11/19/2018 ACCA - AA Audit and Assurance - CBEs - 18-19: F8 - CBE Mock - 2

ACCA F8 CBE Mock Step 08 (0717)

Section A
Question 1 of 25

You are an audit manager of Smith & Co. You have recently been assigned the audit of a
new client, Jones Co, a shoe manufacturing company which supplies shoes to well-known,
luxury department stores where shoes are sold for prices in excess of $500. The previous
auditor of Jones Co, Atkinson & Co, did not seek reappointment.

During a meeting with the Finance Director of Jones Co, he makes it clear to you that as
well as undertaking the external audit of the financial statements of Jones Co, the Board of
Directors is expecting the audit engagement partner to attend monthly board meetings in an
advisory capacity, much like a non-executive director. This is to assist the company in
aligning its corporate governance with the principles of corporate governance best practice.

During the course of your discussion with the Finance Director, he mentions that he would
welcome input from the audit team regarding the calculation of the taxation figures in the
financial statements, as this has been a notoriously difficult area to account for in the past
and is material to the financial statements.

The Finance Director also tells you that in the past it has been something of a tradition to
offer each member of the audit team a pair of shoes of their choice once the audit has
finished and the financial statements have been issued.

At the close of your meeting, the Finance Director casually remarks that his niece has been
accepted by Smith & Co as a trainee ACCA accountant and that she commenced her
training a few weeks ago, which she is thoroughly enjoying so far.

Select the threat which would arise if the audit engagement partner attended the
monthly board meetings and the appropriate action the auditor should take.

Threat Self-interest
Appropriate
Accept the offer and appoint another audit partner to be the audit engagement partner for the audit of Jones Co
action

0 out of 2

The correct answer is:

Threat: Self-interest
Appropriate action: Decline the offer as no appropriate safeguards possible

Having the audit engagement partner on the board of directors of a client acting as a non-
executive director gives rise to a significant self-interest threat and such a request should
be declined as the self-interest threat is too great to be mitigated by any safeguards.

Syllabus area: A4a-c

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Question 2 of 25

You are an audit manager of Smith & Co. You have recently been assigned the audit of a
new client, Jones Co, a shoe manufacturing company which supplies shoes to well-known,
luxury department stores where shoes are sold for prices in excess of $500. The previous
auditor of Jones Co, Atkinson & Co, did not seek reappointment.

During a meeting with the Finance Director of Jones Co, he makes it clear to you that as
well as undertaking the external audit of the financial statements of Jones Co, the Board of
Directors is expecting the audit engagement partner to attend monthly board meetings in an
advisory capacity, much like a non-executive director. This is to assist the company in
aligning its corporate governance with the principles of corporate governance best practice.

During the course of your discussion with the Finance Director, he mentions that he would
welcome input from the audit team regarding the calculation of the taxation figures in the
financial statements, as this has been a notoriously difficult area to account for in the past
and is material to the financial statements.

The Finance Director also tells you that in the past it has been something of a tradition to
offer each member of the audit team a pair of shoes of their choice once the audit has
finished and the financial statements have been issued.

At the close of your meeting, the Finance Director casually remarks that his niece has been
accepted by Smith & Co as a trainee ACCA accountant and that she commenced her
training a few weeks ago, which she is thoroughly enjoying so far.

In relation to the pair of shoes that are to be offered to each member of the audit
team, which of the following actions should the auditor take?
Accept the gift and indiv those charged with governance at Jones Co
Accept the gift as its value is trivial and inconsequential
Indiv those charged with governance at Jones and the ethical partner at Smith & Co
before deciding whether to accept the gift or not
Politely decline the gift

2 out of 2

The correct answer is: Politely decline the gift.

The shoes are sold for prices in excess of $500 and so the value of the shoes is unlikely to
be trivial and inconsequential. Therefore it would be most appropriate to decline politely the
offer of the gift at the end of the audit.

Syllabus area: A4a-c

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Question 3 of 25

You are an audit manager of Smith & Co. You have recently been assigned the audit of a
new client, Jones Co, a shoe manufacturing company which supplies shoes to well-known,
luxury department stores where shoes are sold for prices in excess of $500. The previous
auditor of Jones Co, Atkinson & Co, did not seek reappointment.

During a meeting with the Finance Director of Jones Co, he makes it clear to you that as
well as undertaking the external audit of the financial statements of Jones Co, the Board of
Directors is expecting the audit engagement partner to attend monthly board meetings in an
advisory capacity, much like a non-executive director. This is to assist the company in
aligning its corporate governance with the principles of corporate governance best practice.

During the course of your discussion with the Finance Director, he mentions that he would
welcome input from the audit team regarding the calculation of the taxation figures in the
financial statements, as this has been a notoriously difficult area to account for in the past
and is material to the financial statements.

The Finance Director also tells you that in the past it has been something of a tradition to
offer each member of the audit team a pair of shoes of their choice once the audit has
finished and the financial statements have been issued.

At the close of your meeting, the Finance Director casually remarks that his niece has been
accepted by Smith & Co as a trainee ACCA accountant and that she commenced her
training a few weeks ago, which she is thoroughly enjoying so far.

Which of the following statements is TRUE regarding the issue of the audit team
assisting with the calculation of the taxation figures in the financial statements?
The audit team should not assist with the calculation of the taxation figures in the
financial statements as the ACCA Code of Ethics and Conduct specifically prohibits the
audit team from preparing tax calculations for the purposes of the accounting entries in
the financial statements.
The audit team can assist with the calculation of the taxation figures in the financial
statements as long as the calculations are reviewed by the tax partner.
The audit team’s involvement in the calculation of the taxation figures results in a
familiarity threat for which no safeguards are appropriate.
The audit team can assist with the calculation of the taxation figures as this is of a
routine mechanical nature and no safeguards are required.

0 out of 2

The correct answer is:

The audit team can assist with the calculation of the taxation figures in the financial
statements as long as the calculations are reviewed by the tax partner.

As Jones Co is not a public interest entity, it would be appropriate for the audit team to
prepare tax calculations for the purposes of the financial statements, provided adequate
safeguards are in place. Safeguards include using professionals who are not members of
the audit team to undertake the work, or using a partner with tax expertise who is not a
member of the audit team to review the workings if these have been prepared by a member
of the audit team, or obtaining advice from an external tax professional. Given that the
amount in this case is material, the self-review threat arising may be high, but other factors
such as the client’s expertise in tax and the complexity and judgement required are also
relevant. This situation does not give rise to a familiarity threat but to a self-review threat.

Syllabus area: A4a-c

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Question 4 of 25

You are an audit manager of Smith & Co. You have recently been assigned the audit of a
new client, Jones Co, a shoe manufacturing company which supplies shoes to well-known,
luxury department stores where shoes are sold for prices in excess of $500. The previous
auditor of Jones Co, Atkinson & Co, did not seek reappointment.

During a meeting with the Finance Director of Jones Co, he makes it clear to you that as
well as undertaking the external audit of the financial statements of Jones Co, the Board of
Directors is expecting the audit engagement partner to attend monthly board meetings in an
advisory capacity, much like a non-executive director. This is to assist the company in
aligning its corporate governance with the principles of corporate governance best practice.

During the course of your discussion with the Finance Director, he mentions that he would
welcome input from the audit team regarding the calculation of the taxation figures in the
financial statements, as this has been a notoriously difficult area to account for in the past
and is material to the financial statements.

The Finance Director also tells you that in the past it has been something of a tradition to
offer each member of the audit team a pair of shoes of their choice once the audit has
finished and the financial statements have been issued.

At the close of your meeting, the Finance Director casually remarks that his niece has been
accepted by Smith & Co as a trainee ACCA accountant and that she commenced her
training a few weeks ago, which she is thoroughly enjoying so far.

Which of the following statements is TRUE regarding the Finance Director’s niece
commencing her ACCA accountancy training with Smith & Co?
As the Finance Director’s niece is considered a close family member of the Finance
Director, she must not be allowed to be part of the audit team of Jones Co as she is in a
position to exert significant influence over the outcome of the audit.
The Finance Director’s niece should not be part of the audit team for the audit of Jones
Co as the familiarity threat arising is too great for any safeguards to mitigate to an
acceptable level.
The Finance Director’s niece is unlikely to be able to influence the audit of Jones Co and
so her presence on the audit team is unlikely to cause any problems.
Jones Co is a new audit client and as such the Finance Director’s niece should be
assigned to the audit team of Jones Co in order to ensure that Smith & Co’s relationship
with Jones Co gets off to the best possible start.

2 out of 2

The correct answer is:

The Finance Director’s niece is unlikely to be able to influence the audit of Jones Co
and so her presence on the audit team is unlikely to cause any problems.

The ACCA Code of Ethics and Conduct defines an immediate family member as a spouse
or dependent, and a close family member as a parent, child or sibling who is not an
immediate family member. In this case, the Finance Director’s niece is neither immediate
nor close family and so her presence on the audit team is unlikely to give rise to significant
threats to the ethical principles. However, the audit engagement partner may consider it
more prudent to assign her to another audit instead.

Syllabus area: A4a-c

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Question 5 of 25

You are an audit manager of Smith & Co. You have recently been assigned the audit of a
new client, Jones Co, a shoe manufacturing company which supplies shoes to well-known,
luxury department stores where shoes are sold for prices in excess of $500. The previous
auditor of Jones Co, Atkinson & Co, did not seek reappointment.

During a meeting with the Finance Director of Jones Co, he makes it clear to you that as
well as undertaking the external audit of the financial statements of Jones Co, the Board of
Directors is expecting the audit engagement partner to attend monthly board meetings in an
advisory capacity, much like a non-executive director. This is to assist the company in
aligning its corporate governance with the principles of corporate governance best practice.

