ACCA

Paper F8
Audit and Assurance
Revision Mock Examination
December 2015
Time allowed

Reading and planning:

15 minutes

Writing:

3 hours

This paper is divided into two sections:

Section A ALL TWELVE questions are compulsory and MUST be attempted
Section B ALL SIX questions are compulsory and MUST be attempted
Do NOT open this paper until instructed by the supervisor.
During reading and planning time only the question paper may be
annotated. You must NOT write in your answer booklet until
instructed by the supervisor.
This question paper must not be removed from the examination
hall.

 Interactive World Wide Ltd, July 2015

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Section A ALL TWELVE questions are compulsory and MUST be

attempted
1.

Which of the following is a correct description of an internal control

questionnaire?
A.

A document used by an auditor listing every type of internal control procedure

possible, used to enquire as to the controls in place at a client

B.

A document used by an auditor in which the questions are framed in order to

ask a client whether or not control objectives are likely to be achieved

C.

A document used by an audit committee to question a companys internal audit

department about the effectiveness of the companys internal controls
(1 mark)

2.

An audit junior has been assigned to the audit of trade receivables balances of Peat
Co. He has obtained the following audit evidence:
1.

Balance reconciliations carried out by Peats credit controller

2.

Balance confirmations received by the auditor direct from Peats customers

3.

Verbal confirmation from the directors that the year end balances are accurate

4.

Agreement of balances in Peats records to underlying sales invoices, carried

out by the audit junior

What is the order of reliability of the audit evidence starting with the most
reliable first?
A.

4, 2, 1 and 3

B.

2, 1, 4 and 3

C.

4, 3, 2 and 1

D.

2, 4, 1 and 3
(2 marks)

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3.

Marwick Co operate a large department store and have a large internal audit
department in place. The management of Marwick Co are keen to increase the range
of assignments that internal audit undertake.
Which of the following assignments could the internal audit department of
Marwick Co be asked to perform by management?
A.

Internal audit department members could attend the year end inventory count
and observe the effectiveness of the counting procedures

B.

Internal audit could be asked to assist the external auditors by assessing the
valuation of damaged inventory at the year end

C.

Internal audit could be asked to implement a new store-wide security system

D.

Internal audit could be asked to help the finance department estimate year
end provisions for returns of faulty items
(2 marks)

4.

Application controls are manual or automated procedures that operate over

accounting applications to ensure that all transactions are complete and accurate
Which TWO of the following are application controls?
1.

Disaster recovery plan

2.

Check Digits

3.

Range (Field) Limits

4.

Use of anti-virus software

A.

1 and 4

B.

3 and 4

C.

1 and 2

D.

2 and 3
(2 marks)

5.

Which TWO of the following are threats to objectivity as stated in the ACCAs
Code of Ethics and Conduct?
1.

Advocacy

2.

Independence

3.

Familiarity

4.

Professional behaviour

A.

1 and 4

B.

1 and 2

C.

2 and 3

D.

1 and 3
(2 marks)

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6.

Auditors gather evidence using tests of controls and substantive procedures.

Which of the following statements, if any, is/are correct?
1.

Checking whether a clients sales invoices have been checked to underlying

sales orders before the invoices are sent to customers, is a test of control

2.

Taking a clients bank reconciliation and agreeing the cashbook balance back
to the actual cashbook, and the balance per bank statements back to the actual
bank statement, is a substantive procedure

A.

Neither 1 nor 2

B.

Both 1 and 2

C.

1 only

D.

2 only
(2 marks)

7.

Which of the following statements about analytical procedures are correct?

1.

At Planning stage of an audit, they are mandatory

2.

At Substantive Testing stage of an audit, they are mandatory

3.

At completion (overall review) stage of an audit, they are mandatory

4.

Analytical procedures are an example of a substantive test of detail

A.

1 and 3

B.

2 and 4

C.

2 and 3

D.

1 and 4
(2 marks)

8.

When placing reliance on the work of a clients internal audit department is

the following statement true or false?
Some internal audit work must be re-performed by the external auditor before
reliance can be placed.
A.

True

B.

False
(1 mark)

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9.

An other matter paragraph is used in an audit report to draw attention to a matter

affecting the unaudited content of the companys Annual Report.
Which TWO of the following are correct in relation to an Other Matter
Paragraph in the Auditors Report?
1.

It is used if there is an inconsistency between the unaudited information in the

Annual Report and the audited financial statements

2.

It constitutes a qualified audit opinion

3.

The audit report is referred to as an unmodified report

4.

It should normally be placed below the Opinion section of the audit report

A.

1 and 2

B.

1 and 4

C.

1 and 3

D.

2 and 4
(2 marks)

10.

An auditor has assessed that detection risk needs to be reduced in order to manage
overall audit risk at an acceptably low level.
How should the auditor amend the audit plan to resolve this issue?
A.

