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The auditor should aim to develop a constructive working relationship with those charged with governance, whilst retaining his independence and objectivity, and under ISA (UK) 260, one of his objectives is to promote effective two-way communication with those charged with governance. The main purposes of such communication are:
•to assist the auditor and those charged with governance in understanding matters related to the audit. This includes communicating clearly the responsibilities of the auditor in relation to the audit and an overview of the planned timing and scope of the work;
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Page 2
Introduction
Fox Industries Co (Fox) manufactures engineering parts. It has one operating site and a customer base spread across Europe. The company’s year end was 30 April 2013. Below is a description of the purchasing and payments system.
Purchasing system
Whenever production materials are required, the relevant department sends a requisition form to the ordering department. An order clerk raises a purchase order and contacts a number of suppliers to see which can despatch the goods first.
This supplier is then chosen. The order clerk sends out the purchase order. This is not sequentially numbered and only orders above $5,000 require authorisation.
Purchase invoices are input daily by the purchase ledger clerk, who has been in the role for many years and, as an experienced team member, he does not apply any application controls over the input process. Every week the purchase day book automatically updates the purchase ledger, the purchase ledger is then posted manually to the general ledger by the purchase ledger clerk.
Payments system
Fox maintains a current account and a number of saving (deposit) accounts. The current account is reconciled weekly but the saving (deposit) accounts are only reconciled every two months. In order to maximise their cash and bank balance, Fox has a policy of delaying payments to all suppliers for as long as possible. Suppliers are paid by a bank transfer. The finance director is given the total amount of the payments list, which he authorises and then processes the bank payments.
Required:
As the external auditors of Fox Industries Co, write a report to management in respect of the purchasing and payments system described above which:
(i) Identifies and explains FOUR deficiencies in the system; and
(ii) Explains the possible implication of each deficiency; and
(iii) Provides a recommendation to address each deficiency.
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. (14 marks)
Page 3
Introduction
Fox Industries Co (Fox) manufactures engineering parts. It has one operating site and a customer base spread across Europe. The company’s year end was 30 April 2013. Below is a description of the purchasing and payments system.
Purchasing system
Whenever production materials are required, the relevant department sends a requisition form to the ordering department. An order clerk raises a purchase order and contacts a number of suppliers to see which can despatch the goods first.
This supplier is then chosen. The order clerk sends out the purchase order. This is not sequentially numbered and only orders above $5,000 require authorisation.
Purchase invoices are input daily by the purchase ledger clerk, who has been in the role for many years and, as an experienced team member, he does not apply any application controls over the input process. Every week the purchase day book automatically updates the purchase ledger, the purchase ledger is then posted manually to the general ledger by the purchase ledger clerk.
Payments system
Fox maintains a current account and a number of saving (deposit) accounts. The current account is reconciled weekly but the saving (deposit) accounts are only reconciled every two months. In order to maximise their cash and bank balance, Fox has a policy of delaying payments to all suppliers for as long as possible. Suppliers are paid by a bank transfer. The finance director is given the total amount of the payments list, which he authorises and then processes the bank payments.
Required:
Identify and explain FOUR application controls that should be adopted by Fox Industries Co to ensure the completeness and accuracy of the input of purchase invoices. (4 marks)
Page 4
Introduction
Fox Industries Co (Fox) manufactures engineering parts. It has one operating site and a customer base spread across Europe. The company’s year end was 30 April 2013. Below is a description of the purchasing and payments system.
Purchasing system
Whenever production materials are required, the relevant department sends a requisition form to the ordering department. An order clerk raises a purchase order and contacts a number of suppliers to see which can despatch the goods first.
This supplier is then chosen. The order clerk sends out the purchase order. This is not sequentially numbered and only orders above $5,000 require authorisation.
Purchase invoices are input daily by the purchase ledger clerk, who has been in the role for many years and, as an experienced team member, he does not apply any application controls over the input process. Every week the purchase day book automatically updates the purchase ledger, the purchase ledger is then posted manually to the general ledger by the purchase ledger clerk.
Payments system
Fox maintains a current account and a number of saving (deposit) accounts. The current account is reconciled weekly but the saving (deposit) accounts are only reconciled every two months. In order to maximise their cash and bank balance, Fox has a policy of delaying payments to all suppliers for as long as possible. Suppliers are paid by a bank transfer. The finance director is given the total amount of the payments list, which he authorises and then processes the bank payments.
