UOG Audit - Tutorial 2.pdf

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Updated: 31-Dec-17/1 ACCO 1152: AUDIT & ASSURANCE

TUTORIAL – TERM 2

Chapter 10: Internal Control

Question 1

Royal Icing Ltd operates a chain of fifteen patisseries (cake shops), all of which are located in Greater London. Cakes are made on demand for customers from a range of fresh ingredients. Local suppliers deliver ingredients on a daily basis. Royal Icing Ltd has engaged your audit firm to carry out a review of the purchasing process at each of its outlets. As part of your review you observed the following:

o Each outlet has its own preferred suppliers and places its own orders to suppliers throughout each day.

o When a particular item is identified as being low on quantity an order is placed by telephone.

o Suppliers note down each telephone order and all items ordered are delivered the next morning.

o A number of employees at each outlet have authority to place an order.

o No records of orders placed are maintained by outlet staff at any of the outlets. o When suppliers deliver ingredients the delivery driver takes them directly to the

storeroom. Outlet staff does not check the items delivered.

o The outlet manager signs the delivery note. The delivery driver retains one copy and a second copy is given to the outlet manager. Each outlet manager retains the delivery notes and forwards them to the head office accounts department on a weekly basis. o Suppliers send invoices directly to head office where they are checked against the

delivery notes forwarded by each outlet manager.

Required:

Set out points to be included in a letter to management that outlines the possible consequence(s) arising from the deficiencies identified above. For each point, clearly state recommendations to remedy those deficiencies. Your recommendations should clearly describe how the control procedures should operate.

Question 2

Golfing Pro Ltd. manufactures golf clubs. They have sites in a number of towns across the United Kingdom. The internal audit department is currently reviewing cash wages. The following information is communicated to you:

i) New staff are entered into the system by one of two wages clerks, Donna and Laura.

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Updated: 31-Dec-17/2 iii) Workers on each site reports into a foreman; the foreman has a number of temporary clock cards that can be issued to new staff until they get the permanent cards from Donna or Laura.

iv) Overtime is calculated by the computerised wages system and added to the standard pay.

v) Donna and Laura set up and maintain all employee records.

vi) Donna and Laura have write-access to the computerised wages system and can update holidays and sick leave.

vii) Once every month the foreman of each site will receive a list of the employees being paid on his site. He needs to check that all the employees on the site exist and sign the list. This signed list is filed in the central wages folder.

viii) The computerised wages system calculates how much needs to be deducted from gross pay, such as PAYE and NI. A list of the payments due to each employee is generated. This wages payable list also shows a total of net wages due to all employees and the total number of hours worked.

ix) Donna and Laura print off the wages payable list and complete a cash requisition document. This cash requisition form is accompanied by the wages payable list and signed off by the chief accountant and salaries manager. The first one to sign the document does a reasonability check by multiplying the number of hours worked with the average wage per employee and comparing the total net wages with that of the prior week. The second one to sign the document merely signs the document as part of the formal procedure (i.e. does not do any checks).

x) Sally, the member of staff responsible for cheque issuances, completes a cash cheque for the amount authorised by the chief accountant and salaries manager and takes both the requisition form and cheque for signature to two of the chief directors.

xi) Sally cashes the cheque and takes the cash to Donna and Laura who make up the wages envelopes.

xii) Donna and Laura include a hand-written note in each envelope indicating gross pay, deductions and net pay. The packets are given to the foremen for distribution to the employees.

xiii) The foremen distribute the packets to the employees on site every Tuesday for the prior week ending the Friday. The distribution process occurs in the canteen. The foreman calls out the employees name and the employee goes to the foreman and takes his packet.

Required:

(a) Explain the weaknesses in Golfing Pro Ltd’s system of internal control over the wages cycle by discussing the corresponding risk. (9 marks)

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Updated: 31-Dec-17/3 Question 3

You’ve recently qualified as Chartered Accountant and joined the accounts department of Hit and Miss plc. – they sell tennis equipment to clubs around London. All sales occur on credit. Your direct manager asked you to read through their procedure documents for cash and bank in order to:

a) Identify internal control risks

b) Describe improvements to the current procedures in order to mitigate the risks. Procedures – Cash and Bank

One person opens the mail. Any cash / cheque receipts and the accompanying remittance advices are taken to the accounts manager to be locked in the safe. Any remittance advices pertaining to direct deposits are stacked in the cash book clerk’s in-tray.

Around 2pm each day the cash book clerk picks up the cash/cheques from the accounts manager, enters the details into the cash book and the individual debtors account, prepares the cash deposit book and banks the cash in the company’s bank account. The integrated accounting system automatically updates the cash ledger and debtor’s ledger.

The cash book clerk prints off a bank statement once a week. This is used to identify payments and direct deposit. Any payments are credited to the cash book and debited to a suspense account.

Direct deposits from clients are matched to the remittance advices in the in-tray and debited to cash and credited to the individual debtors account. Any direct deposits for which there aren’t remittance advises are circled on the bank statement and filed in the outstanding deposits file – these are not entered into the cash book.

The outstanding deposits file is reviewed by management once a month. Bank reconciliations are prepared once a month by the cash book clerk and reviewed by the accounts manager.

Question 4 (Jan 2015)

(a) If the auditor finds that the control environment of an audit client is strong, what impact could that have on the audit approach adopted? (2 marks)

(b) Robin Ltd makes payments to suppliers by BACS payments (online bank transfers). All new suppliers are entered into the system by a clerk and then authorised by the finance director before any payment can be made to the new supplier.

Required: In respect of Robin Ltd’s internal control above, outline: (i) The control objective

(ii) The control procedure (activity)

(iii) How the auditor would test this control is working effectively (iv) A limitation of the control

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Updated: 31-Dec-17/4 Question 5 (Jan 2015)

(c) You work for Fire and Ice LLP and are a member of the audit team working on the statutory audit engagement for Putter Ltd, which owns and manages a chain of golf courses with on-site hotel facilities. They only sell package deals whereby customers pay for both the golfing and the hotel facilities combined.

The bookings for these package deals are managed on networked computers and the accounting function is centralised at the head office.

The following significant points have been identified during the audit.

(1) Property, plant and equipment

• Company policy to obtain a minimum of three quotes for capital expenditure in excess of £2,000 was not adhered to on four occasions.

(2) Computer system

• The booking system is not backed up anywhere.

• The changing of passwords is at the discretion of staff members.

Required:

Set out points to be included in a letter to management that outlines the possible consequence(s) arising from the deficiencies identified above. For each point, clearly state recommendations to remedy those deficiencies. Your recommendations should clearly describe how the control procedures should operate. (12 marks)

Question 6 (May 2015)

(a) Outline the responsibilities of a company’s management and its auditor in respect of internal controls. (4 marks)

(b) Sparrow Ltd is an online retailer of silver jewellery. Management are concerned that inventory will be stolen from their warehouse.

