ACCA Paper F8 Audit and Assurance Mock Exam Question Paper Time allowed
3 hours and 15 minutes
Instructions: Take a few moments to review the notes on the inside of this page titled, 'Get into good exam habits now!' before attempting this exam.
DO NOT OPEN THIS PAPER UNTIL YOU ARE READY TO START UNDER EXAMINATION CONDITIONS
Get into good exam habits now! Take a moment to focus on the right approach for this exam.
Effective time management
Watch the clock, allocate 1.95 minutes to each mark and move on if you get behind.
Take a few moments to think what the requirements are asking for and how you are going to answer them.
Remember one mark is usually allocated for each valid point you give in a discursive question.
Effective planning
This paper is in exactly the same format as the real exam. You should read through the paper and plan the order in which you will tackle the questions.
Read the requirements carefully; focus on mark allocation, question words (see below) and potential overlap between requirements.
Identify and make sure you pick up the easy marks available in each question.
Effective layout
With written elements try and make a number of distinct points using headings and short paragraphs. You should aim to make a separate point for each mark.
Ensure that you explain the points you are making, ie why is the point a deficiency in internal controls or an audit risk?
Give yourself plenty of space to add extra lines as necessary; it will also make it easier for the examiner to mark.
Common terminology Advise Analyse Calculate/compute Compare and contrast Define Describe Discuss Distinguish Evaluate Explain Identify Interpret Justify List Prepare Recommend Summarise
To counsel, inform or notify Examine in detail the structure of To ascertain or reckon mathematically Show the similarities and/or differences Give the exact meaning of Communicate the key features of To examine in detail by argument Highlight the differences between To appraise or assess the value of Make clear or intelligible/state the meaning of Recognise, establish or select after consideration Process information to explain its meaning To produce reasons in support of State short pieces of information on separate lines To make or get ready for use To advise on a course of action To express the most important facts of
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Section A – All FIFTEEN questions are compulsory and MUST be attempted Each question is worth 2 marks The following scenario relates to questions 1 – 5. You are an audit manager of Banham & Co and have just been assigned the audit of Globe Co (Globe), a company which runs a chain of travel agents. Mrs Hales is the audit engagement partner for Globe. She recently attended a planning meeting with Globe's finance director, Mr Chalmers, where the following matters were discussed. One of the accountants in Mr Chalmers' team recently left the company and has not been replaced. Mr Chalmers asked Mrs Hales if one of the audit team members could prepare Globe's financial statements. Mr Chalmers also informed Mrs Hales that one of Globe's major shareholders died recently and left his entire shareholding to his old friend, Mr White, who is also a partner in Banham & Co. Mr Chalmers stated that he was delighted that his niece, Amanda, had been offered a training contract with Banham & Co. He was pleased that she would receive her training with a firm that had such a good reputation. Finally the audit fee was agreed at $45,000. The gross recurring fee income of Banham & Co for the last financial year was $276,000 and Globe now represents the largest audit fee within Banham & Co. A substantial proportion of last year's audit fee is still outstanding and Mrs Hales is concerned that payment of this fee could be at risk if the current year audit does not go smoothly. 1
From a review of the information above, your audit assistant has highlighted some of the potential risks to independence in respect of the audit of Globe. (1) (2) (3) (4)
Audit engagement team member to prepare Globe's financial statements Shares in Globe have been inherited by Mr White Overdue fees Globe's audit fee is significant to Banham & Co
Which of the following options correctly identifies the valid threats to independence and allocates those threats to the appropriate categories? A B C D 2
Intimidation
Self-interest
Self-review
(3) only (3) only (4) only (2) and (4)
(2) and (3) (2), (3) and (4) (3) only (1), (2) and (3)
(1) and (2) (1) only (1) and (2) (1) only
In relation to the overdue audit fees: Which of the following safeguards should be implemented in order to comply with ACCA's Code of Ethics and Conduct? A
Banham & Co should discuss the status of overdue account with their credit control department.
B
The balance of the overdue fees should be assessed to determine whether it is material to either Globe's prior year or current year financial statements.
C
No further audit work should be carried out until the overdue fees are paid.
D
A pre-issuance review should be obtained from an independent reviewer in order to oversee conclusions based on matters of judgement.
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3
In relation to the shares that have been inherited by Mr White: Which of the following safeguards should be implemented in order to comply with ACCA's Code of Ethics and Conduct?
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A
An independent review partner should be assigned to the audit in order to oversee conclusions based on matters of judgement.
