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(b) Explain the principal audit procedures to be performed during the final audit in respect of the estimated
warranty provision in the balance sheet of Island Co as at 30 November 2007. (5 marks)
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更多 “ (b) Explain the principal audit procedures to be performed during the final audit in respect of the estimatedwarranty provision in the balance sheet of Island Co as at 30 November 2007. (5 marks) ” 相关考题
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(b) Explain what effect the acquisition of Di Rollo Co will have on the planning of your audit of the consolidatedfinancial statements of Murray Co for the year ending 31 March 2008. (10 marks)
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(b) Explain the matters that should be considered when planning the nature and scope of the examination ofCusiter Co’s forecast balance sheet and income statement as prepared for the bank. (7 marks)
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1 Your client, Island Co, is a manufacturer of machinery used in the coal extraction industry. You are currently planningthe audit of the financial statements for the year ended 30 November 2007. The draft financial statements showrevenue of $125 million (2006 – $103 million), profit before tax of $5·6 million (2006 – $5·1 million) and totalassets of $95 million (2006 – $90 million). Your firm was appointed as auditor to Island Co for the first time in June2007.Island Co designs, constructs and installs machinery for five key customers. Payment is due in three instalments: 50%is due when the order is confirmed (stage one), 25% on delivery of the machinery (stage two), and 25% on successfulinstallation in the customer’s coal mine (stage three). Generally it takes six months from the order being finalised untilthe final installation.At 30 November, there is an amount outstanding of $2·85 million from Jacks Mine Co. The amount is a disputedstage three payment. Jacks Mine Co is refusing to pay until the machinery, which was installed in August 2007, isrunning at 100% efficiency.One customer, Sawyer Co, communicated in November 2007, via its lawyers with Island Co, claiming damages forinjuries suffered by a drilling machine operator whose arm was severely injured when a machine malfunctioned. KateShannon, the chief executive officer of Island Co, has told you that the claim is being ignored as it is generally knownthat Sawyer Co has a poor health and safety record, and thus the accident was their fault. Two orders which wereplaced by Sawyer Co in October 2007 have been cancelled.Work in progress is valued at $8·5 million at 30 November 2007. A physical inventory count was held on17 November 2007. The chief engineer estimated the stage of completion of each machine at that date. One of themajor components included in the coal extracting machinery is now being sourced from overseas. The new supplier,Locke Co, is located in Spain and invoices Island Co in euros. There is a trade payable of $1·5 million owing to LockeCo recorded within current liabilities.All machines are supplied carrying a one year warranty. A warranty provision is recognised on the balance sheet at$2·5 million (2006 – $2·4 million). Kate Shannon estimates the cost of repairing defective machinery reported bycustomers, and this estimate forms the basis of the provision.Kate Shannon owns 60% of the shares in Island Co. She also owns 55% of Pacific Co, which leases a head office toIsland Co. Kate is considering selling some of her shares in Island Co in late January 2008, and would like the auditto be finished by that time.Required:(a) Using the information provided, identify and explain the principal audit risks, and any other matters to beconsidered when planning the final audit for Island Co for the year ended 30 November 2007.Note: your answer should be presented in the format of briefing notes to be used at a planning meeting.Requirement (a) includes 2 professional marks. (13 marks)
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(ii) Describe the procedures to verify the number of serious accidents in the year ended 30 November 2007.(4 marks)
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4 You are an audit manager in Nate Co, a firm of Chartered Certified Accountants. You are reviewing three situations,which were recently discussed at the monthly audit managers’ meeting:(1) Nate Co has recently been approached by a potential new audit client, Fisher Co. Your firm is keen to take theappointment and is currently carrying out client acceptance procedures. Fisher Co was recently incorporated byMarcellus Fisher, with its main trade being the retailing of wooden storage boxes.(2) Nate Co provides the audit service to CF Co, a national financial services organisation. Due to a number oferrors in the recording of cash deposits from new customers that have been discovered by CF Co’s internal auditteam, the directors of CF Co have requested that your firm carry out a review of the financial informationtechnology systems. It has come to your attention that while working on the audit planning of CF Co, Jin Sayed,one of the juniors on the audit team, who is a recent information technology graduate, spent three hoursproviding advice to the internal audit team about how to improve the system. As far as you know, this advice hasnot been used by the internal audit team.