Required:

Explain three controls you would expect Sparrow Ltd to implement in respect of its inventory at their warehouse. You should include the objectives of each control. (6 marks)

(Total 10 marks) Question 7 (May 2015)

(b) You work for Birch and Willow LLP and are a member of the audit team working on the statutory audit engagement for KalmLife Ltd. KalmLife Ltd owns and manages a chain of beauty treatment centres using several hotels’ facilities. KalmLife Ltd only sells package deals for beauty treatments AND hotel facilities together.

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Updated: 31-Dec-17/5 Ltd also offers corporate customers a discount on prices as this helps them to remain competitive in a busy market.

The following significant points have been identified during the audit.

o As part of the review of controls, the audit team observed that members of KalmLife Ltd’s staff have granted discounts in excess of authorised levels in 40% of the transactions examined.

o KalmLife Ltd’s staff noted that in 15% of accounts reviewed the corporate customers did not have a credit limit on file.

o Audit tests indicated that about 20% of corporate customers with an authorised credit limit have exceeded the authorised limits for more than six months.

Required:

Set out points to be included in a letter to management that outlines the possible consequence(s) arising from the deficiencies identified above. For each point, clearly state recommendations to remedy those deficiencies. Your recommendations should clearly describe how the control procedures should operate. (20 marks)

Question 8 (July 2015)

(b) Special Wish Ltd is a small charity that raises funds to give children with long term illnesses a special day trip of their choice. Funds are raised in one of two ways:

o Cash donations at large fundraising events – these funds are pooled together to help any child.

o Alf Olby Ltd, a corporate sponsor, usually funds a special trip for one child. This constitutes ‘restricted cash’ for Special Wish Ltd.

Required:

(i) Discuss two controls you would expect Special Wish Ltd to implement to safeguard the cash collected at fundraising events. (4 marks)

(ii) Discuss one control that can be implemented to ensure that any ‘restricted cash’ from Alf Olby Ltd is used for its intended purpose. (2 marks)

(b)Trilby Plc is a global men’s hats retailer. You work for Heather and Thistle LLP, the statutory auditors of Trilby Plc. As part of the year end statutory audit for the year ended the 31 December 2014, you have identified the following internal control deficiencies.

(1) Accounts receivable: it is the policy of Trilby to give 30 days’ credit to all customers. However, a number of large balances are more than 60 days old and no attempt has been made by the credit controller to recover the amounts due.

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Updated: 31-Dec-17/6 Required:

Set out points to be included in a letter to management that outlines the possible consequence(s) arising from the deficiencies identified above. For each point, clearly state recommendations to remedy those deficiencies. Your recommendations should describe how the control procedures should operate. (22 marks)

a) Discuss the process by which an auditor will test controls. (4 marks)

b) For the scenarios below, suggest two internal control procedures required to avoid the problem described in each.

i) A company is concerned that staff will steal cash from the business when taking money from the till to the bank.

ii) The Finance Director is concerned that staff will set up fictitious suppliers in the accounts system in order to make payments to themselves.

iii) The business has recently had to write off bad debts from several customers who failed to pay their balance. They wish to avoid this happening in the future.

(6 marks) (Total 10 marks) Question 11 (Jan 2016)

(Part a)

Discuss the difference between the auditor’s letter to management (‘the management letter’) and management’s representation letter. (10 marks)

(Part b)

You work for Big and Small LLP and are a member of the audit team working on the

statutory audit engagement for Stockit Ltd, a large wholesaler that sells a variety of products to distributors on credit.

Stockit Ltd have a number of employees working in its warehouse who dispatch products to customers. As part of the year-end audit procedures, the following significant points have been identified:

i. At the end of each shift, staff are asked to sign a book stating what time they started work and finished work. Nobody verifies the accuracy of the hours employees state. Warehouse employees are paid by the hour.

ii. In 15% of dispatches sampled, no copy of a GDN (goods dispatched note) was sent to the finance department.

iii. Of the customer files reviewed, only 70% had a formal credit limit agreed.

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Updated: 31-Dec-17/7 recommendations to remedy those deficiencies. Your recommendations should clearly

describe how the control procedures should operate. (20 marks)

a) Discuss the difference between the responsibilities of management and those of the external auditor in respect of internal controls. (4 marks)

b) A member of your audit team has obtained an understanding of a client, Dolphin Ltd’s sales and despatch system as detailed below:

- Customers place an order by telephone.

- The order clerk records the customer’s request on a piece of paper.

- After hanging up, the clerk will transfer the information from their piece of paper to a pre-designed order form.

- Order forms are not sequentially numbered and are sent by internal post to both the despatch and accounts department.

Required:

i) Discuss three deficiencies with Dolphin’s phone sales process above.

ii) For each deficiency that you have identified in (i), make one recommendation of a control that could be implemented.

(6 marks) (Total 10 marks) Question 13 (May 2016)

b) You are a member of the external audit team of Marjorie Ltd, a watch manufacturer.

As part of the year end statutory audit for the year ended the 31 March 2016, you have identified the following internal control deficiencies:

i) Payables balances:

Marjorie have negotiated a 60 day credit term with their 5 suppliers. Upon investigation, as part of the audit procedures you have discovered that nearly 70% of all invoices inspected were overdue for payment.

ii) Suppliers list

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Updated: 31-Dec-17/8 Required: Set out points to be included in a letter to management that outlines the possible consequence(s) arising from the deficiencies identified above. For each point, clearly state recommendations to remedy those deficiencies. Your recommendations should clearly describe how the control procedures should operate. (22 marks)

b) The Finance Director has also reviewed the output of the prior year (2015) audit, and discovered a copy of a ‘management letter’. Required: Discuss the purpose of the management letter. (4 marks)

c) As part of the statutory audit for the year ended 29 February 2016, the auditors discovered the following in respect of Rescue Ltd.

o A cash donation of £5,000 from a local business that was intended to fund a school awareness project was kept in the same bank account as all other donations. When questioned, only one member of staff knew that this money was for a particular project.

o Rescue Ltd use money collected from donations to run training courses. They frequently use 2 training providers who offer a fixed price that has been authorised and approved by the charity’s trustees. As part of the year end audit procedures, it was discovered that on three occasions, Rescue Ltd had used a different training provider for whom there is no record or agreed price.