During the course of your discussion with the Finance Director, he mentions that he would
welcome input from the audit team regarding the calculation of the taxation figures in the
financial statements, as this has been a notoriously difficult area to account for in the past
and is material to the financial statements.

The Finance Director also tells you that in the past it has been something of a tradition to
offer each member of the audit team a pair of shoes of their choice once the audit has
finished and the financial statements have been issued.

At the close of your meeting, the Finance Director casually remarks that his niece has been
accepted by Smith & Co as a trainee ACCA accountant and that she commenced her
training a few weeks ago, which she is thoroughly enjoying so far.

Which TWO of the following are normal principles of best practice corporate
governance guidance?
All companies should be headed by an effective board, where it is the responsibility of
the executive directors to ensure the long-term success of the company.
All directors should receive induction on joining the board and should regularly update
and refresh their skills and knowledge.
The board should use the AGM to communicate with investors who hold more than a 5%
shareholding in the entity and to encourage their participation.
There should be a dival, rigorous and transparent procedure for the appointment of new
directors to the board.

0 out of 2

The correct answer is:

All directors should receive induction on joining the board and should regularly update
and refresh their skills and knowledge.
There should be a dival, rigorous and transparent procedure for the appointment of
new directors to the board.

Option (1) is not correct as it refers only to executive directors. The Board of Directors is
collectively responsible for the long-term success of the company and this includes both the
executive and non-executive directors.

Similarly option (3) is not correct as corporate governance principles require that a
company communicate with all investors, not just those which own a certain percentage
shareholding.

Syllabus area: A3b

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Question 6 of 25

You are an audit senior of Rowling & Co and are currently involved in the audit of the
financial statements of Walsh Co for the year ended 31 December 20X6. Walsh Co is a
manufacturing company which provides components for electrical goods such as washing
machines and refrigerators.

You have been assigned the audit of trade receivables and revenue. These are material
figures on the financial statements and the interim audit visit highlighted that controls
around sales and receivables were poor. The audit procedures you have been undertaking
are therefore wholly substantive based. Due to the large number of transactions and
balances involved, you have used audit software to help you generate samples for testing.

You have completed the following audit testing:

1. As part of your substantive testing on the revenue figure for the draft statement of
profit or loss, you perdived an analytical procedure by comparing the draft revenue
figure for the current year on a month-by-month basis to the revenue figure on a
month-by-month basis in the prior year audited financial statements, and investigating
any significant variance with the Finance Director of Walsh Co.
2. As part of the testing of the year-end receivables balance, you carried out a positive
receivables’ confirmation, selecting all receivables over $20,000 to test. Of the 25
balances you selected for the confirmation, five of them did not agree with the
balances on the request and three of them did not respond.

In respect of the substantive testing you have perdived on the revenue figures,
which TWO of the following financial statement assertions is this audit test
providing evidence to support?
Cut-off
Occurrence
Completeness
Presentation

0 out of 2

The correct answer is:

Cut-off
Completeness

An analytical procedure comparing the current year revenue on a month-by-month basis to

the prior year revenue and investigating significant variances will provide evidence over cut-
off and completeness.

In order to test occurrence the auditor would need to examine invoices for evidence that
they relate to the entity and are bona fide transactions.

The assertion of presentation requires that transactions are disclosed in accordance with
applicable financial reporting framework and this cannot be carried out using analytical
procedures.

Syllabus area: D1a, D4a(iii)

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Question 7 of 25

You are an audit senior of Rowling & Co and are currently involved in the audit of the
financial statements of Walsh Co for the year ended 31 December 20X6. Walsh Co is a
manufacturing company which provides components for electrical goods such as washing
machines and refrigerators.

You have been assigned the audit of trade receivables and revenue. These are material
figures on the financial statements and the interim audit visit highlighted that controls
around sales and receivables were poor. The audit procedures you have been undertaking
are therefore wholly substantive based. Due to the large number of transactions and
balances involved, you have used audit software to help you generate samples for testing.

You have completed the following audit testing:

1. As part of your substantive testing on the revenue figure for the draft statement of
profit or loss, you perdived an analytical procedure by comparing the draft revenue
figure for the current year on a month-by-month basis to the revenue figure on a
month-by-month basis in the prior year audited financial statements, and investigating
any significant variance with the Finance Director of Walsh Co.
2. As part of the testing of the year-end receivables balance, you carried out a positive
receivables’ confirmation, selecting all receivables over $20,000 to test. Of the 25
balances you selected for the confirmation, five of them did not agree with the
balances on the request and three of them did not respond.

Which of the following methods has been used to select the balances for the
receivables’ confirmation?
Random selection
Monetary unit sampling
Systematic selection
Stratification with haphazard selection

0 out of 2

The correct answer is: Stratification with haphazard selection.

Stratification describes the process whereby a population (here the receivables’ balances)
is divided into different groups (here those with balances over $20,000 and those with
balances under $20,000). Once the population has been divided the sample is then chosen.
This appears to have been done using the auditor’s own judgement (and so is haphazard)
rather than with the use of statistical methods.

Statistical sampling is a sampling method that involves random selection of sample items
and the use of probability theory to evaluate sample results. Random selection and
systematic selection are examples of statistical sampling methods.

Syllabus area: D3b

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Question 8 of 25

You are an audit senior of Rowling & Co and are currently involved in the audit of the
financial statements of Walsh Co for the year ended 31 December 20X6. Walsh Co is a
manufacturing company which provides components for electrical goods such as washing
machines and refrigerators.

You have been assigned the audit of trade receivables and revenue. These are material
figures on the financial statements and the interim audit visit highlighted that controls
around sales and receivables were poor. The audit procedures you have been undertaking
are therefore wholly substantive based. Due to the large number of transactions and
balances involved, you have used audit software to help you generate samples for testing.

You have completed the following audit testing:

1. As part of your substantive testing on the revenue figure for the draft statement of
profit or loss, you perdived an analytical procedure by comparing the draft revenue
figure for the current year on a month-by-month basis to the revenue figure on a
month-by-month basis in the prior year audited financial statements, and investigating
any significant variance with the Finance Director of Walsh Co.
2. As part of the testing of the year-end receivables balance, you carried out a positive
receivables’ confirmation, selecting all receivables over $20,000 to test. Of the 25
balances you selected for the confirmation, five of them did not agree with the
balances on the request and three of them did not respond.

Which TWO of the following statements about receivables’ confirmations is TRUE?

A trade receivables’ confirmation will provide the auditor with sufficient appropriate
evidence concerning the existence and valuation of receivables.
Where an auditor receives satisfactory responses to the receivables’ confirmation, it is
still necessary to perdiv other audit procedures on the receivables balance.
If management refuse to allow auditors to undertake a receivables’ confirmation, the
auditor must modify their auditor’s opinion where the receivables balance is material.
A trade receivables’ confirmation provides evidence in relation to the rights and
obligations of receivables.

0 out of 2

The correct answer is:

Where an auditor receives satisfactory responses to the receivables’ confirmation, it is

still necessary to perdiv other audit procedures on the receivables balance.
A trade receivables’ confirmation provides evidence in relation to the rights and
obligations of receivables.

The receivables’ confirmation provides evidence of existence and rights and obligations, but
it does not provide evidence of the valuation of the year-end balance. Therefore, even if the
responses to the receivables’ circularisation are satisfactory, the auditor will still need to
conduct other audit procedures in order to gain evidence over the assertions which are not
addressed by the confirmation. For example, the auditor may gain evidence over valuation
by testing cash receipts after the year end.

The auditor will consider the implications for the auditor’s report if management refuse
permission to carry out a receivables’ confirmation only after they have attempted to obtain
evidence elsewhere and this has been unsuccessful.

Syllabus area: D4a(i)

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Question 9 of 25

You are an audit senior of Rowling & Co and are currently involved in the audit of the
financial statements of Walsh Co for the year ended 31 December 20X6. Walsh Co is a
manufacturing company which provides components for electrical goods such as washing
machines and refrigerators.

You have been assigned the audit of trade receivables and revenue. These are material
figures on the financial statements and the interim audit visit highlighted that controls
around sales and receivables were poor. The audit procedures you have been undertaking
are therefore wholly substantive based. Due to the large number of transactions and
balances involved, you have used audit software to help you generate samples for testing.

You have completed the following audit testing:

1. As part of your substantive testing on the revenue figure for the draft statement of
profit or loss, you perdived an analytical procedure by comparing the draft revenue
figure for the current year on a month-by-month basis to the revenue figure on a
month-by-month basis in the prior year audited financial statements, and investigating
any significant variance with the Finance Director of Walsh Co.
2. As part of the testing of the year-end receivables balance, you carried out a positive
receivables’ confirmation, selecting all receivables over $20,000 to test. Of the 25
balances you selected for the confirmation, five of them did not agree with the
balances on the request and three of them did not respond.

In respect of the receivables’ confirmation, one of the five customer balances which
did not agree was due to a balance of $12,000. This is currently being disputed by
the customer who believes Walsh Co invoiced goods at an incorrect unit price.
Which of the following options represents the most appropriate action to take?
Agree the disputed invoice to the goods despatch note to determine whether the goods
were sent out before the year end.
Obtain a copy of the invoice and vouch whether the goods invoiced agree to the goods
despatch note in terms of quantity and product code.
Discuss the need for an allowance in relation to this customer’s balance with the credit
control department.
Review credit notes issued to this customer during the post year-end period.

0 out of 2

The correct answer is:

Review credit notes issued to this customer during the post year-end period.

The most appropriate action to take must focus on determining whether or not the goods
were actually invoiced at an incorrect unit price. The dispute does not relate to whether the
goods were sent pre-year end or whether the quantity and product code are correct, but
rather to the unit price charged.