(3) LA Shots Co is a manufacturer of bottled drinks, and has been an audit client of Nate Co for five years. Twoaudit juniors attended the annual inventory count last Monday. They reported that Brenda Mangle, the newproduction manager of LA Shots Co, wanted the inventory count and audit procedures performed as quickly aspossible. As an incentive she offered the two juniors ten free bottles of ‘Super Juice’ from the end of theproduction line. Brenda also invited them to join the LA Shots Co office party, which commenced at the end ofthe inventory count. The inventory count and audit procedures were completed within two hours (the previousyear’s procedures lasted a full day), and the juniors then spent four hours at the office party.Required:(a) Define ‘money laundering’ and state the procedures specific to money laundering that should be consideredbefore, and on the acceptance of, the audit appointment of Fisher Co. (5 marks)
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5 You are the audit manager for three clients of Bertie Co, a firm of Chartered Certified Accountants. The financialyear end for each client is 30 September 2007.You are reviewing the audit senior’s proposed audit reports for two clients, Alpha Co and Deema Co.Alpha Co, a listed company, permanently closed several factories in May 2007, with all costs of closure finalised andpaid in August 2007. The factories all produced the same item, which contributed 10% of Alpha Co’s total revenuefor the year ended 30 September 2007 (2006 – 23%). The closure has been discussed accurately and fully in thechairman’s statement and Directors’ Report. However, the closure is not mentioned in the notes to the financialstatements, nor separately disclosed on the financial statements.The audit senior has proposed an unmodified audit opinion for Alpha Co as the matter has been fully addressed inthe chairman’s statement and Directors’ Report.In October 2007 a legal claim was filed against Deema Co, a retailer of toys. The claim is from a customer who slippedon a greasy step outside one of the retail outlets. The matter has been fully disclosed as a material contingent liabilityin the notes to the financial statements, and audit working papers provide sufficient evidence that no provision isnecessary as Deema Co’s lawyers have stated in writing that the likelihood of the claim succeeding is only possible.The amount of the claim is fixed and is adequately covered by cash resources.The audit senior proposes that the audit opinion for Deema Co should not be qualified, but that an emphasis of matterparagraph should be included after the audit opinion to highlight the situation.Hugh Co was incorporated in October 2006, using a bank loan for finance. Revenue for the first year of trading is$750,000, and there are hopes of rapid growth in the next few years. The business retails luxury hand made woodentoys, currently in a single retail outlet. The two directors (who also own all of the shares in Hugh Co) are aware thatdue to the small size of the company, the financial statements do not have to be subject to annual external audit, butthey are unsure whether there would be any benefit in a voluntary audit of the first year financial statements. Thedirectors are also aware that a review of the financial statements could be performed as an alternative to a full audit.Hugh Co currently employs a part-time, part-qualified accountant, Monty Parkes, who has prepared a year endbalance sheet and income statement, and who produces summary management accounts every three months.Required:(a) Evaluate whether the audit senior’s proposed audit report is appropriate, and where you disagree with theproposed report, recommend the amendment necessary to the audit report of:(i) Alpha Co; (6 marks)
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(b) Describe the principal audit procedures to be carried out in respect of the following:(i) The measurement of the share-based payment expense; (6 marks)
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(ii) Identify and explain the principal audit procedures to be performed on the valuation of the investmentproperties. (6 marks)
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(ii) State the principal audit procedures to be performed on the consolidation schedule of the Rosie Group.(4 marks)
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You are an audit manager responsible for providing hot reviews on selected audit clients within your firm of CharteredCertified Accountants. You are currently reviewing the audit working papers for Pulp Co, a long standing audit client,for the year ended 31 January 2008. The draft statement of financial position (balance sheet) of Pulp Co shows totalassets of $12 million (2007 – $11·5 million).The audit senior has made the following comment in a summary ofissues for your review:‘Pulp Co’s statement of financial position (balance sheet) shows a receivable classified as a current asset with a valueof $25,000. The only audit evidence we have requested and obtained is a management representation stating thefollowing:(1) that the amount is owed to Pulp Co from Jarvis Co,(2) that Jarvis Co is controlled by Pulp Co’s chairman, Peter Sheffield, and(3) that the balance is likely to be received six months after Pulp Co’s year end.The receivable was also outstanding at the last year end when an identical management representation was provided,and our working papers noted that because the balance was immaterial no further work was considered necessary.No disclosure has been made in the financial statements regarding the balance. Jarvis Co is not audited by our firmand we have verified that Pulp Co does not own any shares in Jarvis Co.’Required:(b) In relation to the receivable recognised on the statement of financial position (balance sheet) of Pulp Co asat 31 January 2008:(i) Comment on the matters you should consider. (5 marks)
