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You are the auditor of an engineering firm called Thumpit & Hope Ltd. You are planning for a physical inventory count at the company's warehouse on 31 August 201X. The company assembles domestic appliances, and inventory of finished appliances, unassembled parts and sundry inventories are stored in the warehouse which is adjacent to the company's assembly plant.
The plant will continue to produce goods during the stock count until 5 pm on 31 August 201X. On 30 August 201X, the warehouse staff will deliver the estimated quantities of unassembled parts and sundry inventories which will be required for production for 31 August 201X; however emergency requisitions by the factory will be filled on 31 August. During the inventory count, the warehouse staff will continue to receive parts and sundry inventories, and to despatch finished appliances. Appliances which are completed on 31 August 201X will remain in the assembly plant until after the physical inventory count has been completed.
Describe the procedures which Thumpit & Hope Ltd should establish in order to ensure that all inventory items are counted and that no item is counted twice.
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Verified
VerifiedIt is important that the company establishes controls to ensure that all inventory is counted and that there is no double counting of inventory. The fact that the company is receiving and
despatching goods and also continuing to produce goods on the day of the inventory count
increases the likelihood of inventory being counted twice. The procedures which the company could adopt to ensure an accurate inventory count are:
-Ensure that a responsible official has overall control of the counts, all queries and
-matters of difficulty to be referred to them.
-Inventory should be arranged in an orderly manner and each item of inventory identified by a tag which should be clearly marked when the inventory has been counted. On the completion of the count, all the tags should be checked as being marked.
-Inventory sheets should be prepared by the company detailing the type and reference numbers of inventory to be counted.
-The inventory count teams should be allocated specific locations to count, or the inventory should be counted in pre-determined sequence by the count team.
-Movement of inventory should be kept to a minimum. In this case, if an emergency requisition for goods is authorised on the day of the count, then a record of all requisitions should be made and reviewed by the responsible official in charge of the count. It must be ensured that these items are excluded from inventories of unassembled parts and sundry inventories as they will be included in work in progress or finished goods inventory.
-The company must ensure that all goods received during the day of the inventory count are segregated and counted when no more receipts are expected. It is important that these items are controlled so as to prevent cut-off errors (see below) and double counting of inventories.
-Goods which are to be despatched during the day of the count should again be segregated and not included in the final inventory figure. One of the best ways to ensure this is to record all goods to be despatched on a separate inventory count sheet, mark the goods as having been dealt with and eliminate the inventory count sheet from the final inventory evaluation.
-As appliances completed on 31 August 201X are to remain in the assembly plant and the only inventory movement on the day of the count will be emergency requisitions of goods (which should be minimal), the assembly plant can be treated as a separate unit for inventory count purposes. Therefore, the best way of ensuring the accuracy of the count of inventory in the assembly plant is to wait until the cessation of production at 5 pm on the date of the count, and carry out the count of inventory and work in progress when there is no movement of inventory.
Accounting systems have control objectives and control procedures to mitigate the risks that the control objective is not met.
For each of the following, select whether they are a control objective, risk, or control procedure.
a. Organisations sell goods or services to customers with poor credit ratings
b. Goods are purchased only from approved suppliers
c. All purchase invoices must be matched to purchase orders and goods received notes
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Verifieda. Risk b. Control objective c. Control procedure
Auditors use samples in their audit testing. In which of the following situations is the use of sampling not appropriate
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VerifiedC
You are responsible for the audit of the tangible non-current assets of Glub Ltd, a company engaged in the manufacture and supply of soft drinks and other beverages to the retail, catering and leisure industries. From your discussions with the finance director, you find out that a capital expenditure budget is prepared annually.
Departmental managers can authorise capital expenditure up to £5,000, as long as it is within their budget. Board approval is required for amounts above this threshold but the managing director, who is also the major shareholder in the company, does not always adhere to this policy. He often commits the company to acquiring assets without considering how they are to be financed, leaving the finance director to arrange the borrowings.