B
Banham & Co must ensure that Mr White has no access to the audit working papers for Globe's audit and that he has no involvement with the audit engagement.
C
Banham & Co should inform the directors of Globe that they cannot continue with the audit engagement and should recommend another audit firm to conduct Globe's audit.
D
Mr White should dispose of the shareholding in Globe at the earliest opportunity.
Mr Chalmers' niece, Amanda, has recently been offered a training contract with Banham & Co. As part of her induction into the firm she has been learning about the importance of audit planning and the need to establish both an audit strategy and an audit plan. Which of the following is NOT a matter that auditors should consider in establishing an overall audit strategy? A B C D
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The nature, timing and extent of planned risk assessment procedures Industry-specific financial reporting requirements that may affect the audit of Globe The financial reporting framework adopted by Globe Globe's timetable for reporting its results and financial statements to its shareholders
Amanda has also been trying to understand the difference between the types of issues that should be discussed internally within the audit team at Banham & Co and the matters that would be discussed with Globe's Board. Which of the following would Banham & Co be required to communicate to those charged with governance of Globe, in accordance with ISA 260 Communication with those charged with governance? (1) (2) (3) (4)
Banham & Co's responsibilities in relation to the financial statements The planned scope and timing of the audit Any restrictions of Banham and Co's liability Any material deficiencies of Globe's internal controls
A B C D
(1) and (2) (3) and (4) (1), (2) and (4) (1), (2), (3) and (4)
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The following scenario relates to questions 6 – 10. You are an audit senior in SPFM & Co and are working on the audit of AB Co, a food manufacturing company, for the year ended 30 September 20X5. The audit fieldwork is progressing well and your audit manager has recently visited you and your team at the client's premises, in order to review the audit work which has been conducted to date. The audit manager has reviewed information relating to the documentation of AB Co's internal controls, as well as to the substantive procedures your team has performed. He has left a list of outstanding points which you and your team need to review, together with some ideas to guide you through the finalisation and overall review stage of the audit. 6
The audit manager has reviewed the notes on the internal controls relating to the purchases system, and has noted that there is some confusion about the different types of computer controls, especially application controls. Which of the following is NOT an application control relating to the purchases cycle?
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A
One-for-one matching of purchase invoices to goods received notes before processing of payment
B
Use of hash totals to reconcile the inventory system input with the payables system
C
Manual checks on invoices for evidence of authorised staff initials confirming that goods received have been inspected for quality
D
Segregation of duties, ensuring inventory records are reviewed by a person independent of those responsible for the receipt and control of goods
The audit manager has also reviewed the substantive procedures performed in relation to trade receivables. While he is reasonably happy that you have gathered sufficient appropriate audit evidence, he has raised a review point asking you to link each procedure performed to the financial statements assertion you are testing, so that it is clearer for his review. Which of the following substantive procedures provides assurance over the valuation of trade receivables?
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A
Matching the total of the aged receivables listing to the sales ledger control account
B
Comparing receivables turnover and receivables days with the previous year
C
Tracing a sample of shipping documentation to sales invoices and into the sales and receivables ledger
D
Verifying that price lists and terms of trade are documented, authorised and communicated
The audit manager has also left you some questions to consider as you move on to the finalisation and overall review stage of the audit. Which of the following options describe purposes of analytical procedures carried out during the overall review of the financial statements? (1)
To determine whether the financial statements adequately reflect the information and explanations obtained during the audit
(2)
To assess whether the financial statements are consistent with the auditor's knowledge of the entity's and its environment
(3)
To determine the effect on the financial statements of the aggregate of uncorrected misstatements identified during the course of the audit and the preceding period's audit
(4)
To obtain explanations for significant variances from the prior year
A B C D
(1) and (2) only (3) and (4) only (1), (2) and (3) (1), (2), (3) and (4)
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Which of the following correctly describe the auditor's responsibilities between the end of the reporting period and the date the financial statements are issued? (1)
Between the end of the reporting period and the date of the auditor's report, auditors have a responsibility to perform procedures to identify subsequent events that may require amendment or disclosure to the financial statements.
(2)
Between the date of the auditor's report and the date the financial statements are issued, auditors do not have a duty to perform procedures to identify subsequent events. If any new information comes to their attention that may have caused the auditor to amend the auditor's report, this will be considered during the following year's audit.
(3)
Between the date of the auditor's report and the date the financial statements are issued, auditors do not have a duty to perform procedures to identify subsequent events, but they should act upon any new information that comes to their attention, if it may have caused the auditor to have to amend the auditor's report.