Required:

i) Explain and discuss the concept of ‘restricted cash’ and how it is reported in the financial statements in respect of Rescue Ltd. (4 marks)

ii) Set out points to be included in a letter to management that outlines the possible consequence(s) arising from the deficiencies identified above. For each point, clearly state recommendations to remedy those deficiencies. Your recommendations should clearly describe how the control procedures should operate. (16 marks)

(a) What is the purpose of a company’s internal controls? (2 marks)

(b) Discuss management’s responsibility in respect of internal controls? (2 marks)

(c) Identify and explain THREE internal controls that a company could implement in order to prevent theft of money from the petty cash tin. (6 marks)

Total 10 marks Question 16 (Jan 2017)

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Updated: 31-Dec-17/9 Purchasing system

Whenever materials are required, a requisition form is sent from staff members to the ordering department. A purchase order is raised and a number of suppliers are contacted to see which can despatch the goods first. Whichever supplier can fulfil the order quickest is selected to place the order with. Purchase orders are not sequentially numbered and only orders above £3,000 require authorisation.

Payments system

Washington Ltd maintains a current account and a number of saving accounts. The current account is reconciled weekly but the saving accounts are only reconciled every two months. In order to maximise their cash and bank balance, Washington Ltd 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: Set out points to be included in a letter to management that outlines the deficiencies in the process cycles above. You should detail the possible consequence(s) arising from the deficiencies you identify and state recommendations to remedy those deficiencies. Your recommendations should clearly describe how the control procedures should operate. (22 marks)

Chapter 11: Audit Procedures

Question 1

Under what circumstances can an auditor perform a controls based audit? When taking a control based approach, do any substantive procedures need to be performed?

Question 2

What is meant by directional testing?

Question 3

What considerations would you make before performing analytical procedures?

Question 4 Required:

Perform analytical procedures in respect of the depreciation expense of Scissor Ltd in relation to their loans outstanding during the year end 31 December 2013. Identify which balances require further investigation, assuming that the tolerable threshold has been set at £1,500. Where you have identified balances that require further information, make sensible suggestions at what might have caused the difference to arise.

From the trial balance, depreciation charges are as follows:

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Updated: 31-Dec-17/10 PPE Note for Scissors

Land and buildings*

Plant and machinery

Motor vehicles

Fixtures and fittings

Total

Cost b/f 140,000 85,000 23,000 11,000 259,000

Additions 21,000 6,000 2,000 29,000

Disposals (35,000) (1,400) (36,400)

Cost C/f 140,000 71,000 29,000 11,600 251,600

Accumulated depreciation b/f 28,000 18,860 9,850 2,400 59,110

Disposals (27,000) (27,000)

Charge for the year 2,000 6,900 5,100 1,400 17,100

Accumulated depreciation c/f 30,000 (1,240) 14,950 3,800 49,210

Carrying amount b/f 112,000 66,140 13,150 8,600 199,890 Carrying amount c/f 110,000 72,240 14,050 7,800 202,390

* Land represents £40,000 of the balance of land and buildings.

(a) Identify and explain two different methods of selecting audit samples. (5 marks)

(c)You have been asked to help the audit junior send out bank confirmation letters.

Required: Explain to the audit junior the following.

(i) How a bank confirmation provides the auditor with audit evidence.

(ii) The process followed in order to send out a bank confirmation request. (iii)The contents of the confirmation request letter.

(iv) Who is responsible for the process of sending requests and why. (v) Any other facts you believe to be relevant.

(14 marks) Question 7 (Jan 2016)

Part a)

Discuss when it is appropriate for the auditor to place reliance upon the work of an external expert as part of the audit. Explain the assessment that the auditor must undergo before that reliance is placed.

As part of your discussion you should give examples of the type of work of experts that an auditor may wish to rely upon. (10 marks)

Part c)

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i) Explain the potential advantages of using CAATs

ii) Explain the potential disadvantages of using CAATs.

(10 marks ) Question 8 (May 2016)

a) Discuss the difference between ‘tests of controls’ and ‘substantive testing’. (4 marks) b) Provide two examples of a test of control in respect of a company’s wages and salaries

expense. (4 marks)

c) Provide two examples of a substantive procedure in respect of a company’s wages and salaries expense. (4 marks)

d) Explain what is meant by ‘analytical procedures’ (2 marks)

e) You are the auditor in charge for the external audit of Cabin Fever Ltd. Your manager has asked you to complete the analytical procedures in respect of Cabin Fever’s payroll cost for the year ended the 30 April 2016. The following information is available:

- At the start of the year, Cabin Fever had 12 employees who had been with the company for a number of years.

- During the year, 3 employees left the business, but only 2 were replaced by new joiners.

- According to last year’s audit file, the average salary of employees on 30 April 2015 was £24,000 per annum.

- You have read in the minutes of Board meetings that employees with at least 12 months continuous service were awarded a 4% pay rise on 1 January 2016.

- On 30 April 2016, Cabin Fever announced that eligible employees will receive a bonus of 10% of their salaries, based on performance targets. Last year, 75% of employees met their performance target and received a bonus.

- Cabin Fever pay 2% of gross salary into a pension scheme.

- Cabin Fever’s financial statements for the year ended 30 April 2016 show a total payroll cost of £298,482.

Required:

i) Using the information provided above, perform analytical procedures on Cabin Fever’s payroll costs. Using a tolerable threshold of £8,000 determine whether the payroll balance requires further investigation. (14 marks)

ii) Discuss two limitations of the analysis you have performed in (i) above. (2 marks)

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Updated: 31-Dec-17/12 Required: Explain four procedures an auditor should perform in conducting their overall review of the financial statements. (8 marks)

a) Discuss what is meant by directional testing. (4 marks)

b) Discuss the auditor’s duties during their attendance at an inventory (stock) count. (10 marks)

c) Explain two procedures that Computer Assisted Audit Techniques (CAATs) can assist with when undertaking the audit of inventory. (4 marks)

d) Explain the process by which the auditor would perform a bank confirmation. (10 marks)

e) Discuss the reasons that a bank confirmation is considered a strong form of audit evidence. (2 marks)

Total 30 marks Question 11 (July 2016)

a) Identify and explain three different methods of selecting audit samples. (6 marks) c) Discuss the factors that the auditor should consider before using analytical procedures as part of the audit process. (6 marks)

Chapter 12: Audit Procedures – Non-Current Asset

Question 1

You are a member of the audit team conducting the statutory audit for Knowles Ltd and are responsible for auditing their property, plant and equipment balance for the year-ended 31 December 20X7.