Increase the materiality level

B.

Decrease the control risk

C.

Assign a more experienced team of audit staff

(1 mark)

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11.

The audit of Lybrand Cos financial statements for the year ended 31 March 2015
has been completed; the audit report and the financial statements were signed in
early June 2015 but are not yet issued to shareholders.
One week after the audit report and financial statements were signed, the finance
director of Lybrand Co informed the audit team that an earthquake in late May badly
damaged the companys largest overseas warehouse, totally destroying 40% of the
companys inventory, and the insurance policy is not going to pay out anything.
What actions, if any, should the auditor now take to satisfy their
responsibilities under ISA 560 Subsequent Events?
A.

No actions required as the audit report and financial statements have already
been signed

B.

Request management to adjust the financial statements, verify the adjustment

and provide a new audit report

C.

Request management to make disclosure of this event in the financial

statements

D.

Request that management adjust for this event in the following years financial
statements as it occurred in year ending 31 March 2016.
(2 marks)

12.

To help them achieve their legal duties, auditors of financial statements have legal
rights.
Which of the following is NOT an auditors legal right?
A.

To make corrections to the clients financial statements

B.

To attend the clients General Meetings

C.

To require explanations from the clients management of any matter deemed

relevant to the audit
(1 mark)

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Section B ALL SIX questions are compulsory and MUST be

attempted
1. Alpha plc., a listed company, operates a policy of putting its audit and related services
out to tender every five years. Following submissions from a number of firms of
accountants, the audit committee of Alpha plc. recommended that your firm be
appointed to provide the following services:

The statutory audit.

An independent review of the interim accounts, which will be circulated to the
shareholders together with your firms independent review report. The independent
review will be less detailed than a full audit, being restricted to making enquiries
of management, applying analytical procedures to the financial information and
assessing whether the accounting policies and presentation have been consistently
applied.
Consultancy services in respect of the implementation of a new financial
information technology system.

Your firm has not previously acted for Alpha plc. but does act as an auditor for one of
its major competitors.
Required:
(a)

Using the information above:

(i)

Explain THREE ethical threats which may affect the independence

of your firm in respect of the audit of Alpha plc.; and
(3 marks)

(ii)

For each threat explain how it might be reduced to an acceptable

level.
(3 marks)

(b)

Distinguish between positive and negative assurance, using the above

scenario to illustrate your answer.
(4 marks)
(10 marks)

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2.
(a)

External auditors often choose to rely on the work of their clients internal
auditors. Sometimes external auditors might want to use the clients internal
audit staff to assist with the external audit process itself.
Required:
Explain the issues that the external auditor should consider before
placing the reliance described above.
(5 marks)

(b)

Totally Toys Co. manufacture a large range of plastic and wooden toys, which
they sell to the public in their own chain of retail outlets, and through online sales
on their website. During the last two months of their recently ended accounting
year, the companys internal testing department discovered that a batch of poor
quality plastic material had been purchased and used in the manufacture of some
toys, many of which are already sold. No further sales will happen, because the
tests showed that the plastic was at risk of shattering into lots of small sharp
pieces. The companys board has decided not to issue a warning to customers
who already purchased the toys, as the directors believe the risk of injury is low.
Required:
Describe the responsibilities of the external auditor relating to
confidentiality of client information, using the above scenario to
illustrate your answer.
(5 marks)
(10 marks)

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3.
(a)

You are the audit manager for a listed company client and you are briefing your
team on the approach to adopt in undertaking the review and finalisation stage
of the audit. In particular, the audit senior is unsure about the steps to take in
relation to the unaudited other information that is included in the Annual Report
attached to the audited financial statements.
Required:
Describe the auditors responsibility in respect of other information in
the Annual Report of a company.
(4 marks)

(b)

You are currently reviewing the audit files for several of your clients for which
the audit fieldwork is complete. The audit seniors have raised the following
issues:
Wong Co.
Wong Co. is a manufacturer of electrical goods. At the year-end it held some
damaged inventory at a carrying value of $3.7m (its cost). A customer has
agreed to buy the items for $4.4m, but Wong has agreed to partially repair the
items at a cost of $1.1m before the sale takes place. Profit before tax is $35m.
Chua Co.
Chua Co. is being investigated by its industry regulator for uncompetitive
behaviour. The investigation began several months ago and is likely to continue
for at least another 6 months into the next accounting year. Another company
was found guilty of similar behaviour earlier this year and was fined $86m. Profit
before tax of Chua Co. is $30m. The matter has been fully disclosed within a note
to the financial statements at the year end.
Required:
For each of the clients above:
(i)

Discuss the issue, including an assessment of whether it is

material; and
(3 marks)

(ii)