Any errors in the price charged would be corrected by issuing a credit note post year end.

Syllabus area: D4a(i)

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Question 10 of 25

You are an audit senior of Rowling & Co and are currently involved in the audit of the
financial statements of Walsh Co for the year ended 31 December 20X6. Walsh Co is a
manufacturing company which provides components for electrical goods such as washing
machines and refrigerators.

You have been assigned the audit of trade receivables and revenue. These are material
figures on the financial statements and the interim audit visit highlighted that controls
around sales and receivables were poor. The audit procedures you have been undertaking
are therefore wholly substantive based. Due to the large number of transactions and
balances involved, you have used audit software to help you generate samples for testing.

You have completed the following audit testing:

1. As part of your substantive testing on the revenue figure for the draft statement of
profit or loss, you perdived an analytical procedure by comparing the draft revenue
figure for the current year on a month-by-month basis to the revenue figure on a
month-by-month basis in the prior year audited financial statements, and investigating
any significant variance with the Finance Director of Walsh Co.
2. As part of the testing of the year-end receivables balance, you carried out a positive
receivables’ confirmation, selecting all receivables over $20,000 to test. Of the 25
balances you selected for the confirmation, five of them did not agree with the
balances on the request and three of them did not respond.

You have now completed your testing in respect of the receivables’ confirmation
and have found several misstatements. Which TWO of the following statements
correctly describes the auditor’s responsibilities in relation to misstatements?
The auditor must keep a record of misstatements identified during the course of the
audit unless they are immaterial.
As part of their finalisation procedures, the auditor shall consider whether the aggregate
of uncorrected misstatements in the financial statements is material.
In deciding whether the uncorrected misstatements are material, the auditor shall
consider the size and nature of the misstatements.
The auditor must consider misstatements relating to transactions and account balances,
but not misstatements relating to disclosures.

2 out of 2

The correct answer is:

As part of their finalisation procedures, the auditor shall consider whether the
aggregate of uncorrected misstatements in the financial statements is material.
In deciding whether the uncorrected misstatements are material, the auditor shall
consider the size and nature of the misstatements.

The auditor must keep a record of all misstatements, even ones which individually are
immaterial, unless they are clearly trivial. When considering the impact of misstatements,
the auditor must consider the impact on disclosures as well as transactions and account
balances.

Syllabus area: E4c, d

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Question 11 of 25

You are an audit manager of Berry & Co and are in the finalisation stage of the audit of the
financial statements of two separate clients.

Wicks Co

Wicks Co has a year end of 31 December 20X6 and a draft profit before tax of $7 million.
Wicks Co runs a number of highly successful fine dining restaurants and was recently in the
media spotlight for winning a prestigious award for its food.

During your review of subsequent events, it has come to your attention that the company is
facing a claim for damages for potential lost earnings of $500,000 filed by a minor celebrity
who visited the restaurant in November 20X6 and tripped over a step on her way out of the
restaurant after her visit. The directors of Wicks Co are not intending to include a provision
for the claim as they believe it will come to nothing. However, after reviewing
correspondence from Wicks Co’s solicitor, you ascertain that the legal advice is that Wicks
Co should settle the claim out of court for a figure in the region of $250,000 in order to avoid
any negative publicity that might arise should the claim go to court.

Additionally, the Finance Director of Wicks Co has presented you with the draft annual
report and, during your review of this, you notice that one of the key perdivance ratios
disclosed in the draft annual report is not consistent with the ratio calculated using the
figures in the financial statements.

Rhodes Co

Rhodes Co, a listed entity, has experienced trading difficulties recently, such as the loss of
key customers to a competitor, refusal of additional borrowing from its bank, and a pre-tax
loss. The directors of Rhodes Co are maintaining that the company is still a going concern.
However, you have evidence which suggests that the financial statements of Rhodes Co
should be prepared on a break-up basis.

Which of the following options describes how the auditor’s report for Wicks Co
would be affected by the damages claim if the directors of Wicks Co do not agree to
include a provision of $250,000 in the financial statements to cover the likely amount
of the claim?
The auditor’s opinion would be unmodified but the auditor’s report would be modified by
the inclusion of an emphasis of matter paragraph, drawing users’ attention to the matter.
The auditor’s report would be unmodified.
The auditor’s opinion would be modified with an ‘except for’ opinion and include details
of the claim in the basis for qualified opinion section of the auditor’s report.
The auditor’s opinion would be unmodified but the auditor’s report would be modified by
the inclusion of a section headed ‘Material uncertainty related to going concern’ as any
negative publicity generated by the claim may affect the ability of the company to
continue operating.

0 out of 2

The correct answer is: The auditor’s report would be unmodified.

The potential damages of $250,000 represent 3.6% of profit before tax

($250,000/$7,000,000) and so the amount is not material to the financial statements.
Therefore, even if the provision is not made, the auditor’s opinion would not be modified
and there would be no need to include any additional indivation in the auditor’s report on
this issue, so the report would also be unmodified.

Syllabus area: E5c

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Question 12 of 25

You are an audit manager of Berry & Co and are in the finalisation stage of the audit of the
financial statements of two separate clients.

Wicks Co

Wicks Co has a year end of 31 December 20X6 and a draft profit before tax of $7 million.
Wicks Co runs a number of highly successful fine dining restaurants and was recently in the
media spotlight for winning a prestigious award for its food.

During your review of subsequent events, it has come to your attention that the company is
facing a claim for damages for potential lost earnings of $500,000 filed by a minor celebrity
who visited the restaurant in November 20X6 and tripped over a step on her way out of the
restaurant after her visit. The directors of Wicks Co are not intending to include a provision
for the claim as they believe it will come to nothing. However, after reviewing
correspondence from Wicks Co’s solicitor, you ascertain that the legal advice is that Wicks
Co should settle the claim out of court for a figure in the region of $250,000 in order to avoid
any negative publicity that might arise should the claim go to court.

Additionally, the Finance Director of Wicks Co has presented you with the draft annual
report and, during your review of this, you notice that one of the key perdivance ratios
disclosed in the draft annual report is not consistent with the ratio calculated using the
figures in the financial statements.

Rhodes Co

Rhodes Co, a listed entity, has experienced trading difficulties recently, such as the loss of
key customers to a competitor, refusal of additional borrowing from its bank, and a pre-tax
loss. The directors of Rhodes Co are maintaining that the company is still a going concern.
However, you have evidence which suggests that the financial statements of Rhodes Co
should be prepared on a break-up basis.

Which of the following options best describes the impact of the inconsistency in the
annual report on the auditor’s report for the financial statements of Wicks Co if it is
not corrected?
The auditor’s opinion will be qualified with an ‘except for’ opinion as the misstatement in
the annual report is material.
The auditor’s opinion will be unmodified as the inconsistency is in the annual report, but
the auditor’s report will be modified by the inclusion of an ‘other matter paragraph’ which
refers to the matter.
The auditor’s opinion will be unmodified and the inconsistency will be highlighted in the
‘Other Indivation’ section of the auditor’s report.
The auditor’s opinion will be qualified with an ‘except for’ opinion as the misstatement in
the annual report is material and the inconsistency will be highlighted in the ‘Other
Indivation’ section of the auditor’s report.

0 out of 2

The correct answer is:

The auditor’s opinion will be unmodified and the inconsistency will be highlighted in
the ‘Other Indivation’ section of the auditor’s report.

As the inconsistency is in the annual report and not in the financial statements, the auditor’s
report will be unmodified and the opinion will be unmodified. Where auditors are required to
look at other indivation, they will always include a section in the auditor’s report on other
indivation and this is where they will report the inconsistency in this case.

Syllabus area: E5c

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11/19/2018 ACCA - AA Audit and Assurance - CBEs - 18-19: F8 - CBE Mock - 2
Question 13 of 25

You are an audit manager of Berry & Co and are in the finalisation stage of the audit of the
financial statements of two separate clients.

Wicks Co

Wicks Co has a year end of 31 December 20X6 and a draft profit before tax of $7 million.
Wicks Co runs a number of highly successful fine dining restaurants and was recently in the
media spotlight for winning a prestigious award for its food.

During your review of subsequent events, it has come to your attention that the company is
facing a claim for damages for potential lost earnings of $500,000 filed by a minor celebrity
who visited the restaurant in November 20X6 and tripped over a step on her way out of the
restaurant after her visit. The directors of Wicks Co are not intending to include a provision
for the claim as they believe it will come to nothing. However, after reviewing
correspondence from Wicks Co’s solicitor, you ascertain that the legal advice is that Wicks
Co should settle the claim out of court for a figure in the region of $250,000 in order to avoid
any negative publicity that might arise should the claim go to court.

Additionally, the Finance Director of Wicks Co has presented you with the draft annual
report and, during your review of this, you notice that one of the key perdivance ratios
disclosed in the draft annual report is not consistent with the ratio calculated using the
figures in the financial statements.

Rhodes Co

Rhodes Co, a listed entity, has experienced trading difficulties recently, such as the loss of
key customers to a competitor, refusal of additional borrowing from its bank, and a pre-tax
loss. The directors of Rhodes Co are maintaining that the company is still a going concern.
However, you have evidence which suggests that the financial statements of Rhodes Co
should be prepared on a break-up basis.

Complete the following sentence regarding the impact of the situation on the
auditor’s report on the financial statements of Rhodes Co by selecting from the
options provided.

If the directors of Rhodes Co refuse to prepare the financial statements on a break-up

basis, the auditor’s opinion will be
Qualified on the
basis of a
Material uncertainty related to going concern .

0 out of 2

The correct answer is:

Adverse
Misstatement that is both material and pervasive

If the directors of Rhodes Co refuse to prepare the financial statements on a break-up

basis, the auditor’s opinion will be adverse on the basis of misstatement that is both
material and pervasive.

