（a) Define audit risk and the components of audit risk. （5 marks)You are an audit supervis

ntory system documentation for your audit client, Lemon Quartz Co (Quartz) which manufactures computer equipment. The company’s factory and warehouse are based on one large site, and their year end is 30 June 2016. Quartz is planning to undertake a full inventory count at the year end of its raw materials, work in progress and finished goods and you will be attending this count. In preparation you have been reviewing the inventory count instructions for finished goods provided by Quartz.

The count will be undertaken by 15 teams of two counters from the warehouse department with Quartz’s financial controller providing overall supervision. Each team of two is allocated a number of bays within the warehouse to count and they are provided with sequentially numbered inventory sheets which contain product codes and quantities extracted from the inventory records. The counters move through each allocated bay counting the inventory and confirming that it agrees with the inventory sheets. Where a discrepancy is found, they note this on the sheet.

The warehouse is large and approximately 10% of the bays have been rented out to third parties with similar operations; these are scattered throughout the warehouse. For completeness, the counters have been asked to count the inventory for all bays noting the third party inventories on separate blank inventory sheets, and the finance department will make any necessary adjustments.

Some of Quartz’s finished goods are high in value and are stored in a locked area of the warehouse and all the counting teams will be given the code to access this area. There will be no despatches of inventory during the count and it is not anticipated that there will be any deliveries from suppliers.

Each area is counted once by the allocated team; the sheets are completed in ink, signed by the team and returned after each bay is counted. As no two teams are allocated the same bays, there will be no need to flag that an area has been counted. On completion of the count, the financial controller will confirm with each team that they have returned their inventory sheets.

Required:

(a) In respect of the inventory count procedures for Lemon Quartz Co:

(i) Identify and explain FIVE deficiencies;

(ii) Recommend a control to address each of these deficiencies; and

(iii) Describe a TEST OF CONTROL the external auditors would perform. to assess if each of these controls, if implemented, is operating effectively.

Note: The total marks will be split equally between each part. (15 marks)

(b) Quartz’s finance director has asked your firm to undertake a non-audit assurance engagement later in the year. The audit junior has not been involved in such an assignment before and has asked you to explain what an assurance engagement involves.

Required:

Explain the five elements of an assurance engagement. (5 marks)

dit supervisor of Jasper & Co and are currently preparing the audit programmes for the audit of Kyanite’s financial statements for the year ended 31 March 2016. You are reviewing the notes of last week’s meeting between the audit manager and finance director where two material issues were discussed.

(i) Property, plant and equipment

In the past Kyanite has received negative press reports over the condition of its fast food restaurants, with comments suggesting they are old fashioned and tired looking. Therefore during the year the company undertook a full review of all its assets and carried out extensive refurbishments to the majority of its restaurants. This review resulted in a significant amount of ageing fixtures and fittings being disposed of and a significant amount of capital expenditure was invested in all remaining restaurants. (6 marks)

(ii) Equity The refurbishment was financed via a share issue in April 2015 at a premium of $1·6 million. (4 marks)

Required:

Describe substantive procedures you should perform. to obtain sufficient and appropriate audit evidence in relation to the above two matters.

Note: The mark allocation is shown against each of the two matters above.

ses and three distribution depots spread across North America. The audit for the year ended 31 December 2015 is almost complete and the financial statements and audit report are due to be signed shortly. Profit before taxation is $7·9 million. The following events have occurred subsequent to the year end and no amendments or disclosures have been made in the financial statements.

Event 1 – Fire

On 15 February 2016, a fire occurred at the largest of the distribution depots. The fire resulted in extensive damage to 40% of the company’s vehicles used for dispatching goods to customers; however, there have been no significant delays to customer deliveries. The company estimates the level of damage to the vehicles to be in excess of $650,000. Only a minimal level of inventory, approximately $25,000, was damaged. Grain’s insurance company has started to investigate the fire to assess the likelihood and level of payment, however, there are concerns the fire was started deliberately, and if true, would invalidate any insurance cover.

Event 2 – Inventory

On 18 February 2016, it was discovered that a large batch of Grain’s new cereal brand ‘Loopy Green Loops’ held in inventory at the year end was defective, as the cereal contained too much green food colouring. To date no sales of this new cereal have been made. The cost of the defective batch of inventory is $915,000 and the defects cannot be corrected. However, the scrapped cereal can be utilised as a raw material for an alternative cereal brand at a value of $50,000.

Required:

For each of the two subsequent events described above:

(i) Based on the information provided, explain whether the financial statements require amendment; and

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

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

(i) Describe FIVE types of procedures for obtaining audit evidence; and

(ii) For each type of procedure, describe an example relevant to the audit of BANK balances.

Note: The total marks will be split equally between each part. (10 marks)

(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.