The main control objective the recording sales function

End of Semester 1, 2018

Marking Guide_ACCT3000 Auditing Mock Final Exam Paper

a. a scope limitation.

b. a misstatement confined to a specific item.

d. A qualified opinion or adverse opinion.

3. Which of the following bodies monitors the operation of the Auditing and Assurance Standards Board?

a. a guarantee from an officer of an assurance client.

b. performing services for an assurance client that directly affects the subject matter of the assurance engagement.

b. Completeness.
c. Classification.
d. Accuracy.

6. The audit test that would normally be regarded as a test of control is:

7. Which of the following procedures would an auditor most likely rely on to verify management's assertion of completeness?

a. Comparing a sample of shipping documents to related sales invoices.

b. circulate the name of a prospective client to staff to identify any relationships inconsistent with independence.

c. complete a professional independence questionnaire.

10. For a particular assertion, control risk is the risk that:

a. a material misstatement will occur in the accounting process.

b. are individually immaterial to the statements taken as a whole.

c. bring the cumulative total of known misstatements to the level of materiality established by management.

c. tracing trail.

d. accounting trail.

a. there is intense price competition in the industry of operation. b. promotions are made on the basis of meeting reasonable targets.

c. an employee in the cash office was passed over for a promotion.

d. to produce a monthly customer statement.

16. Prior to recording purchases transactions, supplier's invoices are checked and approved in the accounts department. Controls over this function include all of the following EXCEPT:

17. An important control over inventory is that maintaining the records is segregated from physical custody of the asset. Which of the following is NOT a function of maintaining inventory records?

a. physically comparing inventory with inventory records. b. recording the movement of goods into inventory. c. physically checking inventory on purchase.

c. design an audit program only testing inventory transactions and tests of details of the inventory balance.

d. design an audit program only testing inventory transactions and excluding tests of details of the inventory balance.

High Low
a. accuracy or valuation completeness
b. existence or occurrence completeness
c. accuracy or valuation rights and obligations d. existence or occurrence accuracy or valuation

21. The starting point for verifying cash balances is to:

22. Ordinarily, an event indicating a condition arising after the reporting date requires:

a. adjustment.

b. Qualified and adverse.

c. Disclaimer and unmodified with an Emphasis of Matter.

d. The auditor is not placing reliance on the internal controls.

25. Which of the following is not one of the fundamental principles of professional ethics underlying an audit?

PART B - SHORT ESSAY QUESTIONS. (45 MARKS)

ANSWER ALL THREE (3) QUESTIONS.

Control risk (CR) is the risk that a material misstatement could occur and not be prevented or detected on a timely basis by the entity’s internal control structure. Control risk is a function of the effectiveness of the client’s internal control structure policies and procedures.

Detection risk (DR) is the risk that any remaining misstatements will not be detected by the auditor’s substantive procedures. Detection risk is a function of the effectiveness of audit procedures and their application by the auditor.

c. design and implement appropriate responses to the fraud risks identified.

d. respond to any fraud or suspected fraud identified during the audit.

Required
(a) Considering the information provided, determine the two key account balances at risk of material misstatement. Briefly justify your answer. (4 marks)

(b) For each account balance identify the key assertion at risk. Briefly justify your answer.
(5 Marks)

QUESTION 3
The head office of Bright Lights Ltd, wholesalers of electrical equipment, has asked you to review the system of control over cash collection at the Victorian branch because it suspects that irregularities are taking place. The branch is the largest single outlet of the company and has substantial annual sales invoiced by the branch.

Enquiries reveal the following procedures for invoicing sales and collecting cash. (Cash refers to currency and cheques).

6.The cashier then makes a listing of the cheques, which is used by the credit controller for posting to the accounts receivable ledger.

7.The cheques from credit customers and receipts from cash sales are banked daily by the 8.cashier, except for once a week when sufficient money is retained to reimburse petty cash.

1.Queenscorp has been involved in a legal dispute with a competitor for a number of years. The dispute relates to alleged breaches of copyright by Queenscorp. On 27th July you discovered that Queenscorp had settled legal action out of court on terms more favourable than expected.

2.On 10th July one of Queenscorp’s major product lines developed a fault that rendered the product unusable. Queenscorp became aware of the fault on 30 July. Although the fault posed no safety risks to consumers, Queenscorp decided to launch a full product recall on the following day.

(1) Describe your obligations as the auditor to each of the above subsequent events.

(2) For each of the events described above, select the appropriate action from the list below and justify your response:

Solution:

Period 1 events: Events after balance sheet date (30 June 2011) but before the date of the audit report (31 July 2011).

1.

Requirements (1) & (2): A. This is a post balance date event relating to conditions existing at balance date i.e. it is an adjusting event. Any loss or costs payable that can be verified should be recorded as litigation costs or liability in the accounts. As the dispute has been there for a number of years, the company would have a contingent liability account for this dispute.

Requirement (3): The auditor should discuss with management about the faulty product lines and the launch of a full product recall. The further evidence to be obtained would be documentation to ensure that the dates given by the management were correct.

3.

a breach in one of the ratios for a 24-hour period occurred after the audit report date, no action recommended for this year’s accounts.

Requirement (3): This event occurred after the financial reports have been mailed did not exist at the date of the mailing of the financial reports; therefore it is of no concern to you for this year’s accounts. The further evidence the auditor would seek would be documentation and contracts to ensure that the dates given to you by the general manager were correct.

Consider each of the following independent and material situations. In each case, assume that the financial report has been prepared and audited for the year ended 30 June 2010.

(a) Range Ltd, (Range) holds several parcels of land in suburban Sydney that are currently zoned non-residential. Range has valued land on a fair value basis under AASB 116 Property, Plant and Equipment. This year, however, Range revalued the land by adopting a registered valuer's estimate of the market value of the land. This estimate included a substantial increase in value based on the general community expectation that the land will soon be rezoned for residential use.

Required:

Assume that no adjustments are made. For each situation, identify the type of audit opinion required and explain the basis of your answers.

(b) Disclaimer of opinion

Sufficient and appropriate audit evidence has not been obtained, resulting in a limitation of scope (ASA 705.A8). You are unable to gain evidence on major assets and their related income statement balances (that is, there is a serious limitation on the scope of the audit). The undetected misstatements resulting from the non verifiability of these amounts is likely to be so material and pervasive that it affects many aspects of the financial report, and so you are unlikely to be able to express an opinion (ASA/ISA 705.9-10). Given the limitation of scope on three key balances in the balance sheet and the income statement, it appears the financial effect would be pervasive in nature (ASA 705.5). Therefore a qualified opinion is unlikely to be appropriate. Hence, a disclaimer of opinion must be issued (ASA 705.9-10).

(e) Disclaimer of opinion

Sufficient and appropriate audit evidence has not been obtained, resulting in a limitation of scope (ASA 705.A8). The company did not maintain appropriate books and records (other than statutory registers) throughout the year. There is no evidence that all transactions which occurred during the year are reflected in the financial report. This represents a limitation of scope that is so material and pervasive that you are unable to form an opinion on the financial report (ASA 705.5). Hence, a disclaimer of opinion must be issued (ASA 705.9-10).