Since the directors believe that the financial statements should be prepared on the going
concern basis of accounting but the auditors have reason to believe that the company is not
a going concern, the auditor’s report would include an adverse opinion.

Syllabus area: E2g

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11/19/2018 ACCA - AA Audit and Assurance - CBEs - 18-19: F8 - CBE Mock - 2
Question 14 of 25

You are an audit manager of Berry & Co and are in the finalisation stage of the audit of the
financial statements of two separate clients.

Wicks Co

Wicks Co has a year end of 31 December 20X6 and a draft profit before tax of $7 million.
Wicks Co runs a number of highly successful fine dining restaurants and was recently in the
media spotlight for winning a prestigious award for its food.

During your review of subsequent events, it has come to your attention that the company is
facing a claim for damages for potential lost earnings of $500,000 filed by a minor celebrity
who visited the restaurant in November 20X6 and tripped over a step on her way out of the
restaurant after her visit. The directors of Wicks Co are not intending to include a provision
for the claim as they believe it will come to nothing. However, after reviewing
correspondence from Wicks Co’s solicitor, you ascertain that the legal advice is that Wicks
Co should settle the claim out of court for a figure in the region of $250,000 in order to avoid
any negative publicity that might arise should the claim go to court.

Additionally, the Finance Director of Wicks Co has presented you with the draft annual
report and, during your review of this, you notice that one of the key perdivance ratios
disclosed in the draft annual report is not consistent with the ratio calculated using the
figures in the financial statements.

Rhodes Co

Rhodes Co, a listed entity, has experienced trading difficulties recently, such as the loss of
key customers to a competitor, refusal of additional borrowing from its bank, and a pre-tax
loss. The directors of Rhodes Co are maintaining that the company is still a going concern.
However, you have evidence which suggests that the financial statements of Rhodes Co
should be prepared on a break-up basis.

Which TWO of the following should be included in the written representation

requested from the management of Rhodes Co?
That management has fulfilled its responsibility for the preparation and presentation of
the financial statements.
That all misstatements uncovered during the audit have been adjusted for in the
financial statements.
That all deficiencies in internal control that management are aware of have been
addressed and corrected.
That management believe they will secure alternative funding in order for the financial
statements to be prepared on the going concern basis.

0 out of 2

The correct answer is:

That management has fulfilled its responsibility for the preparation and presentation of
the financial statements.
That management believe they will secure alternative funding in order for the financial
statements to be prepared on the going concern basis.

Regarding misstatements uncovered during the audit, the management of Rhodes Co must
provide a written representation that the effects of uncorrected misstatements are
immaterial (both individually and in aggregate). Regarding deficiencies in internal control,
Rhodes Co must provide a written representation that all deficiencies in internal control that
they are aware of have been communicated to Berry & Co.

Syllabus area: E3c

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11/19/2018 ACCA - AA Audit and Assurance - CBEs - 18-19: F8 - CBE Mock - 2
Question 15 of 25

You are an audit manager of Berry & Co and are in the finalisation stage of the audit of the
financial statements of two separate clients.

Wicks Co

Wicks Co has a year end of 31 December 20X6 and a draft profit before tax of $7 million.
Wicks Co runs a number of highly successful fine dining restaurants and was recently in the
media spotlight for winning a prestigious award for its food.

During your review of subsequent events, it has come to your attention that the company is
facing a claim for damages for potential lost earnings of $500,000 filed by a minor celebrity
who visited the restaurant in November 20X6 and tripped over a step on her way out of the
restaurant after her visit. The directors of Wicks Co are not intending to include a provision
for the claim as they believe it will come to nothing. However, after reviewing
correspondence from Wicks Co’s solicitor, you ascertain that the legal advice is that Wicks
Co should settle the claim out of court for a figure in the region of $250,000 in order to avoid
any negative publicity that might arise should the claim go to court.

Additionally, the Finance Director of Wicks Co has presented you with the draft annual
report and, during your review of this, you notice that one of the key perdivance ratios
disclosed in the draft annual report is not consistent with the ratio calculated using the
figures in the financial statements.

Rhodes Co

Rhodes Co, a listed entity, has experienced trading difficulties recently, such as the loss of
key customers to a competitor, refusal of additional borrowing from its bank, and a pre-tax
loss. The directors of Rhodes Co are maintaining that the company is still a going concern.
However, you have evidence which suggests that the financial statements of Rhodes Co
should be prepared on a break-up basis.

The audit senior working on Rhodes Co is also unclear as to the purpose and
content of the key audit matters paragraph in the auditor’s report. Which of the
following statements about key audit matters are TRUE?
The inclusion of a key audit matter in Rhodes Co’s auditor’s report gives rise to a
modification of the report and the opinion.
Key audit matters are included in the auditor’s report for all listed companies.
If the auditor’s report includes a ‘material uncertainty related to going concern’
paragraph, going concern will not be reported as a key audit matter.
If a modified auditor’s opinion is issued on the financial statements of Rhodes Co, the
auditor’s report must also include details of the matter giving rise to the modification as a
key audit matter.

0 out of 2

The correct answer is:

Key audit matters are included in the auditor’s report for all listed companies.
If the auditor’s report includes a ‘material uncertainty related to going concern’
paragraph, going concern will not be reported as a key audit matter.

Key audit matters div part of the auditor’s report of all listed companies. ISA 705 (Revised)
Modifications to the Opinion in the Independent Auditor’s Report explains that where the
audit opinion is modified, details of the matter giving rise to the modification should not be
included as a key audit matter. The inclusion of a key audit matter in the auditor’s report
does not mean the report or opinion are modified.

Syllabus area: E5a

Section B

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11/19/2018 ACCA - AA Audit and Assurance - CBEs - 18-19: F8 - CBE Mock - 2
Question 16 of 25

This scenario relates to four requirements.

Electrical Co manufactures televisions and DVD and Blu-ray players. It has been trading for
six years and sells to high street retailers across the country. Electrical Co offers a two year
warranty on all products sold and includes a static provision for warranties in the financial
statements. Electrical Co operates from a head office and one small manufacturing facility.
Each of these premises is rented. The company’s year end is 30 September 20X6.

Review of current year

During the year, Electrical Co has continued to grow, albeit more quickly than in previous
years. This has meant that they needed larger manufacturing premises and so the board of
directors decided to buy a large manufacturing facility. Electrical Co has incurred costs of
$860,000 to acquire the new manufacturing facility; this amount includes the site acquisition
cost and all legal fees as well as a three year insurance plan taken out in relation to the
building.

The purchase of the new manufacturing facility was financed by a bank loan of $750,000
and was completed on 1 September 20X6. Electrical Co will vacate their rented
manufacturing facility on 1 January 20X7 and so have been able to increase production
capacity by operating from both manufacturing facilities during September 20X6. A
separate inventory count will be conducted at each manufacturing facility and it is possible
that inventory will be transferred between the two facilities on the day of the inventory
count.

The new facility has become available at an important time for Electrical Co as they are
also in the process of tendering for a contract to supply goods to one of the leading high
street retailers. Electrical Co is confident of winning the contract and has already taken out
an additional $100,000 on its bank loan and has increased production so it has sufficient
inventory available should it win the contract. The contract will be awarded on 1 December
20X6.

Wages system and staff bonus

During the year, Electrical Co introduced a new computerised wages system. Head office
staff (including management and directors) are paid a monthly salary which does not
change from one month to the next. Certain management have annual sales targets to
meet and will be paid a bonus at the year end if these sales targets are achieved. The sales
targets for each member of management are embedded within the computerised wages
system and each bonus must be recalculated and authorised prior to being paid. Sales
targets are felt to be reasonably ambitious.

Staff working in the manufacturing facility are paid on a weekly basis (40 hours per week).
They are paid one of two hourly rates depending on their staff grade. Where necessary
overtime is worked and this is paid at 1½ times the hourly rate. All overtime is authorised
and signed off prior to it being carried out, by the completion of an overtime schedule by the
manufacturing facility manager. Manufacturing staff are required to clock in and clock out at
the beginning and end of each shift. The hours recorded as worked are automatically
forwarded to the payroll department at the end of each week.

Several new staff have been employed during the year. Once employed, human resources
allocate the employee a staff number and send an authorised new joiner report div to the
payroll department which contains the employee’s staff number, salary and bank details.

All staff are paid directly into their bank account by BACS transfer.

Required

(a) List SIX objectives of planning an audit.

(3 marks)

1. To get to know the company and to understand the nature of the busines- specialy
when it is a new client
2. To make sure that enough resources are being alocated for the audit
3. To make sure that enough time is being alocated

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11/19/2018 ACCA - AA Audit and Assurance - CBEs - 18-19: F8 - CBE Mock - 2
4. To ensure that the right people are alocated for the right areas: more qualified staff
for riskier areas
5. To make sure that enough sufficient evidence is being colected to make sure that
the financial statements offer a true and fair view
6. To set up the right frame work for the accounts

0 out of 0

This question has not yet been scored.

Marking scheme

Marks
Objectives of planning an audit (1/2 mark per point).
- Appropriate attention to important areas. 1/2
- Identify potential problems. 1/2
- Complete work efficiently. 1/2
- Assign work to audit team. 1/2
- Co-ordinate internal audit/experts. 1/2
- Facilitate review. 1/2
3

Suggested solution

Objectives of planning an audit

To ensure that appropriate attention is given to important areas of the audit.

To identify potential problems.
To ensure work is completed in an efficient way.
To be able to assign work properly to each member of the audit team.
To co-ordinate work done by the internal audit department/experts.
To facilitate review.

Syllabus area: B6a

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11/19/2018 ACCA - AA Audit and Assurance - CBEs - 18-19: F8 - CBE Mock - 2
Question 17 of 25

This scenario relates to four requirements.