You have obtained the information below:

Statement of financial position for Knowles Ltd for the year ended 31 December 20X7 (Extract)

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Updated: 31-Dec-17/13 PPE Notes

PPE note Land and buildings

Plant and machinery

Motor vehicles

Fixtures and fittings

Total

Cost b/f 2,950,000 1,450,000 856,000 413,250 5,669,250

Additions - 980,000 12,000 12,000 1,004,000

Disposals - (410,000) (84,000) - (494,000)

Revaluations 150,000 - - - -

Cost c/f 3,100,000 2,020,000 784,000 425,250 6,329,250

Accumulated depreciation b/f

435,000 337,000 146,000 294,580 1,212,580

Disposals (119,823) (50,490) (170,313)

Revaluations (435,000) (435,000)

Charge for the year

62,000 101,310 145,000 40,000 348,310

Accumulated depreciation c/f

62,000 318,488 240,510 334,580 955,578

Carrying amount b/f

2,515,000 1,113,000 710,000 118,670 4,456,670

Carrying amount c/f

3,038,000 1,701,513 543,490 90,670 5,373,673

Other information

L&B On first day of year revaluation to fair value of £3,100,000 useful life re-estimated at 50 years

The depreciation policy for L&B is over 50 years on a straight line basis. P&M The depreciation policy for P&M is over 20 years on a straight line basis. MV The depreciation policy for MV is on a reducing balance basis at 25% per

year.

F&F The depreciation policy for F&F is over 10 years on a straight line basis.

a) Required: List the audit procedures that you would perform to test Knowles’ PPE balance. Tip: Make sure when you write your audit procedures you include an action + source + objective.

b) Perform a proof in total in respect of Knowles’ depreciation expense for the year, identifying any balances that require further investigation.

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Updated: 31-Dec-17/14 You work for Castle and Knight LLP, the statutory auditors of ChiliSpice plc. The current year end is 28 February 2015. This year, the audit senior has asked you to assist with the audit of Non-Current Assets, in particular the printing press.

You have been provided an extract of the property, plant and equipment disclosure note as follows.

Printing press (£)

Cost b/f 2,150,000

Additions 200,000

Disposals -

Cost c/f 2,350,000

Accumulated depreciation b/f 821,300

Disposals -

Charge for the year 151,000

Accumulated depreciation c/f 972,300

Carrying amount b/f 1,328,700

Carrying amount c/f 1,377,700

The auditor in-charge has also had a conversation with the financial controller who passed on the following relevant information.

• The printing press is being depreciated over a 15 year useful economic life.

• The additions in the year relate to extra components added to the machine during the year. • The printing machine frequently breaks down, and ChiliSpice spends a lot of money repairing it each year.

Required:

Outline the audit risks associated with the printing press and list the substantive audit procedures that you would perform in respect of the printing press. (15 marks)

(c)Perform analytical procedures on the depreciation balance and determine whether further investigation is required, based on a tolerable error threshold of £5,000. (10 marks)

The balance for PPE in the financial statements is £258,340. You have been provided with an extract of the non-current asset disclosure note as follows:

Land and buildings

Motor vehicles

Total

Cost at 1 May 2015 325,840 107,400 433,240

Additions 7,890 - 7,890

Revaluations 12,000 - 12,000

Disposals (8,025) - (8,025)

Cost at 30 April 2016 337,705 107,400 445,105 Accumulated depreciation at 1 May

2015

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Updated: 31-Dec-17/15

Revaluations (4,800) - (4,800)

Disposals (6,800) - (6,800)

Charge for the year 29,800 11,753 41,553

Accumulated depreciation at 30 April 2016

166,172 20,593 186,765 Carrying amount at 1 May 2015 177,868 98,560 276,428 Carrying amount at 30 April 2016 171,533 86,807 258,340 Smith and Jones LLP audited Stanhope last year, and an audit junior has already confirmed that the opening balances agree to the prior year audited financial statements, and therefore no further work is required on these balances.

Required:

Explain the substantive audit procedures you would perform in respect of their PPE. You do not need to provide audit procedures for the opening (b/f) balances. You should clearly distinguish which balance you are testing in your answer. (12 marks)

(b) You are a member of the audit team for your client Square Ltd who’s year-end is 31 May 2016.

This year you are auditing their land and buildings and have been provided with the following information: Land and buildings

Cost at 1 June 2015 7,525,000

Revaluation 130,000

Additions 700,000

Disposals (154,000)

Cost at 31 May 2016 8,201,000

Accumulated depreciation at 1 June 2015 2,874,550

Revaluation (54,000)

Disposals (16,580)

Accumulated depreciation at 31 May 2016 2,946,550

Carrying amount at 1 June 2015 4,650,450

Carrying amount at 31 May 2016 5,254,450

Additional information:

- Of the opening balance for land and buildings £1,870,000 relates to land. - Buildings are depreciated on a straight line basis over 50 years.

- The addition relates entirely to the purchase of one building in London on 1 January 2016. £100,000 of the purchase price is attributable to land.

- The disposal relates to one property, sold on 1 October 2015. All of the disposal amount relates to buildings, not land.

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i) Describe the audit procedures you would perform in respect of the revaluation of land and buildings during the year. (8 marks)

ii) Perform analytical procedures (‘proof in total’) of Square’s depreciation balance for the year. You should use a tolerable threshold of £9,000 to assess the balance. (10 marks)

(Total 30 marks) Question 5 (Jan 2017)

You are the audit senior completing the statutory audit for Clegg Ltd for the year ended 31 December 2016. You are completing the audit of Clegg Ltd’s Property, Plant and Equipment (PPE) for their Land and Buildings.

You have obtained an extract of their of their PPE note for Land and Buildings below. Land and buildings

Cost at 1 January 2016 2,107,143

Additions 324,780

Revaluations 107,143

Cost at 31 December 2016 2,539,066

Accumulated depreciation at 1 January 2016 310,714

Revaluations (310,714)

Accumulated depreciation at 31 December 2016 44,286

Carrying amount at 1 January 2016 1,796,429

Carrying amount at 31 December 2016 2,494,780 From speaking with Clegg Ltd’s finance director you have determined that Clegg Ltd’s policy is to depreciate land and buildings over 50 years, and the cost of the land is negligible. The revaluation took place on 1 September 2016 and the building revalued has a remaining useful life of 28 years.

Required:

(i) Outline the procedures that you would perform in respect of Clegg Ltd’s

revaluations and additions during the year ended 31 December 2016. (10 marks)

(ii) Perform analytical procedures (proof in total) in respect of Clegg Ltd’s depreciation charge for the year. You should assume a tolerable threshold of £5,000 to determine whether or not further investigation is required. (6 marks)

Chapter 13: Audit Procedures – Inventory

Question 1

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Recline Ltd’s principal activity is the manufacture and sale of high quality tables and chairs, bar stools and patio furniture and outside sofas, which are sold to the public, health spas, hotels and restaurants. All items are hand made to order in the company's workshop which is located in Wales.

Typical production time is one month; however this does depend on the size and complexity of the order. Customers are required to check the items on delivery and have seven working days to return the items if not completely satisfied.