Required:
Describe substantive procedures the auditor should perform to confirm the bank and cash balance of Fox Industries Co at the year end. (7 marks)
Page 5
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Page 8
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Page 9
You are the audit senior of Rhino & Co and you are planning the audit of Kangaroo Construction Co (Kangaroo) for the year ended 31 March 2013.
Kangaroo specialises in building houses and provides a five-year building warranty to its customers. Your audit manager has held a planning meeting with the finance director. He has provided you with the following notes of his meeting and financial statement extracts:
Kangaroo has had a difficult year; house prices have fallen and, as a result, revenue has dropped. In order to address this, management has offered significantly extended credit terms to their customers.
However, demand has fallen such that there are still some completed houses in inventory where the selling price may be below cost. During the year, whilst calculating depreciation, the directors extended the useful lives of plant and machinery from three years to five years. This reduced the annual depreciation charge.
The directors need to meet a target profit before interest and taxation of $0•5 million in order to be paid their annual bonus. In addition, to try and improve profits, Kangaroo changed their main material supplier to a cheaper alternative.
This has resulted in some customers claiming on their building warranties for extensive repairs. To help with operating cash flow, the directors borrowed $1 million from the bank during the year. This is due for repayment at the end of 2013.
Financial statement extracts for year ended 31 March
Required:
Using the information above:
(i) Calculate FIVE ratios, for BOTH years, which would assist the audit senior in planning the audit; and (5 marks)
(ii) Using the information provided and the ratios calculated, identify and describe FIVE audit risks and explain the auditor’s response to each risk in planning the audit of Kangaroo Construction Co.
(10 marks)
Page 10
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Page 12
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Page 13
You could see this question fully worked through if you join the classroom
Bush-Baby Hotels Co operates a chain of 18 hotels located across the country. Each hotel has bedrooms, a restaurant and leisure club facilities. Most visitors to the restaurant and leisure club are hotel guests; however, these facilities are open to the public as well. Hotel guests generally charge any costs to their room but other visitors must make payment directly to the hotel staff.
During the year, senior management noticed an increased level of cash discrepancies and inventory discrepancies, and they suspect that some employees have been stealing cash and goods from the hotels. They are keen to prevent this from reoccurring and are considering establishing an internal audit department to undertake a fraud investigation.
The directors would like the internal audit department to have as broad a role as possible, as this will make the decision to recruit an internal audit department more cost effective.
Required:
Describe additional functions, other than fraud investigations, the directors of Bush-Baby Hotels Co could ask the internal audit department to undertake. (5 marks)
Page 14
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Page 15
Panda Co manufactures chemicals and has a factory and four offsite storage locations for finished goods. Panda Co’s year end was 30 April 2013. The final audit is almost complete and the financial statements and audit report are due to be signed next week. Revenue for the year is $55 million and profit before taxation is $5•6 million.
The following two events have occurred subsequent to the year end. No amendments or disclosures have been made in the financial statements.
Event 1 – Defective chemicals
Panda Co undertakes extensive quality control checks prior to despatch of any chemicals. Testing on 3 May 2013 found that a batch of chemicals produced in April was defective.
The cost of this batch was $0•85 million. In its current condition it can be sold at a scrap value of $0•1 million. The costs of correcting the defect are too significant for Panda Co’s management to consider this an alternative option.
Event 2 – Explosion
An explosion occurred at the smallest of the four offsite storage locations on 20 May 2013. This resulted in some damage to inventory and property, plant and equipment. Panda Co’s management have investigated the cause of the explosion and believe that they are unlikely to be able to claim on their insurance.
Management of Panda Co has estimated that the value of damaged inventory and property, plant and equipment was $0•9 million and it now has no scrap value.
Required:
For each of the two events above:
(i) Explain whether the financial statements require amendment; and
(ii) Describe audit procedures that should be performed in order to form a conclusion on any required amendment.
Note: The total marks will be split equally between each event. (12 marks)
Page 16
Panda Co manufactures chemicals and has a factory and four offsite storage locations for finished goods. Panda Co’s year end was 30 April 2013. The final audit is almost complete and the financial statements and audit report are due to be signed next week. Revenue for the year is $55 million and profit before taxation is $5•6 million.
The following two events have occurred subsequent to the year end. No amendments or disclosures have been made in the financial statements.