Electrical Co manufactures televisions and DVD and Blu-ray players. It has been trading for
six years and sells to high street retailers across the country. Electrical Co offers a two year
warranty on all products sold and includes a static provision for warranties in the financial
statements. Electrical Co operates from a head office and one small manufacturing facility.
Each of these premises is rented. The company’s year end is 30 September 20X6.

Review of current year

During the year, Electrical Co has continued to grow, albeit more quickly than in previous
years. This has meant that they needed larger manufacturing premises and so the board of
directors decided to buy a large manufacturing facility. Electrical Co has incurred costs of
$860,000 to acquire the new manufacturing facility; this amount includes the site acquisition
cost and all legal fees as well as a three year insurance plan taken out in relation to the
building.

The purchase of the new manufacturing facility was financed by a bank loan of $750,000
and was completed on 1 September 20X6. Electrical Co will vacate their rented
manufacturing facility on 1 January 20X7 and so have been able to increase production
capacity by operating from both manufacturing facilities during September 20X6. A
separate inventory count will be conducted at each manufacturing facility and it is possible
that inventory will be transferred between the two facilities on the day of the inventory
count.

The new facility has become available at an important time for Electrical Co as they are
also in the process of tendering for a contract to supply goods to one of the leading high
street retailers. Electrical Co is confident of winning the contract and has already taken out
an additional $100,000 on its bank loan and has increased production so it has sufficient
inventory available should it win the contract. The contract will be awarded on 1 December
20X6.

Wages system and staff bonus

During the year, Electrical Co introduced a new computerised wages system. Head office
staff (including management and directors) are paid a monthly salary which does not
change from one month to the next. Certain management have annual sales targets to
meet and will be paid a bonus at the year end if these sales targets are achieved. The sales
targets for each member of management are embedded within the computerised wages
system and each bonus must be recalculated and authorised prior to being paid. Sales
targets are felt to be reasonably ambitious.

Staff working in the manufacturing facility are paid on a weekly basis (40 hours per week).
They are paid one of two hourly rates depending on their staff grade. Where necessary
overtime is worked and this is paid at 1½ times the hourly rate. All overtime is authorised
and signed off prior to it being carried out, by the completion of an overtime schedule by the
manufacturing facility manager. Manufacturing staff are required to clock in and clock out at
the beginning and end of each shift. The hours recorded as worked are automatically
forwarded to the payroll department at the end of each week.

Several new staff have been employed during the year. Once employed, human resources
allocate the employee a staff number and send an authorised new joiner report div to the
payroll department which contains the employee’s staff number, salary and bank details.

All staff are paid directly into their bank account by BACS transfer.

Required

(b) Describe SEVEN audit risks and explain the auditor’s response to each risk in planning
the audit of Electrical Co.

(14 marks)

AUDIT RISKS AUDITOR'S RESPONSE

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11/19/2018
The risk that the provisions for
warranties are understated. The
financial statemets only provide for a
static provision.
ACCA - AA Audit and Assurance - CBEs - 18-19: F8 - CBE Mock - 2
This has to be further investigated and the
matter discussed with the management.
Check last yars Financial Statements and
compare the figures.

Also check how many claims hav been made in

the previous year and compare with what has
been provided for this year.
There is a risk that the BAnk loan for Requesta bank letter showing the split of the
the new facility is not being recorded loan and the terms.
under the right nominal on the Balance
sheet.
The interest that related to the loanmight not be
acounted for in profit and loss account.

Request a bank statement for the loan, request

There is a risk that the profit is
a bank letter to ensure that the cosing balance
overstated.
is correct.

Inspect any other correspondence with the

bank for further indivation.
A going concern risk, due to the fact
that the company already incresed the We have to investigate the cash flows
loan bank with an additional $100. 000, projections to ensure that company is still a
without being sure that the new contract going concern and that there are no liquidity
to supply goods to a leading retailer is issues.
going to be awarded.
Perdiv a recalculation of the wages for both
rates in production and make sure that the right
ammount has been paid and also that the right
tax deductions hav been accounted for.
There is a risk that the wages are
overstated, or understated due to the Open a dummy employee for production and
change of the payroll system. also one for managers- the ones with a fixed
monthly payment - to see if the right wages is
being produced by the payroll system and
compare with a manual calculation to ensure
accuracy.
Observe the process of setting up a new
employee.
There is a risk of ovestatement of
wages due to fake employees on Try to process one to see in the payroll system
payroll.
will flag a problem or will request a password
to do so.

0 out of 0

This question has not yet been scored.

Marking scheme

Marks
Audit risk and auditor’s response to those risks (1 mark per risk and 1 mark for
each response).
- Warranty provision. 2
- Appropriate accounting treatment of manufacturing plant. 2
- Affordability of bank loan. 2
- Inventory at 2 sites at year end. 2
- High level of inventory held at year end due to tender for new contract. 2
- Incentive to overstate revenue to achieve bonus targets. 2
- New wages and salaries system introduced during the year. 2
14

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11/19/2018 ACCA - AA Audit and Assurance - CBEs - 18-19: F8 - CBE Mock - 2
Audit risks and the auditor’s response to those risks

Audit risk Auditor’s response to risk

Electrical Co offers a 2 year warranty on all of its
products. It is likely that some repairs will be
necessary in the next 2 years on products it has
sold this year and so a warranty provision is
needed in the financial statements. This amount
is an accounting estimate and could therefore be
materially misstated.
Electrical Co has purchased a manufacturing
plant in the year. The total price of $860,000
includes mainly capital costs but also the cost of
a 3 year insurance plan. Only assets which are
capital in nature should be included in property,
plant and equipment.
Property, plant and equipment should also be
depreciated as it was in use on 1 September
20X6.
Electrical Co has taken out a significant bank
loan of $750,000 to fund the purchase of the
plant and a further loan of $100,000 to finance
the production of extra inventory.
It is important that Electrical Co is able to meet
the loan criteria; any problems with repayment
could result in the loan being called in and going
concern difficulties.
At the year end Electrical Co is operating from
two sites and has inventory at both locations. It is
imperative that all inventory held by the business
is included in the financial statements, with no
omissions and no double counting.
Discuss with management as to the
percentage of goods which have
historically developed faults and needed
to be repaired under the warranty.
Recalculate management’s warranty
provision in view of this to ensure the
basis of calculation is reasonable.
Obtain documentation regarding the
breakdown of the full cost of $860,000
and in particular the insurance plan.
Ensure that only capital costs are shown
as property, plant and equipment.
Discuss with management their policy in
relation to depreciation to determine
whether they will charge a whole year’s
depreciation or depreciation on a pro-
rata basis. Recalculate the depreciation
charge.
Obtain a copy of the loan agreement and
verify the existence of any covenants.
Discuss with management their ability to
repay the debt.
Perdiv a going concern review.
Obtain a copy of the inventory count
procedures and discuss management’s
approach to ensure the accuracy of the
year end count.

Audit risk Auditor’s response to risk

Electrical Co is holding a high level of inventory at the Discuss the situation with
year end in order to supply the new contract it hopes to management to determine
win. If the contract is not won, the inventory may not be whether the inventory will be
saleable and inventory may be overstated in the financial saleable if Electrical Co does not
statements. win the new contract.
Extended review of post year
sales to determine whether net
realisable value is greater than
cost and any impact on cash
flow.
Some members of management are paid a bonus if they Discuss the accounting policy for
achieve certain sales targets. This gives management when sales are recognised in the
an incentive to overstate revenue. financial statements with
management.
Review the level of sales and
bonus per manager and follow
up any significant variations.
Electrical Co have introduced a new wages and salaries Document how the new system
system during the year. Any errors in the system could operates. Perdiv tests of controls
lead to inaccuracies in relation to the wages and salaries on the system to assess its
expense or tax liabilities. accuracy.
Analytically review wages and
salaries expense in relation to
prior year to identify any obvious
errors.

Syllabus area: B3b

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11/19/2018 ACCA - AA Audit and Assurance - CBEs - 18-19: F8 - CBE Mock - 2
Question 18 of 25

This scenario relates to four requirements.

Electrical Co manufactures televisions and DVD and Blu-ray players. It has been trading for
six years and sells to high street retailers across the country. Electrical Co offers a two year
warranty on all products sold and includes a static provision for warranties in the financial
statements. Electrical Co operates from a head office and one small manufacturing facility.
Each of these premises is rented. The company’s year end is 30 September 20X6.

Review of current year

During the year, Electrical Co has continued to grow, albeit more quickly than in previous
years. This has meant that they needed larger manufacturing premises and so the board of
directors decided to buy a large manufacturing facility. Electrical Co has incurred costs of
$860,000 to acquire the new manufacturing facility; this amount includes the site acquisition
cost and all legal fees as well as a three year insurance plan taken out in relation to the
building.

The purchase of the new manufacturing facility was financed by a bank loan of $750,000
and was completed on 1 September 20X6. Electrical Co will vacate their rented
manufacturing facility on 1 January 20X7 and so have been able to increase production
capacity by operating from both manufacturing facilities during September 20X6. A
separate inventory count will be conducted at each manufacturing facility and it is possible
that inventory will be transferred between the two facilities on the day of the inventory
count.

The new facility has become available at an important time for Electrical Co as they are
also in the process of tendering for a contract to supply goods to one of the leading high
street retailers. Electrical Co is confident of winning the contract and has already taken out
an additional $100,000 on its bank loan and has increased production so it has sufficient
inventory available should it win the contract. The contract will be awarded on 1 December
20X6.