Capital expenditure proposal forms are required to be completed but this is not always done, particularly when items are required in an emergency, and there is no formal policy in respect of obtaining quotes for major items of expenditure. There is a tangible non-current asset register which is reconciled to the nominal ledger on a monthly basis. No other checking procedures involving the non-current asset register are undertaken.
In July 201X, the company commenced construction of a new packing line. The line was completed in November 201X. Costs recorded in the tangible non-current asset register include materials, own and sub-contract labour, and overheads.
The overheads included are simply the overhead recovery rate used when pricing products and include all overheads, both direct and indirect. The company borrowed money to build the packing line and has included the interest on the loan as part of the construction cost.
(a) Identify four controls which should be in place to control the purchase of tangible fixed assets and explain why they are necessary and the consequences to the company if they are not in place
(b) Identify weaknesses in the system described above and, for each weakness, explain the consequences that could result from it.
(c) In respect of the new packing line what evidence will the auditors need in order to confirm that the expenditure has been correctly include in the financial statements? Comment particularly on the inclusion of overheads and financing costs
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(43) You are auditing Twinkles Ltd which runs a chain of jewellery shops and you are responsible for the audit of inventory. Counting and indentifying the items of jewellery is not a difficulty but verifying the value of the inventory is a major planning issue. How would you gather sufficient appropriate evidence to validate the value of inventories in this case?
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(35) Explain the basic principles of risk based auditing. Set out five examples each of
-Strategic risks
-Operational risks
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(28) Two types of computer-assisted audit techniques (CAAT) are test data and audit software.
For each of the procedures listed below, select the type of CAAT which would be used to perform that procedure.
a. Select all sales ledger accounts showing a credit balance for review
b. Input of inventory (stock) issues in excess of balance of inventory (stock) items shown as held on inventory records
c. Select all accounts in receivables (sales) ledger where balance exceeds credit limit
(Essay)
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(33) State whether the following are true or false in relation to the auditor and fraud
a. It is the auditor's responsibility to follow up possible indicators of fraud uncovered during the course of their audit testing work even if they are not material
b. External auditors must approach their audit testing with an attitude of professional scepticism
c. Management can rely on auditors to detect fraud as this is one of the auditor's duties under ISA 240 'The auditor's responsibilities relating to fraud in an audit of financial statements'
d. Auditor's must consider the effect any fraud which has been uncovered might have on their audit opinion
(Short Answer)
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(28) Greenfumb is a company which operates a chain of garden centres specialising in the retailing of high quality garden products and the provision of landscaping services. Following information from one of the employees, it was discovered that the financial controller had used company cheques and bank transfers to pay for goods and services for his own use. Although the amounts involved were immaterial in the context of the financial statements, it transpired that this had been going on for several years.
The managing director is considering whether the company's auditors were negligent. He has requested that your firm undertakes a detailed independent review of Greenfumb's purchase and payments system in order to establish any shortcomings in its policies and procedures, so that they can be rectified.
Required:
(a) Distinguish between the responsibilities of the management and the statutory auditor of a limited company for the prevention and the detection of fraud and outline how these responsibilities are discharged.
(b) Prepare a list of questions in respect of internal control procedures, answers to which would establish whether there are any shortcomings in Greenfumb's purchase and payments system.
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(29) You are the audit manager in charge of the audit of Gorilla plc. You are about to brief junior members of the audit team prior to the audit of the Statement of Financial Position. Write some notes in preparation for your meeting with the audit juniors to explain the assertions in relation to current assets and what each of the assertions means.
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(46) The audit work requires the verification of cut -off procedures to ensure that all transactions are recorded in the correct accounting period.
During the yearend inventory count on 31 March 201X the audit team recorded the following transactions.
The last Goods Received Note number was 10672.
Which invoices should be recorded in purchases for the year?