(4)
After the financial statements are issued, the auditors have no responsibility to perform procedures to identify subsequent events. If any new information comes to their attention that may have caused the auditor to amend the auditor's report, this will be considered during the following year's audit.
A B C D
(1) and (2) (3) and (4) (1) and (3) (2) and (4)
Your manager has also noted a specific issue and has left a note for you to consider: 'During your detailed testing you recorded that legal action has been brought against AB Co by customers who suffered food poisoning after consuming their products. You note that management believes it is more likely than not that AB Co will be required to pay damages, but the amount of damages payable cannot be estimated reliably at present and so a contingent liability has merely been disclosed in the financial statements. This needs to be investigated further.' 10
Which of the following actions would it NOT be appropriate to take regarding this matter? A
Request written representations from management that all known actual or possible litigation has been accounted for and disclosed appropriately
B
Communicate directly with AB Co's external legal advisors to corroborate management's assessment of the likely outcome
C
Request management to disclose the matter as a material uncertainty related to going concern
D
Review board meeting minutes
The following scenario relates to questions 11 – 15. You are the audit manager of Figures & Co and are reviewing the key issues identified in the files of two audit clients. The first audit client is New Vision Industries (New Vision) which designs and manufactures spectacles. New Vision's year end was 31 December 20X1 and its draft financial statements show a profit before tax of $6 million. The fieldwork stage for this audit has largely been completed but there are a few outstanding issues. On 1 October 20X1, New Vision began the commercial production of a new range of lightweight frames which have been proven to keep their shape regardless as to how roughly they are treated. Up to 30 September 20X1, the company had correctly capitalised development costs of $2 million relating to this project. The directors believe that the new frames will generate revenue over the next three years, with 60% of the revenue in year 1, 20% in year 2 and 20% in year 3. The financial statements show development costs at a carrying amount of $2 million.
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Which TWO of the following audit procedures are the MOST RELEVANT to help the auditor form a conclusion about whether New Vision's 20X1 financial statements are misstated? (1)
Obtain a breakdown of the $2 million development costs and vouch a sample of costs to invoices in order to determine whether they satisfy the criteria for capitalisation in accordance with IAS 38 Intangible assets
(2)
Recalculate the amortisation charge for the period and consider whether it is material
(3)
Review sales of the lightweight frame made after the reporting period, to determine whether the directors' assessment of the sales pattern for the next three years is reasonable
(4)
Review the disclosure note relating to the development costs in the financial statements in order to consider whether it complies with IAS 38 Intangible assets
A B C D
(1) and (2) (1) and (3) (2) and (3) (2) and (4)
The audit report is due to be signed in the next week or so, and you have be unable to resolve a disagreement with the directors concerning the development costs. Which of the following options correctly summarises the impact on the auditor's report if the issue remains unresolved? A B C D
Unmodified opinion Unmodified opinion with emphasis of matter paragraph Qualified 'except for' due to insufficient appropriate evidence Qualified 'except for' due to material misstatement
The second audit client is Occasion Clothing Co (Occasion). Occasion manufactures high quality suits, dinner jackets and dresses and has a year end of 31 January 20X2. The audit fieldwork is almost completed and the financial statements show a draft profit before tax of $15 million. 13
The majority of Occasion's revenue comes from sales to expensive fashion boutiques in the country's capital city. However this year the company has for the first time made a small number of cash sales. The audit senior has not been able to find any supporting documentation to substantiate the cash sales for the year. Which of the following statements BEST describes the action the auditor should take in relation to cash sales? A
Advise the finance director that they plan to express a qualified opinion due to material misstatement
B
Include the issue relating to cash sales in the report they issue to those charged with governance
C
Discuss the likely amount of cash sales that will be generated next year with the directors
D
Recommend a system of internal controls that Occasion should implement in relation to cash sales
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Occasion also has one credit customer, AJ Co, which had a balance on its sales ledger account of $9 million at 31 January 20X2. This balance was selected as part of Figures & Co receivables circularisation and a response was receiving confirming the balance owed. However the results of other audit procedures have revealed that no amounts have been received in relation to the outstanding debt in the three months since the year end. Furthermore the audit senior has noted from the minutes of the February 20X2 Board meeting that AJ Co has contacted Occasion to explain that their business is in serious financial difficulty. 14
After a long discussion with the audit partner concerning this issue, you feel that if the debt due by AJ Co is not recovered then this could have a significant impact on Occasion's ability to continue as a going concern. Which TWO of the following audit procedures would be most effective in assessing whether or not Occasion is a going concern?