Wages system and staff bonus

During the year, Electrical Co introduced a new computerised wages system. Head office
staff (including management and directors) are paid a monthly salary which does not
change from one month to the next. Certain management have annual sales targets to
meet and will be paid a bonus at the year end if these sales targets are achieved. The sales
targets for each member of management are embedded within the computerised wages
system and each bonus must be recalculated and authorised prior to being paid. Sales
targets are felt to be reasonably ambitious.

Staff working in the manufacturing facility are paid on a weekly basis (40 hours per week).
They are paid one of two hourly rates depending on their staff grade. Where necessary
overtime is worked and this is paid at 1½ times the hourly rate. All overtime is authorised
and signed off prior to it being carried out, by the completion of an overtime schedule by the
manufacturing facility manager. Manufacturing staff are required to clock in and clock out at
the beginning and end of each shift. The hours recorded as worked are automatically
forwarded to the payroll department at the end of each week.

Several new staff have been employed during the year. Once employed, human resources
allocate the employee a staff number and send an authorised new joiner report div to the
payroll department which contains the employee’s staff number, salary and bank details.

All staff are paid directly into their bank account by BACS transfer.

Required

(c) Recommend FIVE tests of control the auditor should carry out on the wages system of
Electrical Co, and explain the objective for each test.

(10 marks)

Test of Control Objective

Enquire the payrol department about the new To make sure that they are
employes divs copmpleted and authorised by
signature by someone with an

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Try to get a new employe on the payroll system
Inspect joiner reports and compare with the
indivation on the payroll system
Inspect the clock in and clock out process
Inspect the if the overtime is being approved by
managers and if all the overtime reports are
being signed
ACCA - AA Audit and Assurance - CBEs - 18-19: F8 - CBE Mock - 2
managerial position and that they
contain all the relevant indivation
about the employee stateing the date
of comencement and also the pay
rate agreed.
To see if anyone could add a new
fake employee on the payroll system
or is the system will request a
password to do so.
To ensure accuracy and to make sure
that the new joiners are not being
under or over paid
To make sure that the process is
being monitorised and that no-one
can check in more than just one card
andthat no employee is being paid for
work that hasnt been done.
To ensure that the employees are
being pai for work that has been
aproved and that there is now over
statement or understatement of
wages in the Financial Statements

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Marking scheme

Marks
Test of control and objective of each test (1 mark for each test of control and 1 mark
for the objective).
Recalculate sample of bonus payments. 2
Review sample of hours worked from clocking in/out record to payroll listing. 2
Vouch sample of overtime payments to overtime schedule and recalculate rate. 2
Observe employees clocking in/out to ensure work recorded is done. 2
Verify sample of new joiner details to ensure bona fide employees. 2
10

Suggested solution

Tests of control and the objective of the test

Test of control Objective of the test

Recalculate a sample of bonus payments to management by To ensure that only valid
reference to the bonus criteria. bonuses have been paid
and also that they have
been paid at the correct
rate.
For each staff grade, review a sample of hours worked from To verify that only hours
the clocking in/out records to the payroll listing. worked have been paid and
paid at the correct rate.
For a sample of overtime payments vouch staff member’s To ensure that overtime is
name and number of hours' overtime claimed to the overtime only paid where it is valid
schedule and verify the schedule has been authorised and and authorised and at the
recalculate the rate at which overtime has been paid. correct rate.
Observe employees clocking in/out to ensure that employees To ensure all work recorded
only clock in/out for themselves and are not clocking in/out for is actually done.
other employees.
For a sample of new joiners paid during the year verify the To ensure the new joiners
employee number, salary and bank details to the authorised added to payroll records
new joiner div. are bona fide employees.

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Syllabus area: C3b

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Question 19 of 25

This scenario relates to four requirements.

Electrical Co manufactures televisions and DVD and Blu-ray players. It has been trading for
six years and sells to high street retailers across the country. Electrical Co offers a two year
warranty on all products sold and includes a static provision for warranties in the financial
statements. Electrical Co operates from a head office and one small manufacturing facility.
Each of these premises is rented. The company’s year end is 30 September 20X6.

Review of current year

During the year, Electrical Co has continued to grow, albeit more quickly than in previous
years. This has meant that they needed larger manufacturing premises and so the board of
directors decided to buy a large manufacturing facility. Electrical Co has incurred costs of
$860,000 to acquire the new manufacturing facility; this amount includes the site acquisition
cost and all legal fees as well as a three year insurance plan taken out in relation to the
building.

The purchase of the new manufacturing facility was financed by a bank loan of $750,000
and was completed on 1 September 20X6. Electrical Co will vacate their rented
manufacturing facility on 1 January 20X7 and so have been able to increase production
capacity by operating from both manufacturing facilities during September 20X6. A
separate inventory count will be conducted at each manufacturing facility and it is possible
that inventory will be transferred between the two facilities on the day of the inventory
count.

The new facility has become available at an important time for Electrical Co as they are
also in the process of tendering for a contract to supply goods to one of the leading high
street retailers. Electrical Co is confident of winning the contract and has already taken out
an additional $100,000 on its bank loan and has increased production so it has sufficient
inventory available should it win the contract. The contract will be awarded on 1 December
20X6.

Wages system and staff bonus

During the year, Electrical Co introduced a new computerised wages system. Head office
staff (including management and directors) are paid a monthly salary which does not
change from one month to the next. Certain management have annual sales targets to
meet and will be paid a bonus at the year end if these sales targets are achieved. The sales
targets for each member of management are embedded within the computerised wages
system and each bonus must be recalculated and authorised prior to being paid. Sales
targets are felt to be reasonably ambitious.

Staff working in the manufacturing facility are paid on a weekly basis (40 hours per week).
They are paid one of two hourly rates depending on their staff grade. Where necessary
overtime is worked and this is paid at 1½ times the hourly rate. All overtime is authorised
and signed off prior to it being carried out, by the completion of an overtime schedule by the
manufacturing facility manager. Manufacturing staff are required to clock in and clock out at
the beginning and end of each shift. The hours recorded as worked are automatically
forwarded to the payroll department at the end of each week.

Several new staff have been employed during the year. Once employed, human resources
allocate the employee a staff number and send an authorised new joiner report div to the
payroll department which contains the employee’s staff number, salary and bank details.

All staff are paid directly into their bank account by BACS transfer.

Required

(d) Describe the substantive procedures the auditor should perdiv to confirm Electrical Co’s
directors’ emoluments.

(3 marks)

Question not answered

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11/19/2018 ACCA - AA Audit and Assurance - CBEs - 18-19: F8 - CBE Mock - 2
Marking scheme

Marks
Substantive procedures in relation to directors’ emoluments (1 mark per valid
procedure).
Vouch sample of salaries to payroll records. 1
Recalculate level of bonuses and vouch authorisation to board meeting minutes. 1
Review disclosure of note is in accordance with applicable law/accounting
1
standards.
3

Suggested solution

Substantive procedures for directors’ emoluments

Vouch a sample of salary amounts to monthly payroll records and bank statements to
ensure the amounts recorded are accurately disclosed.
Recalculate the level of bonuses awarded and vouch to board meeting minutes to
ensure amounts are accurately calculated and appropriately authorised.
Review the directors’ emoluments disclosure note to ensure it is in accordance with
applicable law and accounting standards.

Syllabus area: D4g

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11/19/2018 ACCA - AA Audit and Assurance - CBEs - 18-19: F8 - CBE Mock - 2
Question 20 of 25

This scenario relates to three requirements.

Homestores Co is a retailer which sells items such as glasses, crockery, cookware

(saucepans etc) and kitchen storage units to the general public. It has five stores across the
country. The company’s year end was 30 June 20X6.

The indivation below describes the process used by Homestores Co for its purchases.
Homestores Co does not have an internal audit department.

Ordering goods

Each store operates a re-order level system such that when the inventory reaches the re-
order level the inventory manager sends a sequentially numbered requisition div to the
purchase ledger department requesting the quantity of inventory required. The purchase
ledger clerk maintains a list of approved suppliers, but likes to use each supplier on a
rotational basis, so they place the order with the next supplier on the list after the one they
used for the previous order.

The monetary value of orders can vary considerably between $1,000 and $50,000.

The order divs are also sequentially numbered and use the same numbering system as the
requisition divs.

Goods received and invoicing

It can take between one and three weeks for inventory to arrive once the order is placed. If
goods arrive with a supplier’s goods dispatched note (GDN), the quantity on the GDN is
checked to the actual delivery and any discrepancies noted and signed by the inventory
manager. The inventory manager then forwards the GDN to the purchase ledger
department. If the supplier does not send a GDN no internal goods received note is raised.
Upon receipt of the purchase invoice from the supplier, the purchase ledger clerk matches
the invoice details back to the signed copy of the GDN received from the inventory
manager. Any differences are followed up with the supplier. The invoice is then entered into
the accounting records.

Payment

The company’s cash flow can often vary from month to month and so the purchase ledger
clerk makes a regular monthly payment to each supplier. This can mean that for some
months the company overpays the supplier whilst in other months the full balance may not
be paid.

Required

(a) As the external auditors of Homestores Co, write a report to management in respect of
the purchasing system which:

i. identifies and explains SIX deficiencies in that system

ii. provides a recommendation to address each deficiency

A covering letter is required.

Note: up to two marks will be awarded within this requirement for presentation.

(14 marks)

Question not answered

0 out of 0

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Marking scheme

Marks
Maximum 6 deficiencies (1 mark for identification and explanation and 1 mark for a
practical recommendation).
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– Limited segregation of duties (all stages done by purchase ledger dept).
– Not using supplier on supplier listing that gives best value for money. 2
– No senior authorisation of high value orders. 2
– Time delay between placing and receiving orders (stock outs). 2
– No internal GRN raised upon receipt of goods. 2
– GDN received from suppliers not checked back to original order. 2
– Supplier accounts not paid appropriately. 2
12

Report divat (2 marks – divat, deficiencies identified during the course of 2

the audit, not a list of all deficiencies, no disclosure to 3rd parties without
consent).
14

Suggested solution

Board of Directors
Homestores Co

7 September 20X6
Dear Sirs,
Audit of Homestores Co for the year ended 30 June 20X6

Please find enclosed our report to management on significant deficiencies in internal

controls which we have identified during the audit for the year ended 30 June 20X6.