Invoice no Supplier Invoice date GRN number Amount 95493 Big Trumpet plc 28 March 10674 £ 3,098.45 95494 Last Post Ltd 31 March 10671 £12,274.20 94495 Bugle Ltd 29 March 10673 £1,567.90 94496 Bangalong Ltd 30 March 10672 £12,786.42 94497 Simbol plc 1 April 10670 £ 456.48 94498 Twangalong Ltd 31 March 10675 £ 998.46
| Invoice no | Supplier | Invoice date | GRN number | Amount |
|---|---|---|---|---|
| 95493 | Big Trumpet plc | 28 March | 10674 | £ 3,098.45 |
| 95494 | Last Post Ltd | 31 March | 10671 | £12,274.20 |
| 94495 | Bugle Ltd | 29 March | 10673 | £1,567.90 |
| 94496 | Bangalong Ltd | 30 March | 10672 | £12,786.42 |
| 94497 | Simbol plc | 1 April | 10670 | £ 456.48 |
| 94498 | Twangalong Ltd | 31 March | 10675 | £ 998.46 |
(Essay)
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(36) Explain the differences between
-an accrual
-a provision
-a contingent liability
Explain the audit objectives, including the assertions to be validated, in the audit of provisions and how an auditor might approach the process of evidence gathering.
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(40) Hung Lo Ltd is a wholesaler of furniture (such as chairs, tables and cupboards). Hung Lo buys the furniture from six major manufacturers and sells them to over 600 different customers ranging from large retail chain stores to smaller owner-controlled businesses. All financial accounts transaction information is stored on Hung Lo's computer systems. Previous audits have tended to adopt an 'audit around the computer' approach.
You are the audit manager in charge of the audit. For the first time at this client, you have decided to use audit software to assist with the audit of the financial systems.
Computer staff at Hung Lo are happy to help the auditor, although they cannot confirm that all the systems documentation is complete. They have warned you that Hung Lo's accounting software is run using very old operating systems which may not be compatible with more modern programs.
The change in audit approach has been taken mainly to gain a full understanding of Hung Lo's computer systems prior to new internet modules being added next year. To limit the possibility of damage to Hung Lo's computer files, copy files will be provided by Hung Lo's computer staff for the auditor to use with their own audit software.
Following a discussion with the management at Hung Lo Ltd you understand that the internal audit department are prepared to assist with the statutory audit. Specifically, the chief internal auditor is prepared to provide you with some documentation on the computerised wages systems at Hung Lo Ltd. The documentation provides details of the software and shows diagrammatically how transactions are processed through the inventory system. This documentation can be used to significantly decrease the time needed to understand the computer systems and enable audit software to be used on this year's audit.
Based on the information above explain the additional problems the auditors face when considering the use of audit software at Hung Lo Ltd. For each problem, explain how it might be resolved.
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(38) As part of verification techniques in respect of revenues an auditor will inspect sales invoices. The auditor will gain assurance about different assertions depending on the information on the invoice.
In respect of the information below, select the assertion for which that information will provide assurance.
a. Date of the invoice
b. Description of the item sold
c. Monetary amount
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(41) The external auditor should undertake analytical procedures as part of the planning process in order to identify the risk of a possible misstatement of figures in the financial statements. The results of the analytical procedures conducted on the financial statements of an audit client are listed below.
Select whether the results indicate that cash and bank balances and trade receivables might have been under or overstated.
The results show that, compared to the previous year:
a. Inventory has reduced by 5%, trade payables have increased by 7% and trade receivables have reduced by 10%. Cash and bank balances have reduced by 11%
b. There has been no change in credit control procedures or length of credit given to customers. Sales revenues have increased by 9%. Trade receivables have increased by 15%.
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(30) Identify the role of internal audit in managing risk. Set out what the role of internal audit is in the risk management process
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(39) In recent years there has been an increase in the number of larger companies outsourcing their internal audit function, often to their external auditors.
One of your audit clients is considering establishing a new internal audit function, either by recruiting its own internal auditors or by contracting with your firm for the provision of internal audit services.
Describe the advantages and disadvantages of the external auditors providing an internal audit service to their clients.
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(36) You are auditing Megabuild plc a company which builds large projects mostly overseas. At present it is building a dam in the Philippines, a motorway in South Africa and a holiday village in France.
The audit team has been asked to devise audit procedures for the verification of work in progress balances as part of inventories. From the test below select whether you would include them as valid tests or exclude them as invalid.
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