Event 1 – Defective chemicals
Panda Co undertakes extensive quality control checks prior to despatch of any chemicals. Testing on 3 May 2013 found that a batch of chemicals produced in April was defective.
The cost of this batch was $0•85 million. In its current condition it can be sold at a scrap value of $0•1 million. The costs of correcting the defect are too significant for Panda Co’s management to consider this an alternative option.
Event 2 – Explosion
An explosion occurred at the smallest of the four offsite storage locations on 20 May 2013. This resulted in some damage to inventory and property, plant and equipment. Panda Co’s management have investigated the cause of the explosion and believe that they are unlikely to be able to claim on their insurance.
Management of Panda Co has estimated that the value of damaged inventory and property, plant and equipment was $0•9 million and it now has no scrap value.
The directors do not wish to make any amendments or disclosures to the financial statements for the explosion (event 2).
Required:
Explain the impact on the audit report should this issue remain unresolved. (3 marks)
Page 17
Lily Window Glass Co (Lily) is a glass manufacturer, which operates from a large production facility, where it undertakes continuous production 24 hours a day, seven days a week. Also on this site are two warehouses, where the company’s raw materials and finished goods are stored. Lily’s year end is 31 December.
Lily is finalising the arrangements for the year-end inventory count, which is to be undertaken on 31 December 2012. The finished windows are stored within 20 aisles of the first warehouse. The second warehouse is for large piles of raw materials, such as sand, used in the manufacture of glass. The following arrangements have been made for the inventory count:
The warehouse manager will supervise the count as he is most familiar with the inventory. There will be ten teams of counters and each team will contain two members of staff, one from the finance and one from the manufacturing department. None of the warehouse staff, other than the manager, will be involved in the count.
Each team will count an aisle of finished goods by counting up and then down each aisle. As this process is systematic, it is not felt that the team will need to flag areas once counted. Once the team has finished counting an aisle, they will hand in their sheets and be given a set for another aisle of the warehouse.
In addition to the above, to assist with the inventory counting, there will be two teams of counters from the internal audit department and they will perform inventory counts.
The count sheets are sequentially numbered, and the product codes and descriptions are printed on them but no quantities. If the counters identify any inventory which is not on their sheets, then they are to enter the item on a separate sheet, which is not numbered.
Once all counting is complete, the sequence of the sheets is checked and any additional sheets are also handed in at this stage. All sheets are completed in ink.
Any damaged goods identified by the counters will be too heavy to move to a central location, hence they are to be left where they are but the counter is to make a note on the inventory sheets detailing the level of damage.
As Lily undertakes continuous production, there will continue to be movements of raw materials and finished goods in and out of the warehouse during the count. These will be kept to a minimum where possible.
The level of work-in-progress in the manufacturing plant is to be assessed by the warehouse manager. It is likely that this will be an immaterial balance. In addition, the raw materials quantities are to be approximated by measuring the height and width of the raw material piles.
In the past this task has been undertaken by a specialist; however, the warehouse manager feels confident that he can perform this task.
Required:
For the inventory count arrangements of Lily Window Glass Co:
(i) Identify and explain SIX deficiencies; and
(ii) Provide a recommendation to address each deficiency.
The total marks will be split equally between each part (12 marks)
Page 18
Lily Window Glass Co (Lily) is a glass manufacturer, which operates from a large production facility, where it undertakes continuous production 24 hours a day, seven days a week. Also on this site are two warehouses, where the company’s raw materials and finished goods are stored. Lily’s year end is 31 December.
Lily is finalising the arrangements for the year-end inventory count, which is to be undertaken on 31 December 2012. The finished windows are stored within 20 aisles of the first warehouse. The second warehouse is for large piles of raw materials, such as sand, used in the manufacture of glass. The following arrangements have been made for the inventory count:
The warehouse manager will supervise the count as he is most familiar with the inventory. There will be ten teams of counters and each team will contain two members of staff, one from the finance and one from the manufacturing department. None of the warehouse staff, other than the manager, will be involved in the count.
Each team will count an aisle of finished goods by counting up and then down each aisle. As this process is systematic, it is not felt that the team will need to flag areas once counted. Once the team has finished counting an aisle, they will hand in their sheets and be given a set for another aisle of the warehouse.
In addition to the above, to assist with the inventory counting, there will be two teams of counters from the internal audit department and they will perform inventory counts.