The report details deficiencies in the purchases system, the implications of those
deficiencies and suggests recommendations to address the deficiencies.

(i) Deficiency (iii) Recommendation

There is limited segregation of duties The authorised requisition div should be received
with most tasks being carried out by or the order placed by someone other than the
the purchase ledger clerk. purchase ledger clerk. This could perhaps be
done by the office manager.
There is no "second pair of eyes" in
the process so any mistakes made by
the purchase ledger clerk are unlikely
to be identified quickly, if at all. -This
also gives scope for fraudulent
behaviour.
The purchase ledger clerk does not All suppliers on the approved listing should be
review the authorised supplier listing to reviewed to determine which supplier can offer
identify the supplier who is best placed goods at the lowest prices.
to fulfil the order; rather they simply It may also be worthwhile to consider establishing
use the supplier who is next on the list. a central buying department for all 5 stores in
order to benefit from bulk purchasing discounts.
Homestores may not be purchasing
items at the best price as the next
supplier on the list may not offer the
best price for the goods which are
required.
Order values can vary from $1,000 to A second level of authorisation should be required
$50,000 but there is no process in before high value orders can be placed. For
place where high value orders require example the office or store manager may need to
a second level of authorisation. authorise purchase orders over $20000.

Errors in the requisition div leading to

very high order amounts would not be
identified. Also high value items could
be ordered when not required/not
bona fide business expenditure.
There can sometimes be a significant The re-order levels should be reviewed on a
time delay (up to three weeks) quarterly basis in view of how frequently inventory
between placing the order and is turned over and the lead time for deliveries.
receiving the goods. It may also be worthwhile to consider setting up an

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inventory transfer system whereby inventory can
If the re-order levels are not set so that be obtained from the other stores.
they build in this lead time then it is Lead times with suppliers should also be
possible that the business may suffer renegotiated in the hope that they can be reduced.
from stock outs and run out of
inventory before the delivery arrives.
The company does not raise a goods The inventory manager should complete a GRN
received note (GRN) when goods are for each item of inventory delivered. The GRNs
delivered but rather relies on the hope should be sequentially numbered and all invoices
that the supplier has sent goods with a subsequently received checked back to the GRN
goods despatched note (GDN). to ensure the company is only invoiced for goods it
has received.
Homestores does not necessarily have
a complete record of all goods
received, this may mean that
queries/errors are difficult to resolve
when invoices are received and also
the company cannot necessarily verify
that they have only been invoiced for
goods actually received.
Where GDN's are received from Having established the system of GRNs above,
suppliers the details and quantities are the inventory manager should forward a copy of
not matched back to the original order. the GRN to the person who places the order so
that they can vouch the details back to the original
Goods could be accepted which have div to check that the goods were required.
not been ordered and are not required,
thus creating unnecessary liabilities for
the business.
Regular monthly amounts are paid to Homestores Co should produce monthly income
each supplier which may mean that and expenditure and also cash flow budgets to try
suppliers are either underpaid or to estimate when cash will need to be paid to
overpaid during any particular month. suppliers and ensure that monies will be
available. Where there is an estimated shortfall
Overpaying suppliers is not an efficient they could try to limit their purchases or arrange
use of the company’s already for a short term loan or overdraft if the purchases
stretched cash flow. Underpaying are critical to the business.
suppliers may lead to late Homestores Co should also consider transferring
interest/penalties being incurred and excess inventory between stores particularly if one
loss of supplier goodwill. store is not able to sell particular product lines very
quickly.

Please note that this report only addresses the deficiencies noted during the normal course
of our audit procedures. We have not conducted a full review of internal controls and it is
therefore not a comprehensive list of all deficiencies.

This report is for the use of management only and should not be disclosed to third parties
without our prior consent.

Yours faithfully

A N Auditor

Note: the requirement only stated six deficiencies; the others are included for revision
purposes.

Syllabus area: C4b

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Question 21 of 25

This scenario relates to three requirements.

Homestores Co is a retailer which sells items such as glasses, crockery, cookware

(saucepans etc) and kitchen storage units to the general public. It has five stores across the
country. The company’s year end was 30 June 20X6.

The indivation below describes the process used by Homestores Co for its purchases.
Homestores Co does not have an internal audit department.

Ordering goods

Each store operates a re-order level system such that when the inventory reaches the re-
order level the inventory manager sends a sequentially numbered requisition div to the
purchase ledger department requesting the quantity of inventory required. The purchase
ledger clerk maintains a list of approved suppliers, but likes to use each supplier on a
rotational basis, so they place the order with the next supplier on the list after the one they
used for the previous order.

The monetary value of orders can vary considerably between $1,000 and $50,000.

The order divs are also sequentially numbered and use the same numbering system as the
requisition divs.

Goods received and invoicing

It can take between one and three weeks for inventory to arrive once the order is placed. If
goods arrive with a supplier’s goods dispatched note (GDN), the quantity on the GDN is
checked to the actual delivery and any discrepancies noted and signed by the inventory
manager. The inventory manager then forwards the GDN to the purchase ledger
department. If the supplier does not send a GDN no internal goods received note is raised.
Upon receipt of the purchase invoice from the supplier, the purchase ledger clerk matches
the invoice details back to the signed copy of the GDN received from the inventory
manager. Any differences are followed up with the supplier. The invoice is then entered into
the accounting records.

Payment

The company’s cash flow can often vary from month to month and so the purchase ledger
clerk makes a regular monthly payment to each supplier. This can mean that for some
months the company overpays the supplier whilst in other months the full balance may not
be paid.

Required

(b) Describe THREE examples of specific tasks an internal audit department could
undertake which would benefit Homestores Co.

(6 marks)

Question not answered

0 out of 0

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Marking scheme

Marks
Tasks an internal audit department could perdiv to benefit Homestores Co – 2
marks per well-explained point, must be relevant to the scenario.
– Implement central buying department. 2
– Monitor perdivance of each store, implement measures for improvement. 2
– VFM audits. 2
6

Suggested solution

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11/19/2018 ACCA - AA Audit and Assurance - CBEs - 18-19: F8 - CBE Mock - 2
Examples of tasks the internal audit department could undertake

1. Implement a central buying department for all 5 stores; negotiate improved deals with
suppliers in terms of delivery lead times and price to supply all 5 stores.
2. Monitor the perdivance of each store in terms of analysing the variances between the
profit margins for each store, levels of inventory theft/obsolescence and implement
procedures to improve these.
3. Perdiv a value for money audit focusing on economy, efficiency and effectiveness.

Syllabus area: A6

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11/19/2018 ACCA - AA Audit and Assurance - CBEs - 18-19: F8 - CBE Mock - 2
Question 22 of 25

This scenario relates to four requirements.

Walton Co manufactures computer equipment. Its year end was 30 September 20X6. You
are the audit manager and the year end audit is in progress. The following three matters
have been brought to your attention.

(i) Provision for warranties

Walton Co's financial statements have traditionally included a provision for warranties of
$275,000, however the audit senior has noted that $100,000 of this relates to computers
which the company no longer manufactures.

This has been discussed with Walton Co's directors who have stated that they want to
maintain the full provision in the financial statements in case there are any new claims that
relate to these computers, but also because they have started to manufacture a new range
of computers and there will undoubtedly be some initial teething problems with their
reliability.

The audit senior has not yet considered the adequacy of the warranty provision relating to
computers which are still manufactured.

(ii) Receivables

Walton Co's receivables ledger is made up of a relatively large number of medium-sized

balances, so a receivables circularisation was conducted at the year end. Two of the
responses have raised concerns. One customer, Acton Co, has highlighted that the balance
stated on the circularisation included goods which were not received until October 20X6,
while a second customer, Barton Co, identified an outstanding invoice which they claim to
have already paid. Finally, another of Walton's customers, Syan Co, went into liquidation
shortly after the year end, and no allowance has been made for this amount in the financial
statements.

(iii) Other indivation

The audit senior has also just reviewed the other indivation to be included in Walton Co's
annual report and found several inconsistencies between the financial ratios to be
published in the annual report and those the audit team calculated based on the figures
stated in the draft financial statements for the year end. The financial ratios to be included
in the annual report paint a more optimistic picture of the company's liquidity than those
calculated based on the figures in the draft financial statements.

ISA 500 Audit Evidence states that the auditor should design and perdiv audit procedures in
such a way as to enable the auditor to obtain sufficient appropriate audit evidence.

Required

(a) Explain the meaning of the phrase sufficient appropriate audit evidence.

(4 marks)

Question not answered

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Marking scheme

Marks
Sufficient appropriate audit evidence
Definition of sufficient 1
Definition of appropriate 1
Explanation of relevant 1
Explanation of reliable 1
4

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Suggested solution

Sufficient appropriate audit evidence

Having 'sufficient' audit evidence relates to the quantity of evidence collected by the auditor.
This should be adequate for the auditor to reach a conclusion on the items tested and
express an opinion on the financial statements as a whole. Whether or not evidence is
sufficient depends on the risk of material misstatement.

Audit evidence will be 'appropriate' if is relevant to what the auditor is trying to test and has
been obtained from a reliable source. Evidence will be relevant if it supports the particular
financial statement assertion, for example the completeness of payables.

Evidence can be obtained from a variety of sources but evidence is most reliable when it is
either auditor generated or comes from an external source.