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(1)
Obtain a written representation from management confirming that they consider it appropriate to prepare Occasion's financial statements using the going concern basis.
(2)
Agree the balance owed by AJ Co back to the original invoices and goods despatched notes.
(3)
Review the cash flow forecasts prepared by management to determine whether any amounts have been forecast to be received from AJ Co and the impact these have on overall cash flow.
(4)
Review the minutes of Board meetings held post year end to determine any actions that have been taken to secure additional finance.
A B C D
(1) and (3) (1) and (4) (2) and (3) (3) and (4)
Occasion's directors have now agreed to include disclosures in the financial statements of significant doubts over going concern, however they will not make any allowance or write off in relation to AJ Co's debt. Based on the above information which of the following options correctly summarises the impact of the issue relating to AJ Co on the auditor's report? A B C D
Audit opinion
Disclosure in the auditor's report
Qualified Adverse Disclaimer Qualified
Emphasis of matter paragraph Material uncertainty relating to going concern paragraph Material uncertainty relating to going concern paragraph Key audit matters paragraph (30 marks) End of Section A
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Section B – All THREE questions are compulsory and MUST be attempted 16 All-parts Motor Company All-parts Motor Company (All-parts), is a manufacturer that makes components which are used in the production of motor cars and motorbikes. It operates from a single production facility which operates 24 hours a day, 7 days a week and has a warehouse where the company's raw materials and finished goods are stored. You are an audit senior working for HKW Co and are planning the audit of All-parts for the year ended 31 May 20X2. As part of your planning procedures you have obtained the following information about the arrangements for the year-end inventory count. The warehouse manager will supervise the inventory count and will hold a staff briefing on the morning of the count. The counters will be given blank sheets of paper to record the number of each inventory line counted, and they should return these sheets to the warehouse manager at the end of the count. On counting each item, the counters, who work in the warehouse department, will be requested to mark the quantity of each item on the blank sheet. There will be a limited number of staff available on the day of the count, so staff will count each area of the warehouse alone. Any items that appear to be damaged are marked with a red pen and noted on the counter's sheet. These will be valued separately by the warehouse manager. During the inventory count All-parts is scheduled to take delivery of a large order of raw materials. Production will also continue and raw materials and finished goods will be moved from the warehouse to the production facility, which is unavoidable as there is a significant customer order due out on the last day of the year. On completion of the inventory count, the warehouse manager will collect the sheets from the counters and make any necessary changes on the inventory ledger. Required: (a)
International Standard on Auditing 300 Planning an audit of financial statements sets out the auditor's responsibility to plan an audit of financial statements. Describe the objectives of planning the audit.(5 marks)
(b)
In respect of the inventory count arrangements of All-parts: (i) (ii) (iii)
Identify and explain FIVE deficiencies; Explain the possible implication of each deficiency; Provide a recommendation to address each deficiency.
Note. A covering letter is NOT required. (c)
(d)
(15 marks)
You are also considering using audit software as part of your substantive testing of the inventory ledger of All-parts. (i)
Explain TWO difficulties of using audit software.
(2 marks)
(ii)
List FOUR audit procedures that you can program into your audit software for the inventory system at All-parts and state the reason for each procedure. (4 marks)
All-parts is intending to establish an internal audit department. In particular the Board is keen for the internal audit department to review and test key controls over the main transaction cycles. However, it is uncertain whether they should recruit staff for a new internal audit team or outsource the internal audit work, possibly to your firm of accountants. Explain FOUR advantages of outsourcing internal audit work.
(4 marks) (Total: 30 marks)
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17 TYN Co (a)
The overall objective of the external audit is to provide an opinion on whether or not the financial statements are free from material misstatements. Explain the concept of materiality and discuss the impact that it has on the external audit.