The count sheets are sequentially numbered, and the product codes and descriptions are printed on them but no quantities. If the counters identify any inventory which is not on their sheets, then they are to enter the item on a separate sheet, which is not numbered.
Once all counting is complete, the sequence of the sheets is checked and any additional sheets are also handed in at this stage. All sheets are completed in ink.
Any damaged goods identified by the counters will be too heavy to move to a central location, hence they are to be left where they are but the counter is to make a note on the inventory sheets detailing the level of damage.
As Lily undertakes continuous production, there will continue to be movements of raw materials and finished goods in and out of the warehouse during the count. These will be kept to a minimum where possible.
The level of work-in-progress in the manufacturing plant is to be assessed by the warehouse manager. It is likely that this will be an immaterial balance. In addition, the raw materials quantities are to be approximated by measuring the height and width of the raw material piles.
In the past this task has been undertaken by a specialist; however, the warehouse manager feels confident that he can perform this task.
You are the audit senior of Daffodil & Co and are responsible for the audit of inventory for Lily. You will be attending the year-end inventory count on 31 December 2012.
In addition, your manager wishes to utilise computer-assisted audit techniques for the first time for controls and substantive testing in auditing Lily Window Glass Co’s inventory.
Required:
Describe the procedures to be undertaken by the auditor DURING the inventory count of Lily Window Glass Co in order to gain sufficient appropriate audit evidence. (6 marks)
Page 19
Lily Window Glass Co (Lily) is a glass manufacturer, which operates from a large production facility, where it undertakes continuous production 24 hours a day, seven days a week. Also on this site are two warehouses, where the company’s raw materials and finished goods are stored. Lily’s year end is 31 December.
Lily is finalising the arrangements for the year-end inventory count, which is to be undertaken on 31 December 2012. The finished windows are stored within 20 aisles of the first warehouse. The second warehouse is for large piles of raw materials, such as sand, used in the manufacture of glass. The following arrangements have been made for the inventory count:
The warehouse manager will supervise the count as he is most familiar with the inventory. There will be ten teams of counters and each team will contain two members of staff, one from the finance and one from the manufacturing department. None of the warehouse staff, other than the manager, will be involved in the count.
Each team will count an aisle of finished goods by counting up and then down each aisle. As this process is systematic, it is not felt that the team will need to flag areas once counted. Once the team has finished counting an aisle, they will hand in their sheets and be given a set for another aisle of the warehouse.
In addition to the above, to assist with the inventory counting, there will be two teams of counters from the internal audit department and they will perform inventory counts.
The count sheets are sequentially numbered, and the product codes and descriptions are printed on them but no quantities. If the counters identify any inventory which is not on their sheets, then they are to enter the item on a separate sheet, which is not numbered.
Once all counting is complete, the sequence of the sheets is checked and any additional sheets are also handed in at this stage. All sheets are completed in ink.
Any damaged goods identified by the counters will be too heavy to move to a central location, hence they are to be left where they are but the counter is to make a note on the inventory sheets detailing the level of damage.
As Lily undertakes continuous production, there will continue to be movements of raw materials and finished goods in and out of the warehouse during the count. These will be kept to a minimum where possible.
The level of work-in-progress in the manufacturing plant is to be assessed by the warehouse manager. It is likely that this will be an immaterial balance. In addition, the raw materials quantities are to be approximated by measuring the height and width of the raw material piles.
In the past this task has been undertaken by a specialist; however, the warehouse manager feels confident that he can perform this task.
You are the audit senior of Daffodil & Co and are responsible for the audit of inventory for Lily. You will be attending the year-end inventory count on 31 December 2012.
In addition, your manager wishes to utilise computer-assisted audit techniques for the first time for controls and substantive testing in auditing Lily Window Glass Co’s inventory.
Required:
For the audit of the inventory cycle and year-end inventory balance of Lily Window Glass Co:
(i) Describe FOUR audit procedures that could be carried out using computer-assisted audit techniques (CAATS);
(ii) Explain the potential advantages of using CAATs; and
(iii) Explain the potential disadvantages of using CAATs.
The total marks will be split equally between each part (12 marks)
Page 20
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Page 22
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Page 23
Sunflower Stores Co (Sunflower) operates 25 food supermarkets. The company’s year end is 31 December 2012. The audit manager and partner recently attended a planning meeting with the finance director and have provided you with the planning notes below.