At particularly busy times the company engages with subcontractors to assist with the manufacture process. Recline provide all of the raw materials needed to complete each order, and the subcontractors will build to the specifications given. Subcontractors deliver completed orders on one day at the end of each month.

The company does not hold any completed goods in a warehouse since all items are made to customer order. Therefore, any finished goods in the workshop relate to items awaiting despatch to customers or items that have been returned from customers as faulty.

The company does not have continuous records for raw materials inventory and undertakes a full count of raw materials at each month end including at the year end. The quantities are recorded on inventory sheets and are subsequently costed by the company accountant who also estimates the value of work in progress and finished goods awaiting despatch.

Required

You work for Stellar LLP as a member of the statutory audit team for Recline Ltd. This year you have been asked to audit their inventory balances. Identify (and explain) the audit risks associated with Recline’s inventory balance and describe the audit procedures that you would perform in respect of Recline’s inventory.

Tip: Write your audit procedures ‘Action + source + objective’.

Bookworm plc is a publishing company that has two main operations: firstly, it produces exam revision guides, and secondly, it prints these on its printing press ready for distribution. You work for Laurie and Atkinson LLP, the statutory auditors of Bookworm plc. The current year end is 28 February 2014. This year, the audit senior has asked you to assist with the audit of inventory.

(a) Explain the audit procedures that you would perform in respect of Bookworm’s inventory (comprising printed and partially printed revision guides). (20 marks)

(b) Identify and explain three different methods of selecting audit samples. (10 marks)

(Total 30 marks) Question 4 (July 2015)

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(a) Describe the procedures to be undertaken by the auditor DURING the inventory count of Shark Ltd in order to gain sufficient appropriate audit evidence. (16 marks)

(b) Discuss TWO procedures that could be performed using Computer Assisted Accounting Techniques (CAATs) in respect of the audit of Shark Ltd’s inventory (6 marks)

(c) Included within Shark Ltd’s inventory are diamonds. As audit senior attending the stock count, you have invited a diamond valuation specialist to attend the stock count with you.

Required:

Outline the extent to which an auditor can rely on the work of others. (4 marks)

(d) Explain the assessment that the auditor must perform before placing reliance on the work of an expert (4 marks)

(Total 30 marks) Question 5 (Jan 2017)

(a) Explain the procedures performed in a 2-way testing count of inventory and give the financial statement assertions that are addressed. (6 marks)

(b) Discuss how an auditor would obtain comfort from a stock count if a client has a year-end of 31 December 2015 but do not perform their year-year-end stock count until 5 January 2016, assuming that sales and purchases take place between these dates. (6 marks) (c) Discuss the difference between a negative and a positive confirmation process in respect

of receivables. Your answer should include a discussion of the level of audit comfort that each response would provide. (6 marks)

(d) Give SIX audit procedures to audit a company’s receivables balance. (12 marks)

(Total 30 marks) Chapter 14: Audit Procedures – Receivables

Question 1

You work for Lantern LLP auditors and are working on the year end statutory audit of Gazebo limited. You have been asked to audit their trade receivables balance for the year ended 30 June 20X9.

Background notes

Gazebo Ltd is a manufacturer of garden trellising. It sells its goods in two different ways: o Gazebo sells directly to small independent market traders on 30 days’ credit terms. o Gazebo also supplies large garden centres and ‘do‐it‐yourself’ (DIY) stores, with

these sales being on 60 days’ credit. o

Demand is spread evenly over the year for smaller market trader customers but, for the garden centres and DIY superstores, demand is irregular throughout the year with some large one‐off sales transactions.

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Updated: 31-Dec-17/19 Sales in the year to 30 June 20X9 were:

Sales £’000’ Number of Customers

Market traders 24,000 32

Garden centres/DIY Stores 12,000 750

36,000 782

Trade receivables at the year ended 30 June 20X9 were: £’000’

Trade Receivables 5,600

A breakdown of trade receivables has been obtained as follows:

Trade receivables £’000’

Market traders 1,600

Garden centres/DIY stores 4,000

5,600

At the planning stage of the audit, the audit senior from Lantern LLP determined that the control environment surrounding trade receivables was weak, and therefore a fully substantive approach is to be adopted. Materiality is set at 0.5% of Revenue.

You have also been provided with the aged debtor report:

Customers Total 0-30 days 31-60 days 61-90 days 90+ days

£’000’ £’000’ £’000’ £’000’ £’000’

Market trader 1 350 350 - - -

Market trader 2 470 120 250 100 -

Market trader 3 260 240 20 - -

Market trader 4 520 410 100 - 10

Market trader (Total) 1,600 1,120 370 100 10

Garden centre A 1,250 250 900 100 -

Garden centre B 890 - - 600 290

Garden centre C 760 240 520 - -

Garden centre D 120 - 120 - -

Garden centre E 540 220 320 - -

Garden centre F 440 100 290 50 -

Garden centre (Total) 4,000 810 2,150 750 290

Overall Total 5,600 1,930 2,520 850 300

£’000

Extracts from the board minutes that have been forwarded on to you as relevant:

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Updated: 31-Dec-17/20 Requirement

You are required to describe the procedures that you will perform in respect of Gazebo’s receivables balance. Where possible you should perform the procedures that you describe based on the information provided.

Identify any initial concerns you have with Gazebo’s receivables balance based on the information you have been given above.

Question 2

Outline the process and contents of a receivables circularisation.

You are the audit senior responsible for the statutory audit of Eastland Ltd. The following two issues have been bought to your attention.

(1) Warranty provision

Eastland Ltd’s financial statements include a provision for warranties, a figure that has been estimated by management.

(2) Receivable balance owing from Westside Plc

Eastland Ltd has a material receivable balance owing from its customer, Westside Plc. During the year-end audit, your team reviewed the ageing of this balance and found that no payments had been received from Westside for over six months, and Eastland Ltd would not allow this balance to be included in the receivables confirmation. Instead management has assured your team that they will provide a written representation confirming that the balance is recoverable.

Required:

(a) Describe, with reasons, the audit procedures to be performed in respect of accounting estimates, such as the warranty provision. (10 marks)

(b) Explain the process of performing a receivables circularisation. (10 marks)

(c) Discuss the reliability of written representations obtained by the auditor as part of the completion procedures. (6 marks)

(d) Explain whether the auditor can rely on management’s written representation in respect of the balance owed by Westside Plc. (4 marks)

a) Explain the process to perform a receivables (debtor) circularisation. (8 marks)

b) You work for Smith and Jones LLP and are a member of the audit team of Stanhope Ltd, whose year-end is 30 April 2016. This year you have been charged with auditing

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Updated: 31-Dec-17/21 Performance materiality at the planning stage for the audit is £6,000.

i) Trade and other receivables.