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4 You are an audit manager in Smith Co, a firm of Chartered Certified Accountants. You have recently been maderesponsible for reviewing invoices raised to clients and for monitoring your firm’s credit control procedures. Severalmatters came to light during your most recent review of client invoice files:Norman Co, a large private company, has not paid an invoice from Smith Co dated 5 June 2007 for work in respectof the financial statement audit for the year ended 28 February 2007. A file note dated 30 November 2007 statesthat Norman Co is suffering poor cash flows and is unable to pay the balance. This is the only piece of informationin the file you are reviewing relating to the invoice. You are aware that the final audit work for the year ended28 February 2008, which has not yet been invoiced, is nearly complete and the audit report is due to be issuedimminently.Wallace Co, a private company whose business is the manufacture of industrial machinery, has paid all invoicesrelating to the recently completed audit planning for the year ended 31 May 2008. However, in the invoice file younotice an invoice received by your firm from Wallace Co. The invoice is addressed to Valerie Hobson, the managerresponsible for the audit of Wallace Co. The invoice relates to the rental of an area in Wallace Co’s empty warehouse,with the following comment handwritten on the invoice: ‘rental space being used for storage of Ms Hobson’sspeedboat for six months – she is our auditor, so only charge a nominal sum of $100’. When asked about the invoice,Valerie Hobson said that the invoice should have been sent to her private address. You are aware that Wallace Cosometimes uses the empty warehouse for rental income, though this is not the main trading income of the company.In the ‘miscellaneous invoices raised’ file, an invoice dated last week has been raised to Software Supply Co, not aclient of your firm. The comment box on the invoice contains the note ‘referral fee for recommending Software SupplyCo to several audit clients regarding the supply of bespoke accounting software’.Required:Identify and discuss the ethical and other professional issues raised by the invoice file review, and recommendwhat action, if any, Smith Co should now take in respect of:(a) Norman Co; (8 marks)
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5 You are the manager responsible for the audit of Blod Co, a listed company, for the year ended 31 March 2008. Yourfirm was appointed as auditors of Blod Co in September 2007. The audit work has been completed, and you arereviewing the working papers in order to draft a report to those charged with governance. The statement of financialposition (balance sheet) shows total assets of $78 million (2007 – $66 million). The main business activity of BlodCo is the manufacture of farm machinery.During the audit of property, plant and equipment it was discovered that controls over capital expenditure transactionshad deteriorated during the year. Authorisation had not been gained for the purchase of office equipment with a costof $225,000. No material errors in the financial statements were revealed by audit procedures performed on property,plant and equipment.An internally generated brand name has been included in the statement of financial position (balance sheet) at a fairvalue of $10 million. Audit working papers show that the matter was discussed with the financial controller, whostated that the $10 million represents the present value of future cash flows estimated to be generated by the brandname. The member of the audit team who completed the work programme on intangible assets has noted that thistreatment appears to be in breach of IAS 38 Intangible Assets, and that the management refuses to derecognise theasset.Problems were experienced in the audit of inventories. Due to an oversight by the internal auditors of Blod Co, theexternal audit team did not receive a copy of inventory counting procedures prior to attending the count. This causeda delay at the beginning of the inventory count, when the audit team had to quickly familiarise themselves with theprocedures. In addition, on the final audit, when the audit senior requested documentation to support the finalinventory valuation, it took two weeks for the information to be received because the accountant who had preparedthe schedules had mislaid them.Required:(a) (i) Identify the main purpose of including ‘findings from the audit’ (management letter points) in a reportto those charged with governance. (2 marks)
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(a) List and explain FOUR methods of selecting a sample of items to test from a population in accordance with ISA 530 (Redrafted) Audit Sampling and Other Means of Testing. (4 marks)(b) List and explain FOUR assertions from ISA 500 Audit Evidence that relate to the recording of classes oftransactions. (4 marks)(c) In terms of audit reports, explain the term ‘modified’. (2 marks)