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11/19/2018 ACCA - AA Audit and Assurance - CBEs - 18-19: F8 - CBE Mock - 2
Question 23 of 25

This scenario relates to four requirements.

Walton Co manufactures computer equipment. Its year end was 30 September 20X6. You
are the audit manager and the year end audit is in progress. The following three matters
have been brought to your attention.

(i) Provision for warranties

Walton Co's financial statements have traditionally included a provision for warranties of
$275,000, however the audit senior has noted that $100,000 of this relates to computers
which the company no longer manufactures.

This has been discussed with Walton Co's directors who have stated that they want to
maintain the full provision in the financial statements in case there are any new claims that
relate to these computers, but also because they have started to manufacture a new range
of computers and there will undoubtedly be some initial teething problems with their
reliability.

The audit senior has not yet considered the adequacy of the warranty provision relating to
computers which are still manufactured.

(ii) Receivables

Walton Co's receivables ledger is made up of a relatively large number of medium-sized

balances, so a receivables circularisation was conducted at the year end. Two of the
responses have raised concerns. One customer, Acton Co, has highlighted that the balance
stated on the circularisation included goods which were not received until October 20X6,
while a second customer, Barton Co, identified an outstanding invoice which they claim to
have already paid. Finally, another of Walton's customers, Syan Co, went into liquidation
shortly after the year end, and no allowance has been made for this amount in the financial
statements.

(iii) Other indivation

The audit senior has also just reviewed the other indivation to be included in Walton Co's
annual report and found several inconsistencies between the financial ratios to be
published in the annual report and those the audit team calculated based on the figures
stated in the draft financial statements for the year end. The financial ratios to be included
in the annual report paint a more optimistic picture of the company's liquidity than those
calculated based on the figures in the draft financial statements.

Required

(b) (i) Describe substantive procedures the auditor should perdiv to obtain sufficient and
appropriate audit evidence in relation to the provision for warranties.

(6 marks)

Question not answered

0 out of 0

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Marking scheme

Marks
Provision for warranties
Review warranty period offered for products which are no longer manufactured 1
Review warranty claims in last 12 months for products no longer manufactured 1
Consider whether the manufacturing process for the new product is likely to lead to
1
claims
Inspect the warranty agreement for the new product to determine the extent of the
1
liability
Consider assumptions underlying warranty provision for other items 1

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11/19/2018 ACCA - AA Audit and Assurance - CBEs - 18-19: F8 - CBE Mock - 2
Analytical procedures 1
Vouch claims in post year end period to determine if warranty is sufficient 6

Suggested solution

Provision for warranties

Review the terms of the warranty for products which are no longer manufactured to
determine the length of the time for which the warranty is still valid for such products
in order to establish whether future claims can be brought.
Select a sample of claims where warranty repair expenses have been incurred within
the last 12 months and identify the proportion that relates to products no longer
manufactured to determine whether the $100,000 provision is still required.
Discuss with Walton Co's management the liability for any repairs that might be
necessary to the new product range (for example, will the company continue to offer
the warranty on the same terms?).
Investigate whether the manufacturing or design process for the new product range is
expected to lead to increased faults which could lead to warranty claims (for example,
has there been a reduction in the quality of materials used in their manufacture?).
Obtain a copy of the warranty agreement in place for the new product range and
inspect for any obvious signs of changes to the company's liability (credit should be
awarded if the use of an auditor's expert is suggested).
Ask the management of Walton Co how they arrived at their estimate of likely
warranty repair expenses and test any underlying assumptions.
Perdiv analytical procedures on warranty repair expenses for current products to
identify trends: for example, compare year on year expenses for current products to
determine if the amount is rising or falling and compare for consistency with year on
year sales of current products.
Obtain a sample of repair expenses and sales of current products in the new year to
determine if the same trends are continuing.

Note. Only six procedures were required.

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Question 24 of 25

This scenario relates to four requirements.

Walton Co manufactures computer equipment. Its year end was 30 September 20X6. You
are the audit manager and the year end audit is in progress. The following three matters
have been brought to your attention.

(i) Provision for warranties

Walton Co's financial statements have traditionally included a provision for warranties of
$275,000, however the audit senior has noted that $100,000 of this relates to computers
which the company no longer manufactures.

This has been discussed with Walton Co's directors who have stated that they want to
maintain the full provision in the financial statements in case there are any new claims that
relate to these computers, but also because they have started to manufacture a new range
of computers and there will undoubtedly be some initial teething problems with their
reliability.

The audit senior has not yet considered the adequacy of the warranty provision relating to
computers which are still manufactured.

(ii) Receivables

Walton Co's receivables ledger is made up of a relatively large number of medium-sized

balances, so a receivables circularisation was conducted at the year end. Two of the
responses have raised concerns. One customer, Acton Co, has highlighted that the balance
stated on the circularisation included goods which were not received until October 20X6,
while a second customer, Barton Co, identified an outstanding invoice which they claim to
have already paid. Finally, another of Walton's customers, Syan Co, went into liquidation
shortly after the year end, and no allowance has been made for this amount in the financial
statements.

(iii) Other indivation

The audit senior has also just reviewed the other indivation to be included in Walton Co's
annual report and found several inconsistencies between the financial ratios to be
published in the annual report and those the audit team calculated based on the figures
stated in the draft financial statements for the year end. The financial ratios to be included
in the annual report paint a more optimistic picture of the company's liquidity than those
calculated based on the figures in the draft financial statements.

Required

(b) (ii) Describe substantive procedures the auditor should perdiv to obtain sufficient and
appropriate audit evidence in relation to receivables.

(6 marks)

Question not answered

0 out of 0

This question has not yet been scored.

Marking scheme

Marks
Receivables
Confirm date goods were despatched to Acton 1
Determine whether there is any signed proof that goods were received 1
Confirm date of payment by Barton and vouch to cash book 1
Review receivables ledger to determine if payment allocated to wrong account 1
Confirm liquidation of Syan 1
Discuss the need for the allowance with the directors 1
6
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Suggested solution

Receivables

Identify the disputed goods from goods despatched records and confirm the date of
despatch from Walton Co to determine whether it was pre-year end.
Establish whether there is any proof of when the goods were received by Acton Co
and obtain a copy of the courier’s documentation to determine if this should be treated
as a pre-year end despatch (this could also be used to determine if this is an anomaly,
or is an indication that further cases of disputed dispatches may exist).
If the goods should have been recognised as a receivable balance, confirm whether
the inventory despatched to Acton Co was excluded from Walton's closing inventory
balance and included in revenue.
Identify the relevant outstanding invoice and confirm the date that Barton Co claims to
have paid it by reviewing Walton's cash book for receipt of the sum.
Review the receivables ledger to determine if the amount was received but credited to
the wrong receivable account.
Confirm the liquidation of Syan Co by reference to a media search or other sources
(such as Companies House or correspondence from the liquidator).
Obtain a copy of the receivables allowance and confirm that Syan Co is included.
Discuss with the management of Walton Co the need for an allowance for the Syan
Co receivable.

Note. Only 6 procedures were required.

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11/19/2018 ACCA - AA Audit and Assurance - CBEs - 18-19: F8 - CBE Mock - 2
Question 25 of 25

This scenario relates to four requirements.

Walton Co manufactures computer equipment. Its year end was 30 September 20X6. You
are the audit manager and the year end audit is in progress. The following three matters
have been brought to your attention.

(i) Provision for warranties

Walton Co's financial statements have traditionally included a provision for warranties of
$275,000, however the audit senior has noted that $100,000 of this relates to computers
which the company no longer manufactures.

This has been discussed with Walton Co's directors who have stated that they want to
maintain the full provision in the financial statements in case there are any new claims that
relate to these computers, but also because they have started to manufacture a new range
of computers and there will undoubtedly be some initial teething problems with their
reliability.

The audit senior has not yet considered the adequacy of the warranty provision relating to
computers which are still manufactured.

(ii) Receivables

Walton Co's receivables ledger is made up of a relatively large number of medium-sized

balances, so a receivables circularisation was conducted at the year end. Two of the
responses have raised concerns. One customer, Acton Co, has highlighted that the balance
stated on the circularisation included goods which were not received until October 20X6,
while a second customer, Barton Co, identified an outstanding invoice which they claim to
have already paid. Finally, another of Walton's customers, Syan Co, went into liquidation
shortly after the year end, and no allowance has been made for this amount in the financial
statements.

(iii) Other indivation

The audit senior has also just reviewed the other indivation to be included in Walton Co's
annual report and found several inconsistencies between the financial ratios to be
published in the annual report and those the audit team calculated based on the figures
stated in the draft financial statements for the year end. The financial ratios to be included
in the annual report paint a more optimistic picture of the company's liquidity than those
calculated based on the figures in the draft financial statements.

Required

(b) (iii) Describe the further actions the auditor should take to confirm the inconsistencies
between the financial statements and the other indivation, and describe the impact on the
auditor’s report if the inconsistencies are not resolved.

(4 marks)

Question not answered

0 out of 0

This question has not yet been scored.

Marking scheme

Marks
Other indivation
Discuss the inconsistency with management 1
Request that the other indivation be corrected 1
If refused, communicate with those charged with governance 1
Include an ‘other indivation’ paragraph in the auditor’s report 1
4

Suggested solution

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Other indivation

Discuss the inconsistency between the other indivation and the financial statements
with management in order to determine whether the auditor’s understanding of the
entity is correct.
Request that the other indivation be corrected.
If management refuse to correct the other indivation, communicate with those charged
with governance asking that the correction be made.
The auditor's report should include a separate section with the heading 'other
indivation' and due to the inconsistencies the section should describe the uncorrected
misstatement of the other indivation. The auditor's opinion is not modified in this
regard.

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