Stanhope’s financial statements show a balance for trade and other receivables of £269,250. The financial controller has provided you with the following

breakdown of balances:

£ Trade receivables 241,400

Prepayments 27,850

269,250

Required: Discuss the audit procedures you would perform in respect of Stanhope’s trade and other receivables balance. You should clearly distinguish which balance you are testing in your answer. (10 marks)

(c)Discuss the difference between a negative and a positive confirmation process in respect of receivables. Your answer should include a discussion of the level of audit comfort that each response would provide. (6 marks)

(e)Give SIX audit procedures to audit a company’s receivables balance. (12 marks)

Total 30 marks Chapter 15: Audit Procedures – Cash and Bank

Question 1

Explain the difference between a positive and a negative response bank confirmation letter. Why is it important to only use positive responses?

Question 2

How and why does the auditor remain in control of sending out bank confirmation letters?

Question 3

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Updated: 31-Dec-17/22

£ £

Balance per bank statement on 31 December 2016 5,894,482 Reconciling items

Outstanding lodgements from

Belfast 45,618

Golden Hinde 84,689

Mayflower 7,815 138,122

Unpresented cheques to

Cutty Sark (44,844)

Bismark (1,649)

Titanic (98,154) (144,647)

Balance as per financial statements 5,887,957

Required: Explain the audit procedures you will perform in respect of the above bank reconciliation.

(b) You work for Heather and Mountain LLP and are currently working on the statutory year-end audit for GoodCause Ltd, a charity that raises funds towards completing community projects. GoodCause Ltd raises funds for specific projects by one off events, such as charity concerts.

Required: Discuss the concept of restricted cash, and how it might impact the audit. (8 marks)

(b)Special Wish Ltd is a small charity that raises funds to give children with long term illnesses a special day trip of their choice. Funds are raised in one of two ways:

o Cash donations at large fundraising events – these funds are pooled together to help any child.

o Alf Olby Ltd, a corporate sponsor, usually funds a special trip for one child. This constitutes ‘restricted cash’ for Special Wish Ltd.

Required:

(i) Discuss two controls you would expect Special Wish Ltd to implement to safeguard the cash collected at fundraising events. (4 marks)

(ii) Discuss one control that can be implemented to ensure that any ‘restricted cash’ from Alf Olby Ltd is used for its intended purpose. (2 marks)

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Updated: 31-Dec-17/23 • A cash donation of £5,000 from a local business that was intended to fund a school awareness project was kept in the same bank account as all other donations. When questioned, only one member of staff knew that this money was for a particular project.

• Rescue Ltd use money collected from donations to run training courses. They frequently use 2 training providers who offer a fixed price that has been authorised and approved by the charity’s trustees. As part of the year end audit procedures, it was discovered that on three occasions, Rescue Ltd had used a different training provider for whom there is no record or agreed price.

Required:

i) Explain and discuss the concept of ‘restricted cash’ and how it is reported in the financial statements in respect of Rescue Ltd. (4 marks)

ii) Set out points to be included in a letter to management that outlines the possible consequence(s) arising from the deficiencies identified above. For each point, clearly state recommendations to remedy those deficiencies. Your recommendations should clearly describe how the control procedures should operate. (16 marks)

(Total 30 marks) Chapter 16: Audit Procedures – Liabilities, Capital and Directors emoluments

Question 1

Greenwich Bakery is a company which manufactures biscuits and confectionery. You are the auditor responsible for auditing trade creditors, accruals and provisions as shown in the statement of financial position at the year-end. You are in the process of preparing the audit programme which clearly explains the procedures to be performed.

The draft figures for ‘creditors - amounts falling due within one year’ as at 31 December 2013 (with 2012 comparative figures) are as follows:

31 Dec 2013 31 Dec 2012

Trade creditors 261,521 177,625

Accruals 21,162 18,177

Provisions – Legal action* 40,000 -

Provisions – Factory repairs**

72,000 62,000

394,683 257,802

*This provision relates to a legal action brought by a competitor who claims secret recipe has been stolen and used by the Greenwich Bakery.

**This provision which was set up in 2012 relates to sums required to be spent on urgent repairs to the bakery foundations. (£117,000 was spent during the year 31 December 2013.)

Required: List the audit procedures you would perform in the statutory audit for the year ended 31 December 2013 in respect of:

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Pigeon Music Co (Pigeon) distribute and sell music records to customers. You are the audit manager at Dove and Leaf LLP; Pigeon’s statutory auditors. The audit is due to commence shortly for the year end 31 December 2015. The following three matters have been brought to your attention.

a) Payables

Pigeon’s financial controller accidentally closed the payables ledger a week early, on 24th December 2015. This means that any invoices received after the 24th December will be recorded in the 2016 accounts.

b) Receivables

Pigeon’s receivables ledger has increased considerably during the year, and the year-end balance is £2.4 million compared to £1.8 million last year. The finance director of Pigeon has requested that a receivables circularisation is not carried out as a number of their customers complained last year about the inconvenience involved in responding. The engagement partner has agreed to this request, and asked you to identify alternative procedures to confirm the existence and valuation of receivables.

c) Provision for lawsuit

Pigeon is being sued by a competitor for copyright infringement. Pigeon have included a provision within their accounts for £0.3 million, following the advice of their lawyer.

Required:

For each of the three matters above, describe substantive procedures you would perform to obtain sufficient and appropriate audit evidence. Marks are split evenly between the three sections. In your audit procedures you should describe what the procedure is, and explain the purpose of the procedure and how it addresses the audit risk.

(Total 30 marks) Chapter 17: Not-for-profit organisations

Question 1

Compare the statutory audit process to the audit’ process involved in a VFM (3 Es) audit.

Question 2

Donate is a local East London charity. Among their fundraising activities they have donation boxes that are located in local shops, cafes and restaurants. Recently there have been a number of thefts of these boxes or of the cash from inside them.

Required: List 4 internal controls that you would expect over systems of cash donations through collecting boxes.

Question 3

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Aqua Ltd is a charity that digs wells to bring clean water supplies to remote villages currently without a water supply. It generates funds from:

1) Donations made by members of public 2) Government grants

Aqua has recently contacted their auditors (where you work) to enquire out about a value for money audit.

Required:

a) Explain what a value for money audit is in reference to the 3 Es.

b) Give two examples of for each of the 3 Es on factors that the auditors would consider if they were to perform a VFM audit for Aqua.

‘The Leaf Project Ltd’ is a charity committed to creating a better countryside and habitat for animals by planting trees in the United Kingdom. The majority of its workforce is unpaid volunteers, many of whom only work a few hours each week.

The Leaf Project raises most of its funds in three ways:

1) From plant and tree sales in its charity garden centres around the country. Sales in their garden centres are cash only.