(4 marks)
TYN Co (TYN) operates five jewellery shops which sell designer jewellery and watches. Each shop has a small workshop which also produces bespoke items of jewellery (which are sold in the shops) and carries out watch and jewellery repairs. Four of the shops are owned by TYN, and the fifth, which was acquired during the year, is rented. You are the audit manager of Marne & Co and you are planning the audit of TYN who financial year end in 31 December 20X1. You attended a planning meeting with the finance director and engagement partner where the following information was discussed. During the year TYN introduced a new accounting system. The old and new systems were not run in parallel as the finance director felt that it would add too much to the workload of the accounts department, which is already extremely busy. The Board of TYN also signed a rental agreement to rent the premises of a fifth shop. The new accounting system did not have a separate nominal ledger code for this, so the monthly rental costs are being recorded in the same nominal ledger code as the other four shops. Each shop has a workshop where orders for bespoke items of jewellery are produced and repairs to watches and other jewellery items are carried out. At any one time, each of the shop premises is likely to hold several precious gemstones (such as diamonds), jewellery owned by customers are awaiting repairs, as well as the designer jewellery and watches which are for sale. The finance director is proposing to value the inventory for the purposes of the year-end financial statements. In September 20X1 the Board of TYN introduced sales targets for each of the shop managers in order to encourage them to maximise sales in the lead up to Christmas. Where sales targets for the quarter from October to December 20X1 were met the shop managers would be paid a bonus in January 20X2. At the same time the Board undertook a review of the sales performance for each shop assistant. Unfortunately, they identified four sales assistants who had performed poorly over the year and a decision was made to make them redundant. The sales assistants were told in December that they would be made redundant and that their redundancy payment would be made in January 20X2. Required: (b)
Using the information provided, identify and describe SIX audit risks, and explain the auditor's response to each risk, in planning the audit of TYN Co. (12 marks)
(c)
Describe substantive procedures you should perform to obtain sufficient appropriate evidence in relation to the redundancy provision at the year end. (4 marks) (Total: 20 marks)
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18 DRS Co DRS Co (DRS) is a manufacturing company which produces household items such as kettles and toasters, which it then sells to a national retailer. In the past it has operated from one production facility and one warehouse, but has recently enjoyed significant growth in its operations and the Board decided to acquire a second production facility. DRS has a year end of 30 September 20X2. The new production facility was acquired on 1 January 20X2 and, consistent with its accounting policy, DRS intends to have an independent valuer conduct a valuation of all of its land and buildings at the year end. The significant growth enjoyed by DRS during the year has required it to employ a number of extra staff, most notably in the second production facility but there have also been two appointments to the team in the head office. The Board felt that this was an ideal time to rationalise its internal control systems and subsequently introduced a new computerised wages system. You are the audit senior for DRS and, following a visit once the new system was implemented, have documented the system which operates as follows. 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. Staff working in the manufacturing plant 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 plant manager. Manufacturing staff are required to clock in and clock out and 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. As noted above, several new staff have been employed during the year. Once employed, human resources allocates the employee a staff number and send an 'authorised new joiner report form' to the payroll department, which contains the employee's staff number, salary and bank details. All staff are paid directly in to their bank account by BACS transfer. You will shortly return to DRS to test the internal controls in the wages system. Required: (a)
Recommend FIVE tests of control you would carry out on the wages system of DRS, and explain the objective of each test. (10 marks) During the final audit you intend to perform substantive procedures on both property, plant and equipment and payroll.
Required: (b)
Describe SIX substantive procedures you should perform during the final audit to confirm DRS' payroll expense. (6 marks)
(c)
Describe FOUR substantive procedures you should perform during the final audit in relation to the valuation and rights and obligations of DRS' property, plant and equipment. (4 marks) (Total: 20 marks) End of Section B
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Student self-assessment Having completed this paper take a few minutes to consider what you did well and what you found difficult. Use this as a basis to focus your future study on effectively improving your performance.
Common problems
Future emphasis if you answer Yes
Timing and planning for all Sections Did you miss out any questions?
Y/N
Attempt all questions. For multiple choice questions in Section A, it is worth making a guess at the correct answer.
Did you finish too early?
Y/N
Make sure you deal with all the information given in the questions. Use the extra time to go back over your answers.
Did you overrun?
Y/N
Focus on allocating your time better. Practise questions under strict timed conditions. If you get behind leave space and move on.
Interpreting the questions?
Y/N
Learn the meaning of question words (inside front cover). Learn subject jargon (study text glossary). Read questions carefully noting all the parts. Practise as many questions as possible.
Understanding the subject?
Y/N
Review your notes/text. Work through easier examples first. Contact a tutor for help.
Remembering the notes/text?
Y/N
Quiz yourself constantly as you study. You need to develop your memory as well as your understanding of a subject.
Was your answer difficult to follow?
Y/N
Use headings and subheadings. Use numbering sequences when identifying points. Leave space between each point.
Did you fail to explain each point?
Y/N
Show why the point identified answers the question set.
Did you include irrelevant information?
Y/N
Focus on developing a logical structure to your answer.
Were some of your workings unclear?
Y/N
Give yourself time and space to make the marker's job easy.
Content in all Sections Did you struggle with:
Layout in Section B
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