluebird; he has expressed an interest in a fixed seven year contract and he is the brother of Bluebird’s chief executive.

Required

(a) Explain the benefits to Bluebird Enterprises Co of establishing an audit committee. (4 marks)

(b) Discuss the advantages and disadvantages of appointing:

(i) Anthony Goldfinch; and

(ii) Jacob Mallard

as non-executive directors of Bluebird Enterprises Co.

Note: The total marks will be split equally between each part. (6 marks)