You are the audit senior, and this is your first year on this audit. In order to familiarise yourself with Sunflower, the audit manager has asked you to undertake some research in order to gain an understanding of Sunflower, so that you are able to assist in the planning process. He has then asked that you identify relevant audit risks from the notes below and also consider how the team should respond to these risks.
Sunflower has spent $1•6 million in refurbishing all of its supermarkets; as part of this refurbishment programme their central warehouse has been extended and a smaller warehouse, which was only occasionally used, has been disposed of at a profit. In order to finance this refurbishment, a sum of $1•5 million was borrowed from the bank. This is due to be repaid over five years.
The company will be performing a year-end inventory count at the central warehouse as well as at all 25 supermarkets on 31 December. Inventory is valued at selling price less an average profit margin as the finance director believes that this is a close approximation to cost.
Prior to 2012, each of the supermarkets maintained their own financial records and submitted returns monthly to head office. During 2012 all accounting records have been centralised within head office.
Therefore at the beginning of the year, each supermarket’s opening balances were transferred into head office’s accounting records. The increased workload at head office has led to some changes in the finance department and in November 2012 the financial controller left. His replacement will start in late December.
Required:
List FIVE sources of information that would be of use in gaining an understanding of Sunflower Stores Co, and for each source describe what you would expect to obtain. (5 marks)
Page 24
Sunflower Stores Co (Sunflower) operates 25 food supermarkets. The company’s year end is 31 December 2012. The audit manager and partner recently attended a planning meeting with the finance director and have provided you with the planning notes below.
You are the audit senior, and this is your first year on this audit. In order to familiarise yourself with Sunflower, the audit manager has asked you to undertake some research in order to gain an understanding of Sunflower, so that you are able to assist in the planning process. He has then asked that you identify relevant audit risks from the notes below and also consider how the team should respond to these risks.
Sunflower has spent $1•6 million in refurbishing all of its supermarkets; as part of this refurbishment programme their central warehouse has been extended and a smaller warehouse, which was only occasionally used, has been disposed of at a profit. In order to finance this refurbishment, a sum of $1•5 million was borrowed from the bank. This is due to be repaid over five years.
The company will be performing a year-end inventory count at the central warehouse as well as at all 25 supermarkets on 31 December. Inventory is valued at selling price less an average profit margin as the finance director believes that this is a close approximation to cost.
Prior to 2012, each of the supermarkets maintained their own financial records and submitted returns monthly to head office. During 2012 all accounting records have been centralised within head office.
Therefore at the beginning of the year, each supermarket’s opening balances were transferred into head office’s accounting records. The increased workload at head office has led to some changes in the finance department and in November 2012 the financial controller left. His replacement will start in late December.
Required:
Using the information provided, describe FIVE audit risks and explain the auditor’s response to each risk in planning the audit of Sunflower Stores Co. (10 marks)
Page 25
Sunflower Stores Co (Sunflower) operates 25 food supermarkets. The company’s year end is 31 December 2012. The audit manager and partner recently attended a planning meeting with the finance director and have provided you with the planning notes below.
You are the audit senior, and this is your first year on this audit. In order to familiarise yourself with Sunflower, the audit manager has asked you to undertake some research in order to gain an understanding of Sunflower, so that you are able to assist in the planning process. He has then asked that you identify relevant audit risks from the notes below and also consider how the team should respond to these risks.
Sunflower has spent $1•6 million in refurbishing all of its supermarkets; as part of this refurbishment programme their central warehouse has been extended and a smaller warehouse, which was only occasionally used, has been disposed of at a profit. In order to finance this refurbishment, a sum of $1•5 million was borrowed from the bank. This is due to be repaid over five years.
The company will be performing a year-end inventory count at the central warehouse as well as at all 25 supermarkets on 31 December. Inventory is valued at selling price less an average profit margin as the finance director believes that this is a close approximation to cost.
Prior to 2012, each of the supermarkets maintained their own financial records and submitted returns monthly to head office. During 2012 all accounting records have been centralised within head office.
Therefore at the beginning of the year, each supermarket’s opening balances were transferred into head office’s accounting records. The increased workload at head office has led to some changes in the finance department and in November 2012 the financial controller left. His replacement will start in late December.
The finance director of Sunflower Stores Co is considering establishing an internal audit department.
Required:
Describe the factors the finance director should consider before establishing an internal audit department. (5 marks)
Page 26
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