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Following a competitive tender, your audit firm Cal Co has just gained a new audit client Tirrol Co. You are the manager in charge of planning the audit work. Tirrol Co’s year end is 30 June 2009 with a scheduled date to complete the audit of 15 August 2009. The date now is 3 June 2009.Tirrol Co provides repair services to motor vehicles from 25 different locations. All inventory, sales and purchasing systems are computerised, with each location maintaining its own computer system. The software in each location isthe same because the programs were written specifically for Tirrol Co by a reputable software house. Data from each location is amalgamated on a monthly basis at Tirrol Co’s head office to produce management and financial accounts.You are currently planning your audit approach for Tirrol Co. One option being considered is to re-write Cal Co’s audit software to interrogate the computerised inventory systems in each location of Tirrol Co (except for head office)as part of inventory valuation testing. However, you have also been informed that any computer testing will have to be on a live basis and you are aware that July is a major holiday period for your audit firm.Required:(a) (i) Explain the benefits of using audit software in the audit of Tirrol Co; (4 marks)(ii) Explain the problems that may be encountered in the audit of Tirrol Co and for each problem, explainhow that problem could be overcome. (10 marks)(b) Following a discussion with the management at Tirrol Co you now understand that the internal audit department are prepared to assist with the statutory audit. Specifically, the chief internal auditor is prepared to provide you with documentation on the computerised inventory systems at Tirrol Co. The documentation provides details of the software and shows diagrammatically how transactions are processed through the inventory system. This documentation can be used to significantly decrease the time needed to understand the computer systems and enable audit software to be written for this year’s audit.Required:Explain how you will evaluate the computer systems documentation produced by the internal auditdepartment in order to place reliance on it during your audit. (6 marks)
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You are an audit manager at Rockwell Co, a firm of Chartered Certified Accountants. You are responsible for the audit of the Hopper Group, a listed audit client which supplies ingredients to the food and beverage industry worldwide.The audit work for the year ended 30 June 2015 is nearly complete, and you are reviewing the draft audit report which has been prepared by the audit senior. During the year the Hopper Group purchased a new subsidiary company, Seurat Sweeteners Co, which has expertise in the research and design of sugar alternatives. The draft financial statements of the Hopper Group for the year ended 30 June 2015 recognise profit before tax of $495 million (2014 – $462 million) and total assets of $4,617 million (2014: $4,751 million). An extract from the draft audit report is shown below:Basis of modified opinion (extract)In their calculation of goodwill on the acquisition of the new subsidiary, the directors have failed to recognise consideration which is contingent upon meeting certain development targets. The directors believe that it is unlikely that these targets will be met by the subsidiary company and, therefore, have not recorded the contingent consideration in the cost of the acquisition. They have disclosed this contingent liability fully in the notes to the financial statements. We do not feel that the directors’ treatment of the contingent consideration is correct and, therefore, do not believe that the criteria of the relevant standard have been met. If this is the case, it would be appropriate to adjust the goodwill balance in the statement of financial position.We believe that any required adjustment may materially affect the goodwill balance in the statement of financial position. Therefore, in our opinion, the financial statements do not give a true and fair view of the financial position of the Hopper Group and of the Hopper Group’s financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards.Emphasis of Matter ParagraphWe draw attention to the note to the financial statements which describes the uncertainty relating to the contingent consideration described above. The note provides further information necessary to understand the potential implications of the contingency.Required:(a) Critically appraise the draft audit report of the Hopper Group for the year ended 30 June 2015, prepared by the audit senior.Note: You are NOT required to re-draft the extracts from the audit report. (10 marks)(b) The audit of the new subsidiary, Seurat Sweeteners Co, was performed by a different firm of auditors, Fish Associates. During your review of the communication from Fish Associates, you note that they were unable to obtain sufficient appropriate evidence with regard to the breakdown of research expenses. The total of research costs expensed by Seurat Sweeteners Co during the year was $1·2 million. Fish Associates has issued a qualified audit opinion on the financial statements of Seurat Sweeteners Co due to this inability to obtain sufficient appropriate evidence.Required:Comment on the actions which Rockwell Co should take as the auditor of the Hopper Group, and the implications for the auditor’s report on the Hopper Group financial statements. (6 marks)(c) Discuss the quality control procedures which should be carried out by Rockwell Co prior to the audit report on the Hopper Group being issued. (4 marks)
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