2) Cash donations (in donation boxes in local newsagents).

3) Government grants (these funds are usually given for a specific project, such as re-generating a local park, and cannot be used for any other purpose).

You work for Ren and Stimpy LLP who are the external auditors of ‘The Leaf Project’.

(a) List two internal controls that you would expect to be in place in respect of cash collected at the garden centres and in the donation boxes. (4 marks)

(b) Explain 2 similarities and 2 differences (for the auditors Ren and Stimpy LLP) when performing the statutory audit of a charity rather than a profit-making company. (8 marks) (c) Explain one audit risk in respect of the funds raised from government grants received by The Leaf Project. What audit procedure would be performed in order to address this risk? (6 marks)

(d) The trustees of The Leaf Project are keen to ensure that their operations are running as effectively as possible. They have written to the audit partner at Ren and Stimpy asking about a ‘Value for Money’ audit, something that they have read about in the news, but know little about.

Explain what a value for money audit is, using the 3 E’s (Economy, Efficiency and Effectiveness) in your answer. (12 marks)

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Updated: 31-Dec-17/26 Question 7 (July 2015)

(a) Discuss why a charity might have a weaker internal control system than a profit orientated entity. (4 marks)

Part b) Discuss the difference between auditing a profit orientated company compared to a not-for-profit organisation. (10 marks)

a) Discuss why charities often have weaker control systems than profit orientated entities? (4 marks)

b) Reading for Good Ltd is a small charity with 3 charity bookshops located in London. A member of the audit team spent a day observing one of the shops and reported back the following:

I. Staff members gave discretionary discounts to customers purchasing multiple books at one time.

II. At the end of the day, one volunteer counts the cash in the till and enters this into a book.

III. Every 3 days, the same volunteer takes the cash takings from that time period to the bank.

Required:

For the three deficiencies (i) to (iii) identified above (6 marks)

Total 10 marks Question 10 (July 2016)

Rescue Ltd is a small charity that have been operating for 5 years. The charity provide mountain and sea rescue training courses to local volunteers. They have recently appointed a new Finance Director who has approached the external auditors Ricky and Martin LLP (where you work) for advice.

a) The Finance Director is keen to improve the efficient running of the charity to maximise its contribution to society. He has heard of a ‘value for money’ audit but is uncertain what this is and has asked you to explain this to him, in particular the ‘three E’s’. Required: Respond to the finance director’s request. (6 marks)

Chapter 18: Audit review and finalization

Question 1

You are in charge of the audit of Stinky Ltd for the year ended 31 March 2014. The principal activity is the provision of drain and sewer clearance services under fixed price short term contracts.

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Updated: 31-Dec-17/27 10% of the balance being retained by the customer for six months as security against problems with the work undertaken.

Stinky Ltd also has retail outlets through which it sells consumables used in the trade. However, management is currently negotiating the sale of the retail operation and plans to use the proceeds to repay a loan falling due in December 2014. Following the disposal of the retail operation, Stinky Ltd will continue to buy consumables used in its contract work from the existing suppliers but in smaller quantities.

Stinky Ltd made an operating loss for the year ended 31 March 2014. This is mainly due to a substantial provision for rectification work relating to a contract for NewHomes plc, one of Stinky Ltd's major customers. The contract was to fit a brand new sewage system on a new housing estate, and was completed in early March 2014. However, the sewage system built failed to meet the customer's specification. Furthermore, in April 2014, Stinky Ltd received notification that NewHomes plc had lodged a claim against the company for substantial compensation for alleged reputational damage to the customer's business. No provision has been made for this compensation as the directors of Stinky Ltd have instructed the company's legal advisors to fight the claim.

The company is currently trading at its overdraft limit and the directors have been negotiating with the company's bankers in order to increase its borrowings. The directors have prepared profit and cash flow forecasts for the three years ending 31 March 2017 in support of the request for funding. The company's bankers require this information to be reviewed by independent accountants and the board of directors has requested that your firm undertakes this review.

Required:

Identify matters that indicate going concern risk and explain why these matters are important.

Question 2: Kitty Ltd (Subsequent events)

During the external audit of Kitty Ltd for the year ended 31 December 20X3, subsequent events review procedures identified that a sales credit note for a large amount, relating to a pre year end despatch of inventory, was issued to a customer on 20 January 20X4. Explain why this matter should be investigated further.

Question 3 (Jan 2015)

(a) Outline the auditor’s responsibilities in respect of subsequent events. (8 marks)

(b) List 5 audit procedures the auditor may perform in respect of subsequent events. (10 marks)

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Updated: 31-Dec-17/28 Question 5 (July 2015)

(a) Outline the auditor’s responsibilities in respect of subsequent events. (8 marks)

a) Auditors are required to perform an overall review of the financial statements before they provide their audit opinion.

Required:

Explain four procedures an auditor should perform in conducting their overall review of the financial statements. (8 marks)

b) The following additional issues have arisen during the course of the audit of Compass Ltd. The financial statements show profit before tax of £20m.

i. Depreciation has been calculated on the total of land and buildings. In previous years it has only been charged on buildings. Total depreciation is £5m and the element charged to land only is £1.4m.

ii. Compass Ltd’s computerised wages program is backed up regularly, however for a period of three months the wages records and the back-ups have been corrupted, and therefore cannot be accessed. The audit team has not been able to perform any alternative procedures to verify the balance. Wages and salaries for these three months are £2.2m.

iii. Compass’s main competitor has filed a lawsuit for £10m against them for breach of copyright; this case is ongoing and will not be resolved prior to the audit report being signed. The matter is correctly disclosed as a contingent liability.

Required:

For each of the three scenarios (i) to (iii), describe the impact on the audit reports of Compass Ltd if the issues remain unresolved.

a) Discuss the auditor’s responsibility in respect of subsequent events that occur after the audit has finished and the opinion has been issued, but before the company has published its audited financial statements. (8 marks)

(a)Describe four audit procedures that the auditor should perform to test the going concern assumption. (8 marks)

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(b)During the subsequent events review procedures for Clegg Ltd, you have identified that a sales credit note for a large amount, relating to a pre year-end despatch of inventory, was issued to a customer on 15 January 2017.

Required: Explain why this matter should be investigated further. (6 marks) (c) Discuss the auditor’s responsibility in respect of subsequent events. (8 marks)

Chapter 19: Audit reports

Question 1

List the contents of an audit report.

Question 2

Explain the difference between an unmodified report and a modified report.

Question 3

Describe the three types of modified audit reports with modified audit opinions and explain under what circumstances those audit reports should be given.

Question 4

Described below are situations that have arisen in three unrelated external audit clients of your firm. The year end in each case is 31 December 2009. In each of the situations determine whether you would modify the auditor’s report. Give reasons for your conclusions and outline the modifications, if any, to each auditor’s report.