Describe the impact on the audit report if the issue remains

unresolved.
(3 marks)
(10 marks)

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4.
(a) Explain FOUR financial statement assertions relevant to
balances at the period end.

account
(4 marks)

(b)

Mango Tango Co. operate a chain of dance studios. In addition to running dance
classes, they also sell a large range of dance clothing and related equipment. The
company purchases its inventory on credit from suppliers in its home country.
Required:
Describe SIX substantive procedures you would perform to obtain
sufficient and appropriate audit evidence in relation to Torress trade
payables.
(6 marks)
(10 marks)

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5. You are at the meeting for a new audit client, Northern Liquids Co., which has grown
rapidly during the past year. The financial statements have not legally required an
audit in previous years due to the companys revenue and assets falling below the
statutory audit thresholds. However, the companys bankers have requested that an
audit is undertaken on the financial statements for the forthcoming year end. The
company has requested an increase in its overdraft facility in order to fund high levels
of inventory required to meet increasing demand for its products.
The company buys liquid chemicals in bulk, repackages them into smaller containers
and sells the liquids in much smaller quantities. Some of the liquids are mixed together,
and raw materials in the mixing process form work in progress (WIP). The company
uses a standard costing system to value finished products and WIP. The company has
only six suppliers (two of whom are based overseas), but over 100 customer accounts.
The managing director, Mr Fimble, does not understand why it is necessary for him to
discuss some of the items on the agenda for the audit planning meeting, such as
compliance with laws and regulations and understanding the business.
However, he is pleased that you have raised the matter of internal controls. He is
worried that a recently recruited salesman may be selling goods at less than their
minimum mark-up, in order to get his bonus, which is based upon the level of sales he
has achieved. At a mark-up of less than 34%, there is a risk that the company loses
money on the sale, because the margin is not then sufficient to cover the repackaging
costs.
Required:
(a) Explain why it is important for auditors to plan and to understand their
clients businesses as part of an effective audit process.
(10 marks)
(b)

Using the information above, describe the audit risks which should be
assessed during the planning of the audit of Northern liquids Co.
(10 marks)
(20 marks)

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6. You are the auditor of Mota Co., a distributor of automotive components, and have
been provided with the following description of the sales order processing system.
Order entry
Sales orders are taken over the telephone and entered into the computer by a sales
order clerk, via a terminal in the sales office while the customer is on the line. On
entry, the order details are read back to the customer for confirmation. The computer
confirms that there are sufficient inventories to meet the order and that the customers
credit limit is not exceeded.
If the goods are unavailable, the customer is asked if he wants the order to be recorded
as a back order which will be fulfilled when there is sufficient inventory. Once
accepted, the order is automatically given an order number, which is relayed to the
customer.
Orders which take a customer over his credit limit are referred to the credit controller
who decides, in consultation with the chief accountant, whether or not the customer
should be allowed to exceed their credit limit or have the credit limit raised. Any
adjustments in respect of credit limits are entered into the system by the credit
controller via a terminal in the accounts department. Printouts of these amendments
are not generated and no other review of credit limits is undertaken.
New customers are referred to the credit controller who obtains credit ratings and
references and, on the oral authority of the chief accountant, he enters the customer
account details onto the sales ledger master file via a terminal in the accounts
department.
Despatch of goods
Sequentially numbered despatch notes in respect of accepted orders are printed out in
the warehouse and the goods are selected and packed by the warehouse staff.
Confirmations of packing are entered into the computer, via a terminal in the
warehouse, by the warehouse supervisor. Two copies of the sequentially numbered
delivery advice are printed in the warehouse and sent with the goods to the customer,
who is required to sign a copy, which is returned by the driver to the accounts
department. All despatches are checked at the warehouse door to ensure they are
accompanied by the correct documentation. The packing notes are filed in numerical
order in the warehouse and the sequence is checked for completeness on a daily basis
by the warehouse supervisor.
The system does not automatically generate purchase orders with manufacturers when
a customers order cannot be fulfilled.
Computer system
All users of the system are required to log on using identification codes and individual
passwords, which control their access to the system. All passwords are changed every
90 days and when employees leave. A supplier provides system support, where the
service agreement provides for availability of a back-up system within 72 hours of a
system failure.

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Required:
(a)

In respect of the internal control of Mota Co.:

(i)

Identify and explain FIVE deficiencies;

(ii)

Recommend a control to address each of these deficiencies; and

(iii) Describe a test of control your audit firm would perform to assess
if each of these controls is operating effectively.
Note: The total marks will be split equally between each part
(15 marks)
(b)

Explain what is meant by Computer Assisted Audit Techniques (CAATs)

and give THREE examples of how CAATs could be used by the external
auditors of Mota Co. in testing inventory or receivables balances.
(5 marks)
(20 marks)
End of Question Paper

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