Scenario 1

Roscoe Ltd purchased inventory on 15 December 2009 at a cost of £678,000 in anticipation of fulfilling a large order for a customer. However, the customer went into liquidation on 31 January 2010 and was unable to complete any part of the transaction with Roscoe. On 28 February 2010 Roscoe sold the inventory at a market value of £475,000. The directors intend to include this inventory in the year-end financial statements at its original cost. The draft financial statements show that Roscoe's profit before tax is £5,075,000.

Scenario 2

Gladstone is a drug manufacturing company specialising in making drugs to treat heartburn. It currently manufactures one of the market-leading drugs, SootheU, which accounts for 60% of the company's annual revenue. High numbers of sufferers have recently experienced severe side effects when using SootheU and a government committee is now investigating this. Gladstone 's licence to manufacture SootheU has been suspended until the investigation is complete.

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Updated: 31-Dec-17/30 Scenario 3

MakeIt Ltd purchased a new manufacturing plant on 1 January 2009 for £2.8 million. The plant was installed immediately into a working order. Production did not commence until 30 June 2009 because MakeIt already had a full warehouse of inventory and wanted to reduce the stock levels held.

Depreciation on plant and machinery is charged over 10 years on a straight line basis. In the year ended 31 December 2009, MakeIt have charged six months’ worth of depreciation. Draft profit before tax is £1.3 million.

(a) Under what circumstances would each of the following audit opinions be issued? Give a simplified example of each opinion.

(i) Qualified (‘except for’) opinion; (ii) Adverse opinion; and

(iii) Disclaimer of opinion.

(15 marks) (b) Described below is a situation that has arisen concerning an external audit client of Stars and Stripes LLP, an audit firm. The year-end is 31 December 2014.

Blobby plc is a shed manufacturer, distributing to large and small customers in the UK. On 3 February 2015, a liquidator was appointed to Heavenly Shacks Ltd, a customer of Blobby Plc.

The balance outstanding in Blobby’s receivables ledger in respect of Heavenly Shacks is £251,000. In addition to this, Blobby has started the manufacture of a series of bespoke sheds for Heavenly Shacks, and at the year-end has recorded £253,000 worth of work in progress in respect of this contract.

Blobby’s directors do not wish to make any adjustments to the financial statements in respect of the two matters above, since the liquidator was only appointed after the year end.

Blobby’s financial statements show total assets of £25,263,000 at 31 December 2014 and profit before tax for the year ended 31 December 2014 of £6,122,000.

Required:

Discuss whether the audit firm should modify the auditor’s report. Give reasons for your conclusion and outline the modifications, if any, to the auditor’s report.

(a) Discuss the contents of an unmodified audit report. (15 marks)

(b)You work for Bert and Ernie LLP, and are a member of the statutory audit team for Cox plc.

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Updated: 31-Dec-17/31 expires in July 2015. Sales to ScrummyCider plc represent 72% of Cox plc’s total sales revenue.

You have not yet determined how Cox plc is going to treat this in the financial statements.

Required:

Discuss all of the possible treatments of the above within the auditor’s report. Give reasons for your conclusions and outline the modifications, if any, to the auditor’s report.

(15 marks) (Total 30 marks) Question 7 (July 2015)

(a) Explain the difference between a qualified ‘except for’ audit opinion and an adverse audit opinion. Describe the impact that each opinion would have on the firm’s auditor’s report. (8 marks)

(b)You are an audit senior at Duck and Salmons LLP. You are currently in the audit completion stage in respect of your two clients, both with a year-end 31 March 2015.

Below are issues that have arisen in each of the statutory audits this year.

Required:

For each of the issues below, discuss whether the audit firm should modify the auditor’s report. Give reasons for your conclusion and outline the modifications, if any, to the auditor’s report.

Basket Ltd

Basket Ltd is a client that makes basketball equipment worldwide. As part of the year-end audit procedures, the audit team attended the stock counts at all but one of Basket’s warehouses. The audit team were unable to attend the stock count at one of the warehouses located overseas (the current government guidelines are that the country is not safe to visit).

Inventory held at the warehouse is valued by management at £2m, and the total inventory of Basket Ltd at all warehouses is £12m.

Basket’s draft financial statements show profit before tax of £14m and Total Assets of £41m. (10 marks) GlassWorks Ltd

During the external audit of Glassworks Ltd it was discovered that plant and equipment, included in the statement of financial position at £200,000, was sold for £150,000 on 2 April 2015. The directors refuse to adjust this figure on the grounds that the item was sold after the year end. The draft financial statements for the year ended 31 March 2015 show profit before tax of £450,000 and total assets of £980,000.

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Updated: 31-Dec-17/32 Part a): Describe the contents of the following audit opinions and discuss the circumstances under which the auditor would issue such an opinion.

i) An unmodified audit opinion, but a modified audit report showing an ‘emphasis of matter’ paragraph.

ii) An ‘adverse’ audit opinion.

(10 marks) Part b): You are the audit manager of Grisham and Child LLP and are reviewing the key issues identified in the files of two audit clients.

Thriller Industries Co (Thriller)

Thriller’s year end was 31 December 2015 and the draft financial statements show revenue of £56.4 million, receivables of £6.8 million and profit before tax of £9.6 million.

During the audit of receivables, it was discovered that Smith Plc, a customer of Thriller, owed £700,000 at the year-end. Testing of receivables in January and February 2016 highlighted that no amounts had been paid to Thriller from Smith Plc as they were disputing the quality of the goods received and refusing to pay. The Finance Director is confident the issue will be resolved and has refused to write the debt off or include it in the allowance for receivables (provision for bad debt).

Reacher Trading Co (Reacher)

Reacher is a new client of Grisham and Child LLP, its year end was also 31 December 2015 and the firm was appointed auditors in January 2016, as the previous auditors were suddenly unable to undertake the audit. The fieldwork (gathering evidence) stage for this audit is currently ongoing. The inventory count at Reacher’s warehouse was undertaken on 31 December 2015 and was overseen by the company’s internal audit department. Neither Grisham and Child LLP nor the previous auditors attended the count. Detailed inventory records were maintained but it was not possible to undertake another full inventory count subsequent to the year-end. The draft financial statements show a profit before tax of £4.8 million, revenue of £20.2 million and inventory of £1,020,000.

Required:

Describe the impact on the audit reports of the two clients if the issues remain unresolved. (20 marks)

b) The following additional issues have arisen during the course of the audit of Compass Ltd. The financial statements show profit before tax of £20m.

i. Depreciation has been calculated on the total of land and buildings. In previous years it has only been charged on buildings. Total depreciation is £5m and the element charged to land only is £1.4m. (8 marks)